Changing Dynamics Will Cause Biologic Price Increases To Stall

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Includes: ABBV, AMGN, JNJ, PFE
by: Jon Crowley

Summary

Biologic Medications have drastically increased in price over a relative short period of time.

Biosimilars and consolidation in the insurance industry should slow these increases.

The wild card is political pressure which could also put pressure on biologic drug prices..

Biologic medications have been transforming the health care industry. Patients have gotten life transforming relief from debilitating diseases such as arthritis, Crohn's disease, cancer, psoriasis, and many others. However, these medications also come with big price tags which have been increasing at a much faster rate than inflation. For example Humira and Enbrel have increased in cost by 68% and 80%, respectively, in the last three years, and they aren't the only offenders by any means.

Many drug companies have been relying on these price increases to increase profits and revenue. Amgen (NASDAQ:AMGN) is the best example of what can happen when price increases slow down. Amgen recently disclosed that revenues were flat for Enbrel due to pricing pressure and the stock reacted by dropping ten percent. A variety of factors are going to keep biologic manufactures from substantial price increases going forward.

Competition

After years of talk biosimilars are finally starting to enter the market and disrupt prices. Recently Pfizer (NYSE:PFE) announced the approval of Inflectra in the US market. Inflectra is a biosimilar of Remicade. Remicade is by far Johnson and Johnson's (NYSE:JNJ) best selling medication bringing in over 6 billion in sales last year while also bringing in over 2 billion for Merck (NYSE:MRK) which has the rights in Europe. Currently Pfizer is only offering a 15% discount compared to Remicade but that will most likely increase as time goes on. Pfizer isn't stopping with Inflectra either, they have biosimilars for Herceptin, Rituxan, Humira, and Avastin in clinical trials. These four drugs alone had over 30 billion in sales last year and represent a huge opportunity in the biosimilar market. Inflectra should be watched closely by investors who are long AbbVie, Johnson and Johnson, Roche, Biogen, and Amgen all companies that rely on biologics for a large percentage of their revenues. If Remicade can hold market share and pricing power over Inflectra it would be a good sign for these companies.

Of course in the world of biosimilars the ultimate prize is Humira. The best selling medication in the world has numerous biosimilars under development. AbbVie (NYSE:ABBV) the maker of Humira has made it clear it plans to aggressively defend its patents but that hasn't stopped a number of companies from preparing to enter the market. Possibly a bold company might consider an at risk launch but the damages if AbbVie's patents hold up would be enormous.

Making this even more convoluted for investors is that some companies with high priced biologics on the market are also some of the leaders in developing biosimilars. So a company like Amgen(AMGN) could suffer from decreasing revenues from Neulasta and Enbrel, while its biosimilar of Humira could possibly offset those declining revenues. Pfizer and Roche could also find themselves in a similar situation eventually.

More Powerful PBMs and Insurance Companies

Consolidation in the insurance and pharmacy benefit manager, or PBM, industries have given these companies huge negotiating power. These companies now have tens of millions of patients in their roles so their decisions can have huge effects on drug companies. Express Scripts (NASDAQ:ESRX) has already announced it plans to limit options for patients receiving anti inflammatory biologics. Caremark/CVS the other major PBM has announced that it will no longer approve Lantus which is Sanofi's blockbuster long acting insulin. This trend is only going to continue as insurers and employers look more drastically for ways to cut costs and keep premiums in check.

Political Pressure

The wild card in all this is political pressure and legislation. Bernie Sanders has shown a remarkable ability to send stock prices tumbling with a simple tweet, and while the democrats suffered in the election its still a relatively unknown what a Trump healthcare bill would look like.

Conclusion

Drug companies have been juicing profits by increasing prices of biologic drugs well over the rate of inflation. While this was always going to be unsustainable in the long run the combined factors above will structurally change the way companies increase prices. Investors that are long companies that rely on biologics for a majority of sales should watch Remicade to see if sales hold up in the face of all these price checks.

Disclosure: I am/we are long PFE, MNTA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.