1、A World Without Government Rebates HHS Changes to Medicare Part B&DImpact Across the Rx Channel from Manufacturers to PatientsHealthcare Technology&DistributionLisa C.Gill AC(1-212)622-Bloomberg JPMA GILLJ.P.Morgan Securities LLCSee the end pages of this presentation for analyst certification and im
2、portant disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consi
3、der this report as only a single factor in making their investment decision.Biotechnology Large CapCory Kasimov AC(1-212)622-Bloomberg JPMA KASIMOVJ.P.Morgan Securities LLCNorth America Equity ResearchFebruary 2019Pharmaceuticals Major and SpecialtyChris Schott AC(1-212)622-Bloomberg JPMA SCHOTTJ.P.
4、Morgan Securities LLCManaged Care&FacilitiesGary P.Taylor AC(1-212)622-Bloomberg JPMA TAYLORJ.P.Morgan Securities LLC2Our Takeaways From The New ProposalsFollowing the Part B pricing reform proposal released last year and the Part D proposal released earlier this month,we wanted to share our thought
5、s on key takeaways and broader implications for our companies across the Rx supply chainFor PBMs&Distributors:We see the Part B proposal as mixed.The distributors could see an indirect impact as physicians are squeezed.However if we see a shift from Part B to Part D this would be a positive for both
6、 PBMs and distributors as they distribute and manage specialty drugs.As for Part D,we dont see a material direct impact on PBMs(PDPs)as the model passes-through rebates today.However,if this new model extends to the commercial market we could see headwinds from the modest commercial rebates retained
7、 by the PBMs.For Facilities and Managed Care:We dont believe the Part B proposal will have material impact on our publically-traded universe.We believe the Part D rebate proposal presents more near-term timing/disruption/execution risk than material long-term margin or profit risk.In fact,we believe
8、 rising Part D premiums will drive higher MA penetration and higher net PMPM profits for MA plans over time.For BioPharma:We see the Part B proposal as largely manageable for the group with a relatively limited impact to numbers.At the same time,we believe the implementation of the proposed Part D r
9、eform would represent an incremental positive for the group.While the event would likely be a net neutral from a sales and earnings perspective,higher pricing transparency and lower patient out of pocket costs could potentially lift the sector overhang caused by negative drug pricing headlines.3Key
10、Thoughts on the 2018 Medicare Part B Proposal4In October 2018,President Trump&Secretary Azar outlined a proposal to lower the cost of drugs covered under Medicare Part B;specifically,this proposal aims to1.Replace the Medicare Part B add-on fee(currently 4.3%of the average sales price)with a fixed f
11、ee,to dissociate potential financial incentives from prescribing behavior(e.g.,physicians selecting more expensive drugs for patients to reap a higher fee).2.Charge“private sector vendors”with maintaining an inventory of Part B-eligible drugs and supplying physicians,hospital outpatient departments
12、and other providers,thus re-directing CMS payments to these vendors(and alleviating the burden on physician practices to maintain inventory under the old“buy&bill”model).3.Set prices for certain Part B drugs at a calculated“target price”based on an international pricing index(IPI)and the current ASP
13、.The pilot program would impact 60%of Medicare Part B drugs,apply to 50%of the US and be phased in over a 5 year window starting in 2020.In November 2018,CMS issued a separate proposal that,while largely focused on Medicare Advantage(MA)/Part D,proposed allowing MA plans to implement step therapy fo
14、r Part B drugs which could put additional pressure on high-cost therapiesWe believe that the HHS program will likely face pushback from a number of different stakeholders;the proposal is now in a review and comment period before a formal rule is proposed in Spring 2019.2018 Medicare Part B ProposalS
15、ource:Company reports,CMS National Health Expenditure Accounts,Kaiser Family Foundation,J.P.Morgan estimates.5By our estimate,a 30%cut in spend on Part B drugs in 50%of the US is unlikely to have a meaningful impact on individual Pharma/Biotech companiesUnder the proposal,Part B drugs with significa
16、nt US and International pricing differentials would face the largest impact from pricing reforms.CMS estimates that this proposal would reduce drug costs by 30%and generate$17.2bn of savings over five years.Based on CMSs figures,the average top 20 Part B drug price in the US was 80%higher than the i
17、nternational price(see below)and the proposal would look to reduce this to 26%over a 5-year period of time starting in 2020.Source:Company reports,CMS National Health Expenditure Accounts,Kaiser Family Foundation,J.P.Morgan estimates.2018 Medicare Part B Proposal6Approximately 40%of US revenues are
18、paid for by the government,another 40-45%by private insurers and 10-15%from out-of-pocket costsNote:This analysis is based on industry wide payer mix.Individual companies may be more/less exposed to Medicare/Medicaid populations.Source:Company reports,CMS National Health Expenditure Accounts,Kaiser
19、Family Foundation,J.P.Morgan estimates.Of US Medicarespend:Medicare31%Medicaid10%Private Insurance42%Out of pocket13%All other*4%Medicare Part D76%Medicare Part B24%However,assuming a similar US reimbursement mix as the broader industry:For Pharma:For Biotech:50%of revenues are from US Sales 70%of r
20、evenues are from US Sales15%of revenues are exposed to US Medicare 20%of revenues are exposed to US Medicare3.5%of revenues are exposed to Medicare Part B5%of revenues are exposed to US Medicare Part BMedicare Part B Exposure Biotech and Pharma7Indeed,Medicare Part B exposure is limited in large cap
21、 biotechthis holds true for Pharma as wellMedicare Part B Exposure Biotech and PharmaSource:HHS.gov,Company reports and J.P.Morgan estimates.Product2018A sales%exposure to Medicare Part BProduct2018A sales%exposure to Medicare Part BCELGAMGNAbraxane$1,062M60%Aranesp$1,877M26%BIIBBlincyto$230M14%Tysa
22、bri$1,864MEpogen$1,010M59%Avonex$1,915MKyprolis$968M43%Plegridy$448MNeulasta$4,475M27%REGNNeupogen$365M18%Eylea AMD70%Nplate$717M46%Eylea DME40%Prolia$2,291M37%BMRNSensipar$1,774M65%Portfolio$1,513M*3%(%Part B unspecified)Vectibix$691M33%*US only;*BBG estimateXgeva$1,786M53%Source:JPM estimates&Comp
23、any reports25%government channel for portfolio$4,076M*8Medicare Part B Exposure Rx ChannelSpecialty drugs reimbursed under Medicare Part B are currently distributed to physician offices by the specialty distribution arms of the three large pharma wholesalers Specialty distributors could be directly
24、impacted based on the proposal to move to“private sector vendors”under a Competitive Acquisition Program(CAP)-like modelAny potential changes to Part B that squeeze physicians could drive an indirect impact on distributorsCommunity-based physicians could shift patients to the hospital setting or sel
25、l their practices to hospital groups,shifting volume away from the community-based channelDistributors could recapture volume via hospital supply relationships,potentially at a lower marginOther previous proposals that have discussed shifting reimbursement for certain Part B drugs to Part D could po
26、tentially drive an incremental benefit to specialty pharmacies that dispense specialty drugs and PBMs that manage pharmacy benefitsFY17 RevenueAmerisourceBergen Specialty Group(ABSG)$32 McKesson Specialty Health$24 Cardinal Health Specialty Solutions$12 CuraScript SD(Express Scripts)$4 Specialty Dis
27、tribution SalesSource:Company reports.9Medicare Part B Exposure Healthcare Facilities&Managed CareMedicare Part B covers“physician-administered”drugs(typically IV or injection)in the physician office or other outpatient setting.In our universe,exposure would generally be limited to physician clinics
28、,hospital outpatient department(HOPD),ambulatory surgery centers(ACS)and dialysis clinic(ESRD)billings.Reducing the current ASP+4.3%reimbursement or shifting drug reimbursement from PartB to PartD(without an equivalent administration fee)would negatively impact provider PartB revenues.Hospitals Publ
29、ically-traded hospitals have recently consolidated a number of oncology clinics but we estimate the proposed PartB changes would have fairly immaterial exposure to their total earnings power(particularly given an ability to markup drug costs and admin fees to commercial payors).Non-profit hospitals
30、allegedly benefit from 340B drug discounts used for all patients,regardless of income level,and therefore could experience lower revenues.Medicare drug costs for inpatients are paid under the bundled Part A DRG rate and would not be impacted by the proposed rule changes.ASCs Ambulatory surgery cente
31、rs could face revenue risk from the CMS proposal to allow step-therapy for MA in 2020.For example,ASCs with large ophthalmology exposure such as AMSG-(private)and SGRY(not covered,all ophthalmology procedures represent 28%of total case volumes)could see a shift to much cheaper“first-line”version of
32、drugs injected for macular degeneration($50 vs$2000).Dialysis Centers Theoretically ESRD clinics should have little exposure as dialysis-related drugs are reimbursed inside the ESRD bundle(not separately)with the exception of TDAPA“transitional”payment drugs that are reimbursed at ASP+6%before being
33、 added to the bundle(TDAPA moves to ASP+0%for 2019 except for calcimimetics).If the proposed International Pricing Index(IPI)were to materially reduce the ASPs for TDAPA drugs or PartB drugs already inside the ESRD bundle(EPO and heparin for example),CMS theoretically could reduce the current ESRD b
34、undled payment rate per treatment.10Key Thoughts on the 2019 Medicare Part D Proposal11At the end of last month,HHS outlined a proposal aiming to lower patients out-of-pocket cost for drugs covered under the Medicare part D program;specifically,this proposal aims to1.Remove current Safe Harbor exemp
35、tion/protection for rebates paid to PBMs/Part D plan sponsors,which is intended to discourage the formulary preference of high rebate drug and the incentive to raise list price(which in turns increase rebates paid to the channel)2.Add two new safe harbors which are:“Discounts Offered at the Point-of
36、-Sale”safe harbor(or“Point of Sale Safe Harbor”)aiming to transfer rebates to point-of-sale(bypassing the PBM/Part D plan sponsor)where the price discount will be completely reflected in the price the pharmacy charges to the patient.and a PBM Fee Arrangement Safe Harbor(or“PBM Safe Harbor”)aiming to
37、 protect certain fixed fee services arrangements between manufacturers and PBMsSimilar to the previous Part B proposal,we believe that the HHS will likely face pushback from a number of different stakeholders;the proposal is now in a 60-days comment period(comments due by April 8,2019)and is propose
38、d to take effect on Jan 1,2020.Understanding the 2019 Medicare Part D ProposalSource:Company reports,CMS National Health Expenditure Accounts,Kaiser Family Foundation,J.P.Morgan estimates.Flow of Dollars:1.Premium paid by beneficiary to PDP plan2.Direct subsidy paid by government to PDP plan3.Benefi
39、ciary cost share payable to pharmacy4.Drug reimbursement from PDP plan to PBM5.Drug reimbursement from PBM to pharmacy6.Drug procurement cost7.Fee for service8.Rebate from manufacturer to PBM/PDP vs.directly to beneficiary at point of sale9.Coverage gap(“donut hole”)discount to point of sale10.Catas
40、trophic coverage to point of sale11.Risk corridor(true up at end of plan year)12.DIR fee between PBM and pharmacyBeneficiaryPDP PlanPBMPharmacyManufacturerDistributor1345661112910728GovernmentDollar FlowProduct FlowTraditional PDP ModelBeneficiaryPDP PlanGovernmentPBMPharmacyManufacturerDistributor1
41、2345661088971211PDP Model with Change to Rebate Safe HarborSource:J.P.Morgan.Understanding the Part D Proposal PDP Model13Understanding the Part D Proposal Estimated Cost and SavingsSource:CMS Office of the Actuary.Link to memo:https:/www.cms.gov/Research-Statistics-Data-and-Systems/Research/Actuari
42、alStudies/RxSafeHarbor.htmlWhile the actual impact of the rule will depend on how the regulation is ultimately interpreted and applied in contract renegotiations in different markets,here is what CMS predicts to be the potential cost and savings to various stakeholders.According to a CMS research me
43、mo(summary presented in table 1),the proposed rule would decrease patients overall out-of-pocket cost by$13bn in 2029,partially offset by increase in premium of$7.3bn,which will be largely paid by increasing federal spending of$28bn This essentially results in a increase in total drug spend of$19bnW
44、e would note that most manufacturers expect a largely neutral impact to sales after factoring in lower net prices resulting from greater pricing transparency 14Understanding Medicare Part D BackgroundThe Part D program is administered by private plans approved by the federal government.Beneficiaries
45、 can enroll in a stand-alone prescription drug plan(PDP)or a Medicare Advantage prescription drug plan(MA-PD)that covers all Medicare benefits including drugs.CMS 3-year rolling average 85%minimum MLR applies to both PDP and MA-PD plans.In 2018,over 43 million Medicare beneficiaries were enrolled in
46、 Part D(58%in standalone PDP plans and 42%in MA-PD plans).According to the CBO,spending on Part D benefits is expected to total$99 billion in 2019CatastrophicCoverageCoverageGapInitialCoveragePeriodDeductibleDeductible:$415Catastrophic Coverage Threshold:$8,140Initial Coverage Limit:$3,820Enrollee S
47、hareMedicare SharePlan ShareMedicare Part D Standard Benefit Structure(2019)Source:CMS,Kaiser Family Foundation.15Understanding Medicare Part D DIR and Risk AdjustmentDirect and Indirect Remuneration(DIR)Applies to both PDP and MA-PD PlansEncompasses any discounts or adjustments that are not capture
48、d at the point of sale,but after the claim has been adjudicatedIncludes rebates paid by pharma manufacturers(a significant share of all DIR reported to CMS),as well as DIR fees and any other discounts from any other source that serves to decrease the costs incurred under the Medicare Part D planPer
49、statute,CMS requires Medicare Part D plans to report all DIR received so that CMS can reconcile actual plan costs to projected plan costs in the plans Part D bidsMedicare Part D plans factor in an assumption around all elements of DIR within their bids for the upcoming plan yearDIR provides Medicare
50、 Part D plan sponsors the ability to offer lower bids,which can translate into a lower direct subsidy from the government and lower beneficiary premiums3 Mechanisms for Risk Adjustment for Part D plansRisk adjusters(monthly risk-adjusted payments based on the health status of enrollees)Reinsurance s
