1、Mark.PDavid.RMatthew.HRicky.GMORGAN STANLEY&CO.INTERNATIONAL PLC+Mark D PurcellEQUITY ANALYST+44 20 7677-8557MORGAN STANLEY&CO.LLCDavid RisingerEQUITY ANALYST+1 212 761-6494Matthew HarrisonEQUITY ANALYST+1 212 761-8055Ricky R GoldwasserEQUITY ANALYST+1 212 761-4097Global HealthcareGlobal HealthcareC
2、ounting the CostThe cost of medicines in the US is a key focus for thebiopharma industry and investors.This primer explores thehealth system challenges and the prospect of convergingglobal drug prices,as the US Administration considers moreclosely aligning US and International pricing.The biopharma
3、industry faces uncertainty around US drug price reform.Thedrug industry is a clear area of debate in Washington.The CMS(Centres forMedicare and Medicaid Services)is working on a proposal to benchmark US drugprices to international drug prices(IPI model).President Trump has stated he willintroduce a
4、plan to overhaul the healthcare system in September,which couldinclude recommended price cuts to US medicines.US drug pricing is extremelycomplex,and an IPI plan would require a new law to be enacted,clearingsignificant legislative hurdles,in order to effect permanent changes to USgovernment drug pr
5、icing.This primer aims to provide investors with a frameworkto understand some of the areas of debate around US drug pricing and assessthe impact of any potential policy changes.We have built a proprietary pricing database in the US and compare medicineprices in the US to Europe.Our analysis suggest
6、s the average net price premiumin the US for our basket of 217 drugs is 160%above European prices(Exhibits 1-2).We also explore the evolution of gross-to-net pricing in the US.We estimaterevenues into the supply chain(the difference between gross and net revenues)rose by 23%a year in 2013-18,to$155b
7、n across our basket.Attempting to narrowthis gross to net spread is proving difficult;we explore the potential of theproposed Senate Finance Committee Prescription Drug Pricing Reduction act toreduce consumer drug spending.We argue the biopharma industry mustInnovate to survive against this uncertai
8、n backdrop,as the global price ofinnovation converges,funded from a payers perspective by price cuts andgenericisation of legacy medicines.Weighing up the potential for an IPI model.Investors continue to see onlylimited risk of international reference pricing,including potential proposals tolower US
9、 hospital medicine prices by 30-50%.The biopharma industry hashighlighted concerns about proposals which it argues could limit patient access,disincentivise research,and weaken US IP.Moreover,drugs are only 14%of UShealthcare spend,and costs throughout the US healthcare system are higherthan in Euro
10、pe.US biopharma success also brings societal benefits in loweringthe cost of disease,leading global innovation and driving US economic value.Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconf
11、lict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thi
12、sreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1September 8,
13、2019 03:00 PM GMT Pricing AnalysisAcross our basket of 217 drugs,we compare US net prices to UK list or Europeanreported prices.We then calculate the delta using the same methodology as theUnited States Department of Health&Human Services(HHS)(i.e.US net pricedivided by average Europe Top-5 price to
14、 derive a factor,with 2.8x equivalent to a180%premium).We revenue-weight these delta to derive a biopharma companydelta(Exhibit 1)and therapeutic category delta(Exhibit 2)for our basket of drugs.For detail on our methodology,see the section Comparing US and InternationalDrug PricesExhibit 1:Our anal
15、ysis of underlying drug prices in the US and Europe:Biopharma companiesranked by net reference price(US net price divided by UK price(MIMS)or Europe Top-5 price(HHSapproach)UK MIMSapproachHHS IPIapproachList priceNet priceList priceNet priceUCB4.33.75.94.6Novo Nordisk9.74.09.54.0Biogen4.63.54.13.1As
16、traZeneca5.02.36.53.1Novartis4.13.04.22.9Pfizer5.02.95.02.9Amgen5.23.43.92.6Eli Lilly7.13.35.32.4Johnson&Johnson5.33.03.82.3Roche3.22.62.72.3GlaxoSmithKline4.82.25.62.1Gilead3.32.33.02.1Celgene3.12.62.82.0Sanofi5.12.43.42.0Bristol Myers Squibb2.42.02.32.0AbbVie4.93.02.91.9Merck4.01.83.81.7Average4.8
17、2.84.42.6Source:IQVIA MIDAS,IQVIA NSP,Symphony Healthcare Solutions,First Main Bank,company data,Morgan Stanley Research estimates2Exhibit 2:Our Pricing Analysis:Therapeutic categories ranked by net reference price(US net pricedivided by Europe Top-5 price)Therapeutic categoryList priceNet priceCNS
18、specialist8.65.7GLP-1s9.44.9Old primary care7.54.2Multiple sclerosis4.53.1Old specialist4.43.1SGLT2 inhibitors10.02.8New specialist3.52.8DPP4 inhibitors9.82.6New primary care3.62.3Immunology3.42.1Old oncology2.42.0HIV2.72.0ICS/LABA7.91.9EPO/GCSF3.31.9NOAC4.01.7New oncology1.81.6Rare diseases1.71.5Sh
19、ort/mix insulin6.41.5Basal insulin4.11.1HCV1.00.5Source:IQVIA MIDAS,IQVIA NSP,Symphony Healthcare Solutions,First Main Bank,company data,Morgan Stanley Research estimates3 Executive SummaryThe cost of medicines in the US is a key focus for the biopharma industry andinvestors.With a wide array of dru
20、g pricing proposals under discussion,each withuncertainty around its potential to turn from proposal into law,it is not clear whatis going to happen,if anything,and when.In the absence of a path forward,we seea possibility that a lack of progress could lead to more far-reaching policyproposals in fu
21、ture,with potentially material consequences for biopharma.Thisprimer is intended to help investors understand some of the key debates aroundUS drug pricing and provide a framework for assessing the impact of potentialpolicy changes.We note that one possible outcome is an integrated healthcare system
22、 driven bycost-economic analysis and value-based pricing models that could lead to aconvergence of pricing of biopharma innovation on a global basis.We argue thatthis could be funded from a payers perspective by price cuts to legacy medicinesand finding administrative efficiencies.We have grasped th
23、e nettle in analysing the potential impact of InternationalReference Pricing on US drug prices,a key topic for investors to understand overthe coming months.Importantly,while reference pricing would likely only impactdrugs administered in a physicians office(Part B)initially,there is the potential t
24、oexpand to pharmacy drugs(Part D)over time,where the price differentials andscope for savings are greater,as are the possible impacts on the healthcaresystem.Per capita healthcare spending in the United States materially exceeds that in otherhigh-income countries,such as Canada,Germany and the UK,ha
25、ving moved from a pointof parity in the early 1970s.We believe that the introduction of policies to tackle high US drug list prices couldpotentially catalyse a competition-driven,value-based pricing model with a core focuson innovation.Policies to address high drug prices would likely have implicati
26、ons for thebroader healthcare system,necessitating the search for efficiencies across the supplychain,greater integration of data systems and value-driven agreements tied to totaleconomic delivery.We estimate$155bn of revenues into the supply chain(i.e.thosegenerated at the intermediary stages betwe
27、en manufacturer and consumer,includingthrough wholesalers,pharmacies,managed care plans and hospitals)across our basketof 215 drugs could be affected.High US drug list prices,often not directly related to the prices realised by the drugmanufacturers,are seen as a contributing factor to lower patient
28、 medication adherenceand subsequently worse healthcare outcomes(as referenced,for example,in a recentstudy of non-adherence among US adults with diabetes).A complex pharmacy benefitsystem has seen a series of historically substantial list price increases,offset by rapidlyrising discounts/rebates.Thi
29、s has led to higher profits for the healthcare system but4higher deductible and out-of-pocket expenses for consumers.Off-invoice discounts andrebates paid on hospital drugs have also seen rapid growth.Narrowing the US drug price gross to net spreadPharmaceutical spending has fluctuated between rough
30、ly 10%and 14%of US nationalhealth expenditures since the late 1980s,but the manufacturers tend to attract thelions share of the publicity on patient affordability.Drug list price inflation hasmoderated over the past four years,from 12%to 6%across a basket of 215 drugs wefollow.However,we estimate th
31、e net price inflation of 5%in 2014 has completelyevaporated and that net prices for our basket of drugs actually fell by 2%in 2018.The difference between list prices and manufacturers net prices,or the so-called grossto net spread,has continued to inflate,rising from 31%of gross sales in 2013 to 45%
32、ofgross sales in 2018.Expressed in absolute revenues,gross-to-net spread revenuesincreased by 23%per annum on average from$55bn in 2013 to$155bn in 2018 for ourbasket of drugs,compared to reported net sales growth of 9%per annum over thesame period.Attempting to re-allocate the US drug gross to net
33、price spread is proving difficult,giventhe complexity of the healthcare system and the political and economic risks of drivingchange.The US Administration unexpectedly withdrew the rebate reform proposaldesigned to more closely align gross and net prices,although we note various legislativeactions c
34、ould try to tackle this issue.Whilst the rebate proposal is currently off the table,we recognise that efforts to moreclosely align gross and net pricing might emerge in the future.Our report exploresrelative company exposure and what could happen in a world without rebates(seeModelling A World Witho
35、ut Rebates).This analysis is crucial to our IPI analysis of netdrug prices in the US compared to Europe.How might the US address high list prices?Unlike most OECD countries,which have socialized healthcare systems,the US does notdirectly regulate the price of drugs,even though the government account
36、ed for around40%of the net$324bn US drug spend in 2018.The US prescription drug market is asupply-based model,which translates into greater pricing power.The rapid growth in high-cost specialist drugs that face little to no competition hascontributed to higher overall drug prices,with the US healthc
37、are system struggling tokeep pace with scientific innovation(see American Patients First blueprint).Thesespecialist drugs are used by circa 1%of insurance beneficiaries,yet account for 35-40%of drug spending and are estimated by IQVIA to account for half of drug spending by2022e.High initial list pr
38、ices have strengthened the debate around patient-centred value-basedpricing models to price innovation and,in some instances,to break drug utilisationbarriers,which have hindered the launch of some innovative drug categories(forexample,the PCSK9 cholesterol lowering medicines Repatha and Praluent).W
39、e believethe US healthcare system could potentially address high list prices in a number of ways,such as imposing cost-effective parameters on drug prices through direct negotiations,5adopting independent assessments such as ICERs price benchmarks,or importinginternational price negotiations from co
40、untries such as the UK and Germany indirectlyvia reference pricing.The proposed Prescription Drug Pricing Reduction Act additionseeks to shift the combined cost of pharmacy medicines above$11,155 within MedicarePart D to healthcare plans(60%)and back to the manufacturer(20%).We explore the net price
41、 premium of US drugsOur report explores how the net price of medicines in the US compares to list prices inEurope,where governments control drug pricing and patient access.Our analysisextends the one conducted by the Department of Health and Human Services(HHS)for27 hospital drugs to our basket of 2
42、15 medicines.This allows us to explore the relativeexposure of our biopharma companies to potential international reference pricinginitiatives.International Reference Pricing is one of the most important drug pricingtopics for investors to focus on at the moment.Although the Administration has initi
43、allyfocused on high priced hospital drugs,there is the possibility that reference pricinginitiatives could expand to pharmacy drugs,where the price differentials and potentialfor savings are greater.Leading US hospital drugs are priced circa 80%higher than they are internationally;including pharmacy
44、 drugs in the analysis extends the average net price premium of USdrugs to 160%above European prices.This is a reflection of pharmacy drug priceinflation in the US compared to flat or in some cases declining prices in Europe throughprice controls over multiple years.The net price premium could decli
45、ne through marketforces as pharmacy drugs carrying some of the greatest premiums face loss ofexclusivity and biosimilar erosion of specialist drugs spreads from Europe to the US.Weargue that the net price deltas for categories such as diabetes could come underincreasing scrutiny.What are the implica
46、tions of potentially lowering US drug prices?We argue that true innovation is likely to be priced across an increasingly narrow rangeon a global basis going forward,with independent drug pricing economic analyses fromorganisations such as ICER potentially taking on a more prominent and influential r
47、ole.The pricing of breakthrough gene therapy Zolgensma looks set to lead this debate,withthe US net price likely to be around$1.7m after discounts/patient assistance programs a 30%premium to the ICER cost recommendation.Recently launched cancermedicines are priced around a 40%premium in the US,with
48、17-20%of Tagrisso volumesgiven away free of charge.We argue that increasingly integrated healthcare systemsdriven by cost-economic analysis and value-based pricing models may ultimately emergeand drive the convergence of US and European branded drug prices over the long term,with high-priced innovat
49、ive medicines being funded from a payers perspective by pricecuts to legacy drugs.There are significant barriers and vocal and legitimate industry opposition tointernational reference pricing(IPI)initiatives in the US,but we argue that the mostsignificant impact of such a move might be felt outside
50、the US,where net drug pricescould rise and volume growth for new medicines could be affected by restricted supplyand/or delayed introductions.These considerations increase the importance of acarefully managed global drug pricing policy to ensure that new innovative medicinesare priced closer to pari
