Facing pressure over rising drug prices, pharmaceutical companies are pushing a new defense: They aren’t raising prices to make more money but rather to pay a greater cut to middlemen in the medicine-supply chain.
For years, drugmakers justified price increases by saying they needed them to fund research and development of new products. But lately they have flipped the script. They say they don’t actually benefit much from list-price increases and that their net prices are suffering, because they are paying bigger rebates to pharmacy-benefit managers that negotiate prices in secret with their clients, such as employers and labor unions.
Companies including Novartis AG, Johnson & Johnson and Allergan PLC have raised U.S. list prices on hundreds of drugs this year, while simultaneously saying the average net prices they realize after rebates and discounts aren’t going up by much, are staying flat or even are declining.
The pharmacy-benefit managers and health plans are the ones that benefit, drugmakers say, with the rebates not reaching customers at the pharmacy counter.
“Unfortunately, the current pharmaceutical supply chain includes various misaligned incentives that serve to support middlemen while often neglecting patients,” Merck & Co. Chief Executive Kenneth Frazier told analysts Friday on a conference call.
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Critics say the industry’s defense doesn’t tell the whole story, because even modest price increases for some big-selling drugs—such as AbbVie Inc.’s rheumatoid arthritis treatment Humira—can generate sizable revenue and earnings gains. Uninsured patients or those with high-deductible plans still may have to pay list price or a percentage of it, rather than a percentage of the net price.
AbbVie said it is committed to not more than one annual increase of less than 10% for its drugs, which would be offset by rebates and discounts. In 2018, its net price rose by less than the rate of inflation, it said.
AbbVie’s U.S. Humira sales climbed 9.1% to $3.6 billion in the fourth quarter; AbbVie said both volume and pricing fueled the gain. AbbVie raised the list price by 9.7% in January 2018 and then 6.2% more last month.
Drugmakers’ price increases are unrelated to the rebates, according to research commissioned by the Pharmaceutical Care Management Association, a trade group for PBMs. “To a large degree what you’re seeing is a coordinated distraction technique from the pharmaceutical manufacturers,” PCMA Chief Executive JC Scott said in an interview.
It is difficult to assess the merits of the arguments because reimbursement contracts between drug companies and PBMs are done in secret and neither discloses how much profit they make on each of the contracts for each drug.
Drugmakers including Johnson & Johnson, Merck & Co. and Takeda Pharmaceutical Co. publish aggregate data on how much they pay in rebates, which indicates the payments have been growing, but the averages don’t reveal the impact on a specific drug. In addition, their figures count rebates to Medicaid that are required by federal law.
Meantime, pharmacy-benefits managers say they typically retain less than 5% of rebates they receive from drugmakers, but the amounts can vary widely depending on the client. And PBMs usually don’t disclose rebate amounts for specific drugs, even to their own clients.
By shifting blame to middlemen, manufacturers have mitigated some of the political pressure to reduce prices.
Last week, the Trump administration proposed limiting the rebates paid to middlemen in federal pharmacy programs, in hopes list prices will fall and savings will be steered to consumers. The move doesn’t directly limit manufacturers’ pricing power and has the support of the drugmakers’ main lobbying group.
“The focus on the middlemen definitely has gotten more traction,” Wells Fargo analyst David Maris said in an interview. “People understand that. They intuitively want to pay for innovative medicines. They don’t want to pay for bureaucrats pushing paper” at PBMs.
Net pricing is a metric drugmakers have rarely referred to until recently.
In January, Allergan raised prices on more than 50 products, including dry-eye treatment Restasis, but said it would realize no increase on the average net price of its portfolio. GlaxoSmithKline PLC, which raised the list prices on 36 medicines in January, all by no more than 3%, said its net prices fell 9% last year through the first nine months. When Pfizer announced price increases on 41 drugs in November, it said the net effect on revenue growth in the U.S. would be zero.
Industrywide, net prices have indeed been falling as list prices rise, according to data from SSR Health. During the third quarter of 2018, list prices for U.S. branded drugs increased 4.1%, compared with 5.3% a year earlier. Net prices, meanwhile, fell 5.1%, compared with a 0.4% gain a year before.
An important caveat, say analysts covering the industry: Companies are generally disclosing averages, not net price increases for individual products. Companies may see lower prices on some products, but see them rising on others. “The companies get very funky with that math,” Umer Raffat, an analyst at Evercore ISI, said in an interview.
Generally, pharmaceutical companies that are increasing their list prices of drugs by 6% to 9% likely are gaining a net price increase of 2% to 4%, Mr. Raffat said.
Also, while middlemen are capturing some of the price increase, that isn’t the only reason for net-price declines. So-called “copay accumulator” programs, which health plans use to combat the copay assistance that drugmakers provide customers, are also having an impact.
The accumulator programs limit the assistance applied toward a patient’s deductible, so drugmakers often must increase their aid to keep people on the drug. Net prices dropped 7.2% for products that are “accumulator-susceptible” and 2.2% for those that aren’t, according to SSR Health.
The roots of the current debate over rebates trace back to a few years ago, when PBMs increased their negotiating power to get better discounts by threatening to exclude certain drugs from their lists of covered drugs, known as formularies. To help persuade the benefit managers to include their drugs, drugmakers boosted rebates.
More recently, drugmakers have been more vocal about pushing back, shifting their public statements to focus on middlemen and net prices. The changing narrative gained steam in 2016, evident in a Wall Street Journal review of public statements by drug executives and lobbyists.
Mylan NV Chief Executive Heather Bresch in 2016 defended price increases on the EpiPen emergency allergy treatment partly by saying the company received less than half the $608 list price because the rest went to PBMs, insurers, wholesalers and other middlemen.
Pablo Martinez Monsivais/Associated Press Mylan CEO Heather Bresch, holding EpiPens while testifying to a House committee in 2016, defended price increases on the treatment partly by blaming middlemen.
Ian Read, the recently retired Pfizer Inc. CEO, in June 2016 spoke neutrally about PBMs, telling an analysts on a conference call that “in a market-based system PBMs provide value by aggregating volumes and negotiating discounts.” But later that year, Mr. Read was more critical at an investor conference: “Ideally those rebates are going back to lowering the copays. That’s not what’s happened.”
By 2018, Mr. Read said Pfizer realized just 58% of its drug prices. “The rest goes to subsidize profitability of PBMs, insurance companies and frankly, premiums for those that are healthy. This is not a sustainable position.”
The Pharmaceutical Research and Manufacturers of America, or PhRMA, one of the most powerful industry lobbies in Washington, for many years emphasized the cost and risk of R&D in defending industry pricing. PhRMA, too, began in recent years to step up its focus on industry middlemen, promoting new studies concluding they were taking a growing share of drug list prices.
One PhRMA-funded study by Berkeley Research Group found that more than one-third of drug list prices were rebated back to PBMs and other entities in the supply chain.
Takeda Chief Executive Christophe Weber said the U.S. should change federal laws to improve transparency on rebates and discounts on prescription drugs. Doing so, he said, would fuel industry competition and ultimately help patients.
Takeda, which raised the list price for some medicines by 1.5% to 3% last month, expects its average net-price increase to be less than list-price increases.
“Increasing transparency could certainly be a way to improve the system,” said Mr. Weber.
Write to Peter Loftus at email@example.com
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