Benjamin Franklin once postulated that man's only two certainties in life are "death and taxes." With the exception of 2012 where prescription drug prices fell by a little more than 1% I'd opine that prescription drug prices rising could almost be added to that list.
Rising prescription costs have become so common that most Americans have come to accept it as the norm. It's one of the many contributing factors that allows pharmaceutical companies to charge top-dollar prices for their innovative medicines in the U.S.
In addition to consumer and insurer acceptance of high price points, other factors that tend to keep U.S. prescription prices higher than anywhere else in the world on a per capita basis include the need for U.S. sales to subsidize product sales in underdeveloped parts of the world, high research and development, as well as marketing, costs, high legal expenses needed to protect patents, and the fact that Americans demand pharmaceutical products more than anywhere else in the world.
Prescription drug spending: A mixed bag
As you might imagine, thinking about prescription costs from an investing and social standpoint can yield positive and negative implications.
From an investors standpoint high prescription prices and increasing consumer demand means better margins and possibly improved cash flow to conduct additional research into new therapies for pharmaceutical companies. Furthermore, stronger sales of a drug within a class of drugs (e.g., diabetes, oncology, and so on) would imply that patient quality of life within that indication is improving, which is a good thing.
On the other hand, rising prescription prices can strain consumers' pocketbooks and could make it tougher on insurers to turn a profit. Gilead Sciences (NASDAQ:GILD) hepatitis C drugs Harvoni and Sovaldi, which have 12-week treatment price tags of $94,500 and $84,000 respectively (some Harvoni patients will qualify for an eight-week treatment course, while others may endure a full 24-weeks), are wreaking havoc on insurers who are stuck between a rock and a hard place when it comes to paying Gilead's exorbitant prices, but also providing high-quality medicines to their members.
Five indications where prescription spending could grow the fastest
As we examined last week, courtesy of a recently released IMS Health report, prescription drug spending is slated to pick back up over the next five years as the patent cliff winds down and global growth picks up. The net result should be a 4% to 7% compounded growth rate in prescription drug spending to roughly $1.3 trillion by 2018.
But, have you wondered where this drug spending growth will come from?
According to the report five classes of drugs are expected to see a minimum double-digit compounded annual growth in sales between 2014 and 2018 in developed markets. "Why not include emerging markets in these calculations," you ask? The answer is developed markets account for the meatiest margins to pharmaceutical companies, so growth in developed regions (e.g,, United States, Japan, Germany, France, and so on) are the most crucial to overall profitability.
Per IMS Health's latest report, the five indications estimated to see the greatest compounded sales growth between 2014 and 2018 in developed markets are:
- Viral hepatitis: 36%-39% compounded annual growth rate (CAGR) with $21 billion-$24 billion in estimated 2018 sales.
- Anticoagulants: 17%-20% CAGR with $20 billion-$23 billion in estimated 2018 sales.
- Diabetes: 12%-15% CAGR with $61 billion-$71 billion in estimated 2018 sales.
- Autoimmune: 12%-15% CAGR with $47 billion-$52 billion in estimated 2018 sales.
- Immunosuppressants: 11%-14% CAGR with $16 billion-$19 billion in estimated 2018 sales.
There are two particularly interesting findings regarding the five indications above. First, specialty indications (like viral hepatitis and autoimmune diseases) are projected to see some of the quickest growth. Similarly, chronic conditions like diabetes remain a primary focus for pharmaceutical companies.
Secondly, you'll note that oncologics (cancer drugs) aren't in the top five, although they were darn close with a CAGR of 7% to 10%. Projected to bring in $71 billion-$81 billion in annual sales by 2018 oncology products will still remain the pharmaceutical sectors' largest contributor in terms of total sales.
A sea of beneficiaries
Although prescription prices are on the rise, the implication here is that we could see a wide scope of patients benefiting from access to more efficient prescription drugs.
Gilead's Harvoni and Sovaldi are a great example. Sure their prices are enough to give anyone indigestion, but they can be administered without the need for interferon which has been shown to cause flu-like symptoms in patients. Further, these two therapies can eliminate all detectable levels of HCV in 90% or more of the patients it's given to, with very few genotype exceptions. We shouldn't be surprised at Sovaldi's $8.55 billion in total sales through the first three quarters of 2014 and will likely see the combination of Harvoni and Sovaldi provide well over $10 billion in annual revenue going forward.
Anticoagulants such as Pfizer's (NYSE:PFE) and Bristol-Myers Squibb's (NYSE:BMY) Eliquis could be another positive for both investors and patients. In clinical studies Eliquis proved to be superior to Warfarin, the previous standard of care, for preventing thrombotic events in both safety and efficacy. What this means for patients in the hospital setting is growing access to safer blood-thinning medications. For investors in either company it's liable to mean an expanding portfolio of indications for Eliquis that could have it topping $5 billion in annual sales at its peak.
Though no one is a particular fan of rising drug prices, the IMS Health report does offer brighter prospects for patients with regard to access to more efficient drugs as well as investors who might be looking to profit from these game-changing medications.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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