Public Relations Battle Between Drugmakers And Payers Intensifies

BMI View : We believe the intensifying debate over hepatitis C treatment costs and rationing of coverage will ultimately push the federal government to intervene in drug pricing. Drugmakers will see their leverage over payers weaken in the coming years as payers band together to extract discounts. In turn this will call into question the sustainability of the traditional pharmaceutical business model and potentially accelerate further consolidation in the industry.

The US pharmaceutical industry will be concerned to see resistance from payers in a market where companies have traditionally held the bargaining power, and from which they derive a great deal of revenue for their innovative drugs. If the price of a curative drug like Sovaldi (sofosbuvir) can garner such a backlash from both payers and government officials, we suspect that any significantly innovative drug for a relatively common, chronic disease such as diabetes or cancer will face similar hurdles. The industry is expected to deliver breakthroughs in cancer therapies that promise to extend survival but at a premium. Combined with an influx of new signups to health insurance, these two factors will apply pressure to payers over the coming years and we expect them to pushback when faced with rising drug costs.

With pharmaceutical companies facing massive outlays for R&D and the prospect of a squeeze in revenues, the delta between the cost of capital and subsequent returns on capital could narrow if drug pricing sees a paradigm shift within the US. The traditional industry model of screening, developing and commercialising internal drug candidates may come into crisis, while the ongoing consolidation we have witnessed over the last three years accelerates.

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Related sectors of this article: Pharmaceuticals & Healthcare
Geography: United States

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