Specialty Pharma Worries Could Be Bigger Than Valeant

Analysts at Bernstein have warned that the payer pressure discussed by Valeant Pharmaceuticals Intl Inc VRX in its conference call could extend to other specialty pharma companies.

Valeant cut its 2016 EPS expectations to $9 from $13.50. However, most of the revision was related to payer pressure -- $1 for rebates, $1 for slower product growth and $1 for fewer price increases. Valeant argued this is a broader industry action, stating that "the managed care process has changed dramatically, just even this past year".

Bernstein said the decision to act against Valeant appears to be motivated by critical mass of actions by the company: (i) excessive price increases which were being gradually copied by other companies; (ii) attempts to find end-runs around the payor restrictions; (iii) abuse of the pharmacy-payor relationships; and (iv) CVS Health Corp CVS is peeved about the close relations with competitor Walgreens Boots Alliance Inc WBA.

Several 'Bad Actors'

But, there was a uniform view that Valeant is not the only one to be targeted.

"There are several 'bad actors' in the cross hairs. Most would not name names, but some mentioned Horizon, Galderma and pain/dermatology in general (we did not suggest any company names, it was spontaneous recollection)," analyst Aaron Gal wrote in a note to clients.

There is a particular annoyance with "small companies who try to be cute, putting out huge price increases the day after the formulary comes into effect," he wrote. The pricing action would not be limited to specific drugs within these companies, the analyst added.

The firm expects that there will likely be a second round of adjustments in the 2017 contracts for those who do not change formularies mid-year and for smaller insurance players who follow the actions of the larger companies.

"Pressure is certainly rising and the next round of contracts will see more material price protection clauses and perhaps further pressure in categories where there is more competition. Further, payers will not easily tolerate those who price higher than their 'drug budget expectations'," Gal noted.

Two Forces

There are two forces in action here, according to the note. First, there is aggressive competition between CVS Silverscript, which gained share in the past two years to become the largest family of plans and United/Cigna which lost share.

Second, between 2016 and 2020, the donut hole will be partially filled with Part D providers having to pay more of their members' coinsurance. Both changes will lead to sharper demands from drug providers.

However, the analyst said the current round of attrition is around "bad actors" and those who raised their prices more moderately and were part of the symbiotic payor-channel relationships will not be materially impacted.

As a result, Allergan plc Ordinary Shares AGN, Shire PLC (ADR) SHPG, Teva Pharmaceutical Industries Ltd (ADR) TEVA and similar companies will probably not see increased pressure, Bernstein added.