The cost of drugs in the U.S. has long been a controversial topic as out-of-pocket expenses for consumers have risen sharply for patients in recent years. At the same time, innovation in areas such as cancer treatment is signaling a new direction for the industry. The J.P. Morgan Research team gives their view on the debate over how to make medicine more affordable and why the consumer will be the biggest disruptorto the healthcare industry in 2019.

The pricing debate

The rising cost of medicine for U.S. consumers came back into focus in 2018, as President Trump’s administration unveiled a broad policy proposal to tackle drug prices, helping to reignite the debate of how much patients are being asked to pay for their prescriptions. Meaningful reform is a long-term project and the current administration has acknowledged that a comprehensive overhaul of the system will not take place anytime soon. But while regulatory change may be a slow process, consumer awareness on the cost of healthcare is on the rise as more and more patients are selecting their plans directly. At the same time, the pharmaceutical industry is also trying to rely less on pricing and more on innovation and new drugs to boost growth, so an industry shift is gradually underway.

The current system in the U.S. involves a list price and a net price for drugs. A growing number of patients are being exposed to the list price (before rebates or discounts) for a variety of reasons, including the growth of high deductible plans, ultimately making medicine much more costly for consumers. “More and more individuals in the U.S. now have some part of their healthcare expense exposed to the gross price, meaning out-of-pocket expenses have increased quite aggressively over the last few years," said U.S. Major and Specialty Pharmaceuticals Senior Analyst at J.P. Morgan, Chris Schott. Drugmakers have been criticized for this increase in out-of-pocket expenses for patients and in an effort to improve their reputation and minimize risk, they are increasingly focused on keeping net price increases low.

The list price is the price a manufacturer establishes for a product, or in most cases the original selling price before discounts and rebates are applied. Those exposed to the list price include patients without insurance or those with high-deductible plans.

The net price is the final number after discounts are negotiated. It is the actual amount drugmaker recoups from selling their product, once all the fees to various stakeholders including wholesalers, payers, Pharmacy Benefit Managers (PBMs) are taken out.

“Historically, going back 20 years, growth might have been 50% price, 50% volume. In the more recent past, almost all top line growth came from price, so in some cases negative volume and price was the only thing driving growth. The model we’re seeing today is evolving. In 2019, prices are set to basically be flat. We’re expecting the industry to grow volumes in the range of 3-5% annually, driven by innovation and new products, so we’re in a far more sustainable place now than five years ago,” Schott said.

In 2019 and going forward, prices are set to basically be flat. But we’re expecting the industry to grow volumes in the range of 3-5% annually, driven by innovation and new products.

More drugs on the market

This move from price-driven to innovation-driven growth is also being supported by an uptick in Food and Drug Administration (FDA) product approvals. Drugmakers spend billions of dollars every year on research and development (R&D) of new drugs, with many of those drugs failing to pass rigorous FDA tests to get to market. For much of the last decade, the FDA approved around 20 to 25 new products per year according to J.P. Morgan data. In the last two years, between 40 and 50 new drugs have been approved annually and approvals are expected to stay around this level for the foreseeable future. Breakthroughs in key areas such as oncology and immunology and gene therapy in the biotech industry are also opening up previously untapped markets for drugmakers. “We are witnessing scientific breakthroughs in areas such as immuno-oncology, where the body’s immune system is used to fight off cancer. That has probably been the biggest breakthrough in my sector in the last 40 or 50 years and is dramatically able to improve outcomes for patients who didn’t have treatment alternatives in the past,” Schott said.

Expected FDA approvals

45

PER YEAR

Source: J.P. Morgan

 

 

VS.

In the last 20 years

25

PER YEAR

The rise of the consumer

The way consumers are making healthcare decisions, the plans they go for and how they use services are also changing the face of the industry. Healthcare is rising as a percentage of household expenditures and patients are becoming increasingly selective in the services they use, with cost, quality and convenience becoming key deciding factors.

“For 2019 we believe the consumer will be the biggest disruptor in healthcare. As the cost of care rises and the number of employers offering high deductible health plans (HDHPs) continues to grow, patients will continue to be involved in making decisions on how to allocate their healthcare dollars,” said Head of Healthcare Technology and Distribution at J.P. Morgan, Lisa Gill.

Over 70% Americans are covered by employer-sponsored healthcare

45% of the employer markets is enrolled in a HDHP

Source: National Center for Health Statistics

Over 70% of Americans are covered by employer-sponsored healthcare and 45% of the employer market is enrolled in a high deductible health plan, according to the National Center for Health Statistics, meaning the power of the consumer is not going away.

Retail pharmacy chains such as CVS and Walgreens with integrated pharmacy, clinic and lab services in the same place are benefitting from heightened consumer awareness, thanks to their pricing, access and branding. Demographics are also changing the face of healthcare consumerism as most millennials and Gen Xers would rather use mobile or browse and book online for services than make an appointment in person or over the phone. Digital care or “telehealth” is a relatively unexploited pocket of the industry but is expected to grow as younger consumers search out healthcare services. Both CVS Health and Walgreens have rolled out virtual appointment plans and continue to expand their digital offerings. “Telehealth is virtually untapped today, but we expect utilization to increase with consumer demand, as it helps to solve two key issues: Lack of access to care and rising costs. In our view, we expect the next generation of healthcare offerings to be tailored to consumers in their most desirable settings, retail and home,” said Gill.

Related insights

This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication. This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan.