Insurer M&A endangers pharma's pricing power, particularly in cancer: Moody's

Print 08 July 2015
Tracy Staton / Fierce Pharma

Drugmakers can't be excited about the wave of consolidation going through the health insurance business. After all, pharma knows firsthand how mergers can put the screws to prices; just think of Express Scripts ($ESRX) and its Medco buyout.

But Moody's Investors Service has made the worry official: The spate of health insurer dealmaking is bad for pharma companies and their long-term pricing power.

"[I]nsurers' strengthening market share will escalate reimbursement pressure over time, which will reduce the use of some pharmaceutical products and depress pricing on others," Moody's said in a report on Monday.

The pain won't be immediate, Moody's says. As Aetna ($AET) absorbs Humana ($HUM)--and as other insurers combine--they'll be focused on integrating their systems and benefit plans at first. But when that's done, spending will quickly come to center stage.

The biggest pressure point? High-cost cancer drugs, the ratings agency figures, not just because they're costly, but because so many companies now depend on that category. Consider immuno-oncology, which is not only the latest-and-greatest thing in cancer treatment, but a rapidly expanding field that's has drawn in a who's who of pharma companies. Merck & Co. ($MRK), Bristol-Myers Squibb ($BMY), AstraZeneca ($AZN), Roche ($RHHBY), Novartis ($NVS), Pfizer ($PFE), Celgene ($CELG), Merck KGaA … the list seemingly grows by the day. And so far those meds are predictably pricey; Merck & Co.'s Keytruda and Bristol-Myers' Opdivo, the first two on the market, run $150,000 each.

Plus, because many cancer meds are administered by doctors and clinics, insurers have the opportunity to bundle services and drug costs into a set fee, Moody's figures. Or test performance-based pricing models, for that matter; recently, Novartis execs backed the idea as worth a try, and the company is testing a results-based deal on its forthcoming heart failure med Entresto.

In addition to the $37 billion Aetna-Humana deal, a potential merger between Cigna ($CI) and Anthem ($WLP) is in the air, though Cigna has so far rebuffed Anthem's offers. UnitedHealth ($UNH) could follow with its own buyout or buyouts, such as Molina Healthcare or Well Care Health Plans, analysts figure. And two small insurers, Health Net and Centene, agreed last week to a $6.8 billion merger. The Aetna-Humana combo and Cigna-Anthem tie-up would control about one-third of the U.S. healthcare market, Leerink analyst Ana Gupte has said.

That control means arm-twisting power. Pharmacy benefits managers Express Scripts and CVS Health ($CVS) already are flexing their muscles; they've kicked dozens of meds off their standard formularies and squeezed big discounts out of drugmakers in exchange for favorable placement. The insurer deals are likely to give these big PBMs--and to a lesser extent, their smaller rivals--even more market share, and more clout. Like Moody's, they've said cancer drugs offer a ripe target for pricing deals.

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