#WBPI 2: The Impact of International Reference Pricing on “World Biopharma Inc”: An Unsustainable Biopharma Industry

This is the second in a series of articles focused on the drug pricing debate. Using a collection of unique and proprietary databases and analytics to show the global biopharma industry’s financials as if it were a single giant company – World Biopharma Inc (WBPI) – we can model practical implications of new policy proposals.  Today’s post provides an illustration of the impact of applying foreign drug prices to US drug prices, i.e. the topic of one of the President’s recent Executive Orders. 

Question: What would happen to the collective biopharma industry – World Biopharma Inc, or WBPI – if international price indexing was unilaterally implemented in the US? 

Answer: Operating margin would move from around 11% (ballpark in line with the totality of all industries) to a negative ~25%, and would simply not be sustainable in its current form. 

The WBPI approach attempts to bring rationality to the drug pricing debate which is plagued by two major fundamental problems (1) extreme complexity and concomitant lack of understanding of the totality of the global drug pricing ecosystem, and (2) the dearth and/or lack of transparency of a plethora of key facts. 

Our previous article discussed the current Dr Jekyll (saving the world from COVID and concomitant high stock prices and booming biotech IPO window) and Mr. Hyde (vilified on the omnipresent drug pricing debate) elements of the biopharma industry.

In future articles we will delve into many sub-topics in the drug pricing debate, including granular aspects of how WBPI’s P&L was constructed (hint: the database and analytics behind WBPI are not simply adding up company financials). In particular some industry aficionados will want to further understand the cost break down of WBPI, especially the R&D and SG&A split. But for now….

What do the headline numbers in Exhibit 1 tells us about WBPI?

The biggest takes home: if international reference pricing were implemented, whereby US net branded drug prices unilaterally moved to the average of the rest of the comparable developed countries, and all other elements (cost) remained the same, WBPI would become an unsustainable industry with a 25% operating loss.  ~48% of WBPI 2019 revenues are from the US. The US net prices of the branded drugs that WBPI sells are 2.5x the comparable developed world (and hence the target of calls for international price indexing) and our illustration assumes equalization of price to the comparable developed world. 

In the current environment, WBPI has reasonable, not excessive, returns; The 11% operating margin of WBPI is around the same as the total stock market (i.e. all industries put together). Put another way, WBPI does not make excess returns, especially when considering its high R&D spend …

R&D for WBPI is the highest for any sector, and higher than WBPI’s SG&A; That WBPI has high R&D spend is not that surprising, however its magnitude may be:  the 36% R&D spend (of revenues) is more than double the next two highest R&D sectors, Software at 15% and Semiconductors at 13%. Moreover, WBPI’s 36% R&D is significantly greater than the 27% spend on SG&A, contradicting the 1st level perception of many that the “drugs industry” has lower R&D than SG&A (a topic for future articles).

The WBPI series of articles: tackling the drug pricing debate piece by piece

No single item of the WBPI analysis provides a silver bullet answer to the drug debate – it’s just not that simple! Rather each item of WBPI series brings real-world quantitation and/or illustrations (hopefully simplified and digestible) to a specific element within the complex multifactorial debate. Collectively this WBPI series of articles aims to bring rationality to the totality of the drug pricing debate. 

Upcoming #WBPI articles include: 

-       Why are US drug prices higher than in than the comparable developed world?

-       What’s the interplay between the commercial stage biopharma industry (~175 companies) and the development stage biotech industry (>1300 companies)?

-       How is innovation in therapeutics driven, or not, in the US and ROW pricing ecosystems? 

-       Drug spend is <15% of total healthcare spend, why is this a drug pricing debate vs. healthcare spend debate? 

-       R&D spend: Who really pays for the ~$250B R&D spend of the industry?

-       R&D flow: What does the flow of R&D capital look like?

-       Payors vs. manufacturers vs. middlemen – the role, advantages and disadvantages of each of these in the US drug pricing ecosystem?

-       Is the US drug pricing system fundamentally broken, or is the co-pay/out-of-pocket element the real problem? 

-       What are the biggest differences between the US and ROW drug pricing ecosystems?

-       What are the biggest risks and opportunities for changes in the US drug pricing ecosystem?

-       From a science perspective, the drugs industry is the most exciting it has ever been with the emergence of a plethora of new therapeutic modalities such as gene therapy. How does the drug pricing debate impact this?   

Feedback, comments and requests for specific items of analysis are welcome – [email protected]

The views expressed in this article are entirely my own and are not those of any other person, entity or organization.

Ravi Mehrotra, Ph.D. has over two decades of leadership in biotechnology equity research and focused in particular on biopharma industry thematic and strategic topics, such as R&D productivity, biotech business models, the gene and cell therapy revolution, platform technology company evolution and the drug pricing debate.