Here's How Drug Prices Actually Work
`
`http://fortune.com/2016/04/26/drug-prices-valeant-pfizer-merck/
`
`FORTUIE
`Here's How Drug Prices Actually Work
`
`And why that may be bad for Pfizer, Merck, and, yes, Valeant's investors.
`
`By Lauren SUva l.81aplln Aprll26, 2016
`
`Drug company investors may be worried about the Industry's wrong ailment.
`
`On Wednesday, the soon-to-step-down CBO of controversial drug company Valeant Phannaceutic:als
`Michael Pearson is set to testify in front of a Senate panel investigating Valeant and other companies that
`have made a practice of increasing the prices of older drugs. Hedge fund manager Bill Aclanan is scheduled
`to make an appearance as well.
`
`Investors last year were spooked about the growing scrutiny by Washington and regulators on drug prices.
`But even as the Senate is digging in. the real problem for big phanna companies, like AstraZeneca, Pfizer,
`and Merck, may be that their ability to enforce higher prices has actually come to an end.
`
`At least, that's the view of recent research from consulting finn Bain & Co. Rising competition from generic
`drug companies are forcing the drug companies to offer bigger rebates on their drugs than ever, Bain found.
`
`1 of 3
`
`10/30/2017, 12:28 PM
`
`Page 1 of 3
`
`ACRUX DDS PTY LTD. et al.
`
`EXHIBIT 1581
`
`IPR Petition for
`
`U.S. Patent No. 7,214,506
`
`

`

`Here's How Drug Prices Actually Work
`
`http://fortune.com/2016/04/26/drug-prices-valeant-pfizer-merck/
`
`FORTUIE
`Here's How Drug Prices Actually Work
`
`And why that may be bad for Pfizer, Merck, and, yes, Valeant's investors.
`
`By Lauren SUva l.81aplln Aprll26, 2016
`
`Drug company investors may be worried about the Industry's wrong ailment.
`
`On Wednesday, the soon-to-step-down CBO of controversial drug company Valeant Phannaceutic:als
`Michael Pearson is set to testify in front of a Senate panel investigating Valeant and other companies that
`have made a practice of increasing the prices of older drugs. Hedge fund manager Bill Aclanan is scheduled
`to make an appearance as well.
`
`Investors last year were spooked about the growing scrutiny by Washington and regulators on drug prices.
`But even as the Senate is digging in. the real problem for big phanna companies, like AstraZeneca, Pfizer,
`and Merck, may be that their ability to enforce higher prices has actually come to an end.
`
`At least, that's the view of recent research from consulting finn Bain & Co. Rising competition from generic
`drug companies are forcing the drug companies to offer bigger rebates on their drugs than ever, Bain found.
`
`1 of 3
`
`10/30/2017, 12:28 PM
`
`Page 1 of 3
`
`

`

`Here's How Drug Prices Actually Work
`
`http://fortune.com/2016/04/26/drug-prices-valeant-pfizer-merck/
`
`For investors, though, it's really difficult to tell how this is will affect the drug company's future earnings.
`
`"Rebating has become a standard practice for many drugs, but ever rising rebates are economically
`unsustainable,• Bain's report says. "They also fuel the perception that the industry is pushing drug prices
`higher and higher by factoring in big discounts before they negotiate with payers and providers."
`
`Pharmaceutical pricing is complicated, but goes something like this: Drug companies like Pfizer (PFE, -1.24%)
`set the sticker price for their drug. They then negotiate prices on these drugs with insurance companies and
`vendors, like ExpressScripts (ESRX, -1.50%) that put them in the hands of patients. The higher-rebated drugs
`might move their way up a "drug formulary" list, meaning they are more likely to show up on a preferred
`benefit plan, and patients are more likely to buy them.
`
`So when Pfizer is negotiating a deal with a vendor, they give a big "rebate." It has two benefits: Sticker prices
`appear to remain high, and continue to rise. Rebates give them priority.
`
`It "creates less transparency in the system," says Roger Sawhney, partner in Bain's healthcare practice and
`author of a recent report on the topic. They "offer less to some payers and more to others.•
`
`The rush to cut the cost of drugs has quickened as generic drugs have made gains in the pharmaceutical
`business. According to research from McKinsey & Company, net revenue of generic drugs grew 8% per year
`between 2009 and 2012, 1.5 times faster than drugs of the companies that originally patented them. Returns
`to shareholders of generic drug companies have been bigger too-5.8% versus 5.4% for Big Pharma.
`
`Once a drug goes off patent, multiple other producers can come into the market. Prices can go down 90%(cid:173)
`to-95% in the first six months, says Sawhney. As a result, these rebates skyrocket. Rebates for AstraZeneca
`(AZNCF, -0.47%) have gone to 57% from 30% in 2007, according to Bain's research. Novo Nordisk has jump to
`47% rebates, from 32%. Merck (MRK, -5.97%) has gone to 32% from 13%. Pfizer's rebates are 31%, up from
`17%.
`
`"Leading pharma companies have offered rebates for some products that cut revenue by nearly 50% or more,
`sharply compressing margins," the Bain report says.
`
`According to Pratap Khedkar, managing principal and global head of the pharmaceutical practice at sales
`and marketing firm ZS, believes that rebates cut as much as $60 billion out of the drug industry's sales, up
`from $40 billion in 2012. He attributes strong competition and tough negotiations with insurance companies
`on rebates.
`
`The trouble is that no company reports this number for a single drug, and a single pharmaceutical company
`can have hundreds of medications. Some drugs are currently more competitive than others, like diabetes
`inhibitors and inhalers for chronic obstructive pulmonary disease. But for an investor, it's hard to know
`exactly which drugs are being affected, and how much. It's a "hidden cost," Sawhney says.
`
`2 of 3
`
`10/30/2017, 12:28 PM
`
`Page 2 of 3
`
`

`

`Here's How Drug Prices Actually Work
`
`http://fortune.com/2016/04/26/drug-prices-valeant-pfizer-merck/
`
`Over the past two years, stock prices of large pharmaceutical prices like Merck and Pfizer have been
`stagnant. Part of the problem is this dynamic. For example, "while Pfizer holds a diversified product
`portfolio there is some product concentration with the company's largest drug Lyrica representing 6% of
`total sales," says Morningstar analyst Damien Conover in a recent report. Imagine what happens to Lyrica's
`revenue once it starts handing out bigger rebates.
`
`3 of 3
`
`10/30/2017, 12:28 PM
`
`Page 3 of 3
`
`