---
title: "The Battle of the Pharmaceutical Kings: A 20% Discount? Lilly T Drugs Launches a Price War Against Sima Pharmaceuticals? | Insight Research"
type: "News"
locale: "zh-CN"
url: "https://longbridge.com/zh-CN/news/102062843.md"
description: "US pharmaceutical kickbacks, more than you can imagine."
datetime: "2023-11-09T09:10:15.000Z"
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# The Battle of the Pharmaceutical Kings: A 20% Discount? Lilly T Drugs Launches a Price War Against Sima Pharmaceuticals? | Insight Research

In the weight loss drug market, Eli Lilly's tirzepatide has officially been approved and named Zepbound, preparing to compete positively with Novo Nordisk's Wegovy.

A recent report from welfare consulting giant Aon revealed an interesting story: in the most recent quarter, **American employers had to spend $27 per month on GLP-1 drugs for their employees, a 97% increase compared to the previous quarter**.

How is the usage allocated? 76% of the share is used to treat diabetes, while the remaining 24% is dedicated to weight loss. The strong sales of these drugs and the rapid growth in demand for weight loss products have caused the prices of employee health insurance to soar.

Aon predicts that by **2024**, the average cost of employer-sponsored health insurance in the United States will increase to over $15,000 per person. And a whole percentage point - **$150 of the increase - will be attributed to the expenditure on GLP-1 drugs**.

Faced with an increasing number of payers, **Eli Lilly has priced Zepbound 20% lower than Novo Nordisk's Wegovy. Why is the product with better effects priced so much lower**?

## **Two key factors in drug pricing in the United States: List price and Net price**

Eli Lilly announced today that Zepbound will be sold at a price of $1,059.87 per month, which is roughly the same as Mounjaro and 20% lower than the price of Novo Nordisk's Wegovy. This pricing decision has surprised the market, as innovative drugs with better effects are usually priced higher. However, **Eli Lilly is not following the usual pattern this time**.

There are two types of prices for pharmaceutical companies. The price at the end of the retail chain is usually called the **List price**, which is the price at which the drug is sold to the end consumer. In the case of Eli Lilly, the end price is $1,059.87.

However, this price does not all go into Eli Lilly's pocket. Eli Lilly needs to pay rebates and discounts to payers (insurers), PBMs (pharmacy benefit management companies), the US government, and other entities in the supply chain (wholesalers, distributors). After deducting these costs, the remaining amount goes into Eli Lilly's pocket, and this **remaining amount is called the Net price**.

**Therefore, Net price = List price - distribution costs - rebates. Since distribution costs are relatively low, it can be approximated as Net price = List price - rebates. Multiplying this by the volume gives the manufacturer's gross profit (Net sales).** The drug distribution system in the United States is complex, but the majority of the rebate and discount costs are borne by Pharmacy Benefit Managers (PBMs), while channel discounts can be ignored. Therefore, PBMs have a decisive impact on the final prices of pharmaceutical companies.

PBMs have multiple powers, including reviewing physician prescriptions, formulating prescription sets, and negotiating drug prices. Data shows that the top three PBMs in the United States control 85% of prescription drug sales.

According to the Association for Accessible Medicines (AAM), also known as the Generic Pharmaceutical Association, "generic drugs (small molecule generics) and biosimilars (large molecule generics) account for 91% of all prescription drugs, but only 18.2% of prescription drug expenditures."

It is evident that PBMs play an undeniable role in the pricing of innovative drugs in such a large market.

In this case, Eli Lilly chose to price its product Zepbound, which has better efficacy than Novo Nordisk's Wegovy, 20% lower. This may be because Eli Lilly is an American pharmaceutical company and receives lower discounts and rebates, allowing them to achieve sufficient net prices through lower pricing. Additionally, lower pricing from Eli Lilly can attract more end patients, especially first-time users.

Since the variation in rebates depends on product usage and market share, the demand for PBMs is to minimize the total price of all products under a specific indication while maximizing rebate benefits. Therefore, the pricing factors for each product will include various factors such as the effectiveness of all products under the specific indication, market share in the near future, and sales growth.

The rebates for each drug from PBMs are commercial secrets and cannot be specifically known. Previously, the market believed that the difference between Net price and List price would be around 20%-30%. However, this proportion may have exceeded 50% for the top ten mainstream pharmaceutical companies in 2022, meaning that pharmaceutical companies selling their products in the United States are selling them for less than half the price (Eli Lilly disclosed reaching 65%, further discussed below).

In a report in 2022, Johnson & Johnson detailed the specific situation of paying an astonishing $39 billion in rebates, fees, and discounts, providing a glimpse into the tip of the iceberg of drug rebates in the United States.

## Rebate prices in the US drug market have risen rapidly in recent years

Therefore, an increase in List price does not necessarily correspond to an increase in Net price. In fact, in recent years, there has been a trend of increasing price differentials between the two, which means that the price difference from the price increase is entirely consumed by PBM rebates, and even more rebates than the previous year.

To understand the relationship, let's look at the overall differences and changes in Net price and List price disclosed by Eli Lilly and Novo Nordisk in their 2022 ESG reports. In the ESG report, US-listed pharmaceutical companies are required to disclose the price differentials of their products sold in the US to reflect transparency in business operations.

Novo Nordisk's list price for all products sold in the US increased by 2.4% in 2022, but the net price decreased by 10.5%. On the other hand, their insulin products, due to intense competition, had no change in list price in 2022, but the net price decreased by 19.5%.

This clearly indicates that Novo Nordisk's insulin products face fierce competition and can only maintain sales through higher rebates. The fact that the net price decrease for all products is smaller than that of insulin implies that semaglutide, another product of Novo Nordisk, has greater bargaining power. However, as a European manufacturer, they may still face disadvantages compared to American manufacturers in terms of product competition.

The following graph shows the changes in net price and list price in Eli Lilly's 2022 ESG report. Despite a 3.7% increase in list price, the net price still decreased by 3.3% for Eli Lilly. This means that not only was the price increase fully offset by rebates, but an additional 3.3 percentage points were also deducted.

Eli Lilly also disclosed the average net price percentage, which is calculated as (net sales/total sales) × 100. This percentage has decreased from 49% in 2017 to 35% in 2022, indicating that rebates account for 65% of total revenue.

In the same announcement, Eli Lilly explained how they consider pricing based on a value-based approach, taking into account the following factors:

> **Customer Perspective** - How the medication meets the unmet needs of patients and caregivers, as well as how people can afford access to treatment. **Company Considerations** - The cost of providing research, development, manufacturing, and support services to customers; business trends and other economic factors; and the potential market size, patent life, and position in our larger drug portfolio of the drug.

**Competitive Landscape** - The benefits of our drugs compared to alternative medications, the suitability of our drugs for treating conditions, and existing contracts with payers compared to competitors.

**Facilitating Factors** - Such as changes in the healthcare system and policy guidance. Product lifecycle pricing adjustments are also made based on the above factors and clinical data supporting drug use.

Therefore, for Lilly, selling Zepbound at a price 20% lower than Novo Nordisk's Wegovy, based on the significant impact of PBM rebates, is a consideration.

More specific data, however, will have to wait for the details disclosed in the annual reports of these two giants in 2023.

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