An Interview with Bill Roth, General Manager, Managing Partner, Blue Fin Group

Medicine

Nicholas Saraceno: What may be the potential driving force behind recent moves by PBMs like CVS and Express Scripts to overhaul their drug pricing structures?

Roth: There’s a lot of speculation on the real drivers behind what these plans really mean. We’ll unpack them in two main ways. One is the rise of the cash pay model. What they’re proposing is to have an offering similar to Mark Cuban’s Cost Plus and Amazon’s cash pay portion of their pharmacy model. In that world, those pharmacies have realized how dramatically overpriced the out of pocket is on generics. The whole insurance based genetics works on the idea that if a brand is at $1000, and if I charge $600 for the generic, it’s a massive savings from the brand. But, the reality is those products may be purchased by the pharmacy for $20. That would be what you consider an egregious margin. That’s where the cash pay pharmacy is coming in and saying “I’ll price it out at $40.” If you look at specialty products in the oncology area, the list prices of the brand are roughly $120,000 a year. If you use insurance, the generic versions are probably $60,000 a year. Both products are available on a cash pay for somewhere between $15-$30 a month. I just think that’s an example of how much things have inflated. That’s the value in the cash pay market for generics. It’s a pin that’s going to pop the profitability on the generic side. It’s a big risk to the overall retail pharmacy model.

Second, is the repayment of the products to the payers. What they’re trying to do from what we can understand is try to work in a world where they don’t lose money on brands. That is a fundamental shift of how pharmacy has been reimbursed for the last two decades by PBMs. It has worked on a bundled model for a long time. The idea is that you lose a little money on the brands but you make make it back on the generics. Up until the end of the patent cliff in 2016, that was the road and nobody had any problem with it. I get the question a lot from manufacturing clients on why now has the pharmacy come out and they’re losing money. There’s two main reasons than any other. The new generics aren’t coming out the way they were from 2012-2016. Second is the slow degrade of that generic business over to cash pay. Basically, the generic margins aren’t offsetting the massive losses on the brands. In our interpretation, it’s no different than what medicaid did by moving to a NADAC or an AAC perspective. It’s basically to compensate the pharmacy close to where their acquisition price is. I think a piece that’s exacerbating it for the larger pharmacies is a big difference between how national pharmacies buys generics and brands as opposed to how an independent buys. An independent buys at an aggressive cost, sometimes even better. But, they pay more for generics than a chain would. A chain goes very aggressive with their generics. Therefore, they’re paying higher. They’re seeing an exacerbated loss on brands that retailers aren’t seeing. The reality though is that if you move to a NADAC or an AAC pricing model, that could be as much as maybe a 3% price increase to plan sponsors. I don’t think the plan sponsors have the ability to stomach that type of an increase. I think that’s where the skepticism of the reality is. Not to say that it won’t happen, but we’re pretty skeptical that it will. There is another event that’s happening this year. From what we can see, the WAC reductions have already started and we knew this was happening for insulin. If brands were to continue with the thread of lowering WACS, It does at least soften the losses. Your percentages are still losing at the same level, but the dollars that you’re losing are offset by it.

When it comes to these new pharmacy and reimbursement models, the cash pay makes a lot of sense to me, but it’s playing with fire as it could burn the insurance aspect of the business. The move to a NADAC model doesn’t solve the problem, it just lessens the losses. It still doesn’t do anything to offset my earlier point, that the bottom 2% of brands are still looking at losses within the pharmacy. Maybe the losses just aren’t as extreme. It’s better than nothing. The pharmacies have to try something. It’s something to watch to see how it plays out. We’re being a little cautious when it comes to saying whether it’s good or bad or whether it has legs or not. We understand the drivers behind it and we’ll just have to see how it plays out.

Saraceno: With PBMs under fire from legislators in DC, have we begun to see a tectonic shift in the pharma landscape that will remove some of the power PBMs have?

Roth: I view the PBMs as being incredibly strong and powerful entities that are highly needed in the market. Until we have another alternative to them. There’s a great report by Eric Percher from Nephron Research where he profiles the way PBMs have been compensated for the last 10 years relative to where they’re getting money from. They’ve really shifted a lot of their focus into specialty. There’s about a third of their dollars that are coming from specialty pharmacies, we’ve seen massive rises there. They’ve been very successful in moving their rebate dollars to their admin fee layers. Basically, they’ve found great ways to protect all of those margins. I don’t know why people have a tendency to lose the importance of this. It’s not an obvious piece of the business, but it’s a check that comes into these companies through another angle. So, they’ll overpay for healthcare and then use that money for other angles of running their business. I don’t necessarily agree with it, but I understand it. Until the plan sponsors are willing to let go of those rebate dollars, I don’t see any difference. There were a number of good folks that kind of taught me that plan sponsors are looking for performance. The PBMs perform. As much as I think the industry likes to dislike the PBM, they have a very entrenched position in the market. What’s your next alternative? You can carve out things like generics, but it doesn’t do anything to impact specialty.

Saraceno: In light of Eli Lilly’s new DTC program for the above drugs, how might this impact PBMs in the long-term if more manufacturers follow in Lilly’s path?

Roth: I think part of it may be tied up in what success looks like for a program like Lilly Direct. Will they actually do better in that model than working through the traditional PBM to retail, or PBM to specialty pharmacy model. I think there’s still challenges with reaching frequency. One of our consultants was actually talking about seeing where it goes. Even if you try a search right now to find Lilly Direct, it’s not optimized for SEO yet. That’s not the way that I think we recommended it be built. We would have recommended a full therapeutic area approach. Why just have your products? Why not create a better draw? If you’re competing with a lifestyle pharmacy, have everything that they have. Present yourself as another lifestyle pharmacy, and just amplify it.

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