Since the beginning of 2018, the push to curb ever increasing drug prices has picked up steam. Two recent announcements^1-4 in particular are what I consider to be “constructive destructionist”⁵ in nature and if successful, could have a lasting impact and game changing influence on the pharma landscape.

Leading up to these announcements, there has been a lot of talk and proposed legislation to curtail drug costs. However, we have to accept the fact that any change being proposed by legislators or put on the ballot box is not going to come to fruition. The pharma lobby has too big of an influence on the electability of legislators who want to stay in office for as long as possible. This relationship between the pharma industry and legislators has not worked out in favor of the constituents who want justifiably lower drug prices.

The recent initiatives are worth taking a look at because as I mentioned, each presents a possible game changing opportunity to improve drug affordability while at the same time improving product quality, revenues and profits for the pharma industry. In the U.S., drugs are acquired through two major systems: Veteran’s Affairs for military veterans and for the rest of the country through mutually subsidized healthcare systems that includes Medicare. Veteran’s Affairs along with selected Health Systems (VAH) and Amazon, Berkshire Hathaway and JPMorgan^2-4 (ABM) are set to cause a stir to the existing mutually subsidized system when it comes to their employees. The partnership between these organizations could be the start of a revolution against ever increasing drug prices.

Veteran’s Affairs
There are about seven million participants in the Veteran’s Affair (VA) system. Some of us may not know it but the VA has its own methods for acquiring drugs at discounted prices.6 Its drug acquisition plan is unique and most likely is not entertained by pharmaceutical companies because the number of drugs offered are restricted and pharma and supply chain profits are lowered. However, pharma companies have acquiesced to avoid the wrath of the U.S. government and the country. The following guidelines have to be followed: 

“Unlike Medicare, in which beneficiaries can choose drug plans, each with its own formulary, the VA offers no choice. Serving as the sole purchaser of drugs, the VA maintains a single national formulary that physicians must follow. The VA formulary is created through access restrictions on drugs. For drugs to be covered on the formulary, their makers must list all of their drugs on the Federal Supply Schedule (FSS) for federal purchasers at the price given to the most-favored nonfederal customer under comparable terms and conditions.

Additionally, drug makers must offer the VA a price lower than a statutory federal price ceiling (FPC), which mandates a discount of at least 24 percent off the non-federal average manufacturer price (NFAMP), with a rebate if price increases exceed inflation.”

Even with the VA’s restrictive purchasing program, the February 2018 announcement¹ presents generic drug producers with a way to capitalize on an opportunity to expand their markets—other Mutually Subsidized and Medicare systems—and increase profits and revenues. Since the healthcare systems are going to be directly working with the manufacturers, it is a unique opportunity for them to capitalize on the values of economies of scale and innovative manufacturing technologies.^7,8

Mutually subsidized systems
VAH and ABM alliances⁹ should use reverse calculations10 to encourage manufacturing companies to innovate. Economies of scale and “what if” analysis can be used to improve manufacturing processes. The upside of the effort is going to be higher revenues, higher profits and lower drug costs. FDA and other regulators will have to be open minded and proactive to make sure innovative manufacturing practices are adopted on a timely basis and commercialized.^11,12    

Figure 1 is a schematic of the supply chain that is applicable to patients in Medicare and mutually subsidized healthcare systems. 

Pharmacy benefit managers (PBM),¹³ or middlemen, facilitate the distribution of drugs to most outside the VA system. Manufacturing and costs of APIs and their formulations are simple to understand.^10,14 However, under the current system pricing from formulations to the patients becomes murky and complex. The mystery is being slowly unraveled.15-19 States are also taking steps to contain rising prices.^20,21 

PBMs have made every attempt to make sure that the cost details are not readily available and the patients pay the highest drug prices. UnitedHealth²² has announced a possible peak in the PBM “black box.” However, until the beans of this initiative are counted and everything is black and white, it is too early to grasp the impact.   
  
It is interesting to note that PBMs block the direct import of drugs by the patients from, for example, Canada and other countries, but the same drugs are imported and sold at a significantly higher price in the U.S. The explanation given is related to the safety of the drug. This also could be considered an artificial way to keep prices up by using scare tactics. Uniform global drug standards will greatly help the situation but they would be a challenge to establish.

From drug price information collected in India and in U.S.¹⁴ (with regular insurance, Medicare and NO insurance) one can easily see the reasons why PBMs have discouraged the ABM alliance2 to take a peak in the “black box.” Most can conjecture that PBMs do not want anyone to negotiate and jeopardize their profits. Sood etal16 and Grant¹⁷ have done an excellent review of the PBM price structure. Price multiples of between 100-1500 times from manufacturing to patients,^14,16 should be an eye opener for the negotiators in the VA and ABM alliance. As I mentioned earlier, economies of scale and better technologies can significantly lower these multiples.

Drug price reduction opportunities
Using Panel B for the money flow¹⁶ illustration, it is interesting to note how a $18 drug gets to the patient in the current system and sells for $100.



Using sound principles of economics, chemical engineering, chemistry, economies of scale and good manufacturing practices, a 20% reduction in manufactured cost will translate to about $80 to the patient if no improvements are done to the current PBM supply chain “black box.” Twenty-percent or better cost reduction in the supply chain should not be considered out of reach. Combined cost reductions in manufacturing and the supply chain would mean that a current $100 drug would cost about $65 to the patient. I am sure a $35 cost reduction is worth the effort. Twenty-percent cost reductions in manufacturing and in the supply chain each are not out of the realm of possibility. Effort would be needed but everyone along the drug product supply chain from creation (manufacturing) to consumption (patient) will benefit financially.

Business model change
Accelerated 2018 chatter is not going to let up. It seems that the pressure to make drugs affordable or lower drug prices will continuously increase. Dan Akerson, former chief executive of General Motors, said it well when he said, “If you don’t attack your own business model, trust me, somebody else will.”

So far pharma companies and PBMs have stuck with their models of creating new drugs and along with PBMs selling them at the highest price participants can afford in mutually subsidized systems. Essentially no effort has been made to improve their methods to lower drug costs. In the last few years big pharma companies have relied on orphan drugs or marginally better drugs to improve their revenues and profits. These are not going to sustain major pharma companies for the long haul.

Since generic drugs in the U.S., which represent an ever-increasing need, are distributed through PBMs in our mutually subsidized healthcare systems, even they are priced at the highest level (see Table 1). We have to recognize that Pharma/PBMs major customer base is dependent on affordable drugs. The current Pharma/PBM business model has to change. It is time. 

There is a need and it seems that PBMs and associated companies are trying to cater to shareholders²⁵ rather than the patients who are the basis of their existence. With the success of the VAH and ABM Alliance we could see the spread of drug price reductions. The pace could accelerate moving forward now that  “the cat is out of the bag.” The question is how the pharma industry and PBMs are going to participate for everyone’s benefit. My conjecture is outliers will cause a change and it will happen sooner than expected. 

References
1. Leading U.S. Health Systems Announce Plans to Develop a Not-for-Profit Generic Drug Company, www.businesswire.com, Accesses March 1, 2018.
2. Triple Threat: Amazon, Berkshire, JPMorgan Rattle Health-Care Firms, The Wall Street Journal, January 30, 2018, Accessed January 31, 2018.
3. If Amazon And Buffett Lift Veil On Health Prices, Insurers Are In Trouble, Forbes.com, January 31, 2018, Accessed January 31, 2018.
4. JPMorgan to Banking Clients: Joint Health-Care Venture Is No Threat, WSJ.COM, February 4, 2018, Accessed February 4, 2018.
5. Creative destruction: https://en.wikipedia.org/wiki/Creative destruction Accessed January 31, 2018.
6. D’Angelo, Greg: The VA Drug Pricing Model: What Senators Should Know, The Heritage Foundation, April 11, 2007, Accessed March 5, 2018.
7. Malhotra, Girish:  Chemical Process Simplification: Improving Productivity and Sustainability John Wiley & Sons, February 2011.
8. Malhotra, Girish: Innovation In Pharmaceuticals: What Would It Take & Who is Responsible?, Profitability through Simplicity, November 28, 2017, Accessed March 5, 2018.
9. Malhotra, Girish: Could Amazon (A), Berkshire Hathaway (B) and J.P. Morgan Chase (M) be the Anti-Ballistic Missile (ABM) Needed to Control/Curb Rising Healthcare Costs? Profitability through Simplicity, February 9, 2018, Accessed February 27, 2018.
10. Malhotra, Girish: A Blueprint for Improved Pharma Competitiveness, Contract Pharma, September 8, 2014, Accessed February 28, 2018.
11. Malhotra, Girish: Can the Review and Approval Process for ANDA at USFDA be Reduced from Ten Months to Three Months? Profitability through Simplicity, March 25, 2017, Accessed March 5, 2018.
12. Malhotra, Girish: ANDA (Abbreviated New Drug Application) / NDA (New Drug Applications) Filing Simplification: Road Maps are a Must. Profitability through Simplicity, May 11, 2017, Accessed March 5, 2018.
13. What Is a Pharmacy Benefit Manager (PBM) And How Does A PBM Impact The Pharmacy Benefits Ecosystem?, www.truveris.com, August 15, 2017, Accessed February 27, 2018.
14. Malhotra, Girish: Comparison of Drugs Prices: US vs. India; Their Manufacturing Costs & Opportunities to Improve Affordability, Profitability through Simplicity, January 18, 2018.
15. Why Your Pharmacist Can’t Tell You That $20 Prescription Could cost Only $8, The New York Times, Accessed February 26, 2018.
16. Sood, N; Shih, T; Van Nuys, K; Goldman, D; The Flow of Money Through the Pharmaceutical Distribution System, June 14, 2017, http://healthpolicy.usc.edu/Flow_of_Money_Through_the_Pharmaceutical_Distribution_System.aspx, Accessed March 1, 2018.
17. Grant, Charley, Hidden Profits In the Prescription Drug Supply Chain, The Wall Street Journal, February 26, 2018, Accessed February 27, 2018.
18. Profits Are Hidden in the Prescription Drug Supply Chain, The Wall Street Journal, February 26, 2018, Accessed February 27, 2018.
19. Grant, Charley, White House Eyes Role of Middlemen in Drug Price Fight, The Wall Street Journal, February 12, 2018, Accessed March 1, 2018.
20. On Drug Pricing, States Step In Where Washington Fails, The New York Times, February 27, 2018, Accessed February 27, 2018.
21. House Bill 4005, 79Th Oregon Legislative Assembly -2018, Price and Cost of Prescription Drugs, February 26, 2018, Accessed March 5, 2018.
22. UnitedHealth Will Pass Drug Rebates Directly to Some Consumers, The Wall Street Journal, March 6, 2018, Accessed March 6, 2018.
23. Private conversation with Mr. Jack Harding Jr., Harding & Harding Associates, North Canton, OH March 1, 2018.
24. Private communication with a Pharmacist at a leading pharmacy, February 26, 2018.
25. Herper, Matthew: Cigna’s $54 Billion Purchase Of Express Scripts Could Upend The Prescription Drug Market, Forbes.com, March 8, 2018, Accessed March 9, 2018.

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Girish Malhotra
Contributing Editor

Girish Malhotra, president and founder of EPCOT International, has more than 45 years of industrial experience in pharmaceuticals, specialty, custom, fine chemicals, coatings, resins and polymers, additives in manufacturing, process and technology development and business development. girish@epcotint.com; Tel: 216-223-8763.