Latest Drugwonks' Blog
AXIOS: Inside a drug pricing contract
By Bob Herman, March 15, 2018
A contract template used by Express Scripts, the largest pharmacy benefit manager in the U.S., provides a window into how pharmacy benefit managers — middlemen that manage drug coverage for businesses throughout the country — steer negotiations with drug companies to benefit their own financial interests.
Why it matters: These benefit managers have a lot of power over the prescription drug coverage people get through their employers, and they're supposed to negotiate discounts so coverage is cheaper for insurers and employers. If they're not making it cheaper, there's less chance people will get relief from high drug prices.
The details: Axios obtained a 36-page Express Scripts contract template from a source who works in the health care industry. Express Scripts and employers use the document as a starting point to determine how medications are paid for and how pharmacy networks work, but the contract usually is not in the public's view. Since it's a template, there are no hard numbers or terms of any specific agreements.
The big takeaway: There's nothing illegal about these contracts. But the language is clearly written with the PBM's financial interests in mind, and critics say those kinds of provisions can result in lost savings for everyone, especially for small companies and their employees.
Even some of the largest companies think they are protected because they have in-house and outside attorneys vetting contracts, yet that's not necessarily the case.
"That's a little bit like going to Las Vegas and consistently thinking you can beat the house at their own game," said one source who has worked in the industry for many years. "These PBMs have entire departments of lawyers where this is their game."
The other side: Express Scripts, which is in the process of being acquired by Cigna in a $67 billion deal, didn't dispute the contract template was its own. But spokeswoman Jennifer Luddy said in an email the document was "several years old," although some sources said it appeared to be current.
Luddy added that employers are "savvy purchasers of pharmacy benefits" and that these contracts are common: "It is industry standard terminology used by all PBMs, and is well-understood by clients and consultants."
In a follow-up email, Luddy said: "It is clear to us that there are several vocal PBM critics who are eager to provide their biased interpretations of this template contract to serve their own agenda."The details: These are some of the major provisions. The contract was explained in interviews with several people who work in or are familiar with the pharmacy benefit industry, most of whom asked not to be named given the sensitivity of the issue and to speak candidly.
Rebates
A primary function of a PBM is to negotiate rebates from drug companies. Most of those rebate dollars flow back to employers (not workers). But Express Scripts collects other rebate-like fees from drug companies that it doesn't have to pass along to employers.
The Express Scripts contract explicitly says "rebates do not include things" like "administration fees" from drug manufacturers, "inflation payments" and numerous types of "other pharma revenue."
"There are so many carve-outs of what they consider a rebate that it’s very murky of what’s being kept and what’s being passed through (to clients)," an industry source said.
The contract also says Express Scripts negotiates rebates "on its own behalf and for its own benefit, and not on behalf of sponsor."The brand/generic algorithm
Multiple people said the "proprietary" algorithm is one of the most important definitions, as it gives Express Scripts full authority to determine whether a drug is brand or generic without being transparent.
The algorithm allows Express Scripts to pocket the difference between a brand-drug discount and a generic-drug discount — a major tactic to maximize profits.
"This is why they don't miss earnings," said one person familiar with the industry.
Payment schedules
The "MAC list" and "maximum reimbursement amount" also permit Express Scripts to pay for drugs in a way that is "most advantageous to them," according to a source.
For example, using these different lists of drug costs, Express Scripts can charge its employer clients $15 for a particular medication but pay the pharmacy just $1 for the same medication — and keep the extra money for itself.Financial disclosures and auditing
The last two pages rehash some of the initial definitions, but also reiterate how Express Scripts can collect almost any type of revenue it wants and "may realize positive margin" — code for reaping big profits and not having to share with employers.
Employers can choose to have their agreements audited, but they have to get Express Scripts' approval on what auditor is used.
And sometimes they don't get it. Hayes, a pharmacy benefit consultant who agreed to review the document and speak on the record, said Express Scripts has not allowed her firm to conduct audits.
Per this article in the Chicago Tribune, llinois lawmakers are considering a bill that would guard non-medical switching in the middle of a plan year. The proposed bill would prohibit commercial health insurers from modifying coverage of a drug during the plan year if it has previously approved the drug for a medical condition.
If drug manufacturers are giving such large discounts for brand name medicines to Pharmacy Benefit Managers (PBMs); while prices of commonly used generics keep going down, why aren’t co-pays going down and why, in some circumstances, are they going up – even for generic medicines?
In short, where’s the money going?
The answer, according to a new study just published in the Journal of the American Medical Association, Frequency and Magnitude of Co-payments Exceeding Prescription Drug Costs, is … from the purses of patients into the pockets of the PBMs.
Per the JAMA article:
Pharmacies collect patients’ co-payments and pass them to PBMs, who reimburse the pharmacy a negotiated rate to cover drug costs, dispensing fees, and any markup. Overpayments occur when the co-payment exceeds the negotiated reimbursement.
The scheme is called “claw-backs.”
Per JAMA:
However, drug co-payments sometimes exceed costs, with the insurer or pharmacy benefit manager (PBM) keeping the difference. Furthermore, some pharmacists are contractually prevented from alerting patients when their co-payment exceeds the drug’s cash price. Although some have argued that the practice is uncommon, a 2016 survey of independent pharmacists indicates otherwise.
No, you read that correctly, PBMs lock-in these claw-backs, going so far as to contractually gag pharmacists who want to help patients lower their drug costs.
Some of the study highlights include:
* Among 9.5 million claims, 2.2 million (22.94%) involved overpayments.
(That means that almost 1 out of 4 prescriptions involved a patient copayment that exceeded the average reimbursement paid by the insurer. The vernacular for this is – stealing.)
* The most commonly prescribed drug, hydrocodone/acetaminophen, involved an overpayment on 36.15% of claims.
(Could this explain why PBMs make time-consuming prior-authorization for abuse-deterrent opioids and non-opioid pain alternatives such common practice?)
* Overpayments were common in this data set, affecting 23% of all prescriptions, and 28% of generic prescriptions.
(Price gouging on generics! Shameful.)
* In 2013, total overpayments by patients amounted to $135 million in the sample studied
The authors conclude:
Cost-related nonadherence is common and associated with increased medical services use and negative health outcomes. By raising patient costs at the point of sale, overpayments may exacerbate these effects. To lower patient expenses, legislation addressing overpayments and gag clauses warrants further investigation.
Amen.
In short, where’s the money going?
The answer, according to a new study just published in the Journal of the American Medical Association, Frequency and Magnitude of Co-payments Exceeding Prescription Drug Costs, is … from the purses of patients into the pockets of the PBMs.
Per the JAMA article:
Pharmacies collect patients’ co-payments and pass them to PBMs, who reimburse the pharmacy a negotiated rate to cover drug costs, dispensing fees, and any markup. Overpayments occur when the co-payment exceeds the negotiated reimbursement.
The scheme is called “claw-backs.”
Per JAMA:
However, drug co-payments sometimes exceed costs, with the insurer or pharmacy benefit manager (PBM) keeping the difference. Furthermore, some pharmacists are contractually prevented from alerting patients when their co-payment exceeds the drug’s cash price. Although some have argued that the practice is uncommon, a 2016 survey of independent pharmacists indicates otherwise.
No, you read that correctly, PBMs lock-in these claw-backs, going so far as to contractually gag pharmacists who want to help patients lower their drug costs.
Some of the study highlights include:
* Among 9.5 million claims, 2.2 million (22.94%) involved overpayments.
(That means that almost 1 out of 4 prescriptions involved a patient copayment that exceeded the average reimbursement paid by the insurer. The vernacular for this is – stealing.)
* The most commonly prescribed drug, hydrocodone/acetaminophen, involved an overpayment on 36.15% of claims.
(Could this explain why PBMs make time-consuming prior-authorization for abuse-deterrent opioids and non-opioid pain alternatives such common practice?)
* Overpayments were common in this data set, affecting 23% of all prescriptions, and 28% of generic prescriptions.
(Price gouging on generics! Shameful.)
* In 2013, total overpayments by patients amounted to $135 million in the sample studied
The authors conclude:
Cost-related nonadherence is common and associated with increased medical services use and negative health outcomes. By raising patient costs at the point of sale, overpayments may exacerbate these effects. To lower patient expenses, legislation addressing overpayments and gag clauses warrants further investigation.
Amen.
There is a yawning divide between regulatory science and digital development. Digiratti view regulators as stodgy while regulators view digital developers as trigger-happy. There is an unproductive cognitive disconnect.
When we consider the integration of new and exciting digital technologies (ingestible, implantable, portable, app-based, diagnostic, etc.), it's likely that technologists are far more likely to be excited about the possibilities rather than considerate of the risks. The same cannot necessarily be said of regulators/reviewers who reside within a culture of proof and predicate. Technologists inhabit a planet of errors and upgrades. There is no "Beta" approval pathway for the FDA.
For the FDA, risk exists to be minimized while for digital developers risk is an opportunity. Fortunately, there is common ground – and it isn't the technology. It's the public health need for which the technology presents a safe and effective (within the FDA definition of that duality) solution. Interestingly, it's the drug developer who must now play the role of “learned intermediary” between regulator and technologist -- a new and uncomfortable role. But the pay-off is worth the effort for sponsor, regulator and public health advocate -- better patient outcomes through more evolved 21st century technology integration.
Consider Adherence/Compliance, a public health problem of brobdingnagian proportion nowhere more acutely felt than in patients with schizophrenia. That's why products that address new and innovative solutions (such as Abilify MyCite, a pill with a sensor that digitally tracks if patients with schizophrenia have ingested their medication) are so exciting to developer, regulator and patient alike. It's a real world example that should provide momentum for continued development beyond this one therapeutic area.
As real world data becomes available, the FDA will hopefully feel increasingly comfortable expediting similar programs (specifically) and programs with more innovative uses of digital technologies (more broadly).
Positive signals from the FDA will send potent messages to developers that further investment in such clinical programs is worth the investment risk. And positive signals emanating from “the patient voice” will be crucial.
When we consider the integration of new and exciting digital technologies (ingestible, implantable, portable, app-based, diagnostic, etc.), it's likely that technologists are far more likely to be excited about the possibilities rather than considerate of the risks. The same cannot necessarily be said of regulators/reviewers who reside within a culture of proof and predicate. Technologists inhabit a planet of errors and upgrades. There is no "Beta" approval pathway for the FDA.
For the FDA, risk exists to be minimized while for digital developers risk is an opportunity. Fortunately, there is common ground – and it isn't the technology. It's the public health need for which the technology presents a safe and effective (within the FDA definition of that duality) solution. Interestingly, it's the drug developer who must now play the role of “learned intermediary” between regulator and technologist -- a new and uncomfortable role. But the pay-off is worth the effort for sponsor, regulator and public health advocate -- better patient outcomes through more evolved 21st century technology integration.
Consider Adherence/Compliance, a public health problem of brobdingnagian proportion nowhere more acutely felt than in patients with schizophrenia. That's why products that address new and innovative solutions (such as Abilify MyCite, a pill with a sensor that digitally tracks if patients with schizophrenia have ingested their medication) are so exciting to developer, regulator and patient alike. It's a real world example that should provide momentum for continued development beyond this one therapeutic area.
As real world data becomes available, the FDA will hopefully feel increasingly comfortable expediting similar programs (specifically) and programs with more innovative uses of digital technologies (more broadly).
Positive signals from the FDA will send potent messages to developers that further investment in such clinical programs is worth the investment risk. And positive signals emanating from “the patient voice” will be crucial.
The Creating and Restoring Equal Access to Equivalent Samples (CREATES) Act will not be included in the pending omnibus budget bill, according to BioCentury, citing lobbyists. Although the bill has bipartisan support and is aligned with Trump administration policies, a combination of lobbying muscle and political calculation have scuttled efforts to have it included in the omnibus bill. The bill seeks to prevent brand-name drug makers from using Risk Evaluation and Mitigation Strategy programs to avoid selling samples that are needed to develop generic versions and block generic competition.
FDA's Gottlieb blames industry 'Kabuki drug pricing' for high costs
WASHINGTON (Reuters) - U.S. Food and Drug Administration chief, Scott Gottlieb, criticized pharmacy benefit managers, health insurers and drugmakers on Wednesday for “Kabuki drug-pricing constructs” that profit the industry at the expense of consumers.
The comments, made at a conference organized by a leading U.S. health insurer lobbying group, stoked speculation over what steps the administration of U.S. President Donald Trump may take to rein in lofty prescription drug costs.
“Patients shouldn’t face exorbitant out-of-pocket costs, and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries,” Gottlieb said at the meeting of America’s Health Insurance Plans (AHIP). “Sick people aren’t supposed to be subsidizing the healthy.”
The remarks surprised meeting participants and spurred new accusations between leading members of the drug supply chain. Shares of top pharmacy benefits managers CVS Health Corp and Express Scripts Holding Co fell 1.4 percent and 2.4 percent, respectively.
He criticized the health industry for failing to promote access to so-called biosimilar versions of drugs, and for pricing practices that harm consumers.
Biosimilars are copies of original drugs that are supposed to be as effective but cheaper. Kabuki is a form of Japanese theater characterized by dramatization and elaborate costumes.
Gottlieb said practices in the healthcare industry “obscure profit taking across the supply chain that drives up costs” and discourage competition.
As FDA commissioner, Gottlieb has prioritized approving more generic drugs to help lower prices, allowing more than 1,000 copycat drugs into the market last year, he said.
Still, while the agency has approved nine biosimilar therapies to date, only three have reached the market, Gottlieb said. The rest have been mired in legal challenges brought by drugmakers such as AbbVie Inc to protect its multibillion-dollar rheumatoid arthritis treatment Humira.
Trump has vowed repeatedly that his administration will take more steps to lower drug costs, and included some potential actions in a proposed budget made public last month that Congress is not likely to accept.
Other regulatory actions could come directly from Health and Human Services Secretary Alex Azar, a former drug company executive, and through the department’s Centers for Medicare and Medicaid Services. Azar is scheduled to deliver remarks at the AHIP conference on Thursday.
Gottlieb noted that the top three pharmacy benefit managers - CVS, UnitedHealth Group Inc and Express Scripts - control more than two-thirds of their market. The top three wholesalers - AmerisourceBergen Corp, Cardinal Health Inc and McKesson Corp - control more than 80 percent; and the top five pharmacies more than 50 percent, he said.
AHIP responded by saying drug manufacturers were to blame for the high cost of prescription medicines. The Pharmaceutical Care Management Association, which represents pharmacy benefit managers, also said it was unfair to place blame on payers who cannot control the prices drugmakers set.
WASHINGTON (Reuters) - U.S. Food and Drug Administration chief, Scott Gottlieb, criticized pharmacy benefit managers, health insurers and drugmakers on Wednesday for “Kabuki drug-pricing constructs” that profit the industry at the expense of consumers.
The comments, made at a conference organized by a leading U.S. health insurer lobbying group, stoked speculation over what steps the administration of U.S. President Donald Trump may take to rein in lofty prescription drug costs.
“Patients shouldn’t face exorbitant out-of-pocket costs, and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries,” Gottlieb said at the meeting of America’s Health Insurance Plans (AHIP). “Sick people aren’t supposed to be subsidizing the healthy.”
The remarks surprised meeting participants and spurred new accusations between leading members of the drug supply chain. Shares of top pharmacy benefits managers CVS Health Corp and Express Scripts Holding Co fell 1.4 percent and 2.4 percent, respectively.
He criticized the health industry for failing to promote access to so-called biosimilar versions of drugs, and for pricing practices that harm consumers.
Biosimilars are copies of original drugs that are supposed to be as effective but cheaper. Kabuki is a form of Japanese theater characterized by dramatization and elaborate costumes.
Gottlieb said practices in the healthcare industry “obscure profit taking across the supply chain that drives up costs” and discourage competition.
As FDA commissioner, Gottlieb has prioritized approving more generic drugs to help lower prices, allowing more than 1,000 copycat drugs into the market last year, he said.
Still, while the agency has approved nine biosimilar therapies to date, only three have reached the market, Gottlieb said. The rest have been mired in legal challenges brought by drugmakers such as AbbVie Inc to protect its multibillion-dollar rheumatoid arthritis treatment Humira.
Trump has vowed repeatedly that his administration will take more steps to lower drug costs, and included some potential actions in a proposed budget made public last month that Congress is not likely to accept.
Other regulatory actions could come directly from Health and Human Services Secretary Alex Azar, a former drug company executive, and through the department’s Centers for Medicare and Medicaid Services. Azar is scheduled to deliver remarks at the AHIP conference on Thursday.
Gottlieb noted that the top three pharmacy benefit managers - CVS, UnitedHealth Group Inc and Express Scripts - control more than two-thirds of their market. The top three wholesalers - AmerisourceBergen Corp, Cardinal Health Inc and McKesson Corp - control more than 80 percent; and the top five pharmacies more than 50 percent, he said.
AHIP responded by saying drug manufacturers were to blame for the high cost of prescription medicines. The Pharmaceutical Care Management Association, which represents pharmacy benefit managers, also said it was unfair to place blame on payers who cannot control the prices drugmakers set.
Here’s the PBM argument – blame drug companies for high prices and complain when they’re asked to be transparent about their own discounts. Per Express Scripts, transparency will “unintentionally raise costs.” Hm.
Legislators seek to protect consumers from high drug prices
HARTFORD — For six months, Branford resident Robin Comey waited for the price of her son’s prescription asthma medication to drop.
She scoured the internet for coupons and researched generic alternatives, but the cost cut her family needed never came.
Self-employed, Comey has health insurance, she said, but even with deductibles the price of her son’s medications were sometimes out of reach. She was already spending nearly $2,000 a year on epi-pens for her son’s food allergies.
“Our family feels a little bit taken advantage of,” Comey told legislators Tuesday.
Legislators and State Comptroller Kevin Lembo hope to make medications more affordable for Connecticut residents like Comey by increasing transparency around prescription drug pricing.
A bill they unveiled Tuesday would allow consumers to pay post-rebate costs instead of marked-up retail prices for prescription drugs.
In addition, drug manufacturers would be required to justify price increases above 25 percent, and pharmacy benefit managers — middlemen like CVSHealth and Express Scripts — would have to disclose the rebates they receive from manufacturers and how much of the rebate was passed down to consumers.
Lembo said most people pay inexplicable drug price mark-ups without even realizing it through insurance premiums, taxes and buying prescriptions.
“There is only one way to bring any free-market fairness to this realm: by shining a bright light onto a shadowy market,” he said.
Rep. Sean Scanlon, D-Guilford, said he hopes the legislation will uncover why drug prices are rising so health care costs can ultimately be lowered.
“Prescription drug costs are the fastest rising cost in health care and consumers are rarely given an explanation when the costs of their drugs increased,” he said.
Although the proposed bill received support from AARP and many individuals, it faced opposition from pharmacy benefit managers, health organizations and the Connecticut Insurance Department in a public hearing Tuesday.
The Pharmaceutical Care Management Association, a trade association for pharmacy benefit managers, argued that such legislation is preempted by federal benefits law and therefore is unconstitutional. They also said the bill might damage PBMs’ ability to negotiate lower drug costs.
“Any public disclosure of rebate information would allow manufacturers to learn what type of price concessions other manufacturers are giving, thus establishing a disincentive from offering deeper discounts,” said April Alexander, assistant vice president for State Affairs for PCMA. “This transparency will not lead to better health care or lower health care costs.”
Express Scripts, a PBM, also testified that secrecy was a necessary part of obtaining rebates for consumers and disclosing them would
Connecticut’s largest union of doctors and health care workers District 1199 opposed the bill because they thought it did not go far enough to stop price gouging by drug companies.
The National Physicians Alliance in Connecticut called it “toothless.”
Both groups urged legislators to implement the Connecticut Healthcare Cabinet’s recommendation to establish a Drug Review Board to investigate price abuses and empower the Attorney General to act on uncovered abuses.
The Insurance Department claimed it did not have the authority or personnel to oversee parts of the bill.
Legislators seek to protect consumers from high drug prices
HARTFORD — For six months, Branford resident Robin Comey waited for the price of her son’s prescription asthma medication to drop.
She scoured the internet for coupons and researched generic alternatives, but the cost cut her family needed never came.
Self-employed, Comey has health insurance, she said, but even with deductibles the price of her son’s medications were sometimes out of reach. She was already spending nearly $2,000 a year on epi-pens for her son’s food allergies.
“Our family feels a little bit taken advantage of,” Comey told legislators Tuesday.
Legislators and State Comptroller Kevin Lembo hope to make medications more affordable for Connecticut residents like Comey by increasing transparency around prescription drug pricing.
A bill they unveiled Tuesday would allow consumers to pay post-rebate costs instead of marked-up retail prices for prescription drugs.
In addition, drug manufacturers would be required to justify price increases above 25 percent, and pharmacy benefit managers — middlemen like CVSHealth and Express Scripts — would have to disclose the rebates they receive from manufacturers and how much of the rebate was passed down to consumers.
Lembo said most people pay inexplicable drug price mark-ups without even realizing it through insurance premiums, taxes and buying prescriptions.
“There is only one way to bring any free-market fairness to this realm: by shining a bright light onto a shadowy market,” he said.
Rep. Sean Scanlon, D-Guilford, said he hopes the legislation will uncover why drug prices are rising so health care costs can ultimately be lowered.
“Prescription drug costs are the fastest rising cost in health care and consumers are rarely given an explanation when the costs of their drugs increased,” he said.
Although the proposed bill received support from AARP and many individuals, it faced opposition from pharmacy benefit managers, health organizations and the Connecticut Insurance Department in a public hearing Tuesday.
The Pharmaceutical Care Management Association, a trade association for pharmacy benefit managers, argued that such legislation is preempted by federal benefits law and therefore is unconstitutional. They also said the bill might damage PBMs’ ability to negotiate lower drug costs.
“Any public disclosure of rebate information would allow manufacturers to learn what type of price concessions other manufacturers are giving, thus establishing a disincentive from offering deeper discounts,” said April Alexander, assistant vice president for State Affairs for PCMA. “This transparency will not lead to better health care or lower health care costs.”
Express Scripts, a PBM, also testified that secrecy was a necessary part of obtaining rebates for consumers and disclosing them would
Connecticut’s largest union of doctors and health care workers District 1199 opposed the bill because they thought it did not go far enough to stop price gouging by drug companies.
The National Physicians Alliance in Connecticut called it “toothless.”
Both groups urged legislators to implement the Connecticut Healthcare Cabinet’s recommendation to establish a Drug Review Board to investigate price abuses and empower the Attorney General to act on uncovered abuses.
The Insurance Department claimed it did not have the authority or personnel to oversee parts of the bill.
Today Robert Hariri, one of the pioneers in the development of stem cell therapy, launched Celularity a company with a mission to make regenerative medicine as affordable and as convenient as the polio vaccine.
To give you an example of what Hariri (full disclosure, who is a good friend) envisions, consider the excitement over immunotherapy medicines that,"harness the power of the body's immune system to fight cancer" and chimeric antigen receptor (CAR) T cell therapy in particular such as those developed by Novartis and Kite.
CAR-T is not a pill. Or a shot you can get at Walgreens. Instead, it is a very complex and expensive process where immune cells are removed from someone with cancer and then armed with new proteins that allow them to recognize cancer. Then large quantities of these cells are injected into the patient. These cells persist in the body, becoming “living drugs.”
Put another way, CAR-T is the ultimate hand-crafted therapy.
They are true miracles. But the cost, complexity and the need to carefully administer CAR-T at a handful of academic cancer centers means that making them available to everyone who might benefit will not be easy.
Further, the laborious customization characterizing CAR-T is due to its dependence on using one's own cells and then engineering them to avoid an immune response that shuts downs every organ. Donors for bone marrow transplants are hard to come because of the danger that cells from another body will be viewed as invaders by our immune system.
Democratizing cell therapy requires a reliable source of cells that can be mass produced and used off the shelf in any physician's office. Only one scientist on the planet has developed a nearly inexhaustible source of stem cells that overcome the immune system's lethal resistance.
That is Bob Hariri. And there is only one company on the planet that can broadly manufacture, develop and distribute cell therapies of all kinds - including CAR-T - on an everyday basis. And that's Celularity.
Many of the media accounts of Celularity's launch note Hariri's distinguished career as a scientist and the fact that he holds more cell therapy patents than any other researcher.
In an ironic sort of way, this is not surprising. Hariri, like his hero Thomas Edison, does not consider himself just a discoverer of new gadgets. As Sir Harold Evans wrote in "They Made America: "Thomas Edison is thought of as America's foremost inventor, with 1,093 patents in his name, but his most important work was translating the insight of invention into the practical reality of innovation through the long process of development and commercial introduction."
"Edison's transcendent innovation was to understand that the lightbulb he invented would be a mere novelty unless he could find a way to integrate it into an economical and safe electrical system. The simple act of flicking a light switch in offices and homes depended on a complex of dynamos, cables, and numerous connections that all had to be devised, costed and manufactured. Edison had also to fulfill the entrepreneurial role of raising the money, arranging the legal rights-of-way and cultivating the market. Edison was a supreme innovator."
So too is Hariri, who in many ways is the Edison of regenerative medicine. Over 15 years ago, he demonstrated that it was possible to collect 10 times as many stem cells from a single post-birth placenta as have been gathered from any other single source. He then promptly told the rest of the scientific world the recipe for doing so. His hope was that stem cells would be democratized, and be broadly available to researchers, doctors, and patients instead of being controlled by a handful of well-connected scientists who used their dominance to stifle other forms of stem cell research.
But incredibly, very few researchers seized the moment. So, Hariri - while at Celgene - invested nearly a decade and $500 million on democratizing stem cells.
First, he had to develop a process of procuring placentas under tight quality-control systems and with a high level of predictability.
Second, he had to create a manufacturing scheme that's necessary for economies of scale and quality control. Both were and are necessary for cell therapy to be a realistic clinical tool.
Third, he had to find the right "light bulb." (There were other lighting technologies that use electricity before Edison. And Edison himself develop dozens of light bulbs that worked. The challenge was developing a product that was not just affordable, but reliable. And to demonstrate that, Edison, as Sir Harold points out, had to create a whole system of distribution and uses.)
One of those "light bulbs" were, in fact, CAR-T. At the time, Hariri build CAR-T to see how they stacked up against placental-derived stem cells is delivering cancer-fighting instructions to the immune system. The placenta is unique in that it is not rejected by the body. Rather, a placenta can modify the host immune system and evade any host immune detection. As Hariri told me: "That was the premise behind our searching the placenta for these cells, and it served as the basis for our product development and, ultimately, clinical development, which has shown that allogeneic transplant is accepted without problems."
To demonstrate that capacity, Dr. Hariri has developed and used placental stem cells to treat several diseases at every stage of life. He has shown it is possible to use placental cells to update our biological software, upgrade the cellular 'processors' that create the connections and share the information that regeneration requires.
Now with Celularity he is poised to manufacture stem cells that as Hariri told me, can be "easily deployed, readily adoptable like a medicine, and could integrate into the existing healthcare system, where practitioners are most comfortable with traditional pharmaceuticals".
That means millions, if not billions, of people, will live longer free from disease and disability. By anyone's estimation, the lightbulb's impact on humanity would pale in comparison to that accomplishment if Hariri and Celularity succeed in commercializing stem cells.
Express Scripts (ESI) reports that drug spending increased at the slowest pace in 25 years. Or, as the headline from the PBM’s press office touts: “Express Scripts Reduces Employers' Annual Prescription Drug Spending Growth Rate to Historic Low in 2017”
That may or may not be a good thing for patients. A closer look at how the PBM achieved this suggests that it is almost entirely due to a significant reduction in the number of new patients with HIV, Hepatitis C and treatment-resistant high cholesterol for the year before. From 2016-17 generic drug use in those categories declined as a percent of drugs dispensed while the use of new meds increased. If the ratio is tilting towards brand drugs it means the total number of peoples being treated for these conditions declined.
It could be a yearly anomaly due to fewer people needing treatment. Or it could be the result of increased patient cost sharing, the use of drug exclusions, step therapy, etc. Indeed, Express Scripts credits its SafeguardRx program which uses all these tools for the reduction in the rate of drug cost.
Moreover, the low rate of growth does NOT translate into lower costs for patients. Indeed, as noted, the increase in cost sharing through separate drug deductibles, higher copays, co-insurance means that the decline is a result of an increased burden on consumers. The fact that specialty utilization declined in Medicaid and ACA plans, while Medicare specialty spend increased more slowly than in commercial plans suggests that higher cost sharing and restrictive access played a key role in reducing the rate of increase.
Further, it appears that Express Scripts is not counting the rebate dollars shared by plans in the estimates. Yet member cost is what is paid at retail. ESI backs out rebates from the unit and total costs but includes cost sharing of patients. Drug mix is another element calculated in coming up with unit cost. As noted, the mix of generic and specialty spend – as well as the mix of traditional and specialty is moving towards specialty drugs. That means most of the increase in unit cost apart from certain drug categories where utilization dropped, is the result of increased member cost since cost is net of rebates. And as for ESI’s claim they are more than happy to pass rebates to patients instead of plans, it ain’t happening as Drug Channels points out.
Bottom line: Fewer people with chronic or complex conditions are getting access to new medicines while others are paying a bigger sharing of the increase in drug costs.
Does this translate into better health and lower health care costs overall? And what or who is SafeguardRx protecting? My guess is it’s ESI’s failing business model, not patients.
Patients for Affordable Drugs (P4AD), the wholly-owned group advocating on behalf of the Laura and John Arnold Foundation campaign to reduce the number and price of new drugs and limit their access, has produced what it regards as the real cost of developing Kymriah, “the first gene therapy available in the United States, certain pediatric and young adult patients with a form of acute lymphoblastic leukemia (ALL)”. The therapy is a cure for most patients. Kymriah’s costs about $475000 but only if it works. And Novartis is financing the acquisition cost of the medicine in many cases.
But P4AD, run by David Mitchell (whose firm – GMMB -- was responsible for running over a billion dollars’ worth of campaign commercials for the Obama ’12 and Clinton ’16 campaigns, is using the price as a target for the ads its 501c4 (P4ADNow) will be running (using LJAF money) supporting price controls on prescription drugs and attacking congressional candidates who don’t agree with them. (Most patient groups help patients with their daily lives and support research. P4AD simply collected stories and names through the 501c3 and is now using them for their political attack on Novartis.)
Many people, myself included, criticized Mitchell for asserting that NIH invested $200 million in Kymriah and that all Novartis did was manufacture the cells and hand them out. Now, along with academics like Aaron Kesselheim – another LJAF money recipient, he has come out with a ‘study’ posted in a Health Affairs blog that purports to show that Kymriah’s price should be about $160,000.
The simulation is pure fantasy. It is an exercise in ideological accounting carried out to justify the Arnold supported agenda to cut drug prices, including seizures of patients, step therapy, price controls, etc. A few months ago, another Arnold funded individual, Vinay Prasad published an article that overstated the profits of cancer biotech firms and understated R&D and concluded that cancer drug development yields a 10-50 fold return on investment. That study was the source of a lot of deserved derision.
Mitchell and Kesselheim apply Prasad’s LJAF funded methodology to Kymriah in the Health Affairs blog. They presume that the development of Kyrmiah carried no risk. (I wonder if the models John Arnold’s used at Enron used the same assumption about energy exploration and distribution.) The authors claim that the NIH assumed all the cost at the riskiest part of development, preclinical work. This is nonsense. The fact that fewer than 1 in 10000 pre-clinical projects become commercialized products underscores the fact that translating biology into products is the most costly and riskiest of enterprises.
To paraphrase an article in Nature: The authors' calculation ” imply that each clinical trial was a guaranteed success. Instead, clinical drug development should be regarded as a series of high-risk wagers where success in the first wager.”
For example, Novartis began clinical trials in 2009. It did not earn any revenue for almost a decade. The authors assume away the risks of drug development and the opportunity cost of tying up billions for ten years.
Further using cash flows from operating income only (which include revenue and costs), presents unrealistically high valuations for biotechnologies. “Risk is mitigated as biotechnologies progress through development. When this increasingly mitigated risk is taken into account, the risk-adjusted cash flow can be discounted to arrive at the risk-adjusted NPV.”
In the real world, the present value of each risk-adjusted cost is subtracted from the present value of the risk-adjusted payoff to arrive at the rNPV. Only by adding together all of Novartis’s costs and risks and then discounting for time, is the true rNPV is finally revealed. Mitchell does none of that.
Finally, the internal cost of capital (6 percent) is ridiculously low. The internal cost of capital is based on what the market for investment bears and reflects the fact that over time returns will be quite low or non-existent. In the real world of biotech, especially projects for small groups of patients, the internal cost of capital is estimated at 20% or higher. As Ian Coburn notes:“This reflects investors’ expectation of a return sufficient to compensate them for taking on extraordinary risk. Permanently lowering realized returns will lead to lower investment in a critical component of the life sciences industry.”
In their fantasy world, the authors claim that expected returns could be 60 percent lower and offer investors a rate of return that is lower than US treasury notes. The cost of capital increases with risk. The authors assume no risk is being taken by Novartis or any other entity in undertaking clinical development. Indeed, the authors claim at reducing operating income and profits because it’s not fair and Novartis can afford to make less.
Even if we accept the notion that Novartis is not charging a fair price, most companies developing cell therapies are NOT Novartis. They are smaller firms and their costs of capital will be even higher. The authors seem to think that it is possible to reduce rates of return without affecting how much a company or VCs need to “pay” for outside capital. (See Prasad piece for another example of this absurd assumption. and a good laugh.)
If they think it possible, then by all means start up a company that can reduce prices. One of Mitchell’s co-authors, Paul Kleughten, was the CEO of a generic drug company. Let him enter into a partnership with the NIH that gives the agency control over prices. Let him try to raise capital or find a partner for a firm that presents financial projections and a research plan consistent with their assumptions.
The fact is, their model will reduce investment and drive up the cost of capital needed to support biotech. Price controls will steer investment into other sectors. Voluntarily capping profits means less money for other potential cures and will deprive millions of people in the future of their wellbeing and lives. That’s the reality P4AD and their LJAF funding compatriots offer.
Center for Medicine in the Public Interest is a nonprofit, non-partisan organization promoting innovative solutions that advance medical progress, reduce health disparities, extend life and make health care more affordable, preventive and patient-centered. CMPI also provides the public, policymakers and the media a reliable source of independent scientific analysis on issues ranging from personalized medicine, food and drug safety, health care reform and comparative effectiveness.
