All opinions are my own.

Friday, March 9, 2018

Opportunities to Lower Drug Prices and Improve Affordability: From Creation (Manufacturing) to Consumption (Patient)

Since the beginning of 2018 “doing something” to curb ever increasing drug prices has picked up steam. I call two recent announcements 1-4 to be “constructive destructionist” 5 and if successful could have an everlasting impact and game changing influence on the pharma landscape. With their success we should expect additional entrants. 

Till recently many have talked and proposed legislations but whenever rubber has met the road the tires have gone or go flat and the blame games started. We have to accept the fact that anything being proposed by the legislators or put on the ballot box is not going to come to fruition. This is due to pharma lobby having significant influence on the electability of the legislators who want to stay in office for eternity. This combination has been deadly against the needs of the constituents who want justifiable lower drug prices. 

Recent initiatives are opportunities worth a review. Each presents a game changing opportunity to improve drug affordability, improve product quality, revenue and profits for the pharma landscape. In the United States drugs are acquired through two major systems, Veteran’s Affairs is for the veterans and rest of the country through mutually subsidized healthcare systems and that includes Medicare. Veteran’s Affairs along with selected Health Systems 1 (VAH) and Amazon, Berkshire Hathaway and JPMorgan 2-4 (ABM) are set to cause a perturbation to the existing mutually subsidized system when it comes to their employees. They could be start of a revolution against ever increasing drug prices. I am presenting my perspective and opportunities for the these present.  

Veteran’s Affairs:
There are about seven million participants in the Veteran’s Affair (VA) system. Some of us may not know but 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 the pharmaceutical companies because number of drugs offered are restricted and pharma and supply chain profits are lowered. However, pharma companies have acquiesced to avoid wrath of the US government and the country. 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 VA’s restrictive purchasing program, February 2018 announcement 1 presents generic drug producers 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 values economies of scale and innovative manufacturing technologies 7, 8.

Mutually Subsidized Systems:

VAH and ABM alliances should use reverse calculations 10 to encourage manufacturing companies to innovate. Economies of scale and “what if” analysis can be used to improve manufacturing processes. 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, for simplicity I call them middlemen, facilitate distribution of drugs to most outside the VA system. Manufacturing and cost of API and their formulations are simple to understand 10, 14. However, under the current system pricing from formulations to the patients becomes murky and complex. However, the mystery is being slowly unraveled 15-19. States are also taking steps to contain rising prices 20, 21 

Figure 1

PBMs have made every attempt to make sure that the cost details are not readily available and the patients pay the highest drug prices. UnitedHealth 22 has announced a possible peak in the PBM “Black box”. However, till 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 direct import of drugs by the patients from e.g. Canada and other countries but the same drugs are imported and sold at a significantly higher price in the United States. Explanation given is 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 but they would be a challenge to establish. 

From drug price information collected in India and in US 14 (with regular insurance, Medicare and NO insurance) one can easily see the reasons why PBMs have discouraged ABM Alliance 2 to take a peak in the “Black Box”. Most can conjecture that PBMs do not want anyone to negotiate and jeopardize their profits. Sood etal 16 and Grant 17 have done an excellent review of the PBM price structure. Price multiples of between 100-1500 times from manufacturing to patients 14, 16, Table 1, should be an eye opener for the negotiators in VA and ABM Alliance. As has been said earlier economies of scale and better technologies can significantly lower these multiples. 

With Insurance ***
Medicare 23
No Insurance 24

Dose, mg
Price per tablet in India, USD *: ~Rs. =65 to 1 USD
Drug Price per tablet in US, USD **
% over Indian prices
Price Range per tablet, USD
Price per tablet in US, USD

* Price has ~35% profit margin
** US Prices are from Walmart, Costco, Walgreens and GoodRx using non-Medicare insurance
*** Have prescription

Table 1

Drug Price Reduction Opportunities:

Using Panel B for the money flow16 illustration, it is interesting to note how a $18.00 drug gets to the patient in the current system and sells for $100.00. 

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 $80.00 to the patient if no improvements are done to the current PBM supply chain “Black Box”. 20% or better cost reduction in the supply chain should not be considered an out of reach of possibilities. Combined cost reductions in manufacturing and supply chain would mean that a current $100.00 drug would cost about $65.00 to the patient. I am sure $35.00 cost reduction is worth the effort. 20% cost reductions in manufacturing and in the supply chain each are not out of the realm of reality. Effort would be needed. Everyone from “Creation (manufacturing) to Consumption (patient)” will benefit financially. 

Panel B is Courtesy Sood etal 16.  

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, ex CEO General Motors, said it well that 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, an ever-increasing need, in the United States are distributed through PBMs, in our mutually subsidized healthcare systems even they are priced highest level Table1. We have to recognize that Pharma/PBMs major customer base is dependent on affordable drugs. 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 the shareholders 25 rather than the patients who are the basis of their existence. With success of VAH and ABM Alliance we could see spread of drug price reductions. Pace could accelerate. As they say “cat is out of the bag” and the question is how 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.  
Girish Malhotra, PE
EPCOT International 

  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 ConsumersThe 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


Friday, February 9, 2018

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?

Recent announcement of Amazon, Berkshire Hathaway and JP Morgan Chase (1, 2) to address rising healthcare costs for their employees has caused a bit of uproar on the healthcare landscape. Healthcare companies and many others have expressed their concern and doubts about success of the partnership (3). There will be many “naysayers” and many will pontificate. Their concerns could be real but time for “creative destruction” (4, 5, 6) on the healthcare landscape has come. It has been long overdue.

In the last one hundred years creative destruction/disruption has led to significant innovations in almost every industry. To a major extent pharmaceutical and healthcare industries have escaped this disruption. It is my perspective that time for the needed disruption has come. Banding of ABM (Amazon, Berkshire, Morgan) is start of an alternate landscape. There will be evolution. Some of the elements that need the change are also being discussed (1). Discussion of healthcare costs and controlling them is out of the closet. These three companies with a combined revenue of about $500 billion dollars per year and over one million employees are going to explore possibilities of how the costs can be contained and even lowered will be a good thing.

The task is going to be challenging, multi-faceted and evolutionary. There will be significant resistance from every cog of the healthcare wheel. Political and economic power of the healthcare industry will be tested. We should not be surprised if legislators, intellectuals and consultants also get in the act to score points.

For success there will be strategic re-modeling of the current business model, rejuvenation of the manufacturing practices, supply chain changes and re-allocation of the workforce. Status quo of the current practices is going to be increasingly disrupted and disturbed with every ABM success. Each success will bring in new players to improve the process. Business strategies will change. Technology, artificial and real, along with process of continuous improvement will play a major role.  

ABM effort to lower healthcare costs is counter to the current operating philosophies of the pharmaceutical, insurers and pharmacy benefit manager companies. A quick look just at the pharmaceuticals tells us part of the story. Most of the revenue growth of the pharmaceutical companies is in the developed countries (7). Lately pharmaceutical companies due to their inability to create affordable new drugs that are more effective than the current drugs for the mutually subsidized healthcare systems and affordable to 98+% of the global population are depending on high priced orphan drugs, preventing generic entries and are raising prices. Due to political pressures some pharmaceutical companies have opted to less than 10% price increases (8, 9). I am not sure how long this these strategies will work.

At the initial going (1) ABM alliance has supposedly conceded drug distribution to industry’s middlemen PBM (Pharmacy Benefit Manager’s). However, if the Alliance has to be successful in lowering drug prices it will have to crack open the PBM pricing juggernaut between the formulation sellers to the patients. Reverse calculations will show ABM how the price multiples traverse between the API manufacturer and the patient (10).

ABM alliance is giving the healthcare industry and opportunity to stay afloat. There will be survival tug of war. My conjecture is fissures in the healthcare citadel will develop and could get wider thereby lowering healthcare costs.

Other healthcare components would most likely experience similar cost pressures. Since there are multiple elements in healthcare, I am sharing my perspective of the possibilities as they relate to drug prices (pharmaceutical manufacturing) only (11).

A recent post Comparison of Drugs Prices: US vs. India: Their Manufacturing Costs & Opportunities to Improve Affordability” (10) gives us a perspective of drug price differences for the generic drugs. Brief review suggests tremendous price change possibilities.

While collecting the pricing information (10) I noticed drug packing that might be worth mentioning. Majority of the drugs in India come in blister pack or foil strips of 10 to 20 counts each. When one asks for a specific drug, customer receives the prescribed/required number of tablets. Since air-conditioning is not available at every pharmacy, blister pack or foil strips might be preserving the drug from extremes. Such packing could be used in the developed countries also. Few advantages in such packing i.e. reduce waste, reduced cross contamination if the tablets are a look alike and speedier drug dispensing. Every cost reduction could be passed on to the patients.


Since Amazon is an online store and they are already serving the needs of patients, they could throw each of the following elements to serve and lower drug costs.

Local same day delivery could play a major role in Amazon business expansion. Through reverse calculation (10, 11, 12, 13) ABM could negotiate with various OTC, generic and even with the brand companies the best prices they can provide offer via Amazon.com to their employees and expand to serve others. Reverse calculation will improve price negotiation and incorporation of better technologies to improve product quality, profits and lower costs. ABM enterprise through Amazon could have more than one supplier for the same drug offerings. It would be a case similar to companies competing for “shelf space” on the basis of product quality and sell price as is being currently done by different producers of the same products on Amazon website and at the grocery stores. Another significant benefit of ABM’s effort and the drugs being available via Amazon.com will result in drug pricing transparency. Through technology copay systems of mutually subsidized systems could be incorporated. Single pay system could also be tested and if successful could be expanded.

My conjecture is that if companies compete side-by-side for the same product quality they will compete on costs. This also means inclusion of manufacturing technology innovation through “economies of scale” (14, 15), which has been shunned in API manufacturing and their formulations.  

FDA will also have to change its process review and approval methods. It will have to develop and promulgate a road map so that the ANDA approval process could be lowered to three months (16, 17). NDA approval methods will have to be revisited. FDA will face significant internal resistance to such a change but the long-term benefits will outlast the short-term hiccups. Since “Lower the Healthcare Cost” Genie is out of the bag and is recognized, change will happen. 

FDA’s regulatory quality compliance would still stand. My conjecture is that if companies compete side-by-side for same product quality they will compete on costs and quality and that means manufacturing technology innovation through inclusion of “economies of scale” in API manufacturing and their formulations.

Since drugs being available via Amazon.com another significant benefit of ABM’s effort will be drug-pricing transparency that is hidden from the patients in mutually subsidized healthcare systems.    


Quoting WSJ Editorial Board (6)… health care is long overdue for a shake up, and the leaders of these companies—Mr. Buffett, Jeff Bezos and Jamie Dimon —deserve credit for jumping in. The public would be the beneficiary if this trio can figure out how to lower costs and increase quality, and the odds are better with them than another political intervention.” Since change in healthcare is much needed by the constituents of our country it will also be a test of metal of our legislators’ short and long-term interest and alliance. Political and economic pressures will be tremendous.

Only time will tell who wins and who does not and by how much. One thing is for sure that each segment of healthcare (pharmaceutical development, manufacturing, distribution and insurers, providers, hospitals) will have to review/alter their modus operandi to lower their costs and improve quality of products/services they provide.

Assembly line methods e.g. cataract in India, knee replacements and other procedures might have to be adopted, streamlined or considered to improve and lower healthcare costs. Drug affordability is an issue and will become increasingly an important part of the discussion as America ages. Healthcare providers will have to forgo their latent prevailing sentiment that patients will pay the highest price to get well and extend their life.

Many will be rooting for the ABM alliance success but there will be many who could create obstacles.

Girish Malhotra, PE
EPCOT International

  1. Triple Threat: Amazon, Berkshire, JPMorgan Rattle Health-Care Firms, The Wall Street Journal, January 30, 2018, Accessed January 31, 2018
  2. If Amazon And Buffett Lift Veil On Health Prices, Insurers Are In Trouble, Forbes.com, January 31, 2018, Accessed January 31, 2018
  3. JPMorgan to Banking Clients: Joint Health-Care Venture Is No Threat, WSJ.COM, February 4, 2018, Accessed February 4, 2018
  4. Creative destruction: https://en.wikipedia.org/wiki/Creative destruction Accessed January 31, 2018
  5. Malhotra, Girish: Is "Creative Destruction" the way to go for the Pharmaceuticals? Profitability through Simplicity, December 11, 2008, Accessed February 5, 2018
  6. Welcome to the Health-Care Jungle, WSJ.COM February 1, 2018, Accessed February 5, 2018
  7. Malhotra, Girish: An Alternate Look at the Pharmaceutical World Revenues and Drug Affordability, Pages 2-5, www.gmpnews.net, Autumn 2017, Manufacturing Chemist, Volume 88, Number 10, October 2017, Pg. 28-32
  8. Facing Criticism, Drug Makers Keep Lid On Price Increases, WSJ.COM [https://www.wsj.com/articles/facing-criticism-drug-makers-keep-lid-on-price-increases-1488157893], February 26, 2017, Accessed February 5, 2018
  9. US pharma industry holds to price-cap pledge, Pharmaceutical Technology [https://www.pharmaceutical-technology.com/comment/us-pharma-industry-holds-price-cap-pledge/], January 5, 2018, Accessed February 5, 2018
  10. Malhotra, Girish: Comparison of Drugs Prices: US vs. India; Their Manufacturing Costs & Opportunities to Improve Affordability, Profitability through Simplicity, January 18, 2018
  11. Malhotra, Girish: May Day May Day: Can Someone Help and Lower Drug Prices?Profitability through Simplicity, May 1, 2015, Accessed February 5, 2018
  12. Malhotra, Girish: A Blueprint for Improved Pharma Competitiveness, Contract Pharma, September 8, 2014 Accessed February 6, 2018
  13. Malhotra, Girish: Can An Alliance Between US Pharmaceutical Benefit Managers (1) and Make in India (2) Lead to Lower Global Drug Prices? Profitability through Simplicity, June 17, 2015 Accessed February 6, 2018
  14. Malhotra, Girish: Recent Posts That Relate to Pharmaceuticals and Chemicals-I, Profitability through Simplicity, 2013, Accessed February 6, 2018
  15. Malhotra, Girish: Neglected Tropical Disease (Infectious Diseases) Drugs: What are they telling us about Innovations! Profitability through Simplicity, March 7, 2012, Accessed February 6, 2018
  16. 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
  17. Malhotra, Girish: ANDA (Abbreviated New Drug Application) / NDA (New Drug Applications) Filing Simplification: Road Maps are a Must, Profitability through Simplicity, May 11, 2017