- Triple Threat: Amazon, Berkshire, JPMorgan Rattle Health-Care Firms, The Wall Street Journal, January 30, 2018, Accessed January 31, 2018
- If Amazon And Buffett Lift Veil On Health Prices, Insurers Are In Trouble, Forbes.com, January 31, 2018, Accessed January 31, 2018
- JPMorgan to Banking Clients: Joint Health-Care Venture Is No Threat, WSJ.COM, February 4, 2018, Accessed February 4, 2018
- Creative destruction: https://en.wikipedia.org/wiki/Creative destruction Accessed January 31, 2018
- Malhotra, Girish: Is "Creative Destruction" the way to go for the Pharmaceuticals? Profitability through Simplicity, December 11, 2008, Accessed February 5, 2018
- Welcome to the Health-Care Jungle, WSJ.COM February 1, 2018, Accessed February 5, 2018
- 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
- 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
- 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
- Malhotra, Girish: May Day May Day: Can Someone Help and Lower Drug Prices?, Profitability through Simplicity, May 1, 2015, Accessed February 5, 2018
- Malhotra, Girish: Comparison of Drugs Prices: US vs. India; Their Manufacturing Costs & Opportunities to Improve Affordability, Profitability through Simplicity, January 18, 2018
- Malhotra, Girish: A Blueprint for Improved Pharma Competitiveness, Contract Pharma, September 8, 2014 Accessed February 6, 2018
- 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
- Malhotra, Girish: Recent Posts That Relate to Pharmaceuticals and Chemicals-I, Profitability through Simplicity, 2013, Accessed February 6, 2018
- 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
- 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
- Malhotra, Girish: ANDA (Abbreviated New Drug Application) / NDA (New Drug Applications) Filing Simplification: Road Maps are a Must, Profitability through Simplicity, May 11, 2017
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.
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. ABM 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 (10).
A recent post “Comparison of Drugs Prices: US vs. India: Their Manufacturing Costs & Opportunities to Improve Affordability” (11) gives us a perspective of drug price differences for the generic drugs. Brief review suggests tremendous price change possibilities.
While collecting the pricing information (11) 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 (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
Thursday, January 18, 2018
Comparison of Drugs Prices: US vs. India; Their Manufacturing Costs & Opportunities to Improve Affordability
In recent years in the United States there has been news about ever increasing drug prices (1) and essentially ineffective calls/pressure and votes to lower them. Drugs are increasingly becoming unaffordable. Discussions and/or referendums to lower the drug prices are an ongoing attempt by the consumers, healthcare activists and even politicians but all efforts die a slow and silent death.
All elected officials in spite of electorate’s need for lower drug prices and pressure have no say or influence in establishing price controls through legislative action or negotiations because their repeat electability depends on funding from pharma and other lobbies. Since repeat legislative terms are important to the legislators they succumb to the financial pressures of the vested interests. Patients in established healthcare systems or otherwise pay the demanded or the best negotiated prices.
Since patients pay their required co-payments, actual drug prices do not matter to them till they cannot afford them. As the prices rise some slowly stop taking the needed drugs. In the developing countries prices are generally based on what patients can pay from their pocket. Prices in these countries are definitely lower than the developed country prices. Many in the developed countries complain about lower drug prices in the developing countries. This is not due to intellectual property being abused but more due to affordability and big pharma participate in these lower prices.
We have to recognize that the pharmaceutical companies have no interest in lowering drug prices (2) and then we get to hear comical statements (3). Their expected goal is to increase revenue and profits. With not many drugs in the pipeline or having been approved in the recent years that are for masses (more than five million patients per disease) or more efficient than the current drugs for the same ailment and are affordable, only option for the companies is to increase revenue by raising prices. In the last two years pharma companies succumbed to the social and political pressure and some opted to keep their price increases below 10% per year (4,5). Orphan drugs do raise revenue and profits but these drugs are not the answer for pharma’s long-term survival. Unless pharma companies can offer affordable and better performance drugs the current model will have a short life. My perspective is that the current model is faltering and failing.
This is a review of comparative drug prices in the United States and India and a reaffirmation of price differences. It also discusses the API’s (active pharmaceutical ingredient) contribution in the prices. Analysis can be used by anyone to calculate profits being made at different points in the supply chain and how the mutually subsidized systems camouflage the real costs.
Higher Affordability ≅Higher Revenue:
It seems ironic that there is not much interest to increase revenue through higher drug affordability. Recent high priced pharmaceutical acquisitions are expected to deliver blockbuster drugs (over billion dollar sale per year) and improve revenues and profits. If the drugs are not affordable sustainability of recent acquisitions in my estimation will not have long-term value. Viability of certain companies could be in jeopardy. Survival of pharma companies necessitates consideration of alternate business model/s. We will have to see if companies will consider alternate business models. Economics 101 teaches that higher customer base even at lower than previous prices can increase the total revenue and profits. Improving affordability with larger patient base is one of the answers.
In recent times pharma companies are justifying higher prices for drug efficacy but if most are unaffordable such drugs have limited financial value. This stance might be acceptable to some but with lower affordability improved drug efficacy might not matter. As discussed later companies have lowered prices in certain countries. I believe that if pharma can improve affordability and serve larger population, their overall revenue could be much higher than revenue increases under the current model.
Forecasts of 6.5% CAGR global pharma revenue growth have been made. I am not sure of such growth. A detailed analysis suggests such numbers are not possible (6). Regulations come in the way to improve processes that lower costs, improve affordability, improve profits and revenues.
Background/Knowledge about Drug prices:
Elements of drug prices are a secret. Majority of the people associated with pharma business either don’t understand or question how the prices are established. Pricing elements are not discussed openly. Patients can complain about drug prices but will pay the asked prices as the drugs cure ailments and extend life.
Financial analysts during their company/analyst meetings generally do not ask pharma companies about their drug pricing. Generally pharma company prices and their offered explanations are accepted (6). They welcome news about pharma revenue and profitability rise whether it happens through higher priced drugs or price increases. Since profits in pharma are generally high, questions using better manufacturing technologies to improve profitability or affordability are not discussed. Financial analyst’s mission is to recommend buy and sell investments. To the Press quarterly results, new drugs and their prices are the story. Drug pricing methodology or improved affordability is not much of a story to either.
In this review sale prices of few drugs are used to “reverse calculate” API price contribution. These prices are compared to the actual API prices. This gives us an approximate idea of price differential at different points in the chain. Randomly selected drugs are used. However, before we analyze the data some information about pricing set by the BIG pharma might be of interest.
Pharma companies have been forced to change their pricing model when the drugs are sold at lower prices than in the developed countries through compulsory licensing. When WTO agreements were negotiated companies in the developed countries did not realize potency of compulsory licensing. Big drug companies learnt a lesson. Gilead got caught flat-footed and when Cipla sold AIDS drugs at extremely lower prices outside the United States. Gilead’s Sovaldi for HCV is an excellent example of different global pricing strategy. Gilead licensed manufacturing and distribution at significantly lower prices through selected developing country companies. Prices in the United States started at $1000.00 per day vs. about $10.00 in Egypt (7) vs. about $10.00 in India and $100.00 in China (8).
It has to be acknowledged that the drugs being sold at lower prices are not being sold at a loss or are of lower dosage. Table 1 shows API cost contribution. Through licensing profits are being made even at lower prices. Idea of licensing is to prevent circumvention of intellectual property.
Januvia, a Merck diabetes drug, was initially offered in India at prices that were similar to US prices. Even with very high diabetes population and drug of high value, patients shrugged the new drug. Eventually Merck lowered its sell price (9) to make it affordable.
Above references clearly state that the drug prices in the developed countries can also be lower even with participants in the supply chain making significant profits. Economies of scale and better manufacturing technologies can further lower API and formulation costs with every one in the supply chain making decent profits thus improving affordability.
API cost in drug price:
Table 1 illustrates cost contribution of active pharmaceutical ingredients (API) at different dosages assuming 100% formulation efficiency. These numbers are theoretical numbers and are a good place to start. Sovaldi API price is approximated at $3,000.00 per kilo (10). Table 2 later shows imported API price vs. reverse calculated API contribution. Table 4 shows the pharmacy selling price. Assumptions are detailed later.
API cost, $/kilogram
Drug dose, milligram
Number of tablets per kilogram
API cost contribution, $ per tablet
Drug prices: India vs. US
Table 2 is an illustration of few drugs sold in India. 35% margin is used between the manufacturer and the local pharmacy. This number is used after consultation with large Indian pharmacies. It is assumed that API cost contribution in each drug is 35% at the manufacturer level. Remaining is the cost of manufacturing, excipients, profits and sundries. These numbers are an approximation and used for illustration only. Readers can use different numbers of their choosing.
Reverse calculated API prices in Table 2 when compared to the imported prices for the same drugs suggest that the formulation efficiencies of the formulation processes are significantly lower or the intermediaries are making high profits. Low conversions are opportunities. Having many suppliers of APIs also suggest that their manufacturing processes are not optimum and need considerable engineering and process help. Economies of scale can improve processes, lower prices and improve affordability. Very little or no effort is made to improve manufacturing.
Price per tablet, Rs
Ex-Mfg. price/tablet, Rupees
API cost @ 35%, Rs
API cost per kilo, Rs
API Cost, $/kilo
Import API price, $/kilo (Ref 11-17)
Table 3 is comparison pricing of the drugs in Table 1 in the United States vs. India. Except for Nexium listed drugs have to bought by prescription and thus are part of mutually subsidized system. Real prices in the United States without prescription are much higher.
Price per tablet in India, Rupees
Price per tablet in India, USD: ~Rs. =65 to 1 USD
Price per tablet in US, USD **
** US Prices are from Walmart, Costco, Walgreens and GoodRx.
Hypothetical Drug Prices:
Table 4 illustrates approximate selling prices of drugs through formulation and various points in the supply chain. There are assumptions made for the costs of excipients, conversion costs. They are assumed to equal to the cost of API. Profits at factory, PBM and pharmacy are assumed to be about 33% for each entity. The selling price can be compared to the selling price in the US and India.
Mg. per tablet
# of tablets per kg.
API cost $ per tablet
Theoretical Sell price, $ per tablet
Closest drug from Tables 1 & 2
Purpose of this post is not to finger point any company or country but is to suggest that there is significant opportunity to adjust/lower sale prices in the countries, make drugs affordable, and improve revenues and profits.
Girish Malhotra, PE
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- The drug industry is addicted to price increases, report shows, CNBC, April 20, 2017 Accessed December 20, 2017
- Lilly CEO: With pharma friends in high places, it's 'time for action' to ease drug costs, FiercePharma.com January 10, 2018, Accessed January 11, 2018
- Several drug makers just raised their prices by nearly 10 percent, and buyers expect more price hikes, Statnews.com, Accessed January 3, 2018
- Pfizer, Novartis and more post price hikes on dozens of drugs, but AbbVie’s is worth the most, FiercePharma.com, Accessed January 5, 2018
- Malhotra, Girish: An Alternate Look At the Pharmaceutical World Revenues and Drug Affordability, Manufacturing Chemist, Volume 88, Number 10, October 2017 pg. 28-32
- Gilead prices hepatitis C giant Sovaldi in China at one-fifth the U.S. price: report, FiercePharma.com, Accessed January 12, 2018
- Gilead offers Egypt new hepatitis C drug at 99 percent discount, Reuters.com, Accessed January 12, 2018
- Merck prices diabetes drug at fifth of US rate http://www.livemint.com/Companies/bQMFNMPw2lUm49D0lOFEQI/Merck-prices-diabetes-drug-at-fifth-of-US-rate.html Accessed December 22, 2017
- Hill, Andrew, Khoo, Saye, Fortunak, Joe, Simmons, Bryony Simmons,3 and Ford, Nathan: Minimum costs for producing hepatitis C direct-acting antivirals for use in large-scale treatment access programs in developing countries, Clin Infect Dis. 2014 Apr;58(7):928-36. doi: 10.1093/cid/ciu012. Epub 2014 Jan 6. Accessed January 16, 2018
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- Fed Up With Drug Companies, Hospitals Decide to Start Their Own, The New York Times, January 18, 2018, Accessed January 18, 2018