All opinions are my own.

Friday, May 4, 2018

Improving Drug Affordability for the United States Populous through Alternate Business Models

Recent layoffs and closures in the pharmaceutical industry have been on the horizon for some time. However, it seems the signs have been ignored. Blame is being put on increased pressure coming from (Pharmacy Benefit Managers) PBMs and supply chain intermediaries on drug manufacturers1 to lower their selling prices i.e. reduce profits. Simple laws of economics suggest that if companies cannot make the necessary profits under their prevailing business model, the easiest thing to do is to reduce expenses through curtailment of marginal or non-profitable businesses. Companies have to constantly tweak their business model to avert such situations. All said and done, if profits are not as expected, closures, shutdowns and layoffs are the only way to survive.

Recent articles2,3 discuss some of the details of the supply chain profits. If the numbers are correct then it seems that collectively PBMs and intermediaries may be as or more profitable than the drug manufacturers. PBMs and intermediaries by putting pressure to lower selling prices, while retaining their profits, could be leading to increasing drug shortages4 and forcing pharma company layoffs and/or closures. If the current trend continues, price controls might be one way to make drugs affordable and they would create a turmoil for PBMs and intermediaries and make their future bleak.  

Drug Distribution Models:  

In 1999, Amazon5 tried an alternate distribution model: direct selling to the patients. This disruptive model did not come to fruition. It is possible that they had not crossed every “t” and dotted every “i”. Had they succeeded drug affordability might have improved. 

Earlier in 2018 two new proposals to improve drug affordability have been suggested. They are alliance of Veterans Affairs and Intermountain Healthcare (VAH)6 and alliance of Amazon, Berkshire Hathaway and JPMorgan (ABM)7. VAH alliance will only serve veterans but parts of the proposed model can be very effectively used by ABM alliance. ABM alliance is initially intended for the employees of the three companies but my conjecture is that it could be a stepping stone for broader distribution.

The ABM Alliance selling directly to the patient population of United States will be a tremendous disruption. It would be resisted by PBMs and intermediaries. The Alliance’s success without PBMs would be like PBMs loosing their goose that laid golden eggs. My conjecture is that PBMs will make every effort to be part of this alliance. If they do not succeed, they also have their swords drawn to kill the alliance through regulatory and political/legislative pressures. They do not want to loose their cash cow. My fear is that if they are included, the ABM alliance would not fully achieve its intended goals. It is my conjecture that Amazon has learnt a lot from its 1999 attempt and would use its experience in its current attempt. 

The VAH alliance will work directly with drug manufacturers. This alliance can handle its drug distribution. Reverse calculations8 can be easily used to introduce new innovative manufacturing technologies to lower costs and maximize profits of each participant. Since they are isolated from PBMs and other intermediaries, they have an excellent possibility of success. Success here will definitely change the drug affordability landscape and sow alternate improvement ideas. Regulators will have to facilitate innovation.  

Manufacturer’s Options:

Drug manufacturers have to consider their own alternates. They need to explore them for their survival, retain their profits, minimize drug shortages and potentially avoid layoffs/closures. Continuous manufacturing improvements and technology innovation will play a significant roll. They have to be an internal company decision rather than a regulatory directive. 

Regulators need to eliminate/minimize constraints that prevent continuous improvements and innovations. 

Incorporation of economies of scale are well known method to improve manufacturer’s technologies and profits. Again, companies have to decide. As said earlier regulators have to facilitate the process. 

Gains from manufacturer’s effort can be short lived till PBMs and others catch up and force them to lower their selling prices i.e. lower profits or drive them out of business. Generic drug companies, for their survival, have to figure out how to control their destiny. They will have to recognize that economies of scale have a drawback. They can result in reduced number of facilities making the same product through better technology, thereby resulting in layoffs.

Manufacturing technology innovation for the brand drugs during the life of the patent again has to be a company decision. Brands might have to overcome regulatory obstacles as they might have to make sure that the drug efficacy and performance are not altered. Since they work under a patent time limit, they might not entertain this route.

GEN (Creative Destruction9) Alliance:

The long-term existence of the generic pharmaceutical companies depends on altering/disrupting the current model. Generic pharma companies can create their own drug distribution model (GEN Alliance) to supply drugs at affordable prices to the United States populous. This model is based on the premise that the generic drug producers want to control their survival, “profit and loss” destiny and make drugs affordable with a reliable distribution partner. It is a reconfiguration of the current model in reverse. Since it is close to the existing model it has not been explored.

I believe that lack of sales of marginally better new drugs and expensive orphan drugs are causing a dent in the profits of PBMs and intermediaries. 

To counter that they are pressuring generic drug producers and threatening their very survival. They will also make every attempt to disrupt/kill GEN Alliance through regulatory and political/legislative effort. I hope they will think about their efforts to disrupt GEN alliance as they will be going after the same generic drugs suppliers who are their current suppliers. 

Since it is reconfiguration of the existing model, many from the get go could say that it is cumbersome and unworkable. If it was easy and not disruptive, it would have been already done. It needs to be considered, reviewed, modified and exploited. We need to explore methods to make drugs affordable. Since many parts of the process exist, I believe that is  implementation should be easy.  

In the GEN Alliance some of the leading generic companies could band together and approach Amazon or Walmart or a similar entity to supply the necessary prescription drugs there by minimizing the price differentials discussed in Panel B of reference 3 and reference 4. The Alliance could be formed through their association or outside their association. Reliable distributor/s will be critical to their success. Companies will have to adhere to the prevailing laws and regulations. For this model’s success, like the ABM Alliance model, the current mutually subsidized healthcare system may have to be modified. 

I am confident that in the GEN and ABM models approved FDA drugs can be imported and significant monies can be made by selling drugs to the populous at much lower prices than the current prices. Price comparison of drugs, Table 1, in India and the United States10 shows the price differential of randomly selected drugs. Sales price in India includes manufacturers and pharmacy profits. Prices in US in Table 1 are what a patient pays with and without insurance. If all goes well drug prices could be reduced by 50% or more. Improved drug affordability could also increase sales. 

My conjecture is that through GEN alliance generic pharma companies will become masters of their destiny i.e. P&L, longevity. Competition on product quality, technology, costs and exceeding regulations will become the cornerstone. My expectation is that best of the best in each category will participate in GEN Alliance. With affordable drug prices, we all will be on a new turf.    

Nuances of VAH, ABM and GEN models:

Economies of scale, manufacturing technologies and product quality will play a significant role in all three models.
In each of these models, companies will compete on manufacturing technology and quality to gain shelf space with distributors. 

Amazon while working through its own ABM alliance could also approach the selected GEN alliance companies it sees fit to form a longterm relationship. VAH, ABM and/or GEN models if executed properly will work and would be a win-win.  

As I eluded earlier changes in the current mutually subsidized healthcare system might be needed. This task could be a challenge and in our political/economic system could be equivalent to trying to climb Mt. Everest bare feet with no oxygen. PBMs and other intermediaries will throw every barb at the participating companies. However, small successes at initial stages will make believers and hopefully generic drug prices in the United States will be realistic and out of the clutches of PBMs and intermediaries who in the name of service have artificially jacked up their prices.

An ultimate method to make drugs affordable would be to eliminate the drug coverage from the mutually subsidized healthcare system. Political and economic pressure would be tremendous. Pharmacies will have to sell drugs at affordable prices otherwise no one will buy them. Everyone will pay real prices. There will be brouhaha about this thinking but this is an ultimate method to make drugs affordable. Patients will also have to make life style choices. Such an effort would be a major disruption to the US economy. 

Drug affordability is a painful issue and has been ignored for a longtime. In mutually subsidized healthcare system prices have risen under the guise of convenience. It needs to be addressed. Even the most financially blessed feel the pain with current drug and healthcare prices.  

Girish Malhotra, PE
EPCOT International

  1. Koons, Cynthia, Why We May Lose Generic Drugs, Bloomberg Businessweek, April 11, 2018, accessed April 18, 2018 
  2. Sood, N; Shih, T; Van Nuys, K; Goldman, D; The Flow of Money Through the Pharmaceutical Distribution System, June 14, 2017, Flow of Money Through the Pharmaceutical Distribution System, Accessed March 1, 2018 
  3. Grant, Charley, Hidden Profits In the Prescription Drug Supply Chain, The Wall Street Journal, February 26, 2018, Accessed February 27, 2018 
  4. FDA Drug Shortages, https://www.accessdata.fda.gov/scripts/drugshortages/ Accessed April 24, 2018
  5. Ross, Casey: Amazon failed to disrupt the prescription drug business with Drugstore.com. Could a second try succeed? statnews.com, April 26, 2018, Accessed April 26, 2018 
  6. Leading U.S. Health Systems Announce Plans to Develop a Not-for-Profit Generic Drug Company, www.businesswire.com, Accesses March 1, 2018
  7. Triple Threat: Amazon, Berkshire, JPMorgan Rattle Health-Care Firms, The Wall Street Journal,  January 30, 2018, Accessed January 31, 2018
  8. Malhotra, Girish: May Day May Day: Can Someone Help and Lower Drug Prices?, Profitability through Simplicity, May 1, 2015, Accessed May 1, 2018
  9. Creative Destruction, https://en.wikipedia.org/wiki/Creative_destruction, Accessed April 26, 2018
  10. Malhotra, Girish: Opportunities to Lower Drug Prices and Improve Affordability: From Creation (Manufacturing) to Consumption (Patient), Profitability through Simplicity, March 9, 2018, Accessed April 25, 2018