Tag Archive Gilead Sciences

Was CVS’s Formulary Exclusion of Mavyret a Violation of Antitrust Laws?

Lawrence W. Abrams No Comments

Summary

In October 2017, CVS Caremark (CVS) finally decided to exclude from its 2018 drug formulary the new-to-market Hepatitis C Virus (HCV) drug Mavyret despite it being list priced aggressively by its manufacturer AbbVie at an estimated 72% below the list price of Gilead Sciences’ incumbent HCV drug Harvoni.

We estimate that Gilead Sciences had to offer CVS a minimum of a 83% rebate percentage in order for Harvoni to have a net price below Mavyret’s list price.  The 83% figure would represent an outlier in reported gross rebate percentages today that generally fall in the 40% to 60% range.

If it turns out that the rebate percentage was less, it sets up an anti-competitive and antitrust case that Mavyret was excluded because of lack of pharmacy benefit manager (PBM) rebate retention despite being the lowest cost drug in the HCV therapeutic class.

We call on CVS Caremark to issue a public statement confirming that its choice to exclude Mavyret was in the best interest of clients because Harvoni was the lower cost drug after rebates.

 

Pharmacy Benefit Managers and Formulary Choice

The pharmacy benefit manager (PBM) business model relies heavily today on rebates received from drug companies in return for placement on a formulary –a list of drugs covered by a prescription benefit plan.

We have observed a change in PBMs’ approach to formulary design over the past 15 years.  Basically, “rebatable” therapeutic classes have gone from being open — a few preferred drugs — to being closed — a single preferred drug.  We are just beginning to figure out the causes of this change, but the basic idea is this:

The more a PBM limits competition in a therapeutic class, the more potential entrants will pay for access.  Small molecule therapeutic classes tend to be open, hence less valuable to entrants.  Specialty and biotech therapeutic classes tend to be closed, hence more valuable to the single favored entrant.  

Today, PBMs need to squeeze everything they can from granting access to specialty therapeutic classes.  This is the reason for the trend toward closed therapeutic classes in formularies and correspondingly more drugs on excluded lists.

Adam Fein of the Drug Channel blog has done a great job at tracking this trend. Below is his latest graph:

 

Antitrust Issues In Exclusive Formulary Contracts

Following the generally accepted theories of the late legal scholar and Supreme Court nominee Robert Bork, vertical restraints such as exclusive dealing in formulary contracts are presumptively welfare-enhancing and procompetitive because it would not be rational for a buyer to exclude the lowest cost supplier.  

Exclusionary formulary contracts between Pharma and PBMs present an interesting variant to Bork’s antitrust theories as the PBM business model is not “rational” in the traditional economics sense of maximizing revenue minus costs.  

While PBMs are resellers of brand drugs, their gross profits on brand Rx are derived only from a retained rebate percentages.  CVS has stated publically  that it retains on average 10% of gross rebates negotiated and received in return for formulary placement.

In contrast to generic Rx fills by retail drugstores, PBMs do NOT markup, or earn a “spread margin” on, brand Rx ingredient costs however measured where ever filled.  A 2005 study conducted by the FTC into possible PBM conflicts of interest confirmed this business model.

The PBM business model setups up a possible misalignment of interests between plan sponsor preferences for the lowest net cost drug in a therapeutic class and PBM preferences for the drug with the highest rebate retention DOLLARS.  

With PBMs, you have to take out Bork’s “presumptive” qualifier to his dictum that vertical constraints are presumptively procompetitive because the PBM business model is not rational in the traditional economics sense.  

With antitrust cases involving PBM exclusive dealing in formulary contracts, you can’t presume anything and the rule of reason apply.  

There have been two recent lawsuits claiming that exclusive dealing in formulary contracts are anti-competitive and violate antitrust laws starting with Section 3 of Clayton Act covering exclusive dealing:

Following Bork, we believe that both of these lawsuits are weak as it is likely that the plaintiffs (the excluded) are NOT the low cost suppliers.  This likelihood is due to the fact  the plaintiffs listed their new-to-market drugs at, or slightly below, the list price of the incumbent drugs.

 Had they started out with a list prices at least 70%-80% lower than the list price of the incumbent, they might have been in a position to show that they were the lowest cost supplier of a therapeutic class and merited inclusion in the formulary. Furthermore, they would have been in a position to expose PBMs’ misaligned business model.

Unlike the two cases mentioned above,  AbbVie’s aggressive list pricing of its new-to-market HCV drug Mavyret creates a real possibility of an anti-competitive and antitrust (Section 3 Clayton Act) case of exclusive dealing due to a lack of rebate retention despite Mavyret being the lowest cost drug available in the HCV therapeutic class.

 

The Hepatitis C Virus Drug Therapeutic Class

In 2013,  the biotech company Gilead Sciences got FDA approval for its innovative Hepatitis C Virus (HCV) drug combo called Sovaldi.  Eight month later, an improved version of Sovaldi,  called Harvoni, came on the market.  These drugs produce fewer side effects than first generation combo drugs requiring painful stomach injections of interferon.  Also, Sovaldi / Harvoni only requires pill regimens lasting 12 weeks, instead of 24 to 28 weeks with prior combo drugs.  

In 2016, Gilead’s Harvoni stood at #2 on the list of top selling prescription drugs at $10 Billion a year, after AbbVie’s top selling biotech drug Humira at $13 Billion a year used to treat a variety of autoimmune diseases.

In the three years since Harvoni came on the market, there have been five additional HCV drugs approved by the FDA, but only AbbVie’s Viekira Pak has garnered any significant sales.  

The two largest PBMs CVS Caremark and Express Scripts (ESRX) have a history of making the HCV therapeutic class a “winner-take-all” proposition, persuading competing companies to choose a high list price to be in a position to offer a “deep discount” rebate to gain exclusivity in the HCV therapeutic class.  

Below is a summary of the 2017 formulary choices of CVS and ESRX for the HCV therapeutic class:  

 

AbbVie’s Mavyret Drug Pricing Is Disruptive to the PBM Business Model

On August 3, 2017, the FDA approved a new HCV drug called Mavyret from AbbVie. According the Speciality Pharmacy Times, this new drug had the potential to challenge the dominant position of Gilead’s Harvoni on two fronts: (1) a regimen requiring only 8 weeks versus 12 weeks for Harvoni; and (2) a disruptive ultra-low regimen list price of $26,400  that left little to no room for PBM rebates while still coming in at 15% below the NET price of Harvoni implying a 78% as the gross rebate percentage.

We have argued in another paper that AbbVie’s pricing for Mavyret is disruptive to the PBM business model.  It forces CVS and Express Scripts to consider a drug for inclusion in their national formularies that is aligned with their clients interests — lower net costs than Harvoni — but not aligned with their own interest of squeezing out all the rebates they can from specialty drugs.

 

Express Scripts’ Choice for the HCV Therapeutic Class

On September 15, 2017 Express Scripts announced its 2018 choices for the HCV therapeutic class.  It chose to add Mavyret as a preferred drug.  But, surprisingly, it also chose to open up completely the HCV class by adding Gilead’s existing HCV drugs.   The new Gilead combo drug Vosevi was also added with a step-therapy proviso.

Below is a comparison of Express Scripts’ closed formulary for 2017 versus its open formulary for 2018.

 

CVS Caremark’s Choice for the HCV Therapeutic Class

In August 2017, CVS Health released a white paper reiterating the criteria it uses for formulary choices and exclusion lists.

“We remove drugs only when clinically-appropriate, lower-cost (often generic) alternatives are available.

CVS stated that it expected to remove 17 products from its 2018 Standard Control Formulary, but noted that  

“We are in the process of finalizing changes for autoimmune and hepatitis C categories, which will be communicated mid-September.”

On September 28, 2018, we noted in a blog post that CVS was two weeks late in making its decision on Mavyret. We also tweeted about it to CVS.

On October 1, 2017 CVS released its drug exclusion list for 2018 with no mention of its decision on Mavyret.  Replicating its 2017 choices, CVS preferred the Gilead drugs and excluded the rest.  

Sometime after October 1, 2017 and before October 10 201,7 CVS released an “undated” Advanced Control Formulary for 2018 that indicated that it finally did decide to exclude Mayvet:

It is interesting to consider the question of why CVS chose to keep the the HCV class closed while ESRX choose to open it up.  Obviously, CVS received more from Gilead for exclusive placement of Harvoni than ESRX received in return for opening the theapeutic class and subjecting Harvoni to competition.  

A less obvious reason is that, because of CVS’s sagging “front store” drugstore convenience business, CVS has to rely on retained rebates from specialty drugs more than the pure play PBM ESRX.  This forces CVS to squeeze all the rebates it can from specialty drug companies by offering exclusivity on its formulary.  

On the other hand, ESRX’s gross profits from rebate retention do not have to subsidize low to negative gross profits from the “front stores” of vertically integrated retail drugstore chain.  ESRX can afford to be more “open” about formulary design than CVS. 

 

Was CVS’s Exclusion of Mavyret Anti-Competitive?

Based on list prices reported by Speciality Pharmacy Times and CVS’ own reported average rebate retention rate of 10%, we estimate that Gilead would have to had to offer CVS Caremark an 83% rebate off list in order for Harvoni to come in at a lower net price than Mavyret’s list price.  

If our estimate of 83% was what actually transpired, then both Gilead and CVS would have a solid case that this exclusive dealing rebate contract was procompetitive and in the best interest of plan sponsors and consumers.

 

On the other hand, our 83% estimate seems to an outlier for rebates negotiations today.

Merck has published data on average gross rebate percentages given to PBMs and others.  For 2016, Merck’s average gross rebate percent stood at 40.9%, far below our estimate of 83% that Gilead would have had to pay CVS to undercut AbbVie’s list pricing for Mavyret.   The Merck data cast doubt on the likelihood that Gilead would given anywhere near 83% rebate.

If the gross rebate was slightly less, say 75%, then Mavyret would be the low cost drug.

In this case, the Bork presumption of the pro-competitiveness of vertical restraints breaks down. Here a “rational” PBM buyer would exclude the low cost supplier because of a misaligned business model based on retained rebates. A buyer with a normal reseller business model would NOT have excluded Mavyret.

We call on CVS Caremark to issue a public statement confirming that its choice to exclude Mavyret was in the best interest of clients because Harvoni was the lower cost drug after rebates.

While there is no prize for second place here, we all benefit from AbbVie’s competitive effort.  It’s aggressive pricing has forced PBMs to consider a low cost specialty drug that offers no rebate potential.  If Gilead’s Harvoni was in fact the low cost drug, then AbbVie forced Gilead to pay an outlier gross rebate percentage of around 83% to gain exclusivity and plan sponsors using CVS as their PBM all benefited.

In addition, AbbVie’s aggressive pricing was likely a factor in Merck and Johnson & Johnson  deciding to halt wasteful R&D spending on “me-to” HCV drugs.  Merck said that it would be writing off a full $2.9 Billion in HVC R&D “due to competition.”   

Finally, while AbbVie’s aggressive list pricing might not have been enough to undercut Gilead’s outsized rebate offer, we believe AbbVie might have planted the seed in other specialty drug companies, especially ones with biosimilars in development,  that you cannot beat out incumbents by matching their high list prices and out rebating them for formulary placement.  

 

Hepatitis C Formulary Choices for 2018: Will CVS Risk Looking Bad?

Lawrence W. Abrams No Comments

Summary:

AbbVie’s aggressive list pricing for its new Hepatitis C Virus (HCV) drug Mavyret is disruptive to the current PBM business model.  It essentially asks PBMs to align with client interests by adding a cost-effective drug to their national formularies despite little to no possibility for retained rebates.

On September 15, 2017 Express Scripts (ESRX) chose to align with client interests by opening up the HCV therapeutic class to include Mavyret as well as other HCV drugs previously excluded.  

CVS Caremark has yet to announce its final choices for the HVC class despite promising that it would do so by mid-September 2017.

If CVS chooses not to add Mavyret, it will be a sign that CVS is so desperate for rebate income that it is willing incur a very public case of misaligned interests.

 

The Pharmacy Benefit Manager Business Model

The management of the prescription (Rx) drug benefit portion of health care plans has become the domain of contracted specialists called pharmacy benefit managers (PBMs).

The three largest, independent PBMs — Express Scripts, CVS Caremark,  and OptumRx,  (known as “The Big 3”) control 73% of the total Rx claims processed the United States in 2015.

Since the early 2000s, PBMs have continually come under attack for not acting in the best interest of their clients.  We have written a number of papers since 2004 pinpointing an opaque reseller business model as the source of this misalignment.

In a 2017 paper, we presented the case that there have been 3 distinct phases of the PBM business model over the past 15 years demarcated by radical shifts in the primary source of gross profits: (graph below)

  1. up to 2005 — reliance on retained rebates from small molecule brand drugs;  
  2. 2005 – 2010 — reliance on mail order generics Rx margins;
  3. 2010 – today — reliance on retained rebates from specialty drugs.

To compensate for declining mail order generic Rx margins after 2010, PBMs saw the rising trend of specialty and biotech drugs as a promising basis for a renewed reliance on retained rebates.

But there are several constraints today that make it difficult to rely on retained rebates from specialty drugs.

The first constraint in that the specialty drug Rx volume “basis” for collecting rebates today is a lot less than it was ten years ago when small molecule drugs were the basis for rebates.

The second constraint is a newfound awareness by clients that retained rebate dollars can be substantial yet an opaque source of PBM gross profits.   As a defensive move, CVS  finally declared publicly on their website that,

“CVS Caremark was able to reduce trend for clients through… negotiations of rebates, of which more than 90 percent are passed back to clients.”

The problem facing PBMs today is how to derive a majority of gross profits from specialty Rx while maintaining a transparent rebate retention rate of 10% on average.

We found that to do this required PBMs to “coax” drug companies into increasing list prices for brand drugs at double-digit rates yearly while demanding that nearly all of it be rebated back to the PBMs. The result of this scheme has been an occurrence now known as the “gross-to-net price bubble.”

Formulary Choice and Drugs Rebates

An important managed care function of PBMs is to develop a list of drugs that are covered by insurance.  That list of covered drugs is called a formulary.  

The formulary is a lookup table that PBMs add to their claims processing systems that checks a Rx request against a list of therapeutic equivalents preferred by the plan.  The formulary is designed to limit Rx to the most cost-effective drug(s) in each of 50-80 different therapeutic classes.  

In 2005, we were the first to conceptualize formularies and their therapeutic classes as a group of markets.  On the sell-side are brand drug companies with close, but not perfect substitutes, called therapeutic equivalents.  On the buy-side are the Big 3 PBMs representing plan sponsors and their members.

Economists call such markets bilateral oligopolies.  We have written a number of papers  about the Pharma – PBM bilateral oligopoly. We have also written a number of papers conceptualizing rebates as tariffs paid by Pharma to gatekeepers (PBMs) for access to markets with limited competition.  

We have observed a change in PBMs’ approach to formulary choice over the past 15 years.  Basically, “rebatable” therapeutic classes have gone from being open — a number of covered drugs — to being closed —  1-2 covered drugs. The corollary of this trend is a growing list of excluded drugs.

Adam Fein of the Drug Channels blog has done a great job at tracking this trend. Below is his latest graph:

 

We are just beginning to think about the causes of this trend.  But our basic view of what drives PBMs to choose open versus closed therapeutic classes is this:

The more a PBMs limits competition in a therapeutic class, the more potential entrants will pay for access.  Small molecule therapeutic classes tend to be open, hence less valuable to entrants.  Specialty and biotech therapeutic classes tend to be closed, hence more valuable to the single favored entrant.  

Today, PBMs need to squeeze everything they can from granting access to specialty therapeutic classes.  This is the reason for the trend toward closed formularies and correspondingly more drugs on excluded lists.   

 

The Hepatitis C Virus Drug Therapeutic Class

In 2013,  the biotech company Gilead Sciences got FDA approval for its “innovative” Hepatitis C Virus (HCV) drug combo called Sovaldi.  Eight month later, an improved version of Sovaldi,  called Harvoni, came on the market.  These drugs produced fewer side effects than first generation combo drugs requiring interferon.  Also, Sovaldi / Harvoni only required regimens lasting 12 weeks, instead of 24 to 28 weeks with prior combo drugs.  

In 2016, Gilead’s Harvoni stood at #2 on the list of top selling Rx drugs at $10.0 Billion a year.  In the three years since Harvoni came on there market, there have been 9 additional HCV drugs approved by the FDA, but only AbbVie’s Viekira Pak has garnered any significant sales to date.  

The main reason is that the two largest PBMs — CVS Caremark and Express Scripts  — chose to close the HCV therapeutic class to all but two drugs that cover all six HCV genotypes.  (see table for 2017 below)

Source: CVS Caremark Formulary 2017

Source: CVS Caremark Formulary Exclusion List 2017

Source: Express Scripts Formulary and Exclusion List 2017

 

Factors Underlying Formulary Choice

The question is what were the determining factors underlying the formulary choices above.  Also, given the opaqueness of the PBM business model and history of misalignment with client interests,  were the above choices aligned or misaligned with client interests?

PBMs all state on their websites that the fundamental criteria governing formulary choice is drug cost-effectiveness.  In the case above, a few of the nine HCV drugs may be less effective than the leader Harvoni,  but effectiveness cannot account for breadth of formulary exclusion above.  

The most important variable affecting HCV formulary choice above is on the cost side.  Specifically it is NET costs — Pharma’s list price less gross rebates negotiated between Pharma and PBMs — that is the determining factor.

A conflict of interest can arise if there are several therapeutic equivalents that are all cost-effective, but there is one drug with a list price so low that it affords PBMs little to no retained rebates.  

Consider this hypothetical choice below:

Until AbbVie’s aggressive list pricing of Mavyret appeared in August 2017 (see below), the regimen list price of all of HCV drugs was about the same.  Unlike the example above, formulary choice for the HCV class did not present a potential conflict of interest prior to AbbVie’s pricing of Mavyret.  

The choices made by ESRX and CVS in 2017 highlighted above are aligned with interests of clients.   The only question for us is why did the two PBMs choose to close the therapeutic class?

We think the reason comes down to the specific rebate formulas used in rebate contracts —  a top secret element in a generally opaque PBM business model.

We speculate that the formula for placement as a preferred drug could take several general forms:

  1. $ discount / unit;
  2. % price discount / unit;
  3. single lump sum in $ tens of millions as a function of market share delivered.

We think that behind closed therapeutic classes are contracts with large lump sum payouts as a function of market share.  We think that behind open therapeutic classes are dollar or % discount formula with no incentives / penalties for market share delivered.

One of the reasons why PBMs want to keep rebate formulas a secret is that such formulas have been a key element in antitrust lawsuits alleging that market share rebates foreclose competition.

 

AbbVie’s Mavyret Drug Pricing Is Disruptive to the PBM Business Model

On August 3, 2017, the FDA approved a new HCV drug call Mavyret from AbbVie. According the Speciality Pharmacy Times, this new drug has the potential to challenge the dominant position of Gilead’s Harvoni on two fronts: (1) a regimen requiring only 8 weeks versus 12 weeks for Harvoni; and (2) a disruptive ultra-low regimen list price that leaves little to no room for PBM rebates.  

Below is our spreadsheet comparison of the NET REGIMEN for Mavyret versus Harvoni:

AbbVie’s pricing for Mavyret is disruptive to the current PBM business model because it forces the Big 3 PBMs to consider a drug for inclusion in their national formularies that is aligned with client interests — as cost-effective than Harvoni — but not aligned with their own interest of squeezing out all the rebates they can from specialty drugs.

On July 31, 2017,Express Scripts released its 2018 National Formulary, but noted:

“Please note that product placement for Hepatitis C and treatment for Inflammatory Conditions are under consideration and changes may occur based upon changes in market dynamics and new product launches. The full list of excluded products will be available on or before September 15, 2017.”

As promised, on September 15th Express Scripts released its choices for HCV class.  It chose to add AbbVie’s Mavyret even though the pricing afforded them little to no rebates potential.  

This choice represents a clear statement by Express Scripts that it is aligned with client interests.

Surprising to us was that Express Scripts also chose to open up the HCV class to 3 other drugs as indicated in the table below.

Source: Express Scripts Formulary and Exclusion List 2017

Source: Express Scripts Formulary and Exclusion List 2018

We believe that underlying the decision to an open therapeutic class is the replacement of a large lump sum rebate predicated on market share to a simple linear rebate as a function of volume.

CVS Health has yet to announce its final choices for the HVC class despite promising that it would do so by mid-September 2017.

If CVS chooses not to add Mavyret, it will be a sign that CVS is so desperate for rebate income that it is willing incur a very public case of misaligned interests.

Postscript added October 17, 2017

Summary

In October 2017, CVS Caremark (CVS) finally decided to  exclude from its 2018 drug formulary the new-to-market Hepatitis C Virus (HCV) drug Mavyret despite it being list priced aggressively by its manufacturer AbbVie at an estimated 72% below the list price of Gilead Sciences’ incumbent HCV drug Harvoni.

We estimate that Gilead Sciences had to offer CVS a minimum of a 83% rebate percentage in order for Harvoni to have a net price below Mavyret’s list price.  The 83% figure would represent an outlier in reported gross rebate percentages today that generally fall in the 40% to 60% range.

If it turns out that the rebate percentage was less, it sets up an anti-competitive and antitrust case that Mavyret was excluded because of lack of pharmacy benefit manager (PBM) rebate retention despite being the lowest cost drug in the HCV therapeutic class.

We call on CVS Caremark to issue a public statement confirming that its choice to exclude Mavyret was in the best interest of clients because Harvoni was the lower cost drug after rebates.

AbbVie’s Mavyret Drug Pricing: Disruptive to the Pharmacy Benefit Manager Business Model

Lawrence W. Abrams No Comments

Summary:

AbbVie’s pricing for its new Hepatitis C Virus (HVC) drug Mavyret is disruptive to the current PBM business model because it forces the Big 3 PBMs to consider a drug for inclusion in their national formularies that is aligned with their clients interests — more cost-effective than Harvoni — but not aligned with their own interest of squeezing out all the rebates they can from specialty drug manufacturers.

Will PBMs open up the HCV therapeutic class and include Mavyret?

Or, will they expose themselves to claims of misalignment by excluding AbbVie’s Mavyret?

Stay tuned.

The PBM Business Model Today

The management of the prescription (Rx) drug benefit portion of health care plans has become the domain of contracted specialists called pharmacy benefit managers (PBMs).

The three largest, independent PBMs — Express Scripts, CVS Health,  and Optum Rx, (known as “The Big 3”) control 73% of the total Rx claims processed the United States in 2015.

Since the early 2000s, PBMs have continually come under attack for not acting in the best interest of their clients.  We have written a number of papers since 2004 pinpointing an opaque reseller business model as the source of this misalignment.

In a 2017 paper, we presented the case that there have been 3 distinct phases of the PBM business model over the past 15 years demarcated by radical shifts in the primary source of gross profits: (graph below)

  1. up to 2005 — reliance on retained rebates from small molecule brand drugs;  
  2. 2005 – 2010 — reliance on mail order generics Rx margins;
  3. 2010 – today — reliance on retained rebates from specialty drugs.

To compensate for declining mail order generics Rx margins after 2010, PBMs saw the rising trend of specialty and biotech drugs as a promising basis for a renewed reliance on retained rebates.

But there are several constraints today on this phase of the PBM business model.

The first constraint in that the specialty drug Rx volume “basis” for collecting rebates today is a lot less than it was ten years ago when small molecule drugs were the basis for rebates.

The second constraint is a newfound awareness by clients that retained rebate dollars can be substantial yet an opaque source of PBM gross profits.   As a defensive move, CVS Health finally declared publicly on their website that,

“CVS Caremark was able to reduce trend for clients through… negotiations of rebates, of which more than 90 percent are passed back to clients.”

The problem facing PBMs today is how to derive a majority of gross profits from specialty Rx while maintaining a transparent rebate retention rate of 10% on average.

Using data supplied by the drug company Merck, we reconstructed a step-by-step sequence of how PBMs and drug companies might negotiate the parameters of a rebate deal under the triple constraints of (1) Pharma’s net prices must grow; (2)  PBMs retained rebate gross profit DOLLARS must grow; and (3) PBM rebate retention rate must be fixed at 10%.  

We found that to do this required PBMs to “coax” drug companies into increasing list prices for brand drugs at double-digit rates yearly while demanding that nearly all of it be rebated back to the PBMs. The result of this scheme is an occurrence now known as the “gross-to-net price bubble.”  Below is a graph of the phenomenon using data supplied by Merck:

PBMs and Formulary Choice

As we said in the prior section, the PBM business model relies heavily today on rebates received from drug companies in return for placement on a list of drugs covered by a Rx benefit plan.  That list of covered drugs is called a formulary.  

The formulary is a lookup table that PBMs add to their claims processing systems that checks a Rx request against a list of therapeutic equivalents preferred by PBMs and rubber-stamped by plans.  The formulary is designed to limit Rx to the most cost-effective drug(s) in each of 50-80 different therapeutic classes.  

In 2005, we were the first to conceptualize formularies and their 50-80 therapeutic classes as a group of markets.  On the sell-side are brand drug companies with close, but not perfect substitutes, called therapeutic equivalents.  On the buy-side are the Big 3 PBMs representing plan sponsors and their members.

Economists call such markets bilateral oligopolies.  We have written a number of papers about the Pharma – PBM bilateral oligopoly available for download free on our website.

Rebates are essentially tariffs paid by drug companies to gatekeepers (PBMs) for access to markets with limited competition. We have presented that case that the most “rebatable” brand drugs fall in oligopolistic therapeutic classes featuring a small number of patented drugs that are therapeutic equivalents.  

Over time, “me too” drugs enter and older drugs lose patent protection opening the door to generics or biosimilars.  The therapeutic class becomes competitive and no manufacturer has any wiggle room left to negotiate price reductions with PBMs.

We have observed a change in PBMs’ approach to formulary design over the past 15 years.  Basically, “rebatable” therapeutic classes have gone from being open — a few approved drugs — to being closed — a single approved drug.  We are just beginning to figure out the causes of this change.  

But our basic view of what drives PBMs to choose  open versus closed therapeutic classes is this:

The more a PBMs limits competition in a therapeutic class, the more potential entrants will pay for access.  Small molecule therapeutic classes tend to be open, hence less valuable to entrants.  Specialty and biotech therapeutic classes tend to be closed, hence more valuable to the single favored entrant.  

Today, PBMs need to squeeze everything they can from granting access to specialty therapeutic classes.  This is the reason for the trend toward closed formularies and correspondingly more drugs on excluded lists.   

The Hepatitis C Virus Drug Therapeutic Class

In 2013,  the biotech company Gilead Sciences got FDA approval for its “innovative” Hepatitis C Virus (HCV) drug combo called Sovaldi.  Eight month later, an improved version of Sovaldi,  called Harvoni, came on the market.  These drugs produced fewer side effects than first generation combo drugs requiring interferon.  Also, Sovaldi / Harvoni only required regimens lasting 12 weeks, instead of 24 to 28 weeks with prior combo drugs.  

In 2016, Gilead’s Harvoni stood at #2 on the list of top selling Rx drugs at $10.0 Billion a year, after AbbVie’s top selling biotech drug Humira at $12.9 Billion used to treat a variety of autoimmune diseases.

In the three years since Harvoni came on there market, there have been 5 additional HCV drugs approved by the FDA, but only AbbVie’s Viekira Pak has garnered any significant sales.  

The reason has been that the Big 3 PBMs have decided the make the HCV therapeutic class a “winner-take-all” proposition, coaxing competing companies to choose a high list price to be in a position to offer PBMs  a “deep discount” rebate reaching 70% to 80% of list price to gain exclusivity in the HCV therapeutic class.  Below is a summary of the formulary choices of Big 3 PBMs and Prime Therapeutics for the HCV therapeutic class for 2017.   

Gilead has secured exclusive preferred status for Harvoni with CVS Health, OptumRx and Prime Therapeutics. AbbVie has secured exclusive status for Viekira Pak with Express Scripts.   

All of these choices are aligned with plan interests of having the most cost-effective drug included in the formulary.  All choices are also aligned with PBMs’ interest of securing the most rebate DOLLARS.

Harvoni and Viekira Pak are both about equally effective so rebates become the determining factor for cost-effectiveness.  For CVS Health, OptumRx and Prime Therapeutics, Gilead’s Harvoni is more cost-effective choice because Gilead’s rebate offer was greater than AbbVie’s.

For Express Scripts, Viekira Pak is the most cost-effect choice because AbbVie’s rebate offer was greater than Gilead’s whose bid might have been constrained due to a depleted budget after all the other wins.   

AbbVie’s Mavyret Drug Pricing Is Disruptive to the PBM Business Model

On August 3, 2017, the FDA approved a new HCV drug call Mavyret from AbbVie. According the Speciality Pharmacy Times, this new drug has the potential to challenge the dominant position of Gilead’s Harvoni on two fronts: (1) a regimen requiring only 8 weeks versus 12 weeks for Harvoni; and (2) a disruptive ultra-low regimen list price that leaves little to no room for PBM rebates.  

Below is our spreadsheet comparison of the NET REGIMEN for Mavyret versus Harvoni:

AbbVie’s pricing for Mavyret is disruptive to the current PBM business model because it forces the Big 3 PBMs to consider a drug for inclusion in their national formularies that is aligned with their clients interests — more cost-effective than Harvoni — but not aligned with their own interest of squeezing out all the rebates they can from specialty drugs.

On July 31, 2017,Express Scripts released its 2018 National Formulary, but noted:

“Please note that product placement for Hepatitis C and treatment for Inflammatory Conditions are under consideration and changes may occur based upon changes in market dynamics and new product launches. The full list of excluded products will be available on or before September 15, 2017.”

In August 2017, CVS Health released a white paper outlining the criteria it uses for formulary choices and exclusion lists. It stated that in January 1, 2018,  it expects to remove 17 products from their Standard Control Formulary in 10 drug classes, but noted that  

“We are in the process of finalizing changes for autoimmune and hepatitis C categories, which will be communicated mid-September.”

Will the PBMs open up the HCV therapeutic class and add Mavyret?  

Or, will they expose themselves to claims of misalignment by excluding AbbVie’s Mavyret?

Stay tuned.

Postscript added October 17, 2017

Was CVS’s Formulary Exclusion of Mavyret a Violation of Antitrust Laws?