Tag Archive Robert Bork

The Winner of Biosimilars vs Incumbents in 2017: Competition

Lawrence W. Abrams No Comments

Summary

While 2017 has been bad for biosimilar entrants, it has been good for competition as prices for incumbent drugs such as Remicade have dropped significantly for the first time.  Rather than argue for more legal and legislative protection for biosimilars, we argue for a rethinking of competitive strategy on the part of the entrants.

One of the most profound quotes in antitrust law can be found in a 1962  Supreme Court opinion by Chief Justice Earl Warren regarding Brown Shoe Co. v. United States, 370 U. S. 320.  He argued that the U.S. Congress enacted antitrust laws “for the protection of competition, not competitors.”

This idea will being tested to the maximum in the coming years as new biosimilar entrants will have a tough time gaining insurance coverage because of exclusive dealing formulary contracts between incumbents and pharmacy benefit managers (PBMs) and insurance companies.

If manufacturers of biosimilars choose to litigate, we believe that the courts will dismiss antitrust lawsuits summarily based on the now widely accepted Chicago School theories that vertical restraints such exclusive dealing formulary contracts are presumptively pro-competitive. 

This is because it would not be rational for a buyer to exclude the lowest cost supplier.   See our recent paper Biosimilars and Exclusive Dealing Antitrust Law: The Case of Pfizer, Inc v Johnson & Johnson et. al.

 

Price Competition Between Biosimilars and Incumbents

The potential of biosimilars to compete on price has been greatly enhanced by Federal legislation passed as part of the Affordable Care Act of 2010.  This legislation greatly abbreviated the FDA approval process for biosimilars by allowing entrants to use test results supplied to the FDA by incumbents.

 The accelerated approval process has reduced biosimilar R&D costs by more than 90% from an estimated $2.6 Billion for a new drug to an estimated $100 – $200 Million to develop a biosimilar.

Prior to 2017, most of the attention has focused on the competitive potential of biosimilars. Not much attention had been paid to the potential of incumbents to respond with aggressive price cutting of their own.    Also,  until this year, not much attention had been paid to the potential of insurance companies and pharmacy benefit managers (PBMs) to drive price competition through exclusive dealing formulary contracts.   

This is surprising because there there has been considerable evidence  that PBMs have been driving price competition among small molecule brand drugs via exclusive dealing formulary rebate contracts since 2012.  

 

Biosimilars Inflectra® and Renflexis® vs the Incumbent Remicade®

Johnson & Johnson’s (J&J) incumbent biologic drug Remicade was approved by the FDA for use in August 1998.  It was the first autoimmune drug to be approved in three different therapeutic classes and is used to treat patients with autoimmune diseases including rheumatoid arthritis, psoriatic arthritis, Crohn’s disease, plaque psoriasis, and ulcerative colitis.

In 2016, Remicade was the 5th highest selling drug in the United States with estimated sales of $5.3 Billion.  Remicade was J&J’s top selling drug, representing 20% of its total global drug sales.     

In November 2016,  Pfizer introduced Inflectra as the first biosimilar to Remicade. It was followed by the introduction of a second biosimilar called Renflexis in June 2017  by Merck and Samsung Bioepis.

At the time of its introduction,  Pfizer list priced Inflectra only 15% below the incumbent, but increased the discount to 35% seven months later to match the list price of the second biosimilar entrant Renflexis.

On September 20, 2017, Pfizer filed a lawsuit Pfizer Inc, v Johnson & Johnson et al (link to the full court filing)  claiming that Johnson & Johnson (J&J) violated Section 2 of the Sherman Antitrust Act by monopolizing the market for its incumbent biologic drug Remicade.   This was achieved via rebate contracts with the largest insurance companies in the USA that had the effect of excluding from coverage Pfizer’s biosimilar drug Inflectra.

Pfizer argued that its rebate offers would have make Inflectra the lower cost drug on a “unit-for-unit” basis.  But, in our paper dealing with this lawsuit,  we presented a spreadsheet (see below)  comparing Pfizer’s unit rebate offer with an estimate of J&J lump-sum rebate offer estimated at 28% off Remicade’s list price contingent on exclusive coverage.  

We concluded that Remicade was still the low cost choice on a total dollar basis and that exclusive dealing contracts between J&J and insurance companies were pro-competitive and not in violation of antitrust laws.  

In September 2017, J&J’s CFO Dominic Caruso told Wall Street analysts  that Remicade sales had dropped only 5% year-over-year.   He attributed J&J’s success to doing a  “pretty good job of contracting for Remicade well in advance of the biosimilar entry from Pfizer.” He also attributed J&J’s success to natural barriers to biosimilar adoption in general.

With the 5% figure doesn’t seem like much, it is masking a larger YoY drop in the net price of Remicade due to the biosimilar entry.  Below is a chart of quarterly US sales for Remicade for a full two years from 3Q15 through 3Q17.   Note the drop in sales dollars beginning in 4Q16 when the biosimilar was first introduced.  A simple projection of sales from 2015 before the biosimilar entry results in a “what-if?” no entry estimated 3Q17 US sales for Remicade of around $1,700 Million.  While YoY sales from 3Q16 to 3Q17 only dropped 5%, we believe that a more accurate estimate of the effect of biosimilar entry is a 20% decline in sales dollars  = (1,700 – 1,362 ) / 1,362.  Again this 20% decline in Remicade sales dollars has to be broken down into quantity changes vs unit price changes.

 According to Pfizer in a 2Q17 conference call with investors,  the results to date with its biosimilar entry had been “disappointing” and “slower than expected”  taking only a 2.3% of the Remicade’s market.

The competition between Remicade and Inflectra represents the first “clean” case study of biosimilar price competition in the United States.   We see several takeaways that future biosimilar entrants might want to keep in mind:

  • Incumbents will have in place insurance coverage contracts with $100+M lump sum rebates contingent upon exclusivity.
  • Entrants should consider adopting a “land and expand” strategy going after coverage for new patients first. 
  • Understand the differences between how PBMs versus how insurance companies negotiate rebates.  With PBMs, it is gross rebates that matter. With insurance companies, it is net price that matters.  In either case, gross rebates in the area of 40% won’t dislodge the incumbent.  It look like it will take gross rebates in the order of 60% to 70% off list price to gain any coverage.

 

The Follow-On Biologic Basaglar® vs the Incumbent Lantus®

Sanofi’s Lantus was the first long-acting insulin drug approved by the FDA in April 2000.  Since then, there has been a number of other long-acting insulin drugs approved that are in the same therapeutic class:  Sanofi’s Toujeo (glargine) and Novo Nordisk’s Levemir (detemir) and Tresiba (degludec). Because these drugs are self-injectable, they are usually covered by a drug benefit plan managed by PBMs as opposed to a medical benefit plan managed by insurance companies.

While Lantus faces competition from therapeutic equivalents, it has remained the dominant drug in the long-acting insulin class.   In 2016, Lantus was the #9 best selling drug in the US with estimated sales around $3.3 Billion dollars.  

On December 15, 2015, Eli Lilly introduced a rapid-acting insulin drug called Basaglar.  It is formally classified as a follow-on biologic, not a biosimilar,  because it was approved under a different approval process.   Notwithstanding the label, this case has relevance to biosimilar competition.

According to Business Insider, Lilly list priced Basaglar only 15% below Lantus at the time of its introduction.  The table below summarizes the 2016 list prices of all rapid acting insulin drugs relative to the incumbent and top seller Lantus.  

According to BioFarmDive, Lantus sales have fallen nearly 17% YoY from 2Q15 to 2Q16.  Some of that has been attributed to price competition from therapeutic equivalents.  Some has been due to quantity reductions as patient have moved to new drugs including Sanofi’s own drug Toujeo.

It appears that Lilly’s tepid list pricing of its biosimilar Basaglar has added nothing to the the price competition (via rebates for formulary placement) that already existed in the rapid-acting insulin therapeutic class.

The fact that the incumbent here was facing significant competition before the entry of a biosimilar is probably unique to the insulin class due to a relative lack of patents protecting biologic production processes for insulin.

As a result, the Basaglar entry is not a “clean” case study of biosimilar competition.  But, what it demonstrates is that once again list pricing a biosimilar not more than 15% below the list price of the incumbent and playing the rebate game is insufficient to gain much insurance coverage.

This lack of impact is reflected in the recently announced 2018 national formularies of the four largest PBMs.  Only CVS Health has decided to include Basaglar and exclude Lantus.

 

Other Biosimilars Approved Since August 2017

We have identified five other biosimilars approved by the FDA in the last half of 2017.  Four have been delayed because of patent disputes, with one  — Humira, the #1 selling drug in the US — being a controversial “pay for delay.”

On December 13, 2017  Pfizer announced that a second biosimilar to the J&J’s incumbent Remicade was approved by the FDA.  Given the failure of Pfizer’s first biosimilar, it did not surprise us to see Pfizer announce that it had no immediate plans to commercialize this second biosimilar.  

We have presented in more detail the price competition between Remicade and Inflectra in our recent paper Biosimilars and Exclusive Dealing Antitrust Law: The Case of Pfizer, Inc v Johnson & Johnson et al.  We believe this experience will impact future biosimilar entry strategies pertaining to list pricing, rebate offers, and target markets.  

In addition, it may increase “no go” decisions regarding biosimilars in the R&D pipeline and “pay for delay” agreements between biosimilars and incumbents.

While 2017 has been bad for biosimilar competitors, it has been good for competition as prices for incumbent drugs Remicade and Lantus have dropped significantly.  Rather than argue for added legal and legislative protection for biosimilars, we argue for a rethinking of competitive strategy on the part of the entrants.

Biosimilars & Exclusive Dealing Antitrust Law: Pfizer (Inflectra) v J&J (Remicade)

Lawrence W. Abrams No Comments

Summary

Following the generally accepted theories of the legal scholar Robert Bork and his Chicago School colleagues, vertical restraints such as exclusive dealing contracts are presumptively procompetitive and welfare-enhancing because it would be irrational for a buyer to exclude the lowest cost supplier.  

On September 20, 2017, the drug manufacturer Pfizer filed a lawsuit Pfizer Inc, v Johnson & Johnson et al (link to the full court filing)  claiming that Johnson & Johnson (J&J) violated Section 2 of the Sherman Antitrust Act by monopolizing the market for its incumbent biologic drug Remicade®.  This was achieved via rebate contracts with the largest insurance companies in the USA that had the effect of excluding from coverage Pfizer’s biosimilar drug Inflectra®.

We will present the case that Pfizer’s antitrust case is weak because it was unlikely that Pfizer was the low cost supplier based on a view of lump sum rebate offers as  efficiency-enhancing “signals” of expected consumer demand for a product.  

Introduction

Johnson & Johnson’s (J&J) biologic drug infliximab — trade name Remicade® —  was approved by the FDA for use in August 1998.  It was the first autoimmune drug to be approved in three different therapeutic classes and is used to treat patients with autoimmune diseases including rheumatoid arthritis, psoriatic arthritis, Crohn’s disease, plaque psoriasis, and ulcerative colitis.

In 2016, Remicade was the 5th highest selling drug in the United States with estimated sales of $5.3 Billion.  Remicade was J&J’s top selling drug, representing 20% of its total global drug sales.     

Remicade consists of monoclonal antibodies bioengineered from mouse tumors. It is prescribed to patients with autoimmune diseases. Because it is infused at physician’s offices or outpatient clinics, it is almost always covered by a medical benefit plan rather than a drug benefit plan.  Remicade is a live, large molecule protein.  It is impossible for other companies to manufacture perfect substitutes, only “biosimilars”.  

Remicade now faces competition from biosimilars due to the expiration of FDA exclusivity coupled with court judgements invalidating some of J&J’s patents protecting it bio-engineering processes.

In November 2016, the FDA approved Pfizer’s biosimilar drug Inflectra® followed by a June 2017 approval of Merck and Samsung’s biosimilar drug Renflexis®.

Pfizer’s Antitrust Lawsuit 

On September 20, 2017, Pfizer filed a lawsuit Pfizer Inc, v Johnson & Johnson et al (link to the full court filing)  in the U.S. District Court, Pennsylvania Eastern District Court, Philadelphia Office, No 17-04180.

Pfizer claimed that J&J violated Section 2 of the Sherman Act by monopolizing the infliximab market using a

“…web of exclusionary contracts on both health insurers and healthcare providers (e.g., hospitals and clinics) to maintain its stranglehold in respect of an important biologic, brand named Remicade, also known by its generic name, infliximab.”

It is significant to note that the Pfizer chose Section 2 (monopolization) of the Sherman Act rather than Section 1 (restraint of trade) of the Sherman Act or Section 3 (exclusive dealing) of the Clayton Act.

Former FTC Commissioner J. Thomas Rosch had noted in a 2007 article that the one exception to the trend of courts ruling against plaintiffs in vertical restraint cases focused on Section 2 of the Sherman Act.  He found that the 1978 case of Eli Lilly v SmithKline was often cited by plaintiffs who won their cases.

It is interesting to note that the SmithKline case involved bundled drug discounts. It was tried by the Third Circuit Court of Appeals which encompasses the District Court in which the Pfizer case is to be tried.

J&J’s exclusionary contracts were

“… designed to block both insurers from reimbursing, and hospitals and clinics from purchasing, Inflectra or other biosimilars of Remicade despite their lower pricing.”

The suit also claimed that J&J engaged in below cost predatory pricing:

“..when the total amount of discounts and rebates that J&J offers to insurers and providers under the contracts described herein, including multi-product bundle contracts, is attributed to the portion of Remicade sales that is contestable by a biosimilar like Inflectra, J&J is pricing Remicade below its own average variable cost.”

 

Expectation for Price Competition Between Biologics and Biosimilars

The pattern of price competition in 2017 between Remicade and Inflectra represents the first “clean” case study of price competition in the United States between a newly introduced biosimilar and its original biologic.

A year and a half earlier in March 2015, Sandoz introduced a self-administered, injectable drug called Zarxio that was a biosimilar to Amgen’s biologic Neupogen used to stimulate white blood cell production after chemotherapy.

Zarxio’s ease at gaining exclusivity on drug benefit formularies turned out to be an anomaly. That is because Amgen decided not to compete with Sandoz on price. Instead, Amgen focused its marketing efforts on converting existing Neupogen users to Amgen’s newly introduced, long-lasting version of Neupogen called called Neulasta.   

Before we turn to the lawsuit itself, we want to discuss the expectations that experts had for biosimilar competition in general.  We also want point to signs indicating what Pfizer’s own expectations were.  

The reason for this is to show that no one was expecting aggressive price competition from the incumbent.  When Pfizer realized its strategy was a failure, it decided to sue, claiming it was J&J fault.  

Instead, it should have renewed its efforts by devising a “winnable” strategy involving deeper discounts and rebate percentages on contracts that offered exclusive coverage for a subset of infliximab users.

At the time of its launch, Pfizer list priced Inflectra at $946 a vial, only 15% below $1,113 for a comparable vial of Remicade.  The normal regimen for both drugs consists is an IV infusion every 8 weeks or 6.5 times a year.  This translates to a yearly list price of $6,149 for the biosimilar versus $7,235 for Remicade.

Pfizer stated in its antitrust lawsuit that it

“… introduced Inflectra with a list price 15 percent lower than Remicade, and, in negotiations with insurers and providers, offered substantial additional pricing concessions in the form of discounts and/or rebates that in some instances were more than 40 percent below Inflectra’s list price. The goal and effect was to offer Inflectra for less than J&J was offering Remicade; indeed, for many customers, Pfizer committed to ensure that Inflectra would have a lower net per-unit price than Remicade”

Pfizer failed to mention in its lawsuit that, when Merck launched a second biosimilar called Renflexis in June 2017, Pfizer reduced its list price from 15% to 35% to match Merck.   We view this downward revision as an acknowledgement by Pfizer that its pricing between November 2016 and July 2017 had not been competitive.

In September 2017, J&J’s CFO Dominic Caruso told Wall Street analysts  that Remicade sales had dropped only 5% year-over-year since the introduction of Pfizer’s biosimilar.   He attributed J&J’s success to doing a  “pretty good job of contracting for Remicade well in advance of the biosimilar entry from Pfizer.” He also attributed J&J’s success to natural barriers to biosimilar adoption in general.

The costs above do not include infusion costs, running $3,000+ per visit or $19,500 a year, for administering the infusion at physicians offices or outpatient clinics.   Insurance coverage for the combination of drug and infusion fall under a medical benefit plan rather than a drug benefit plan, which limits coverage to self-administered drugs.  In the case of Medicare, both drugs are covered under Medicare Part B as opposed the drug benefit plan Medicare Part D.   

Pfizer’s choices for discounts off list have been in line with general expectations for new biosimilars.   Experts had thought that biosimilar competition would mirror the modest price competition that had been observed among branded, but therapeutically equivalent, small molecule drugs.  

No one believed that the competition would mirror the vigorous price competition initiated by generic manufacturers once a brand drug lost its patent protection. In these cases, a number of generic manufacturers with offshore operations would enter the market within a year and offer perfect substitutes that pharmacists could switch to automatically.  The vigorous competition caused generic prices to fall  80+% lower than the original brand.

These expectations for modest price competition seemed to be based only on the economics of the biosimilar manufacturer.  The idea was that the willingness of a biosimilar manufacturer to compete on price was a lot less than a generic manufacturer.  This stems from a need to cover amortized R&D expenses estimated at $100 Million to $250 Million for a biosimilar versus $1 Million to $4 million for a generic.

Biologic and Biosimilar manufacturing

It was also felt that biosimilar manufacturers would hold back from aggressive pricing because substantial gross profits would be needed to cover large sales expenses for consumer advertising and “physician detailing.”  This non-price competition followed from the expectation that physicians would be reluctant to switch existing patients to another drug that was not a perfect substitute.

No one in general, and not Pfizer specifically, expected that the manufacturer of the biologic would become the driver of vigorous price competition upon entry of a biosimilar.  After enjoying 16 years of monopoly profits with fully amortized R&D, the incumbent could afford to undercut any biosimilar “burdened” by the yearly amortization of $100 – $250 Million in R&D expenditures.

Also, no one considered  the possibility that payers — insurance companies and plan sponsors  — would be the drivers of biosimilar price competition.  This is surprising because there there has been considerable evidence since 2010  that payers and contracted specialists called pharmacy benefit managers (PBMs),  have been driving price competition among small molecule brand drugs via exclusive formulary rebate contracts.  

 

The Chicago School on Exclusive Dealing

Following the now generally accepted theories  of the legal scholar Robert Bork and his University of Chicago colleagues,  vertical restraints such as exclusive dealing contracts are presumptive welfare-enhancing and procompetitive because it would not be rational for a buyer to exclude the lowest cost supplier.    

Beginning in the 1980s, Federal courts have ruled that most cases involving various vertical restraints — exclusive dealing, tying arrangements, slotting arrangements, rebate bundling, etc —  are procompetitive and do not violate antitrust laws.

The Chicago School argued persuasively that antitrust cases involving vertical restraints  should be decided on the basis of prices and costs.  The Chicago School has rendered the industrial organization paradigm of structure-performance-conduct and related data, which Pfizer offered as evidence in its lawsuit,  as irrelevant to vertical restraint antitrust cases.

We believe that Pfizer’s antitrust lawsuit is weak.  Following the Chicago School, we believe that the exclusive dealing contracts between J&J and insurance companies are procompetitive as it is highly unlikely that Pfizer’s biosimilar had a lower price after rebates than Remicade.

Pfizer Inc v Johnson & Johnson et al is no different that the 2014 case of Eisai Inc. v. Sanofi-Aventis U.S., LLC, No. 08-4168 (MLC) (D.N.J. Mar. 28, 2014)  tried in The United States District Court for the District of New Jersey. The court ruled that contracts between a drug company and hospital groups offering “loyalty discounts” if buyers met market share targets were procompetitive as long as the net prices exceeded costs.

 

Predatory Pricing

Pfizer alleged in its lawsuit that “J&J is pricing Remicade below its own average variable cost.”

Predatory pricing is a form of vertical restraint initiated from the sell-side.  The Chicago School argued that predatory pricing is unlikely to occur as it would be irrational for a seller operating under a normal profit-maximizing business model to so.

Pfizer’s claim of predatory pricing is weak. The bioengineering costs to manufacture infliximab have to be about the same for the two companies.  Where the two firms’ cost structures differ is in the area of amortized R&D expenditures.   

J&J has been amortizing Remicade’s R&D costs for the past 18 years. By now J&J’s R&D expenditures on its balance sheet have been fully amortized. No longer is J&J required by GAAP to “burden” its cost of goods sold.  

On the other hand, Pfizer introduced Inflectra a year ago and has to “burden” its cost of goods sold with a yearly amortization of the total R&D for its biosimilar in range of $100 Million to $250 Million.

Unburdened by amortization,  J&J could easily underprice Pfizer without going below its costs of goods sold.  In other words, J&J would not have to engage in predatory pricing to outbid Pfizer for exclusive dealing contracts.  It would be irrational for them to do so.

 

Business Model Misalignment

One factor that might have bolstered Pfizer’s case would have been a misalignment of the business model of the buyers.  But, we rule that out here.

The buyers in this case are the largest national health insurance companies in the United States and a slew of regional Blue Cross Blue Shield companies. Below is the list of these companies and how they chose to cover Pfizer’s biosimilar.

  • UnitedHealthcare  – only after Remicade failed first
  • Anthem — outright exclusion
  • Aetna — complex indication list before approval
  • Cigna — only after Remicade failed first

In its lawsuit Pfizer estimated that “70% of medical drug benefits of commercially insured patients in US”  are managed by the companies named in its lawsuit.  

EVERY SINGLE ONE of the national health insurance companies either excluded Inflectra outright or required Remicade to “fail first” before covering Inflectra. It is presumed that EVERY SINGLE ONE of these big insurance companies signed these exclusive coverage contracts only after a thorough investigation of competing bids leading to the conclusion that J&J was the low cost supplier.

In the lawsuit, Pfizer did make the persuasive argument that “fail first” coverage for Inflectra amounted to de facto exclusion.  They argued that if one infliximab drug — Remicade — did not work, a physician would then turn to a non-infliximab drug, not to another biosimilar infliximab drug like Inflectra. This is because years of clinical trials submitted to the FDA  proved that there was no meaningful difference in outcome between Remicade and Inflectra.

The question is are there other circumstances under which a large insurance company would intentionally exclude coverage for a biosimilar with lower costs?

We have been the first to raise the possibility that a buyer with a misaligned business model could be an exception to the Chicago School dictum about vertical restraints. This is because their conclusion depends on the assumption that the buyer has a rational business model in the economic sense of maximizing revenue minus costs.

But, we rule the possibility of irrational business model out as the insurance companies in this case operate under normal economic business models.  

One is an insurance model based on revenue from fixed premiums offset by provider reimbursement costs.  The other is a self-insured model where the insurance company operates as a fee-for-service contractor offering medical benefits management with 100% pass through of provider reimbursements to plan sponsors.

While mistakes can occur without affecting profits in the short run,  it is in the best interest of an insurance company to produce a cost-effective medical benefit as plans will compare results at contract renewal time.

Unlike cases involving insurance companies as buyers, we have pointed out that the Chicago School’s assumption of a rational buyer business model is problematic in instances involving exclusionary formulary contracts between drug companies and PBMs as buyers.  

PBMs have a reseller business model where their gross profits on brand Rx are derived only from opaque retained rebate percentages.  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.

 

Lump Sum Rebates

The question is how do you determine the low cost supplier in cases where the defendant uses market share or lump sum rebates in return for exclusive deals?

Pfizer alleged that its rebates offers would have make Inflectra the lower cost drug on a “unit-for-unit” basis.  While Pfizer’s specific descriptions of the form of J&J rebates is somewhat vague in the lawsuit, it appeared that J&J’s payments to insurance companies were in the form of a contractual commitments of multimillion dollar lump sums contingent upon meeting near 100% market share targets for Remicade.  

Below, we  present a “stylized facts” comparison of rebates offers where our estimate for the total annual lump payment paid by J&J reasonably could have been as much as $2 BILLION, or 28% off Remicade’s list price.  

We show that on “unit for unit” basis, Pfizer is the low cost supplier.  However, on a “dollar for dollar” basis, J&J is the low cost supplier given our estimated 25:1 volume advantage for Remicade coupled with our estimated $2 Billion lump sum rebate.

Who is the low cost supplier here?

J&J is the low cost supplier based on a view of lump sum rebate offers as  efficiency-enhancing “signals” of expected consumer demand for a product.   

Lump sum rebates can be viewed as the product of a unit rebate times a manufacturer’s expected demand for their product.   They provide a “signal” to buyers of which product among a group of therapeutic equivalents might offer buyers the single best opportunity for satisfying downstream consumer demand.

The intermediate market buyer is looking to maximize expected profits.  This can be cast at the product of unit margin (unit resale price – unit cost) times expected downstream demand.  It would be irrational for an intermediate market buyer to enter into exclusive dealing contracts only on the basis of unit costs after rebates without considering expected demand as well.

What buyers are doing by comparing rebates on a lump sum basis and not on a unit basis is similar to the AdWord algorithm Google came up with for “slotting”  search ads based on keyword bids on a unit basis.  

Slotting ads based only on cost per click (CPC) bids most likely would have resulted in the top slots going to bidders advertising products that few viewers were interested in,  resulting in few clickthroughs.  Slotting ads only on the basis of CPC bids would be far from revenue-maximizing as measured by the product of CPC times clickthroughs.

Instead, Google looked at past data on bidders, their ad relevancy to viewers,  and calculated something called an expected clickthrough rate (eCTR), a measure of expected demand.  Google then sold the top slots to bidders with the highest “AdRank”, a rating index that is function of CPC and eCTR.

Consider insurance company in a situation similar Google selling a single slot for insurance coverage of supplying infliximab vials to patents. The insurance companies received two rebate bids — $333 per vial from J&J vs $400 per vial from Pfizer.  Who should they choose for the slot?

Unfortunately, insurance companies did not have a genius like Larry Page to come up with a “AdRank” for the two bids — a measure combining unit bid with expected consumer demand.  But, insurance companies were provided with a “signal”  of expected demand in the form of a J&J’s market share or lump sum rebate offer.

Pfizer could have chosen to outbid J&J’s on a market share or lump sum basis.  But, this would have required Pfizer to have the confidence that it could deliver a 25x increase in patient demand for its biosimilar if given exclusive coverage. But Pfizer did not have such confidence.  

 

 Bundling or Tying Arrangements

Pfizer’s anticipated the “signaling”  defense of lump sum rebates by arguing that J&J’s rebates covering the entire market for infliximab were exclusionary bundling or tying arrangements.  In its lawsuit, Pfizer viewed the “contestable” market for its biosimilar as consisting only of new patients.  It viewed as “uncontestable” current users of Remicade.

Pfizer argued that J&J’s offer should be viewed as tying a lump sum payment for supplying existing patients with a lump sum payment for supplying new patients.  

Pfizer argued that its rebate offer should be compared with J&J’s lump sum, but only after it had been prorated over the “contestable” market.  In effect, pro-rating amounts to an “unbundling” of J&J lump sum rebate offer turning it into a “unit-for-unit” offer.  As we have shown above, Pfizer would be the low cost supplier on a “unit-for-unit” basis.

Again, the Chicago School argued that it is presumptive to expect that rational buyers would accept bundling or tying arrangements if they involved excluding the low cost supplier.

We recommend that in the future Pfizer asks insurance companies to create two types of contracts: (1) one contract offering exclusive coverage of patients already using Remicade; and (2) another contract offering exclusive coverage for new infliximab patients.  Give this division, Pfizer has a chance to outcompete J&J on price by bidding only on (2).

 

Conclusion

We believe that Pfizer’s case is weak.  Pfizer did compete, but only moderately so. Pfizer never expected existing users of Remicade to switch to its biosimilar.  Being excluded from that market was not a shock.  

Pfizer really thought it had a chance to win over physicians looking to prescribe an infliximab for new patients.  But, Pfizer was not smart enough to devise a “winnable” contract specifying rebates in return for coverage only in its “contestable” market.

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.  

 

PBM Legal and Antitrust Issues

Lawrence W. Abrams No Comments

Insulin Drug Price Inflation: Racketeering or Perverse Competition (1/18)

Biosimilars & Exclusive Dealing Antitrust Law: The Case of Pfizer Inc v Johnson & Johnson et al. (10/17)

Biosimilar Drugs in 2017: Good for Competition, Bad for the Competitors (12/17)

Was CVS’s Formulary Exclusion of Mavyret A Violation of Antitrust Laws? (10/17)

Hepatitis C Virus Formulary Choices for 2018: Will CVS Caremark Risk Looking Bad? (09/17)

 Exclusionary Practices in the Mail Order Pharmacy Market

Practical Issues With PBM Full Disclosure Laws
Originally Published in Update Magazine, Issue 4, 2004. Available with permission from FDLI

The Formulary Game

Contrary to What Wall Street and the FTC Say, The PBM Business Model is Misaligned

Sins of Omission’: A Review of the FTC Study of PBM Conflict of Interest (10/05)