A New Prescription For PBMs with Allan Shaw

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Our friend and celebrated biopharma opinionator , Allan Shaw , says the last mile of the supply chain , the part that gets therapies to , and indeed into , patients , is twisted and broken , that incentives work for all the wrong players and that patients , physicians , pharmaceutical developers , payers and virtually everyone except the PBMs are getting short shrift as a result .

I'm Matt Pillar . This is the Business of Biotech , and on today's show , Alan and I are back together to plane over the business of drug distribution what's broken , how it might get fixed and the signs on the not too distant horizon that tell us the time for reform just might be nigh . Alan , good to see you again .

So this concept , this discussion that we're going to have about the way the drugs are distributed , who's rewarded , you know , compliance to drugs and therapies and better outcomes it's absolutely relevant to our audience .

I think and you and I had a brief conversation about this a week or so ago and I think there are some movements in play that might be cracking the door open to sort of change the paradigm .

So I'm going to get your thoughts on that , but to sort of get a level set heading into the conversation , I'm curious if you can just expand for us a little bit at the high level on what you mean when you talk about this convoluted last mile of the pharmaceutical supply chain and how it works today and where you see broken links and how it works today and

where you see broken links .

You know , given the sheer magnitude of the financial stakes , it's not surprising a cottage industry was created which feasts on the inefficiencies and a Byzantine relationships embedded in the opaque biopharma supply chain , With high gross to net margins never been greater almost 50% or higher that neither benefit the patient or the innovative drug manufacturer , and it's

estimated to be approximately $250 billion on the table annually . And only the middlemen , otherwise known as the PBMs , win . And they do this by extorting ever-increasing rebates and discounts in exchange for favorable formulary positions .

I think it's time to get back on the road , and this is no different , you know , with so much value being lost or redirected , particularly in a pricing environment that's being challenged by gravitational forces reflecting the current system , which is apparently and increasingly , unsustainable .

Um , you know this and actually you know , while this is all negative , it can actually , if you , if you look at it , look at it through another lens it can actually provide an opportunity for the industry to start rehabilitating its image .

Instead of trying to raise drug prices , isn't it time to start exploring ways to extend the commercial supply chain , to better engage with patients and advance commercial goals , while squeezing out the vast waste of legacy business practices ?

You know , and you would think that you know , the industry continues to raise prices . Right , it continues to raise prices at a pace that outpaces inflation , you know , and that really underscores the industry being tone deaf . And right now and I can get into it in a little bit , you know , I can get into , you know what's happening .

But in many cases , what's driving price increases are actually the PBMs themselves , who you know , because you know what happens is you raise the price but then you're also increasing the rebate , so you know the net amount that's coming back to the manufacturer is pretty negligible , yeah , at the end of the day .

So you know , you know , definition of insanity is to do the same thing and expect a different outcome . So I don't think the industry can continue raising prices like they have been and it's also continuing to , you know , fan the negative perception that we have .

You know we're not helping ourselves by doing it , either economically or from a public relations perspective . We lose-lose . You know the industry's pricing headwinds are well known , particularly in the face of global cost and containment initiatives . Tethered at , really tethering .

The unsustainable nature of our system and the aging demographics is only making us harder and there's a need to change . You know , I mean you can point to a lot of things in this country where we continue to kick the can . You know I don't think it's necessarily sustainable . I don't think this one is either .

So at some point it's point , there's going to be a day of reckoning and I think there's still an opportunity for the industry to control the narrative , as opposed to having the narrative controlled for us . Yeah .

I mean , you know , you said we outpace the cost of inflation , which is that's really saying something , given the inflationary period that we're in right now , right now . But the American public , payers , seem to be begrudgingly dealing with rising costs of grocery prices , rising cost of consumer packaged goods I mean , automobiles are off the chain right now .

Real estate is out of control , everything's getting more expensive and I think to consumers anyway , to patients , as it were , in this case , in all of those industries there are gray areas where it's not understood exactly who's benefiting or who's getting rich on these price increases .

The pharmaceutical last mile supply chain , all of this expense that that people and payers are , are , are burdened with , is is coming without apology , yet we keep paying . Why , so ? So why and again I asked the question sort of tongue in cheek why , why not drugs ? Why shouldn't ?

Why shouldn't the people who are , you know , pulling the wool over our eyes in the pharmaceutical industry and making money on it , continue to get away with it the way that everyone else is right now . That sounded very cynical , didn't it ?

You know , if you go to the ATM machine and you don't get your money out , you know you have recourse . You know if , if you , if you , you know if you fly in an airline , and you know you have recourse . You know we , you know when you take our products , it either works or doesn't work . There's no recourse .

So you know , I think you know , there should probably be more risk sharing as part of the answer to you know , I think there's things that can be done in terms of squeezing out costs on the supply chain , as we can touch on and go into the PBMs , but I also think that there's things that we can also further do on a risk sharing perspective .

You know whether you can do it with current modalities or you can , certainly . I think it lends itself , very much so with some of the newer modalities , such as gene editing , when you're talking about sticker prices that are rather significant , you know . So there's going to be some risk there .

There's gonna be a need for the industry to risk share you just , you know , you just can't sell pills without it being any accountability , or injections without it working , you know , and the industry is gonna move to that at some point .

But I think there's a lot of inefficiencies and I think the way we have historically operated , as I touched on , is really there's lax transparency , there's a lot of different folks involved and it's you know why did the chicken cross the road ? Because they did it last year and it's just like night follows day .

Unfortunately , it hasn't worked out that way , as the PBMs have really lost their way . At issue is the convoluted and opaque nature of their relationships , which greatly affect the cost of medicines for hundreds of millions of Americans . Greatly affect the cost of medicines for hundreds of millions of Americans .

Presently , pbms use their market power to profit by keeping drug prices high , harming patients . In biotech innovation , three PBMs CVS , express , grips and OptumRx are integrated with pharmacy chains and insurers and control 80% of the prescription drug market . This dynamic is driven by the rebate game , which I'll further elaborate on .

Pbms provide favorable placement on formularies , which are the lists of medicines covered by health insurances , in exchange for rebates they receive from drug makers , effectively pay to play . Drug makers argue that they must raise prices to compensate for these rebates , while pharmacy benefit managers maintain to drug companies raise prices to boost profits .

In practice , this is not much different than a traditional retail shelf space for other consumer products , different than a traditional retail shelf space for other consumer products . You know slotting fees paid by retail product manufacturers , whereby commercial success can hinge on consumer or patient access .

Without formulary listing , over 95 of the drug purchases will go elsewhere because of the situation . Rebates are a really big factor in the increase of drug prices .

You're in a situation like that , it's more difficult to kind of claw your way out of it with a rational thought . So what is an ? Or ? You know the alternative .

But you know , I think if we can focus on the patient and think about the patient and this should be all about the patient and the outcomes of the patient , you know , I think it's easier to get to answers that make sense and work towards that .

Again , a lot of this is much easier said than done , but from my experience , drug adherence is the common denominator for all stakeholders and should serve as the foundation of patient engagement strategy strategy , as patient drug compliance is the biggest rate limiting factor in successful outcomes .

Implementing patient loyalty programs that correlate pricing discounts to drug adherence would provide a win-win strategy for redirecting middlemen or PBM profits back to consumers while driving down drug prices . Of course , as I said , this is much easier said than done . Yeah , but I think it's a start to .

You know , the more the patient takes a drug and stays compliant , the drug price comes down . So you know you're correlating everyone's interests to successful outcomes . Somehow , you know that gets lost in translation you know that gets lost in translation .

Should some of the money that's going to PBMs in the form of rebates be reallocated ? Do you think that the economy of that kind of downward scale works ?

The idea here is to provide patient access , and if you can reduce the costs and provide access , I think that's a winning strategy for patients . As I mentioned , the drug prices go high , but the gross to net discount is really the thing that sometimes gets lost in the headlines .

At the end of the day and you know what's the stick of price isn't necessarily , certainly not realized by the manufacturer . It's really the difference between what the manufacturer gets and everybody in between .

And if the health outcome as a result of that compliance is positive which in theory it would be , if you've built a good drug , you're also not only selling more product but improving that perception of this industry that we've talked about on multiple occasions . We're bottom of the barrel .

People like the government and airlines and lawyers more than they like us .

So so the bigger question is who's involved in a change like this , and , and like I said , I'm assuming that the federal government plays a role in there somewhere .

Just to show lack of alignment is just an illustration of one . For example , the pbms put an emphasis on minimizing current period costs over health care system costs .

So rather than treating somebody with a chronic issue or paying for something that would be useful , it's in their benefit to pay more of the generic cost , lower , less innovative product in order just to minimize their cost today , even if not realize hospitalization down the road .

And that's really a huge systemic misalignment that focuses on short-term cost and profit as opposed to patient outcomes . So you know where we kind of we can't get out of our own way .

You know you know where we kind of we can't get out of our own way and you know you really need to , I think , reorientate what the outcomes are and what we're trying to , and I think you know as an industry , it's an opportunity for us to kind of change that , that paradigm a little bit , or try to at least try to control the narrative paradigm a little

bit , or try to at least try to control the narrative . You know , I don't think we really have staked out a position other than , uh , focusing on the pbms are better than focusing on us um , at some pharma companies , uh , you know .

I mean , in my simple mind , I see those as favorable indications toward change because , at the very least , there's a more direct line to patients . Do you agree or do you see anything problematic there ?

You know , going back to what I said , you know it was just the way why the chicken crossed the road . You know this this up , this changes that . You know , going back to what I said , you know it was just the way we that why the chicken crossed the road yeah you know this , this up , this changes that .

you know , and I think you're you're you're seeing that lily's been doing that uh , in terms of , uh , some of the glp drugs that they've got , uh , direct to consumer , and you know , I think some of that also lends itself because some of those things are outside of insurance .

I think you know what , what , what Amazon and Cuban are doing are more directed to generics , but I think it does provide the platform that's going to be necessary to give people alternative ways of distributing drugs . You know , I think you know the control over the formulary is important because that controls reimbursement .

You know you got to follow the cash you know , at the end of the day , follow that , which is why I think you know , if you can make the rebates part of a compliance program , I think you can drive some really good outcomes . But you know , and cutting out the middleman by what those folks are doing is going to squeeze out wasteful costs .

You know , the question is how you can kind of scale that out and make it much more pervasive to really upset and put pressure on the system , because right now I think I'd probably call it more of a net and a nuance as opposed to something that's going to really change the way we conduct business , I think .

But I think we also need to be mindful that the way care delivery is going on is changing . You know , I don't think it's as much of us selling a pill anymore or selling an injection . You know we're selling an outcome . You know , when you look at gene editing or gene therapy or any of those , you know those are almost like providing a service .

You know it's not as much of the traditional way we conduct . You know you look at digital pharma . You know it's all about engaging the consumer and educating the consumer , and the consumer is playing a much more active role . Let's just look at all the commercials we watch on tv when we're watching a ball game . You know , um , in terms of informing consumers .

So you know , I think we got got to extend that and become engaged with them . And I think , you know , recognizing health care consumerism is here to stay is really important , and the Internet and e-health have facilitated this . Biopharma must focus on creating closer relationships with patients as well as the other stakeholders , other stakeholders .

The step change towards healthcare consumerism necessitates supporting patients on their journey and becoming more engaged and educated in their decision making . You know , I think a lot of times patients are overwhelmed with some of the indications and diseases that they have and they don't necessarily know where to turn .

And I think you know , other than just selling them a drug , you know , I think you can help them with their patient experience and I think you know it's going to create a lot more loyalty with the consumer .

So I'm curious about whether or not the fact that , like I asked you earlier , why is this a timely conversation to have right now we are in an election year we do see quite a bit of jockeying for position and influence in Congress right now around the biopharmaceutical industry , whether it's around pricing and benefits or whether it's around who we do business with

of Chinese origin , a la the Biosecure Act , which I don't want to get into right now . We'll save that for another episode . But my point is that we see a lot of this kind of positioning happening right now , and I think that's probably influenced by the fact that it's an election year .

What impact do you think this year of politics could , in a positive sense , have on at least starting the ball rolling a little bit toward change ?

At the end of the day , you know that certainly is a formal recognition of the issue . The White House has initiated discussions at the end of February on the topic as well , so it certainly seems to be front and center .

So I would hope , given that it's an election year , you know we can , you know , use our vote , our influence and reach out to our senators and our congressmen to facilitate that For everybody's benefit . The BIO website actually has a place on their website where you put in your zip code . You know they got the form letter and they've got .

They can really direct it to whoever you need it directed to . So it shouldn't be an investment of too much time but the impact can be really profound . So I would certainly encourage people to do that and you know to your point . You know in the election year , people you know , particularly since they have a target that they both agree on .

Maybe that's our best protection is that they're not going to be able to differentiate ourselves themselves by beating on us . I'm hoping that the PBMs will bear a bit of that as well as an actual , as their profile gets raised as , in a more objective , villainous manner . But you know , I think it's only going to be natural . You know that .

You know it's going to put some pressure on the industry . You know there's going to be talk about expanding IRA . You know . I think there's also positive things in there that I'm hearing that they may fix the disconnect between large and small molecules and may make it a little bit easier for , often , drugs .

So I think there's been some general acknowledgement that some of that policy has room for improvement . So I think , as part of some of the horse trading , you know , I think that there's some positive in that sense . But I do think you know we're going to be a punching bag , because that's what politicians do , you know , I think .

You know , I think a lot in my view , it's going to be more noise and balk than bite , and that's obviously to be determined .

Um , and a lot of these , a lot of the biotech execs that I spend time talking with are , uh , you know , a generation or two removed from you , and I , alan , uh , they had to grew up in a , in sort of a , you know , put push the boundaries and explore new avenues kind of a world , and and that's good , like , I think it's good as we look forward to

making making change happen at the at the drug distribution level . But the question would be like what , what can they ? What role , what role can can the industry , industry leaders , play ? I had an interesting conversation just recently with a guy .

Totally unrelated topic , but I was talking with a guy , paul Preeb , who's working with me on a , on a project for a single use bioprocess manufacturing , single use event , right . So totally unrelated to what we're talking about right now , but we we started talking about standards and he said something that really resonated .

He said in his capacity he hears from a lot of biopharma execs and leaders and SMEs who constantly refer to standards bodies as they and what they need to do and they need to . You know they need to do this and they need to do that , they need to affect this and that . And Paul's response was they is us like , they is us Like we .

If you want standards or systems or operations to change , you can't just sit there and say they , you got to get involved . So to what degree can industry leadership , individuals , people who have opinions and want to see benefit to patients , to want to see benefit to their drug distribution models , even before they exist ? What can they do ?

What can they be doing right now ?

You know we don't have to cross the road like the chicken . You know there are other ways . I think what you know , what Amazon and Cuban are doing . You know speak , speak to that . Direct-to-consumer approaches are going to become a possibility . So , you know , I think it's something to think about .

You know , I think you know you don't want to necessarily be the do mercenaries selling ? You know mercenaries get a lot of arrows in their back . Yeah , I think it's something for all of us to continue to think about .

I would say that , fundamentally , though , that you know it's really important for us to focus on , you know , perhaps , statements of the obvious , but first things first . You know you need to focus on developing differentiated and impactful products , and it's critical to really understand what your target product profile is .

Otherwise , it's akin to getting into a car without a destination You're never going to get there , and , in addition to establishing clinical value , which I think people always focus on .

You know you need to really understand , you know how is that going to be differentiated , at the end of the day , from the standard of care and the competitive products that are out there ? And one area that I think people really , really overlook , gloss over .

I think it's getting , I think it's becoming more , but I think again , I think it's worth taking a survey and seeing where it falls , and that is focusing on the pharmacoeconomics of a product and really able to demonstrate the economic value and ideally , that should really be built into . You know your clinical studies as appropriate .

You know you should be able to remeasure I think I touched on it . You know re-hospitalization . You know additional procedures . You know and factor in what are you saving the system ? Again , I think the emphasis should be on outcomes and system savings .

You know we as a nation , you know , have the highest cost per capita on health care spend and we have the lowest life expectancy in the Western world . You know we'll figure . You know we're actually spending more for less . That's not good , for sure , for sure .

If you're , if you were going to give some advice to someone who's on the on the precipice , you know , who's about to launch a new therapy in the current paradigm , is there anything that you can suggest to them as to as to how they navigate in the reality that we're in right now ?

Right , like , it's one thing to affect big change and these are great ideas , I mean it's and it's great to talk about them , uh , but in the paradigm that we're in right now , is there anything that they can do to to affect , uh , you know , a better outcome despite the , the money grab ?

Make sure that you know that , that they understand the drug , that they can they comply and continue taking the drug . Making sure , again , whether or not there's pre-authorization . You know there's a lot of hoops to get involved with this . So you know , you know I think an interesting statistic is how many scripts actually get converted to in and get fulfilled .

Um , and there's a , there's a , there's a big gap there . So you know that that's that's money that's falling on the ground and patients that are not being helped , um . So I think there's things that you want to look at in terms of ensuring your commercial execution .

You know there's a reason why many drug launches for companies get shorted by the investors on Wall Street , and that's because they don't necessarily execute so well . So the expectations around the drug launch are generally disconnected from what the ultimate reality is , and that inefficiency provides an arbitrage opportunity for investors . Yeah , you know learning .

I would certainly go to school and look at recent drug launches and look at the ones that have worked and look at the ones that haven't worked , understand why in both cases and incorporate those lessons and learnings um into your plan of action .

Um , and I would just say that , you know , the combination of exposing and reforming pbms and championing biopharma consumerism would really be a great start uh to rehabilitating the biopharma bad boy image that we uh have right now , and I think there's a huge , huge opportunity . You know , the bar is very low .

Are you comfortable ? Are you like somebody's got to talk about this stuff ?

I mean , I talked to all of you . I talked to all of you , and patient outcomes comes up in every single conversation , and if patient outcomes are important , then this is important . So so there you go , take action . It's not them , it's us .