Taking on Big Pharma

Oshmyansky: I’m a board certified diagnostic radiologist, and while going through my training, I saw multiple patients have bad health outcomes, even death, from being unable to afford their medications. No one knew they weren’t taking their medications because they couldn’t afford it. You would think that would be enough to set me on this sort of tirade for many years, but honestly, the straw that broke the camel’s back was Martin Shkreli, the so called “Pharma Bro.”

Back in 2015, he was the social media villain of the moment. He raised the price of a drug called Daraprim by over 5,000% overnight, largely needed by indigent populations, patients with HIV AIDS, and other immune-compromising conditions. I just got very angry about that. The next day, I very naively got some doctor friends together and said, “We’re going to start a nonprofit pharmaceutical company. We’re going to make drugs at cost, sell them at cost, and that’ll be the end of it.” And we tried. For the better part of three years, [we] went around, hat in hand, trying to raise financing for that and failed spectacularly. Did not raise a single dollar outside of what I put in myself. But we eventually got connected with a group of venture capitalists in Silicon Valley who periodically donate to nonprofits, a group called Y Combinator. They basically said, “Hey, we like what you’re doing. We’d like to donate. But we do not think you will be able to raise enough money to get this off the ground as a nonprofit.” [They said], “If you reincorporate as a public benefit corporation—so a type of for-profit company with a stated public mission—we’ll invest in you like any other company.” At that point, after three years of zero success, I kind of said, “Well, you know, why not? Let’s give this a shot.”

And to their credit, they were right. After a few months of working with them, I was able to raise what in pharmaceutical industry dollars is a small amount, a little over a million dollars, to get the company off the ground. About three or four months after that, I cold-emailed [celebrity entrepreneur and owner of the NBA’s Dallas Mavericks] Mark Cuban—believe it or not, he reads emails from his fans and anyone who wants to pitch him a business idea. He donated a small amount to start with and I think just became increasingly enthusiastic about the project and allowed us to dramatically increase the scale of our ambitions.

Oshmyansky: You know, I didn’t ask. I was just going to take good enough as it was, but I know he’s done studies with the Rand Group on hospital pricing as well. So I know his interest is more broad in the healthcare space as a whole. I can’t read his mind, but I think part of the interest here is this was very actionable. This wasn’t a hypothetical thing we could do if we got the right coalition together; this was a thing we could just go out and do. I think that was probably appealing.

Oshmyansky: The initial plan was, and still is, to build a pharmaceutical manufacturing plant to focus on the manufacturing of particularly high-cost drugs—generally, biologics, rare disease, orphan, specialty products, products in shortage. But it very, very quickly became apparent that that wasn’t enough. We could make the drugs, but actually getting them to patients would be the hard part.

There are many intermediaries in the pharmaceutical supply chain with their own motivations, with their own incentives that might not necessarily align with ours. So, if we sold to pharmaceutical wholesalers, they’re under no obligation to pass along the savings to pharmacies. Similarly, pharmacies or pharmacy chains are under no obligation to pass along the savings to their consumers. And certainly, pharmacy benefit managers aren’t under any obligation to have our products on their formulary without paying them a large rebate, a de facto bribe effectively, to put ourselves on their formulary. So we decided we were going to try to build all of that.

A parallel supply chain [means] we are a registered pharmaceutical wholesaler in all 50 states. It varies by jurisdiction, but we launched our mail-order pharmacy a couple of weeks ago and have had a sort of surprisingly robust response. It’s a direct-to-consumer cash-pay pharmacy at the moment, and we even started building out our own pharmacy benefit manager so that patients could access our products through insurance rather than having to do cash pay.

Harrison: Essentially, we intend to build a full-service PBM. We will start with our Cost Plus direct-to-consumer pharmacy as an employer-sponsored program, essentially overlaying our pharmacy on top of the existing PBM products to allow consumers to purchase those generic medications today, at a much lower cost. For employers to help drive traffic and savings to our pharmacy, we can create variable plan designs, lower co-payments, preventive Rx lists, or any other mechanism to help drive traffic to that pharmacy. Over time, we’ll contract with brand-name manufacturers, single-source manufacturers, and specialty drugs, but when we do that contracting, it will be all without any type of rebate or patient assistance program. So that net cost that we’re acquiring it for is what we’ll be able to sell it to the employer for.

Oshmyansky: The reason we started it was to try to add as much transparency as we possibly could into the pharmacy benefit manager space. You look at the revenue chains for pharmacy benefit managers now, and they’re incredibly complicated. You have spread pricing, you have rebates. Recent policy innovations have said 100% spread pricing can’t be a thing anymore. Rebates have to be 100% pass-through to plan sponsors, and the large PBMs have largely gone along with that. But at the same time, they’ve started adding other revenue streams, which plan sponsors don’t necessarily see. The big three PBMs set up so-called “rebate aggregators,” … and these entities effectively touch rebate dollars first, take a cut of the rebate dollars, pass them along to their parent entities, and then the parent entity passes along quote unquote 100% of rebates. In the meantime, an enormous amount of fees, dozens upon dozens of fees, have started to be implemented at the PBM level as a cost to the pharmaceutical company. In some way, are those fees just rebates with another name, potentially?

Essentially, we wanted to go into the marketplace with an offering, 100% transparency, reveal all sources of revenue. And not only that, but we pass along not just all rebates; we pass along all revenue that we see back onto our employer sponsors.

Now, we would probably charge either a PMPM [per member per month] administrative fee or fee per script, whichever the plan sponsor prefers, and we would charge that in our Cost Plus fashion. We will reveal to the public what it costs to run a PBM, what our salaries are, our IT expenses. Any source of revenue, we pass them along and just charge on a cost-plus basis, what it costs us to run the PBM plus 15% for our services, and we’ll come up with that price annually, depending on what our expenses the previous year were.

As we started to go out and try to build this, we went to pharmaceutical companies and were like, “Hey, let’s negotiate. Give us pricing on your drugs for our transparent model.” The initial feedback was, “We like what you’re doing. We also don’t like the status quo. We don’t like the PBMs. Like, we do all the work, we do all the manufacturing, all the R&D, we take all the legal liability, why do the PBMs get 15% to 30% of the revenue? That makes no sense. But at the same time, we are bought into the system and the devil you know type of thing.”

What most new PBMs do to get into the business is they piggyback or white-label existing PBMs and advertise [that] their own services may be more transparent than other folks’. But at the end of the day, they have to rely on tapping into the same aggregators that are set up by the Big Three PBMs. So they wind up—and we would have wound up—being essentially a layer on top of the same PBM rebate aggregators that, when you look at contracts with them, they won’t tell you the exact rebates they are getting on each product. They’ll break it down by therapeutic class, for example. But we wouldn’t have enough transparency into that to actually pass along the transparency we wanted to our customers.

So our way of hacking this chicken and the egg problem, we started offering access to our pharmacy as an employee benefit. Your employees would go to costplusdrugs.com/your company name here, and all your employees would be able to order from us. We’ve been working with some consultancies, and they’ve done some analyses. It seems that, even with a $0 co-pay for your employees, we would largely save you 60% to 70% on your generic spend with our formulary as is, with only 100 drugs, which just goes to show the level of markup that all these intermediaries put on even very cheap, generic products.

Harrison: We are going to add hopefully another 500 to 1,000 drugs over the next six to 12 months.

Harrison: Absolutely. We’ve had a real overwhelming response from brokers and consultants that want to understand the program. First, just really understanding a lot of what Alex is talking about today, what does it mean to be a manufacturer, a wholesaler? And then really getting into the pharmacy and how they can access that pharmacy for their employers. A lot of the things that I’m talking about with consultants coming out of that community, that they’re asking for and you can see a real demand for, is doing something different than what they’re currently doing with their PBMs today.

They’re looking at any way to help save money for their employers and, ultimately, the consumer. This is just one more strategy that we can employ. Then over time, we really will replace the current PBM system that they have today.

Oshmyansky: That was actually one of the big surprises for me from our pharmacy launch a few weeks ago. We were focused on approximately 12 what I call ultra-high-cost generic drugs, where we can really save people a lot of money even over the best prices that come in discount card programs.

What surprised me genuinely was the number of patients who came to us saying, “I’m paying $200 a month for my statin. I’m paying $200 a month for my blood pressure medicine.” An employer showed us some statistics where Rosuvastatin was being adjudicated for $200 a claim—a drug we offer for $10. So even the employers are getting hit by this. If you just don’t know, as a patient, that alternatives already exist, discount programs, or even just asking your pharmacist for the cash price, you just naively are told, “OK, your generic Atorvastatin is going to cost you $200.” And you just go, “Well, I know drugs are expensive in America.” I’ve been startled by the amount of outreach we’ve had by just those groups. Certainly, I feel like there’s some health equity issues there, because I feel those who are more likely to overpay are those in communities which are underserved and do not have access to the same health information that other communities might.