How PBMs Profit From the Hepatitis C Formulary Wars...And What It Means for Specialty's Future

A new formulary exclusion battle is happening in specialty drugs…and PBMs will be profiting.

Just before Christmas, Express Scripts made AbbVie’s new Viekira Pak the exclusive option for genotype 1 hepatitis C patients covered by its national preferred formulary. This week, CVS/Caremark made Sovaldi and Harvoni (both from Gilead Sciences) the exclusive options for patients with hepatitis C.

I estimate that these formulary moves, combined with specialty pharmacy dispensing, will allow the PBMs to earn as much as $2,600 to $3,100 per patient. Pretty, pretty, pretty good.

Within three years, the generic wave ends, and specialty drugs will become payers’ primary focus. Expect more formulary battles as specialty classes get crowded with multiple therapeutic alternatives.

WHAT HAPPENED

In case you missed the news, here are two Wall Street Journal articles on the formulary deals:

New Hepatitis C Drug Gets Helping Hand (December 22, 2014)

CVS Gives Preferred Status to Gilead’s Hepatitis C Drugs (January 5, 2015)

AN INEVITABLE SURPRISE

When Sovaldi launched in December 2013, I wrote Express Scripts Plans a Specialty Drug Price War. Here’s what Steve Miller, chief medical officer of Express Scripts, said then:

“We will identify which drugs can be pitted against each other and make some really tough formulary decisions. If the difference in convenience cannot be demonstrated to have a difference in outcomes, we often recommend coverage of the equally effective, less-convenient product.”

In April 2014’s Weighing Express Scripts’ Drug Trend Forecast Errors, Sovaldi Pricing, and PBMs’ Pricing Control, Dr. Miller’s tough talk continued:

“Gilead could have a great year this year and lose all its market share a year from now…The companies that will be second and third to the market here will have to play catch up. We could shift the market share as soon as a competitor comes out. We need to start a national debate on fairness in drug pricing.”

This bluster didn’t stop Sovaldi from having the most successful drug launch ever. For proof, revisit the chart in Sovaldi: The Legendary Blockbuster.

When AbbVie’s Viekira Pak launched last month, Express Scripts followed through on its threats. The PBM excluded the Gilead products from its national preferred formulary, which covers about 25 million members of its total 85 million covered lives. AbbVie’s discount to Express Scripts has not been publicly disclosed.

Gilead responded quickly with its own deal. The CVS/Caremark agreement is broader, because it includes the standard commercial, Medicare Part D, and Managed Medicaid formularies.

I expect we’ll soon hear from Catamaran, OptumRx, Prime, et al.

HOW MUCH?

I estimate that Express Scripts and CVS will earn about $2,600 to $3,100 per patient. Here’s how:

1. Specialty pharmacy dispensing margins—Express Scripts and CVS Health operate the two biggest specialty pharmacies, so these products have been very good to them. (See PBM-Owned Specialty Pharmacies' Financial Win From Sovaldi.)

Express Scripts disclosed that AbbVie’s product will be dispensed exclusively by its Accredo specialty pharmacy. Other specialty pharmacies will be dispensing the product to patients with a different PBM or payer. CVS Health hasn’t publicly disclosed anything about dispensing, although its CVS Caremark Specialty Pharmacy will presumably garner most of the volume.

The PBMs are notoriously secretive about their pharmacy operations and margins. We know however that specialty pharmacy Diplomat Pharmacy had net income from operations of 1.0% in 2014’s third quarter. Given the products’ WAC prices and typical pharmacy reimbursement rates, the PBMs’ specialty pharmacy will earn about $825 to $925 per patient, for a typical course of therapy.

2. Share of Rebates—AbbVie and Gilead have negotiated discounts with the PBMs. These discounts are paid as formulary rebates, which reduce the payer’s net cost per prescription. I estimate that PBMs pass back more than 90% of rebates received from brand-name pharmaceutical manufacturers. (Some payers negotiate to receive 100% of rebates.) For the hepatitis C drugs, Deutsche Bank’s George Hill estimates that PBMs will retain about $1,800 to $2,200 of rebates per patient.

These are rough estimates. We don’t know the actual rebates, what percentage of those rebates will be retained by the PBMs, the PBMs’ pharmacy operating margins, etc. Keep in mind that Hepatitis C products will only account for a very small share of 2015’s prescriptions.

ET TU, SPECIALTY?

Formulary exclusions have become distressingly common. In 2013, I called it the “Inevitability of Formulary Exclusion.”

The recent Hepatitis C exclusions however are the most significant exclusions for a specialty therapeutic class. Typically, drugs that are targeted for formulary exclusion usually fall into one or more of these categories: (1) Non-preferred, tier 3 drugs with very low utilization, (2) heavily promoted drugs in therapeutic classes with multiple generic alternatives, and/or (3) brand-name products with generic equivalents.

Compared with Caremark, Express Scripts has been more aggressive about specialty drug exclusions from its national formularies. For instance, Express Scripts excluded Amgen’s Aranesp and Epogen from its 2015 formulary. See The 2015 PBM Formulary Exclusion Lists are Here!

Key unknown: will specialty managed care contracting start looking like the traditional drug market?

With the emerging PBM profit picture, I suspect it will.