Analysis

Last week, Diplomat Pharmacy became the latest high-profile drug channel company to see its shares take a high-profile dive. The specialty pharmacy’s stock dropped by 45%, falling below the IPO offering price. Look out below!

Diplomat’s management pinned the blame squarely on direct and indirect remuneration (DIR) fees paid to Medicare Part D plans. Below, I highlight the key concerns that Diplomat outlined. By reader request, I also provide a primer on DIR fees, whose impact was apparently unexpected by investors.

The rhetoric and controversy over DIR fees once again pits pharmacies against PBMs. Who will take the DIRect hit?

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The content of Sponsored Posts does not necessarily reflect the views of Pembroke Consulting, Inc., Drug Channels, or any of its employees.

Oops.

I made a significant error in yesterday’s article. Sorry about that. After 10 years and more than 1,400 posts, I guess I was due for a major brain fart.

Basically, I counted the rebate twice, thereby incorrectly making it appear that payers were paid when an EpiPen prescription is dispensed. That’s not what CVS Health’s white paper illustrated.

EpiPen: What You Need to Know shows the following trends:

• The average wholesale price (AWP) for EpiPen 2-pack increased by 143%, from about $300 in 2013 to $730 in 2016.

• The final payer cost—which deducts rebates, discounts and the beneficiary’s copayment—increased by only 38%, from about $160 in 2013 to $220 in 2016.

Based on these data, CVS can legitimately claim that it “significantly reduced the impact of 3 years of EpiPen price increases” (for patients with flat copayments).

To avoid confusion, I have removed yesterday’s post because it is not reliable.

WHAT I GOT RIGHT

1) The CVS analysis changes significantly when patients have high deductibles. In those situations, the patient buys an EpiPen based upon its list price. The PBM and plan profit by collecting a rebate that is not reflected in the retail price, per the discussion in The Insurance Rip-Off At The Heart Of The EpiPen Scandal. We'll be hearing much more about cost-sharing and deductibles in coming months.

2) Senator Bernie Sanders' obsession with list prices is economically illiterate and misleading. The published list price does not equal the net price paid, as the EpiPen example illustrates. Our current drug channel system encourages ever-higher list prices—even when the net amount received by a drug maker is stable or even declining. That's why understanding the flow of funds and benefit designs is important before going on a twitter rant.

3) My tweet still stands: “Hey @SenSanders: List price increases for #insulin go to insurers and #PBMs, not #drug makers.”

More to come: Senator Sanders and Representative Elijah Cummings have just asked the Department of Justice and the Federal Trade Commission to investigate three insulin makers for alleged collusion on list prices. See this Pharmalot story.

This post has been removed. Explanation here.

On Friday, McKesson sharply lowered its outlook for future profits. Its stock closed down 23%, erasing more than $8 billion of market capitalization. Ouch.

The wholesale industry’s problems have been building for some time. From McKesson’s earnings call, I have interpreted some of its most revealing statements, which illuminate the key challenges facing wholesalers:

• Why wholesalers want brand-name drug prices to go up—and the negative impact of slowing inflation

• A sell-side price war started by...AmerisourceBergen?

• The factors pressuring wholesalers' profits from specialty pharmacies

McKesson has a plan to recapture its lost profits from customers and manufacturers. Don’t say you weren’t warned when McKesson and its peers come asking for more money.

The Biotechnology Innovation Organization (BIO) has just released "Understanding Your Drug Costs: Follow the Pill," a short and informative video that explains the factors behind a consumer's costs at the pharmacy.

It's a more user-friendly cartoon version of the chart that appears in Follow the Dollar: Measuring Who Profits From a Brand-Name Prescription.

Video below. It's worth a few minutes of your time. Grab some popcorn and enjoy!

Boo! Time for my Halloween-themed roundup of Drug Channels news stories. In this issue:

• Scary! The gross-to-net bubble for insulin

• Shocking! Reality check on Medicare Part D rebates

• Spooky! Five things to Know About the EpiPen Settlement

Plus: Got a spare $22.5 million? Great! Then you can snag McKesson CEO John Hammergren’s secure eight-acre, 23,000-square-foot compound. Savor the video below and get ready to bid on November 15.

P.S. Watch out, Kim Kardashian! @DrugChannels now has nearly 3,100 followers on Twitter. You can follow along for daily tweets on cool studies and news that you might have missed.

In a previous exclusive analysis (Preferred Pharmacy Networks Are Back in 85% of the 2017 Medicare Part D Plans), I highlighted how preferred pharmacy networks will dominate next year’s Medicare Part D prescription drug plans (PDP).

Today, I examine pharmacy participation in the 2017 Part D preferred networks. Our analysis shows some pharmacies getting more selective about plan participation.

• For the first time, Walgreens is the most active participant in the major preferred networks. Walmart has pulled back, and CVS and Rite Aid are barely participating as preferred pharmacies.

• The pharmacy services administration organizations (PSAOs), which represent independent pharmacies, appear to be engaged selectively with some plans. Independents are completely absent from almost half of the major plans.

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The content of Sponsored Posts does not necessarily reflect the views of Pembroke Consulting, Inc., Drug Channels, or any of its employees.

The Big Three wholesalers—AmerisourceBergen, Cardinal Health, and McKesson—will soon report their latest quarterly earnings. Expect specialty drugs to be a hot topic.

About $134 billion in specialty drugs was sold via wholesale distribution in 2015. The chart below presents our estimates of market share by parent company and, where relevant, the division of that company. I also explain wholesalers’ three major customer groups for specialty drugs.

Like specialty dispensing, the distribution market is highly concentrated. But wholesalers face significant challenges in capturing the value and profits from the booming specialty drug market, particularly for patient-administered, pharmacy-dispensed specialty drugs. Specialty’s rapid growth will prevent the market from going to the dogs, but it’s certainly getting ruff.