Tuesday, August 08, 2017

Follow the Dollar Math: How Much Do Pharmacies, Wholesalers, and PBMs Make From a Prescription?

Yesterday,The Wall Street Journal published an intriguing article by Jonathan Rockoff titled Behind the Push to Keep Higher-Priced EpiPen in Consumers’ Hands.

The article includes a graphic attributed to me (cited as Pembroke Consulting). It shows that the drug channel—pharmacy benefit managers (PBMs), wholesalers, and pharmacies—receive more than $37 in gross profit for a brand-name drug with a $300 list price. PBMs capture about half of this amount.

The WSJ article doesn’t describe how I arrived at the figures. But now you, Drug Channels reader, will get the inside scoop.

Below, I go inside the box and trace these crucial computations. They determine the revenues and profits of the drug channel participants that operate between a brand-name drug maker and the patient. I also reveal how the figures affect the net prescription cost for a third-party payer.

As with many things, you'll have to observe the system to figure out the superposition.

SCHRODINGER'S CAT: WANTED DEAD AND ALIVE

The WSJ article examines Mylan’s infamous EpiPen and the why the brand-name version still owns a big share of the market. It’s a complex story, especially because the generic version is not automatically interchangeable. For my take on the epinephrine market, see The Weird and Wild Gross-to-Net Adventures of EpiPen and Its Alternatives and item 4 in What’s In, What’s Out: The New 2018 CVS Health and Express Scripts Formulary Exclusion Lists (Plus: A Sneak Peek From Prime).

The WSJ piece includes the following snazzy graphic.

[Click to Enlarge]

Confusing, right?

FROM THE DEPARTMENT OF DISAMBIGUATION

Never fear, dear reader. Below is a detailed spreadsheet that explains the computation for a prescription drug with a Wholesale Acquisition Cost (WAC) of $300. Click here to download it as a PDF file.

[Click to Enlarge]

Comments:
  • The example is illustrative. It is not intended to be a complete representation of every type of financial relationship, contract, and product flow in the marketplace. There are many variations to this basic model. Translation: YMMV.
  • The assumptions and sources are documented and explained in our 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. Start with Section 8.5, on page 165.
  • The “Summary” at the bottom illustrates the quadruple-counting of revenues that I explain in Profits in the 2017 Fortune 500: Manufacturers vs. Wholesalers, PBMs, and Pharmacies.
  • For a channel intermediary, gross profit equals the intermediary’s revenues minus its cost of products (net of discounts and returns). Gross profit measures the portion of revenues available for operating expenses and operating profit. It is a useful way of assessing how buyers and sellers value the services and role of the intermediary.
  • A channel adds margin and absorbs discounts and fees. It is therefore not possible or logical to apportion the $300 list price among the channel participants. Be skeptical of any article that purports to do so.
  • The example excludes certain factors that increase or decrease gross profits. For instance, pharmacies pay undisclosed direct and indirect remuneration (DIR) fees to PBMs. DIR fees reduce pharmacy profits. Pharmacies also receive undisclosed rebates from wholesalers and manufacturers. These rebates increase pharmacy profits.
As a reminder, here's our not-quite-as-snazzy-as-the-WSJ chart that illustrates relationships among drug channel participants.

[Click to Enlarge]

So much misinformation and spin muddies the economics of U.S. prescription drugs. I hope our mathematical example helps you better understand our murky and mysterious drug channel.

Today’s bonus quantum paradox: Will looking inside the box trigger a collapse in profits?

CLARIFICATION: The "PBM Admin Fee" figure refers to a fee paid by a brand-name manufacturer to a PBM. It does not refer to an admin fee paid by a plan sponsor to a PBM.

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