Thursday, May 08, 2014

PBM-Owned Specialty Pharmacies' Financial Win From Sovaldi

I’m writing from the Armada Summit in Las Vegas. Gilead’s hepatitis C drug, Sovaldi, is a hot discussion topic.

In the first quarter, Sovaldi generated U.S. revenues of $2.1 billion, making it one the most successful drug launches. Many payers and pharmacy benefit managers (PBMs) are highly critical of Gilead’s pricing strategy. Good background in Kaiser Health News’ Who Should Get Pricey Hepatitis C Drugs?

Since PBMs own the largest specialty pharmacies, perhaps there’s a silver lining to Sovaldi’s robust sales. David Larsen, an analyst at Leerink, estimates that CVS Caremark and Express Scripts gained as much as $600 million in revenues from first quarter Sovaldi sales. As he sees it, PBMs “will actually benefit from Sovaldi sales and earnings in 2014."

Read on for highlights of David’s creative analysis. I have also included related comments from George Paz, chairman and CEO of Express Scripts.


In the first quarter, almost 60% of Sovaldi’s initial scripts were made by mail order and specialty mail pharmacies. Here are the Leerink estimates for the incremental Sovaldi sales for CVS Caremark, Express Scripts, and Catamaran.

[Click to Enlarge]

Note that Leerink relied partly on Pembroke Consulting's specialty pharmacy market share estimates, as shown in 2013 Pharmacy Market Share for Specialty Drugs—and the Biggest Players.

Leerink also estimates that due to Sovaldi, all three companies’ earnings per share (EPS) will rise.


This analysis is especially interesting, because Dr. Steven Miller, Express Scripts’ chief medical officer, has been an outspoken critic of Gilead’s pricing strategy. See his quotes in Weighing Express Scripts’ Drug Trend Forecast Errors, Sovaldi Pricing, and PBMs’ Pricing Control.

George Paz, Chairman and CEO of Express Scripts, addressed the impact of Sovaldi in last week’s first quarter earnings call:
“And we had some early discussions with manufacturers and others about where they were pricing their drugs, and this drug in particular, so we knew it was going to happen. And so we came at this, and this drug, like all other specialty drugs, we do make a profit on them. The question is, what’s our driver? Our driver is to make sure we manage our clients’ trends, because we also make money by doing step therapies and prior authorizations. So our job is to make sure that the drug, when it’s prescribed, is being prescribed at the right time for the right person, for the right utilization.” (emphasis added)
The PBMs’ financial benefit is partially offset by any “at risk” Medicare Part D Prescription Drug plans (PDP) claims. Paz indicated that the effect is small, partly because Express Scripts anticipated Sovaldi’s impact.
“And you know, the only area where the drug could hurt us, if you will, would be in our PDP. But that’s a very small piece of our overall book of business. It’s a sizable PDP, but relative to a gross profit and net income, it’s not all that meaningful to the rest of the book. And quite frankly, because of Dr. Miller and his efforts, and knowing utilization trends and where it was going to go, we had a very low price into our product. So it didn’t have a negative impact on our PDP, and it was accounted for appropriately in our PBM results.”
Final thought: With all the talk about Sovaldi’s economics, let’s never forget that the drug is a jackpot for people with hepatitis C.


  1. Adam - good post. I spoke to a few of the PBMs this week at Armada about this and called them on the optics of their pushback. They are very much tongue-in-cheek about this. On one hand, they have to manage to spend targets with their employer, government, and healthplan clients, but you are spot-on. These guys have increased revenues and profitability from these types of products. Again, good post. And good to see you this week out at Armada. Cheers,

  2. I am a stakeholder in the innovator industry and I just don't understand why there isn't more discussion about the plan's unwillingness to pay for HEALTH....this is a cure afterall. Moreover, a cure to a communicable disease - it isn't just about getting the CURE to symptomatic patients, but preventing the transmission to others. What price a cure?

  3. Hmmm...specialty pharmacy margins have traditionally been razor thin compared to traditional retail and mail pharmacy. With a high cost drug like Solvadi, I would anticipate them being just as thin. The PBMs are making some profit, but not much, hence the pushback the industry has seen from the pbm industry.

  4. What price a cure is indeed the question. If every Hepatitis C patient that I know about was treated, my annual drug spend would be quadrupled. By a single drug. Yes, that is somewhat offset by the reductions in carcinoma and liver transplants, but not all patients progress to that. And that's only the patients I know about; there may be as many as I don't. And a cure assumes that patients don't engage in risky behavior that results in reinfection.

  5. Yes it is a cure but it boils down to cost in the long term impeding future access to cures. This is why Solvadi's cost has finally sparked national debate. Because it may (emphasis on may) stagnate the entire system.

  6. Assuming margins are a result of spread and volume (let's leave rebate hold-backs, 'administrative fees', data fees, and other such revenues aside--for now), someone could try to convince you that volume is so low in specialty that the margins are "thin". However, revenue from a 50bps spread on a low volume product that results in $2MM of AWP load gives you $1MM in revenues, where a product with $200K of load results in $100K of revenues. So, even with low volumes, if you can push utilization (of if utilization organically shifts) to higher "priced" products, you will see your margins increase. PBMs and others have woke up (and smelled the coffee brewing here) as Adam has stated in many past posts.--Fun times....

  7. The debates around this (and other high cost specialty drugs) will continue to rage on, and I think there will be some really beneficial side effects of the discourse. Raising awareness and asking questions is a great first step here. One interesting story line I'll be trying to follow is the official inquiry into the price discovery process for these high cost specialty products (a system that I fear is broken). I think that the kinds of market research, pricing analyses, and discussions that result in price-setting that go on here would be eye-opening to the average American. If we get to the point where internal e-mails/communications are subpoenaed (I doubt things will get this far), things should get really, really interesting.

  8. Thanks, Bill. Good to see you in Vegas.

  9. A low % ("thin" margin) of a big number is also a big number.