Edison KOL call
Conversation focus
The third in our KOL series, Edison sponsors an interview between Max Jacobs (call leader) and Dough Hillblom, President of Arena Healthcare, a strategic consultancy focusing on payers and policy makers. The conversation featured a discussion on the PBM model as well as drug pricing and formulary trends.
Call Leader: Great. Thank you Carol. Thank you Doug for joining us today. I was just wondering if you could start by discussing your experience?
Expert: Sure. We’ll start at the beginning. I spent 18 years with the state of California, just short of 18 years, within the Medi-Cal program where I held multiple positions, and at one point in time was responsible for management of the drug formulary, and everything associated with the drug program, the medical supply and division and care programs. I left the state of California and went to Kaiser Foundation hospitals, Kaiser Permanente, as the Assistant Director of Pharmaceutical Contracting and Strategic purchasing.
From there I was then recruited away to Prescriptions Solution to what is now OptumRx, a division of the UnitedHealth Group, where over my last title was Vice President of Professional Practice and Pharmacy Policy.
I am a pharmacist by training, currently licensed in California and Nevada. I’m a past president of the California Pharmacist Association, sit on the board of trustees, active member in AMCP, NCPDP, APHA, CPHA, and will be teaching for the Keck Graduate Institute School of Pharmacy starting in January also.
Call Leader: Great. Thank you. Maybe we could just start, maybe you can explain how does a PBM decide on what level of reimbursement they will pay to the manufacturer?
Expert: Let’s think about this from contract relationship. PBMs do very little direct purchasing. Where they do do direct purchasing is in their mail service. Think about the contract between the pharmacy benefit manager and the manufacturer in two ways. The pharmacy benefit manager, for the bulk of its business, compensates a pharmacy for the services rendered. It’s then captured to utilization, and invoices to the manufacturer a rebate amount.
The easiest way to think about it is, I negotiated a rebate with somebody like a Best Buy on computers. Every computer I get a $100 back. I pay them $400, but I get $100 back in rebates. At the end of the quarter I bought seven computers, so I invoice them seven computers at $100 per unit, and I get $700 back in rebates.
Now, I’ve also negotiated where I’m going to buy some computers directly from the manufacturer. In that case, my price is $250. I bought those directly. I bought three of those directly, so I paid the manufacturer $750 in direct purchases. So between the PBM and the manufacturers are two mechanisms. Does that make sense, how I’ve explained that to you?
Call Leader: Yeah, no, definitely. How big is that mail order business, as a percentage of like a PBM’s total business generally?
Expert: Today it averages maybe up to about 15% of the volume. It’s going up and down. One of the trends that we’re seeing in the marketplace is that the PBM’s clients are wanting the availability of 90 days fill at retail. You’re starting to see PBMs ... Which is probably led by the CVS Caremark 90 days at CVS pharmacy, cutting into that mail service business by offering 90 days at retail. That has been the bread and butter [inaudible 00:06:49]. So you may see, and I say may because we don’t know what the impact of that will be, but with say, 15% of business, you may see a one or two percent impact of that, so it may end up being 12 percent of their volume rather than 15.
Call Leader: There’s probably a risk for the PBMs who don’t have a pharmacy associated with it.
Expert: I will tell you that as a retiree beneficiary that one of the things that CalPERS has required of their PBMs is that they offer that 90 days at retail. I think you’re going to see all of the PBMs being requested to offer that.
Some of the smaller players have never had their own mail service pharmacies. They’ve contracted with larger PBMs for those services. They will not be impacted to the same degree as the larger ones that have had really mail service as a major component of their revenue streams.
Call Leader: Mm-hmm (affirmative). One question I’ve always had is we often see drug prices, even if there’s a second competitor come in, still increase. Generally between the two competitors the price seems to increase in tandem. Do you have any explanation for that?
Expert: Yeah, with two competitors, each one of those ... I have PBM-A and PBM-B. They don’t really set the drug price, the manufacturer sets the drug price. They are going to respond to the price. The manufacturer reports to, let’s say first data bank is set as a pricing resource. That price is increased. What they pay the provider is going to change based upon that providing information.
Where they have a maximum allowable cost or MAC program, those programs [inaudible 00:09:19] by each individual pharmacy benefit manager is proprietary to them. The other thing that I will tell you is that in the industry there is not one MAC program for every pharmacy benefit manager. Their contract with their clients may drive multiple MAC programs via PB. You could have easily 200 different MAC programs at one PBM. When you talk about pricing, are you talking about pricing or reimbursement to the pharmacy? Because what you’re going to see on open page is representative, not necessarily what the reimbursement is for each and every claim.
Call Leader: Mm-hmm (affirmative). Could you actually expand on the MAC programs, just give a general explanation for our listeners, and just how is it that a PBM could have like, 200 different ones?
Expert: They could have 200 different ones because they have 200 different clients. Each client within their contract may request different things, so they customize the MAC program for each client. The only place that you really have consistency and reportability [inaudible 00:10:57] within the Medicaid fee-for-service program, in which case the states publish what their maximum allowable cost is. They do so whenever there is a change. The federal upper limit program also publishes that information. That’s consistent in the fee-for-service programs in every state.
When you deal on the commercial side, if I said I want a guaranteed discount of x percentage, then that’s what you do. Or they say, I only want that discount on these therapeutic categories, and I’m willing to accept a difference on another category.
Call Leader: Okay. My original question, though, what I was trying to get, was actually if you had any insight on the drug manufacturer side why they increase their prices in tandem. Is there some sort of incentive built into the system where some of the distributors or PBMs are compensated by having more higher-priced products flow through the system?
Expert: When you’re saying the manufacturer does it in tandem ...
Call Leader: For example, there were some, let’s just use EpiPen. They had a competitor, the LVQ come on, this was a few years ago, and I’ve seen data that showed that even though they had a new competitor, EpiPen’s price increased, and then the competitor’s price actually increased in tandem with it.
Expert: What you’re really seeing there is you have one who is the pricing leader, and somebody else who is responding. The secondary manufacturer is responding, saying, “well, we thought we had a price advantage, maybe we’re lower than they are. They’re going to raise their price by $100, I’ll raise my price by $100 and I’m still going to be $100 less than they were.” They cannot talk about the price, but the secondary one typically responds to the first. It’s more a market response.
Call Leader: Shouldn’t they be able to get more usage by, let’s say, not increasing it at all? What was a $100 difference might become a $200 difference?
Expert: You know, you and I would think that way, however one of the things that I have seen over the course of time, spending thirty-plus years doing this, is that often what we see is pressure on a company to raise prices. The reason you see that pressure is it’s increased its net revenue. If they only sold 100 units before, and they still sell 100 units based upon that price, that $100 price increase increases net revenues. That’s seen favorably by investors. While you may make the same margin if you kept it at, you know the delta is now $200, you would have to sell more units and is your net revenue per unit going to give you the same net gain.
Let’s say I make $20 a unit versus $40 a unit. It may come up to the same net gains, but I have to have increased production costs etc. It really is dependent upon what the management of the individual company feels is best in terms of stockholder’s equity, would be the way I would look at it. Does that help?
Call Leader: Okay. Yes, that was a great help. One other question I have on that subject is, a lot of times when they do increase their retail prices, that actually doesn’t translate into higher revenues, at least, let’s say not in that quarter. I was just wondering, is the retail price really just for show and what really matters is what PBMs or others are actually paying for the drug, which could be negotiated on a case by case basis?
Expert: Well, again, let’s go back to our original conversation about how PBMs buy drugs. They negotiate rebates. You can increase sales dollars by increasing prices, without impacting net revenues if your contract says if you raise the price by $50, your rebate increases by $50. You may have a $50 increase in the sales price, but your net revenue stays the same.
Call Leader: That’s very helpful, thank you. A question I have, I don’t know if you can speak to this, but I’ve read that there’s a trend towards increasing amounts of co-insurance for specialty drugs, so that the patients are paying a certain percentage of their costs. Have you seen that as a trend?
Expert: Yes, that has been a trend over the last several years. In response to that, what you’re seeing is a lot of state based legislation that is trying to limit the ability of payors to do that. That’s why some legislation might create an annualized cap, or some of the legislation may say that you cannot charge on these products any greater co-payment amount than you would on your standard tiering. This has been because what has happened, particularly in the specialty marketplace, is that we have an awful lot of niche biotech drugs. When you look at that, and you look at the insurance marketplace in general.
Let’s say you work for a company and you have the ability to annually select from a cafeteria plan that you can purchase from. Every year you can make a change. Insurers, because you may not see the value of that drug therapy into the second year, or you may not see the condition of the patient degrade until the second year, are going to want to make sure that they maximize their shareholder’s equity. Having a larger co-payment amount, there’s less of a financial impact on the insurer. Does that make sense to you?
Call Leader: Yes, it does. Would you have any idea of what percentage of the covered lives out there would have to pay coinsurance on specialty drugs?
Expert: Essentially everybody’s paying some coinsurance. In some cases it may be a percentage. Just like a tiered co-payment. On the first tier you have a five or ten dollar co-payment. On the second tier you have a $25 co-payment. On the third tier you have a $50 co-payment. On the fourth tier you have a coinsurance. Your specialty is in the coinsurance market, okay? That’s how we tiered it.
Call Leader: What’s the average percentage in the tier four?
Expert: It goes anywhere from around 20% is fairly common, up to some higher set fees, depending upon the nature of the drug. Again, the relationship between the insurer and the insurance company, and the third party payer, the PBM.
Call Leader: Mm-hmm (affirmative). Have you seen ... I’m guessing companies are really trying to get around this issue by doing their copay programs to try to minimize the impact on patients?
Expert: A number of the manufacturers have those types of programs available. Those become somewhat problematic for patients and for payors depending upon the type of program. If you are a Medicare Part D beneficiary, theoretically, if it comes from a prescription assistance program or PAP, that doesn’t count for your out-of-pocket expense. There are some issues with some of the co-payment plans that way.
Some of the insurers have rules that can be used in prescription assistance programs. I would say that by and large they’ve been somewhat successful in addressing those issues. Again, you’re seeing state legislators…insurance, which is what it generally falls under, is under state’s rights and state’s domain. What you see in one state may not be the same as what you see in another state. That’s because the insurance product falls under the state’s rights. Each state sets its own rules.
Call Leader: Okay. Do the insurance companies have a lower percent coinsurance levels for drugs that they see, let’s say, minimize hospital stays down the line, so it kind of helps the pharmacoeconomics of the whole thing? Do they look at that at all, or is it some other metric that they use to decide that this should be five percent coinsurance, this is twenty, this is thirty? Or is it arbitrary?
Expert: You know, I don’t want to say it’s arbitrary, I don’t want to say that they don’t. Typically, what you do see is self-insured programs have one thought process. When I say self-insured programs, let’s say that you are a union benefit but you are paying directly, you may then have a greater concern about downstream costs, because you expect that patient to be yours for their lifetime. If you are an employer buying insurance in the open market, you may not have the same feelings. The insurer may feel like, well they can change next year. The employer goes, well, I don’t know if they’re going to be here next year. They may not be concerned about second, third and fourth year costs.
Having said that, in some disease states, they’re going to want the best therapy because it’s going to impact their costs from in year one. Year one costs versus year two costs is always a concern based upon who the health insurance purchaser is, who the insurer is, and what their philosophy is. There is no one set way that the marketplace is going to look at this.
The other thing that you’re going to start seeing is a differentiation again here with the market. We’re starting to look at outcomes measures. If that’s going to be in that Medicare marketplace, it is more likely that they would look at second and third year costs and outcomes.
Call Leader: Okay. Basically, a lot of the commercial insurance companies probably aren’t looking at QALY studies or anything like that, they’re probably just looking at costs, trying to minimize it while it’s the-
Expert: They would look at these studies, the question is how much they weigh that in the evaluation.
Call Leader: Mm-hmm (affirmative).
Expert: I will look at it, but I may not weigh it at the same weight that I would back when I was with Medicaid.
Call Leader: I see.
Expert: When I worked with Medicaid, I expected to have patients for a fairly long time, because of that I look at second and third year costs.
Call Leader: Okay, great. Now, going back to more direct drug pricing questions, there seems to be a trend for generic drugs to have a higher retail price, because they know that at least in that first six months, they might be the only game in town and then people are automatically switched from branded to the generic. Is there anything that PBMs have at their disposal to control that?
Expert: No. In fact what you will see is that some PBMs will have a contract with the branded manufacturer for a rebate amount that will make it actually less than the generic at the introduced price. There was a multi-state litigation that basically looked at generic drug pricing. One of the things that if you’re very familiar with drug pricing, you’ll know that in the branded market-price, reported pricing is actually very close to market purchase price, whereas the multisource for generic purchase, that is not necessarily true. We saw, back when I was with Medicaid, oftentimes reported prices at six, seven, eight, nine thousand percentage points greater than the actual market price.
That was actually driving Medicaid costs up if they went to generic drugs, you saw a lot of Medicaid fee-for-services using branded drugs. CMS has addressed that by doing what they call national average drug acquisition costs, which is available on their website. That represents a survey of actual acquisition costs at the pharmacy level of most drugs. There are some drugs that are not on there, it’s just simply because their distribution mechanism is such that it really doesn’t fall under the general retail distribution definition.
Call Leader: Mm-hmm (affirmative). When PBMs are looking at their costs, you know the prices they’re paying, how do they decide what’s a focus area? Is it the drugs that they’re spending the most on, or is it the ones that have the highest price per unit?
Expert: Well, highest price per unit doesn’t necessarily mean that you’re spending the most money.
Call Leader: Yeah.
Expert: You look at your total expenditures, you look at ... Where they’re focusing the majority of their evaluations today is in the specialty marketplace. That’s a very small utilization but a very high cost factor.
Call Leader: Yeah, I saw a UnitedHealth presentation from 2014 saying that one percent of specialty drug use equates to 36% of drug spend? Is that accurate?
Expert: Yeah. Fairly accurate. You have a very small number of patients but very expensive product. Anything you can do to control expenditures is, going back to an earlier part of our conversation, that’s the reason why those copayment amounts have gone up. That is one of their cost controls in that specialty environment.
Call Leader: Okay. Why don’t they come out with plans that are, maybe, either generic only or just limited branded coverage? I saw another statistic from that presentation, generics are either 80% of the usage and 20% of the cost. Couldn’t you get a much cheaper plan if it’s generic only?
Expert: Well, there are some generic only plans in the Part-D space. The reality is that generics don’t make everything. If you’re looking at, particularly in the specialty marketplace, generics are not in that marketplace today. Most of the new drugs that they’re looking at doing, the bioidenticals or biosimilars. However, those larger complex molecules will not have the same price reduction as the small molecules. Where you saw an 85% or 90% reduction in the small molecules, you’re maybe looking at a 20% delta between the branded and the multisource product here. The delta’s not going to be the same. Often times, that delta is such that if you’re doing contracting, it’s not even a difference there, in terms of net costs.
Call Leader: Okay.
Expert: You could do it, but they don’t really address the high-cost areas today.
Call Leader: Okay. Just maybe focusing on the biotechs a little bit, you know, we start seeing a trend from CVS and Express Scripts, I think it was just this year that they said they are no longer going to cover Lantus, and they’re kind of for switching to the Lilly version, which I thought was kind of shocking, considering insulin is a really vital product for people. Do you think that’s a trend, or the PBMs going to get braver in terms of not covering certain products in order to maybe control costs a little better?
Expert: That’s a contracting issue. In other words, they were able to negotiate a contract with one manufacturer versus another manufacturer. That is not all that unusual. That has been done in the marketplace for many years.
What happened in this case is somebody came out and made a significant, should we say, change. My guess is the manufacturers came up with a much better value proposition that allowed the company to change. You know, because of the way you do diabetes, looking at hemoglobin A1Cs and you’re looking at your glucose levels, you can adjust dosages between the various insulins.
All the insulins today are basically either synthetic insulin, etcetera; they don’t have the same problems that we had in the past. The treatment of diabetes is so significantly different than it was five or ten years ago that I think you’re more readily able to make those types of changes than you were, say, 10, 15, 20 years ago.
Call Leader: Okay. Do you see companies ... Is it becoming more frequent that some of the drug manufacturers are offering steep discounts, in order to get some sort of exclusivity? One of the reasons I’m asking is there’s a drug, Soliris, for an orphan disease called PNH. It’s one of the most expensive drugs out there, between $400,000 and $600,000 a year. There’s a lot of potential competitors out there, biosimilars that are in development. I’m thinking in the future, couldn’t someone price their drug at, let’s say, $200,000 a year and then get exclusivity with one of the PBMs, or all the PBMs?
Expert: Potentially, yeah. You could, theoretically, do that. Again, the question that you have to ask yourself is how many potential patients are there, what are your fixed production costs? When you’re doing these biotech drugs, your production costs are far different than making small molecules. Where it might cost me $20,000 to make a batch of a small molecule drug, the fractionating column for some of these biotech drugs maybe cost a million dollars. I can use it one time. Those production costs are going to be different.
Call Leader: Yeah, no, I understand, but I mean in the case of like a Gilead, though, they were charging $1000 for a pill, so it doesn’t always correlate.
Expert: Well, they’re charging $1000 per pill. That is not necessarily the net cost of that drug. Every manufacturer who has a Medicaid rebate agreement on that brand of product has about a 23% rebate mandatory under federal law. States can negotiate over and above that, as can private third party payors. That $1000 quote pill, a) was not that much to begin with, but that is a sales value. Okay? Not a net revenue value. That’s why I keep going back to - think about $1000 is the sales dollars that’s reported, the net revenue factor, net of rebates, the discount, I can’t say what that delta is today, but it’s fairly significant.
Call Leader: Yeah, I think for the Gilead product, it’s at least ... I think the actual price they’re getting is probably below 50% of the retail price, from what I’ve heard.
Expert: I would say that that’s a good estimate. There’s what you pay and what it costs. One of the big differences in understanding the United States marketplace, versus another country’s marketplace. If I’m going to Europe, that drug price is part of the drug introduction, but I don’t do rebates in those types of contracting. What my price is, is what my price is. Whereas in the United States, I charge $1000 and I give you 55% back.
There’s a delta in the way we look at pricing and costing etc between what we do in this country versus maybe what you do in Canada or Europe or Japan or Australia, New Zealand, etc. It’s really hard to say, well, this is the reported price, but it’s actually not the true market value price that we say.
Call Leader: Before you were saying that the PBMs are probably willing to accept a lower ... have an exclusive biologic if the manufacturer gives them a much lower price. I was just wondering if ... Does that extend also to new versions? Let’s say, just in the case of Soliris, the company is developing a once monthly product. Once a biosimilar Soliris comes on the market, could they say, well, you know, once every week or once every two weeks is fine, you don’t need the once monthly product.
Expert: They could say that I’m going to incentivize you to use the biweekly product versus the monthly product and they can do so because it’s not a requirement, you’re providing the same therapeutic entity.
Call Leader: Would they just not cover the other product, or would it just be different levels of coinsurance? What is the levers that they can pull?
Expert: They can have a differential coinsurance and they would make it subject to prior authorization. You may have a higher level of prior authorization requirement for the monthly product versus the twice monthly product.
Call Leader: Great, no, thanks, that’s very helpful. Just moving on to another biotech drug that was a little bit controversial. This company, Sarepta that developed Exondys, which is for Duchenne Muscular Dystrophy, it received a controversial approval from the FDA, where one of the FDA staff, or actually the head reviewer, said it was a scientifically elegant placebo. In such a case, do you see the PBMs pushing back at all on covering them? Do they have to cover any drug that’s approved by the FDA for a serious disease? How much wiggle room do they have?
Expert: What they’ll do is they’ll put it on a) prior auth, and b) interesting enough I’m fairly familiar with that drug product and some of the issues associated with it. The FDA and the way they responded to the three products that were in development, two of them dropped out. The Sarepta product is the only one that made it through to an FDA drug approval process. If you think about it from a competition and marketplace, if the FDA basically didn’t approve one of the three products, would any other manufacturer be willing to do research into the area of Duchenne Muscular Dystrophy?
Call Leader: But if the drug doesn’t ... I mean, do you need to have kind of that global perspective?
Expert: The drug product does work, the question is what degree of improvement?
Call Leader: Okay.
Expert: In the opinion of a reviewer, maybe the improvement is not significant enough. I don’t know the particular reviewer, but I do know, because I happen to have friends in three companies, that the way some of those study designs were altered by the FDA, they almost ensured that the drugs would fail, by the study design. The question is, in this case, was there an improvement? If you have a drug for this disease that’s 100% fatal, and now you have a 3% survival rate, and I’m just saying 3% for the sake of saying 3%, is that 3% significant? From a policy ...If you’re one of the three percent, it’s very significant to you.
Call Leader: Yes, but is that 3% enough for insurance coverage, generally?
Expert: What else is available that’s going to ... there’s nothing else.
Call Leader: Yeah. It’s a question though of costs and benefits. These aren’t free, this costs, like, $300,000 or up to $600,000 really, depending on the weight. That could be used, maybe, to pay for other people’s drugs. Unfortunately we don’t have all the money in the world.
Expert: Well, I will tell you what I used to say when I worked with the Medicaid program. I would put a dollar on the table. This is the dollar we have. We have to figure out how to work within that. Now, $300,000, $600,000, again, let’s go back and say, you’ve got 23% of that is going to be Medicaid rebate, which is going to be a large percentage of these patients. Probably 85% to 90% of them are going to be paid under some type of Medicaid program. Automatically, you’ve got that discount. Will private, third party payors negotiate discounts? Likely, yes.
Let’s say this marketplace, everybody gets 20% discount because that doesn’t impact their Medicaid best price. Everybody’s getting 20% off that $300,000. That automatically drops it down. Then you’re going to have a 20% co-payment based upon $300,000. You’re at 60% of that cost. That’s what you’re paying out. I can’t give you absolutes, but if you think about it from there’s going to be some kind of contract negotiations, there’s going to be some kind of co-payment, you’re going to have prior authorization in place, your exposure is going to be fairly limited.
Call Leader: Okay. Just maybe to follow through on- [crosstalk 00:44:07]-
Expert: By the way, guaranteed insurability, you cannot deny access to that patient.
Call Leader: Okay.
Expert: What it transfers into is to higher rates.
Call Leader: Mm-hmm (affirmative), yeah. You mentioned Medicaid best price, and I was just thinking, because drug pricing obviously is this big issue, that’s why we’re having this call. What would happen if the Medicaid best price regulation was expanded to cover Medicare?
Expert: Oh, there is actually, under the Affordable Care Act, an exception for Medicaid best price in the language. That exemption is to lower Medicare drug costs. If you’re negotiating with a manufacturer for a rebate that is in excess of the Medicaid rebate, it does not impact the dollars that they owe to the Medicaid programs. That was done specifically in order to address the affordability of Medicare Part D. It would have a negative impact if you apply the Medicaid best price to those contracts.
Call Leader: Okay. I didn’t really think of that. I guess it affects ... Since it would affect a very large proportion of your contracts then you’d be negotiating less.
Expert: Yeah, or your amount would be lower because you wouldn’t want ... If you think about it from the manufacturer’s perspective, I have a drug that’s going to be used in Medicaid in Medicare, because it’s exempt from best price in Medicare, I can be more aggressive in negotiating with payors. If it were not, I can’t be as aggressive, because that’s going to impact my Medicaid portion of the business also.
Call Leader: Okay. That’s very helpful. If you were the secretary of HHS, what would you do to reign in drug prices?
Expert: Hm, boy. A couple of things, and they’re going to require statutory changes. One would be under the Medicaid drug rebate program there’s a BPI penalty. That BPI penalty is a lifelong increase in Medicaid rebate if you raise your price greater than the CPI. The other thing that does not exist in there is if a manufacturer has that CPI penalty in place. There’s no incentive to lower the price.
The question that I keep asking people who are decision makers is, is it time to create an opportunity that a drug that’s going off patent, and lower the price, and lower it’s rebate liability? Would that, in effect, give an incentive to lower prices?
Call Leader: What have people said?
Expert: We just don’t think they would do it. Why not? Well, there’s really no basis why they think they wouldn’t do it, it’s just that the opinion is that they would not do it.
Call Leader: Okay.
Expert: Well, I’m not sure that they would or would not, but there is no mechanism currently to even test that.
Call Leader: Other than the CPI penalty issue, what else would you do?
Expert: I’m not sure how familiar you are with how they do pricing in other countries.
Call Leader: Relatively, I mean I know reference pricing, etc.
Expert: Yeah, but that is part of the drug approval process. They may have a reference price in establishing the price of a product going into the market. If you look at Europe, they use kind of that reference in value perception. Is there a significant increase in value based on a reference price. They come up with a formula, what’s the allowable price.
As an example, you would look at that and say, okay, the price is a dollar as our reference price. We think that this has a, is 20% better, so you could charge a dollar and twenty cents for that product. If you look at Canada, their generic drug prices are very close to their branded price and they don’t have the same number of generic manufacturers producing products in Canada, for sales in Canada. It is an interesting issue. I believe in Japan, the highest price you ever have for a drug is the year you introduce it, and then they have a calculated decline in price. It would require that we change from a free market type of idea to very much a controlled environment in terms of drug pricing, and that could have a significant impact.
One of the issues that you have there as we’ve talked about is I have this $1000 tablet and when I report sales at $1000, that’s what I’m reporting, that’s what the market looks at. If all of a sudden we change that to, you’re only going to be able to charge $550, although that may be on the same net revenue, how is the marketplace going to look at that? You have to look at it from not only the drug price but what are the downstream impacts on the marketplace side of it. Does that make sense?
Call Leader: Mm-hmm (affirmative). Yeah, no, definitely. Just given that we have a Republican administration and it seems to be probably more conservative and libertarian than most people would have expected, they’re probably not going to do the drug price control. Do you see any levers that they’ll be pulling to control drug prices?
Expert: I think that you have a gentleman who probably will be driving policy, who will look at it from a business perspective. From a business perspective, it’s going to be interesting to see what happens. I think he ... and I really can’t share some of the knowledge that I have, I will just upfront tell you that.
Call Leader: Okay.
Expert: I think you’re going to see some changes. I think you’re going to see potentially an aggressiveness and increase in BPI penalties, maybe? Disincentivizing those things. How they’re going to incentivize lower costs I don’t know. I actually haven’t got a really good feel what they’re going to do here. I don’t think that it’s been the number one priority to date. Some of it will depend upon how they do the Affordable Care Act rewrite. That is where I would expect to see some of that coming in. I would expect it to be changes potentially in the Social Security Act, section 1927, which is the Medicaid drug rebate. Potentially some changes in the Veterans Health Care Act, section 340B. That’s where I think they can influence things.
Call Leader: Okay great, so it looks like I think we’re out of time. Thank you so much Doug for your time and your insights. I really appreciated it.
Expert: You’re very welcome and hopefully this was helpful.
Call Leader: Yes, it was, very much. Thanks Doug, have a great day.
Expert: All right, thank you.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.