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If a bone building drug reduces hip replacement surgeries (which cost $40k now), the value of it should be seen through billions saved in avoiding these surgeries. Its value is passed through to generations when it goes generic
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When valuable drugs like Lipitor (atorva) go generic, its like a house in NYC becoming affordable overnight.
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Biotech social contract - Universal healthcare with low/no out-of-pocket costs while patented drugs go generic without undue delay
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Lisinopril (generic) - 100 million prescriptions per year. Came to market in 1987 as Prinivil (Merck) and Zestril (AstraZeneca) - improved versions of generic Enalapril (all ACE inhibitors). Enapril itself was a better version of Captopril (first in class).
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If insurance is paying for a drug, it requires the pharmacy to fill a zestril prescription with lisinopril generic to save money. The insurance company pays a fixed amount to pharmacy for generic, so pharmacy’s best interest is in sourcing the cheapest generic
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Generics account for 90% of all prescriptions written in US by volume but only 28% by value (2018 data). Drug spends overall are only 9.4% of overall healthcare spend (so only 2.5% of overall healthcare spend in generic - there’s nothing to save here by tariffing)
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Enrolling a patient for trials is extremely expensive - $200k per patient is common for cancer studies
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Unlike doctor’s visit, MRI, hip replacement, nursing care etc. (services and procedures), drug cost come down over time. Its services that account for over 70% of healthcare spends. Services never go generic
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If we make all branded drugs go generic with immediate effect, it could save just 6.7% of healthcare spending (1.2% of US GDP) - but it will mean no new drug ever and our mountain of generic will cease to grow
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GoodRx and Drug Patent Watch compile list of drugs that could go generic in near future
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Drug companies offer insurers rebates over list price. This rebate or discount are confidential and never disclosed. What public sees is list price and is often very misleading.
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US makes the most of generic drugs. They make up 90% of prescriptions filled. In Switzerland its 17%, France 30%, Spain 47% and Germany 80% (Can see why US spends more on branded drugs. But some parts of Europe like Germany may have to pull their weight which is what Trump is pushing for)
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US spends 2.4% of GDP on roads, water infra. At 1.3% of GDP, investing on new drugs is a worthwhile investment
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We don’t charge copays for security of police dept or safety from fire dept. Why should healthcare be any different?
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QALY (Quality adjusted life year) estimates reduction of life and quality of life for a patient with a particular condition in $s - Suggesting that its not worth developing drugs that can only be justified if priced higher than QALY. But it misses peace of mind in knowing eradication of a disease/condition for generations
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From car to internet to statins - society is incapable of appreciating or anticipating innovation (Hence following models like QALY is deeply flawed)
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Smokers save taxpayers money on medicare and social security by dying early - so should be encourage smoking?
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A 20% drop in US branded drug prices (say $24k instead of $30k) would cut industry’s profits in half - but it would still be unaffordable to patients. At the same time it removes possibility of reinvestment of profits into future drugs.
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Sick are subsidising the cost of the healthy through copays and deductibles today (the healthy may make use of generics in the future). Copays are justified by payers as a measure to prevent patients from seeking unnecessary treatments and services
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Out of pocket costs mean that many people with insurance still can’t afford healthcare which defeats the purpose of insurance (91% pay < $500 but 2% pay over $1500 and are the most affected and drive the avoidable disproportionate outrage)
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Emergency care doesn’t need insurance (uncompensated care) and large part of it is borne by taxpayer and rest is charged by increasing premiums. This is very expensive ($85b) and could have been avoided by spending upfront in prevention (by cheaper universal insurance without copay).
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Medicaid (funded by state and federal subsidy) covers poor. Medicare covers older Americans (65+). Third one is for veterans and armed services - all funded by federal tax dollars - this leaves a large part who aren’t poor, old or veterans without coverage - some part of these are covered by pvt insurers by employers but a large part are uninsured (13%) - but these still wont be turned down at the ER (Emergency Response)
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Bureaucracy in healthcare costs over $500b and is 2.4% of GDP (twice branded drug spend). Bureaucracy never goes generic
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Insurance companies use Prior Auth ¶ and Step Edit (SC) to prevent over-utilisation. Docs have to do lot of paper work to get a drug to their patient if that drug needs PA (Paperwork discourages them). Docs have to use a generic or cheaper med before using the drug if it requires SC. Even if PA and SC hurdles are crossed, there’s still copay (even for generics!)
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Cost sharing (Copay and Deductibles) allow lower premiums to everyone is the justification given by insurers - but whole point of insurance is for the fortunate to subsidise the unfortunate (Eliminating copay will increase premiums for everyone by just 2.3% and increase tax by 0.35%)
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Pharmacy Benefit Managers (PBMs) extract profits whenever patient gets a drug, even if that spend is out of pocket. Sometimes its a rebate from the drug company and other times its from deductibles - its like mechanic paying insurer $50 for a $400 repair bill which you paid completely out of pocket since your deductible is $500.
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Diabetics are likely to stop taking treatments earlier in the year when they are still paying out of their deductibles than later in the year after they have hit their out-of-pocket maximums. (Have noticed this in Esperion’s calls as well for their LDL-C drug)
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The system only optimises for reduction in one drug vs other but not if a certain drug would reduce overall healthcare spends (esp services and ERs). This might only be possible in a single-payer system
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Insurance companies spend 80-85% on patient care (MLR or Medical Loss Ratio). Of the 15-20% left, they must take care of operations and can keep rest as profit. This incentivises them to increase overall healthcare spends than decrease it
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Payers (insurers) set budgets annually and price their premiums. If a blockbuster drug launches and they fail to anticipate demand, they stop many patients from being cured until the next year’s budget cycle (Again saw this repeatedly in Esperion calls). Customer mobility (users switching plans) also means not paying today might mean savings down the road (patient is another payer’s problem next year)
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In-class monopoly - When a drug is the lone one in its class and is very good at it that no competitor can even get patients for trials. (Eg. Cerezyme for Gaucher’s disease, Roche’s Rituxan anti-CD20 antibody for leukemia, Norvatis Gleevex for CML, Merck’s DPP4 inhibitor Januvia for type-2 diabetes)
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Long In-class monopolies are now rare - when a company launches a first-in-class drug, others are often not behind with their “fast-follower” drugs. While they are derided as non-innovative or me-too drugs - sometimes they are better on side effects or some people might respond better to them, so they serve a purpose.
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Fast followers allows payers to play drugs off one another and reduce costs (for preferable formulary status - as is happening with wegovy vs zepbound). Eg. Two PCSK9 inhibitors (Repatha and Praluent) within weeks of each other, SGLT2 inhibitors (Empa, Dapa, Cana gliphozins) and CAR-T treatments (Escarta and Kymriah)
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Fast-followers are rare in smaller markets so innovator may enjoy a longer monopoly
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Payers (Pharmacy Benefit Managers or PBMs in specific) get rebates from innovator and so keep biosimilars out (there’s not as significant a price difference as in small molecules so free markets dont work). Biosimilars can’t match those rebates so the innovator doesn’t lose market share as quickly (Super interesting viewpoint)
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CAR-T cell therapies and gene therapies are not genericizable by any approaches conceivable today
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Sometimes me-too drugs are used in combination and dont compete - as in HIV where two polymerase inhibitors and one integrase inhibitor work together (LTD or TLD - which forms bulk of Laurus ARV generic business)
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Sometimes multiple drugs are used in combination for a disease and not having capability in one might cripple a drug company - thats why every oncology company has a anti-PD(L)1 antibody. Not having one is a non-starter
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Payers influence market share by tweaking copays even against a preferred drug (as in Wegovy vs Zepbound). This is esp. crucial when patients take the drug over longer periods. Sometimes good enough drugs are used as leverage against better drugs (Orforglipron might be used as a leverage against Wegovy, the way Wegovy is used as a leverage against Zepbound)
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PBMs negotiate drug prices for payers (sometimes Payers own the PBMs, so they are just agents) - they retain a portion of the rebates. Express Scripts, CVS/Caremark, United’s OptumRx have 80% PBM market share. A drug company that offers lower list price thus threatens the PBM model (Principal-Agent problem). This is where bulk of US healthcare spends are sunk (what Trump should be going after, instead of prices of branded drugs or generics). Patient’s out-of-pocket costs are linked to list prices
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Drug companies RoCE has halved since 90s but profits of middle mean - PBMs, insurers, wholesalers, pharmacies have clinbed from 20% to 40% of healthcare industry’s profits (and 2/3rd of healthcare industry’s profits)
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Antibiotics need a guaranteed payment model to encourage innovation since market size is small and patents expire before they can recoup investment
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Some drugs like Daraprim (malaria) cost $1/pill and have only 8000-12000 prescriptions in a year. GSK loses money just selling the drug. In cases like these, drug companies prefer to offload them rather than risk raising prices (bad publicity) - a smaller biotech that buys it though can raise prices (no reputation to worry about). This is what leads to price-jacking (Daraprim acquired by CorePharma and prices were raised to $13.50/pill. Pharma bro Martin Shkreli’s Turing acquired CorePharma and raised per pill price to $750 and became infamous)
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Compounding pharmacies are holdovers from a pre-FDA era (thousands of them in US). They are allowed to purchase RM necessary and make and sell drugs. These homemade versions introduce dosage errors and contamination
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Gilead developed the Hep-C drug Harvoni and priced it at $94500 in the US. However in 91 developing countries it was priced at $600-900 (Indian generics manufacturers were allowed to make and sell). This is a way in which companies maximise profits as higher prices will shut these markets out and lead to zero sales (some profit is better than no profit)
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A drug that costs $20 to manufacture might sell at $1000 in the US and $50 in Mexico. Given the cost of making the drug - its profitable either way to the drug company. So they try to maximise profits by maximising volume by regulating price (I’ve been thinking about on similar lines for Orforglipron pricing in developing markets)
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Affordability is a function of what customer can pay and not cost alone
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If reference prices are enforced (Europe prices matching US), it will end up exporting higher prices from US to EU, rather than reduce US prices. In US treatment cant be denied whereas, in the EU it is. US is a price-insensitive market because of policy. This will shut out EU markets and drug makers will try to recoup profits in the US thereby rising prices.
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Price controls won’t work because in a company’s portfolio, one or two drugs might sustain the pricing of rest of the portfolio, like in a restaurant with few great dishes priced higher
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DTC (Direct to consumer) ads were banned by FDA in 1983 but was brought back with stricter regulations (cant be false or misleading, has to balance risks and benefits etc). It equips patients with better ability and understanding but can also lead to over-diagnosis and over-treatment
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Epinephrine used to treat anaphylaxis was sold in vials and then EpiPen was approved in 1987 but it was priced too low and was barely profitable ($50/device). Mylan acquired it from Merck. Raising prices 3x and advertising to raise awareness, increased sales to $1b/year and also benefitted millions of patients (Benefits of DTC ads)
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Chiral compounds are structural variants using same chemical formula (Enantiomers in chemistry - which are mirror images). Prilosec (Omeprazole) was a mix of two enantiomers - one effective and another dormant. AstraZeneca launched Nexium (Esomeprazole) which was purer with only the working enantiomer and extended patent. Esketamine (J&J) and Ketamine is another similar case. (BlueJet has been talking of Chiral chemistry, so found this interesting)
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Pfizer’s Lyrica (pregabalin) went generic in 2019. Pfizer patents for once daily version wont expire for another 8 years - so it has Lyrica CR competing with Lyrica (generic) in the market. By offering generous copay assistance to paitents and rebates to PBMs, Pfizer can make sure Lyrica CR is preferred over generics (though generics are just as good and just have to dosed twice)
This book is by far the best I have come across to understand the US healthcare landscape when it comes to drugs (provider, payer, patient ecosystem). It also covers a lot of details on drugs themselves, so you get to learn a lot about pharma sector as well. Its backed by a lot of research, data and experience of the author being a biotech investor and also a scientist. Its also relevant in current times to understand feasibility of tariffs on branded drugs and generics. 11/10
