PBMs and generic drugs: Is the good news ending?

The growth of generic drugs has been a good news story for payers and pharmaceutical benefit managers (PBMs), but that story may be coming to an end.
Many major brand name drugs are at the end of their patent-protected life cycles and now face generic competition. Two years ago, Lipitor and Plavix alone were at $15 billion combined revenue but are nearing the end of their revenue blitz with a projected drop to as low as $1 billion.
While generic alternatives to Lipitor and Plavix will take billions in drug costs out of the healthcare system in the next 3 to 4 years, other major drugs reaching the end of patent protection will reduce spend in a similar way. But this anticipated decline in spending is masking the growth of specialty drug costs. For many healthcare payers, the drug portion is the most slowly increasing area of their spending, but in the next couple of years the tide will turn, as specialty drugs becomes the focus.
For payers and PBMs this will be more good news, as they can offer services to control costs and utilization, but it also harbors bad news for PBMs. It is not unlikely that in the very near future, nine out of 10 drugs dispensed will be generic. With generic utilization at more than 90 percent, the need to manage this area of drugs spend will not be of great concern. As a result, the current PBM business model has 3 to 4 years of life before it goes over the cliff.
With the need for business model change on the horizon, the ongoing deal making within the PBM industry is not surprising. Witness the recent deal between Catamaran and Cigna, along with the massive acquisition of Medco by Express Scripts. We will continue to see strategic distribution planning as PBMs brace for the end of the generic wave, a new era of specialty pharmacy and a re-positioning imperative to their expansion and acquisition goals. We will undoubtedly see more attractive mid-market and regional PBMs acquired as the industry moves to solidify its influence within “Big Pharma.”
Impact of the specialty market
For drug manufacturers, because the future is specialty pharma, the most obvious challenges surround the management of “go to market” strategies. Within 4 to 5 years, fifty percent of manufacturer revenue will come from specialty and will be targeted to a much smaller population. The real complexity lies in the way these drugs come to market. If a drug only targets 20 or 30 thousand people, it’s not going to be stocked at your local pharmacy. Thus, comprehensive strategies need to be built around managing and contracting for these drugs.
These complex management issues will give drug manufacturers more negotiating leverage with PBMs, and their investment in bringing these innovative drugs to market will provide them with a balance of power within the industry.
Specialty drugs may hit the shelves at a high price, but they also have high value. Even if the price of a drug is high, the net benefit to healthcare costs outweighs the price of that drug. Many specialty drugs, such as those for MS, may have a cost of product well in excess of $50,000 per year, but that cost enables a person to go back to work, get off disability, etc. – bringing significant value and trumping the price concern.
So, what exactly are PBMs hoping to get out of the specialty market? Primarily, it is:

• Significant competition in specialty therapies to create preferred products (prescribers are pushing back because they still see legitimate differences in drugs within same therapeutic categories);
• Creation of bio-similars (a pathway for bio-logic drugs to be produced by other manufacturers)

The bio-similar timeline is probably pretty far out in the future, because unlike the original underestimation of creating a bio-similar market, the industry is very much aware of complications that would suggest anything but a quick and easy solution. In addition, bio-similars are also fueling strong ethical discussions about how to approve these products.
It is reasonable to believe that all of the above will allow drug manufacturers to drive innovation without the worry of those particular products being commoditized by PBMs.