Dear Reader,

It's a big week for Insiders. Tomorrow, we will release our third trend report on aging in place and the shifting care landscape for older adults. Be on the lookout for that in your inbox tomorrow.

If this was forwarded to you and you're interested in joining Insider to receive that report, click the link below and sign up.

A “Thank You” to the Companies That Tried to Charge Less

Late last month, the White House announced most favored nation pricing agreements with nine more drug manufacturers, bringing the total to 26 companies, and the President urged Congress to make the deals permanent.

Buried in those agreements is a provision that has received far less attention than the Medicaid discounts and the TrumpRx cash prices: participating companies are expected to launch new drugs in the United States at net prices roughly in line with other wealthy countries.

The administration is, in effect, asking manufacturers to do something the public has long assumed they would never do voluntarily. Launch low.

Here's the thing.

Some of them already tried. A handful of companies have looked at a market dominated by a high-priced incumbent and launched a competitor at a fraction of the price.

The near-universal narrative in drug pricing is manufacturers charge the highest price the market will bear. I've contributed to that narrative myself.

But the exceptions deserve a closer look, because almost all of them ended the same way. The lower-priced drug lost.

This edition is a thank you note.

Not because these companies were 100% altruistic, but because each of them ran an expensive natural experiment on our drug distribution system, and the results tell us something the debate over list prices keeps missing.

Thank You to Merck

In January 2016, Merck received FDA approval for Zepatier (elbasvir/grazoprevir), the third all-oral hepatitis C cure to reach the US market.

Gilead's Harvoni carried a list price of $94,500 for a 12-week course and AbbVie's Viekira Pak sat at $83,319. Merck priced Zepatier at $54,600, a 42% discount to the market leader for a drug with comparable efficacy in the most common genotype.

Analysts expected more than $2 billion in annual sales by 2017.

For a quarter or two, it looked like it might work.

AbbVie's CEO even noted on an investor call Merck had been more aggressive on price than expected, and Gilead admitted it had deepened discounts to keep Harvoni on formularies.

Then the market did what the market does.

Gilead's rebates to payers were already reported to run as high as 45% of list, which put Harvoni's net price in the same neighborhood as Zepatier's list price.

Worse, those rebates were structured so that a plan which moved some patients to Zepatier risked forfeiting Gilead's rebates on the patients who stayed.

A payer had to choose between a lower list price on part of its population and a large rebate check on all of it. So, what did we expect those health plans to do?

Zepatier's worldwide sales reached $555 million in 2016 and $1.7 billion in 2017, with much of the growth coming from launches in Europe and Japan, then fell 73% to $455 million in 2018 once AbbVie's Mavyret arrived.

By early 2018, US sales were so thin they were offset by rebate adjustments.

That July, Merck cut Zepatier's list price by another 60%, a move the administration celebrated and the market barely noticed.

Merck had already taken a $2.9 billion impairment on its next-generation hepatitis C program and walked away from the disease area entirely.

I should be fair to AbbVie here.

AbbVie did eventually take real market share with Mavyret, which launched in August 2017 at $26,400 for an eight-week pan-genotypic course.

But look at what that took: a price less than half of Zepatier's, a shorter regimen, and coverage of every genotype. Gilead's response was not to cut Harvoni's list price.

It created a subsidiary, Asegua, and launched authorized generics of Harvoni and Epclusa at $24,000 in 2019, explaining that existing contracts and government pricing rules made it hard to lower a list price once a drug was on the market.

A lower price only survived in hepatitis C by leaving the brand behind.

Thank You to Viatris, Lilly, Coherus, Pfizer, and Amgen

Merck is my favorite example because Zepatier was a new molecule from a large company that chose to compete on price.

But the pattern repeats, and the insulin and biosimilar markets have produced the cleanest versions of it.

In November 2021, Viatris launched the first two interchangeable insulin biosimilars.

Semglee, the branded version, carried a list price about 5% below Lantus. Unbranded insulin glargine-yfgn, the identical product in an identical pen, carried a list price 65% below Lantus.

Express Scripts put the high-priced Semglee on its largest commercial formulary and excluded both Lantus and the cheap unbranded version.

As Adam Fein at Drug Channels observed, Viatris had to nearly triple its list price before the largest PBM in the country would prefer its product.

Amgen tried the same two-price approach with its Humira biosimilar Amjevita in 2023, with similar results.

Lilly's version was the authorized generic Insulin Lispro, launched in March 2019 at $137.35 per vial, half the list price of Humalog.

Lilly told Congress plainly why PBMs would be slow to embrace it: a lower list price means fewer rebate dollars.

Coherus took the most aggressive swing anyone has taken.

In July 2023 it launched Yusimry, a Humira biosimilar, at $995 per carton, more than 85% below Humira's $6,922 list price, and partnered with Mark Cuban's Cost Plus Drugs to sell it for even less.

Twelve months later, Coherus sold the entire product for $40 million and exited adalimumab.

Pfizer's Inflectra, an infliximab biosimilar launched in late 2016 at a list price 19% below Remicade, fared little better.

Pfizer sued Johnson & Johnson over contracts it said were built to block the cheaper product, settled quietly in 2021, and infliximab biosimilars still held the lowest share of any biosimilar class in the country.

Amgen's Repatha is the exception that proves the rule, and it took brute force.

Amgen cut Repatha's list price 60% in October 2018, from $14,523 to $5,850 per year, because Medicare patients facing coinsurance on the full list price were abandoning prescriptions at the counter.

Amgen could not simply lower the price. It had to issue a new NDC, keep the old NDC alive because PBMs and plans needed time to rework existing contracts, warn investors that payers might not adopt the cheaper version, and finally discontinue the high-priced NDC at the end of 2019 to force the issue.

Repatha eventually became the multi-billion dollar product Amgen expected and it got there by removing the higher-priced option from the market entirely, not by offering a choice.

Why the Market Punishes a Lower Price

Regular readers will recognize the theme.

The entire pharmaceutical supply chain feeds off of the list price (Wholesale Acquisition Cost or WAC). Lowering the WAC changes the pricing dynamics throughout the chain.

Start with the PBM, where many these stories typically end.

Historically, the value a PBM delivers to its plan sponsor is measured largely in rebates, and the rebate is a percentage of list price. A drug that launches at 42% below the incumbent has 42% less headroom to offer a rebate.

The incumbent can match the entrant's net price with a bigger rebate, keep its list price intact, and tie that rebate to the plan's willingness to keep the entrant off formulary.

From the PBM's perspective, the cheap drug is not a bargain.

It is a drug with nothing to negotiate. Most rebates pass through to plan sponsors, so the rebate is how a PBM proves to its client that it is earning its fee.

A low list price with no rebate attached gives the PBM fewer levers to pull and less savings to report.

Move down the chain and the incentive repeats.

As I wrote in July, wholesalers earn a percentage of the brand price. Pharmacies are reimbursed on formulas anchored to list. As I wrote in May, 340B covered entities capture a spread that grows with list price.

Physician-administered drugs in Medicare Part B are paid at average sales price plus a percentage.

A $54,600 drug generates less revenue for every intermediary than a $94,500 drug, so a lower price is, quietly, a request that each of them accept less money to distribute a product that does the same thing.

Then there is the prescriber and the patient.

Physicians generally do not see price at the point of prescribing, and most commercially insured patients pay a flat copay that does not change whether the drug behind it costs $500 or $5,000.

The people who benefit most from a lower list price, the uninsured, patients in a deductible phase, and Medicare beneficiaries paying coinsurance, are real, but these people do not sit on pharmacy and therapeutics committees.

The buyer who makes the decision is insulated from the price, and the person exposed to the price does not make the decision.

The Modern Workaround

The industry learned the lesson.

The current wave of lower prices is not happening inside the insured channel at all. Lilly sells Zepbound vials through LillyDirect.

Novo Nordisk sells cash-priced Wegovy. TrumpRx.gov is a federal portal that aggregates cash-pay and discount channels for patients paying outside insurance, and the most favored nation deals themselves mainly affect Medicaid and cash purchases while leaving commercial and Medicare prices largely untouched.

Every one of these is a route around the rebate system rather than a reform of it.

That is the takeaway from the thank you list.

A lower price in the US survives only when it exits the intermediaries entirely, through an authorized generic, a direct-to-consumer channel, a “cost plus” partnership, or a federal cash-pay website.

Inside the system, it dies.

The first products expected to launch under the most favored nation deals, including AstraZeneca's Baxfendy and Novo Nordisk's weekly insulin Awiqli, will tell us soon whether anything has changed.

If they launch at meaningfully lower prices and formularies treat them the way Express Scripts treated unbranded insulin glargine, we will have our answer.

So, thank you!

Joey Mattingly, PharmD, MBA, PhD
Associate Professor and Vice Chair of Research
Department of Pharmacotherapy
University of Utah College of Pharmacy

September 22: Medicare Part B Drugs on the Negotiating Table

As Medicare's Drug Price Negotiation Program enters a new phase, join drug policy experts to unpack what Part B drug price negotiation means for manufacturers, patients, providers, and the health care system.

This event is free for all. Speakers include Anna Kaltenboeck, Richard Evans, and Michael Sherman.

Watch: Artificial Intelligence and Health Care: What’s Next

Last week at an Insider-only event, Halle Tecco, Paige Nong, and Jonathan Ketcham shared their perspectives on AI, health care, and where might patients, policymakers, and health system leaders see the biggest ROI.

You can now watch the event at your convenience if you missed it.

340B Could Inflate Spending In The CMS Bridge Program By More Than A Billion Dollars

Stacie Dusetzina et al.

Early-Stage Drug Development Is Strategic Infrastructure. Can The US Afford To Lose It?

So-Yeon Kang and Yunan Ji