Did generic drugs party too hard?
Generic drugs can’t party forever
The last three months have been a party of epic proportions. Of course, we’re not talking about a party that most of us have gotten to enjoy, because 2020 has not given us much of a reason (thanks COVID) or ability (thanks COVID) to party. But generic drug prices, which apparently have herd immunity to COVID-19, took advantage of cheap deals on event spaces, rented out Grant Park, and threw a non-stop, summer-long, make-Andrew-WK-jealous, deflationary bash. And let it be told, we humans got nothing on generic drugs when it comes to partying. It cost $645,000 to clean up after 2019’s Lollapalooza – a rounding error compared to the damage generic drugs can do when they show up to party. In the last three months, generic drugs wiped out more than $400 million in annualized acquisition costs based on Medicaid’s drug utilization … and that’s only the damage done by those crazy tablets and capsules (i.e. oral solids).
But much like humans and Nikki Sixx, generic drugs can’t party forever. They too need a break to hydrate, rest, and recover some of their energy, which is exactly what happened in October’s latest drug price survey results. We estimate that the price changes reported just this month translate to $81 million in annualized inflation on generic oral solid ingredient costs for Medicaid. Ordinarily we would highlight this as a large number, but in the context of the deflation-fest we’ve witnessed in recent months, this month’s inflation numbers are, in our view, a small price to pay.
What Happened?
On October 21, CMS published its latest update to the National Average Drug Acquisition Cost (NADAC) database. For the uninitiated, NADAC is the best national public database of surveyed pharmacy invoice costs to acquire prescription drugs. In other words, if you are looking to understand what pharmacies are paying to purchase drugs from their wholesalers each month (before rebates), and you don’t want to cough up a boat load of money to pay for it, NADAC is where you must go.
As we’ve discussed at length in recent months, NADAC is lagged by roughly two months. So the survey prices we just received at the end of October reflect pharmacy invoice costs from August.
Each month we view this data through many lenses, interrogating it until we feel comfortable with the story it has to tell. Think of the rest of this report as a transcript of the interrogation of this dataset.
Let’s see what we can learn.
1. Unweighted price change analysis shows inflationary signs
Each month, we first look at how many generic drugs went up and down in the latest month’s survey of retail pharmacy acquisition costs, and compare that to the prior month (Figure 1).
Basically, the quick way to read Figure 1 is to look for blue bars that are taller than orange bars to the left of the dotted line, and exactly the opposite to the right of the dotted line. That would indicate a good month – more generic drugs going down in price compared to the prior month, and less drug prices going up.
Figure 1
Source: Data.Medicaid.gov, 46brooklyn Research
At first glace, Figure 1 makes this month look quite terrible, simply due to the comparison to last month. But remember, September was the most deflationary month we have ever seen, by a considerable amount. In other words, it was a very tough “comp.”
If we look closer at the blue bars alone, while October wasn’t a train wreck, it was certainly inflationary. Look no further than the double digit price increases, and compare them to the double digit price decreases to see this. All told there were 460 drugs that increased by 10% or more, compared to 325 that decreased by 10% or more. Those numbers don’t bode well for Team Deflation. It also is a bit concerning that there were 49 drugs that increased by 40% or more. We couldn’t recall the last time this many generic drugs had popped by 40% or more month-over-month… so we went back and checked the tape and found out that the answer was never. Well, at least not since we have been on the job.
2. Weighted Medicaid generic inflation swings back to $81 million
As we’ve written in prior updates, knowing the price changes alone are not enough. We need to apply utilization (drug mix) to the price changes, which is the purpose of the NADAC Change Packed Bubble Chart (Figure 2). We use Medicaid’s 2019 drug mix to arrive at an estimate of the total dollar impact of the latest NADAC pricing update. This helps quantify the real impact of those price changes from a payer’s perspective (in our case Medicaid, individual results may vary).
The green bubbles on the right of the Bubble Chart viz (screenshot below in Figure 2) are the generic drugs that experienced a price decline in the latest survey, while the yellow/orange/red bubbles on the left are those drugs that experienced a price increase. The size of each bubble represents the dollar impact of the drug on state Medicaid programs, based on utilization of the drugs in the most recent trailing 12-month period. Stated differently, we simply multiply the latest survey price changes by aggregate drug utilization in Medicaid over the past year, add up all the bubbles, and get the total inflation/deflation impact of the survey changes.
Figure 2
Source: Data.Medicaid.gov, 46brooklyn Research
While Figure 1 suggested that there could be inflation this month, Figure 2 definitively tells us there was pretty meaningful inflation. Unlike last month, the “increase” side of the ledger is now full of larger bubbles, while the “decrease” side of the ledger is mostly made up of smaller bubbles (except the one large growth protruding from the top right, which is actually generic Tamiflu, a notable drug to experience a large pricing decrease going into flu season! More on this later on). Add it all up, and that explains how aggregate net inflation eclipsed $81 million this month.
3. Year-over-year generic oral solid deflation moderates to 13%
Ever since last June, we have been tracking year-over-year generic deflation for all generic drugs that have a NADAC price. We once again weight all price changes using Medicaid’s drug utilization data. Over the past year, we have been seeing a gradual compression in deflation. But oddly enough, as the pandemic started, this trend started to reverse. After last month’s pop to nearly 17%, oral solid generic deflation moderated to 13.4% year-over-year (YoY) in October, just slightly above its average over the past 24-months. Deflation on all generics stepped down by a point to 11%.
Figure 3
Source: Data.Medicaid.gov, 46brooklyn Research
4. Generic Tamiflu prices decline by more than 30%
Oseltamivir (generic Tamiflu) is a medication indicated for the treatment of uncomplicated influenza (i.e. flu) in newly symptomatic patients (48 hours or less). And even if your mail-carrier just dropped some phantom doses on your front doorstep, Tamiflu is not a substitute for getting your annual flu shot (which you should definitely get if you haven’t already), as Tamiflu’s proven benefit in treating flu is pretty limited (in clinical trials it reduced the median time to improvement of flu symptoms by 1.3 days; which considering the average duration of flu symptoms is 3-7 days is not a lot of added benefit to begin with).
Over the past month, the NADAC of the 75 mg capsule declined by 34% to $2.12 per pill (or $21.20 for a full 5-day course of treatment with 75 mg twice per day). This is about a $1 cheaper per pill than this time last year as shown in Figure 4.
Figure 4
Source: Data.Medicaid.gov, 46brooklyn Research
With experts warning on the challenges that may befall the U.S. healthcare system as it moves to battle a “twindemic” (both COVID-19 and the seasonal flu), this decrease in pricing for a flu-treatment is certainly welcome. This is especially important as hospitals begin to reach or exceed their capacity thresholds.
Of course, for the payers of healthcare out there, this analysis presumes that decreases in generic drug acquisition costs will actually translate into savings to their bottom line. Sadly that is not always the case – even for the biggest, baddest payers out there (i.e. Medicaid). If we compare what Medicaid programs across the country were charged by their collective managed care partners for generic Tamiflu 75 mg in Q1 2020, we see charges range from $3.20 to $8.30 per pill despite the NADAC price being $2.38 per pill in the same time frame, as shown in Figure 5.
Figure 5
Source: Data.Medicaid.gov, 46brooklyn Research
Only time will tell if this flu season will be different. Will Medicaid programs will actually see the acquisition-based savings on these drugs transition into taxpayer savings? If past indicators are predictors of future events, probably not. If you don’t believe us – check our work by navigating to the Medicaid Drug Pricing HexMap, selecting a prior year quarter in the drop-down (FYI generic Tamiflu came to market in Q4 2016), and see for yourself the historical approximate $1-$6 gap between NADAC-based acquisition cost and the average Medicaid managed care plan charge. Alternatively, just hover over any state and you’ll see its historical pricing compared to NADAC pricing. For example, hover over to our good friends to the south of us in Kentucky to prove our point quite well (Figure 6). Just because drug costs drop, doesn’t necessarily mean a state, or any payer is going to see those savings. The Bluegrass State learned that lesson the hard way.
Figure 6
Source: Data.Medicaid.gov, 46brooklyn Research
And before the Wildcats hunt us down, know that Kentucky is not alone in dealing with this problem. If you navigate over to our Top 20 over $20 – which tracks the 20 top drugs (ranked by absolute markup dollars) that sported a markup per prescription of $20 or more above NADAC for any state that has managed care – and you’ll see that in Q1 2020, the #1 drug in the country in this category is oseltamivir (generic Tamiflu), with $15 million dollars in added costs due to this markup, as seen in Figure 7.
Figure 7
Source: Data.Medicaid.gov, 46brooklyn Research
5. ADPIT highlights price spike on promethazine syrups
Finally, let’s check in on our Abnormal Drug Pricing Increase Tracker (ADPIT) and see what it has to say about this month’s data. As a reminder, ADPIT takes all of the NADAC prices for one drug over any given 52-week period, ranks them, finds the 90th percentile for the price, and then compares the current price to that 90th percentile price. If the current price is above the 90th percentile, we consider the current week’s price to be “abnormal” and add it to the list for you to peruse. Then we do this for another 20,000 or so drugs for good measure to complete the list, shown in Figure 8.
If this is the first time you are seeing this, we include the number of annual Medicaid prescriptions for each of these abnormally priced drugs, and then two metrics we created – one called Relative Impact Ratio (RIR) and another called Relative Impact Score (RIS). RIR simply tells you how far above the 90th percentile a drug’s price currently is (i.e. Dexamethasone 4 MG/ML Vial at 1.33 means its 33% above its T-52 week 90th percentile price). RIS multiplies the number of annual Medicaid prescriptions by (RIR - 1) to size the impact of the “pricing abnormality” (for cephalexin, 10% x 2,814,095 prescriptions = 285,947). Add up all the RIS for all of the drugs each week, take the four-week moving average, and you get the chart in bottom right of Figure 8 (which sizes the aggregate weighted impact each week). We then divide the bottom right chart into drugs with active ingredients in ongoing COVID-19 clinical trials, and all other drugs. Check out our interactive ADPIT tool here, and find more information on how to use it here and here.
Figure 8
Source: Data.Medicaid.gov, ClinicalTrials.gov, 46brooklyn Research
Overall, the dashboard continues paints a very healthy picture for the generic marketplace. The chart on the bottom right shows that the aggregate RIS is at historically low levels, and the leaderboard doesn’t highlight any high utilization drugs that have blown through their T-52 week 90th percentile price.
But there seems to always be at least one drug that is misbehaving when it comes to price – exactly the type of drugs that ADPIT is designed to catch. Last month, it was the very noteworthy dexamethasone (FYI, this month dexamethasone’s price held steady). This month, it’s the much less noteworthy promethazine syrup and promethazine/codeine syrup (shown above). Both products are generally used to treat a cough.
To be clear, these are drugs with Medicaid volume that is so small that it rounds to a relatively insignificant number. So the point of digging deeper to find out what happened here is not to find lots of money for Medicaid. Instead it’s simply to learn more about the generic marketplace.
That said, we dug deeper and here is what we found.
We quickly figured out that both of these promethazine syrups are highly concentrated markets with only a few players. There are only three labelers that sold any volume into Medicaid in 2019 for promethazine syrup (Morton Grove, Hi-Tech, and Nostrum), and only four that had any 2019 Medicaid volume for the version with codeine (same three as above, plus Tris Pharma). Morton Grove dominates both markets, with 72% Medicaid market share for promethazine syrup and 61% market share for the promethazine/codeine syrup.
Highly concentrated markets with only a few players tend to be inefficient, fragile markets. To understand a fragile market, let’s first look at the opposite – the market for generic Lipitor (atorvastatin). Atorvastatin 10 mg has 20 different labelers participating in the market. Apotex has a commanding 40% market share (again based on Medicaid volume), but large generic manufacturers like Mylan and Dr. Reddy’s are right behind them, also with double-digit market shares. If Apotex were to increase its atorvastatin acquisition cost, there are 19 other manufacturers willing to step in and take their spot. As such, generic Lipitor is an efficient market that should at all times produce a healthy supply/demand-based market-clearing price (just like the stock market).
Increase concentration and reduce the players, and we start to lose the supply/demand-driven price for a generic drug. This is what happened with these promethazine syrups. Morton Grove dominated a fragile market. And then in May of this year, it increased its Wholesale Acquisition Cost (WAC) of both drugs by nearly four times. This sounds worse than it is though, as their last price increase was more than seventeen years ago. Do the math and the 4x increase works out to roughly be a 7% Compound Annual Growth Rate (CAGR) over that period. Nonetheless, these Morton Grove price increases appear to have directly driven the entire market for these two promethazine-based syrups higher.
When most people think about the generic marketplace, they think of drugs like generic Lipitor, generic Lyrica, and generic Prilosec. These are the high-utilization generics with heavy competition and robust markets. While the utilization of this group of generics dwarfs all others, the unweighted number of generic drugs stuck in uncompetitive markets (like promethazine syrup) outweighs those in the high utilization group. So payers can’t ignore these obscure drugs.
Simply put, from a payer’s perspective, the generic drug pricing war is won in the weeds. It’s not about getting a better price on generic Lipitor. Rather, it’s about identifying and tracking generic drugs lurking around in these uncompetitive markets and when necessary, responsively adjusting your formulary to shift away from the ones that are not adding value to your members. And then doing that over and over again as prices change, altering the value proposition of these drugs. Unfortunately, that is every bit as hard as it sounds, but necessary given the design of and incentives throughout the U.S. pharmaceutical supply chain.
A major thanks to Mike Koelzer at the Business of Pharmacy Podcast for his extensive, deep-dive interview with 46brooklyn CEO Antonio Ciaccia about his journey into the abyss of the prescription drug supply chain and his work to create better system for payers and patients.
Additional thanks to Maia Anderson at Becker’s Hospital Review, who highlighted last month’s NADAC findings on dexamethasone’s 137% price increase. It looks like those prices held steady this month, indicating we could be seeing a new normal.