“We Could Use More Focus” Addendum


I saw FiercePharma story on ad spending and thought I’d post a little update.  According the story, AbbVie spent $500 million on advertising for Humira in 2020.  The U.S. is only one of two countries that permit direct-to-consumer advertising (New Zealand is the other), so this figure suggests AbbVie spent about 3% of domestic Humira sales on advertising.  Humira is a late-cycle product (it will be subject to follow on biologic competition in 2023), so this ad figure was down year-on-year, and probably represents a bit of an “under” investment as a result.  AbbVie has two other products it thinks will be blockbusters and is investing behind them aggressively.  These are Skyrizi and Rinvoq.  According to FiercePharma, AbbVie spent $202 million on Skyrizi ads and $176 million on Rinvoq ads in 2020.  These figures represent approximately 15% and 27% of domestic sales, respectively.

These three drugs no doubt account for the bulk of AbbVie’s advertising spend.  The company’s other drugs either simply don’t warrant the investment or involve a much different physician-patient dynamic.  For example, drugs in AbbVie’s oncology portfolio simply wouldn’t be expected to be as sensitive to DTC.  Thus, when I see AbbVie spending about 4.8% of sales, in aggregate, on these three drugs, I feel pretty good about the 5-8% figure I use in my “we could use more focus” piece, and suspect the true industry figure is closer to the lower end of this range in aggregate. 

We Could Use More Focus and Action When it Comes to Pharmaceutical Affordability


On January 12, HCPF sponsored the 2021 Colorado Health Cabinet Health Policy Summit.  As a part of the program, Commissioner of Insurance, Mike Conway, moderated a panel on prescription drug affordability.  While informative, audience questions suggested that the discussion did not fully address factors affecting prescription drugs costs in the state of Colorado.  At the risk of oversimplifying, I will make an attempt to do so here. 


In an attempt to persuade, various stakeholders describe the pharmaceutical industry model in ways that do not accurately portray how drug manufacturers make money.  Often, I will read about how companies spend twice as much on advertising as R&D, which is patently false.  To set the record straight, I’ll do my best here to speak to what it costs to bring a drug to market and to develop and maintain the product once it has been approved. 

Manufacturing.  Loosely speaking, there are two types of drugs – pills and biologically-based drugs.  Categorizing drugs this way is important, because pills are super-cheap to make and biologically-based drugs are not.  Pills are often more expensive to develop, which is why the industry is increasingly trying to develop biologically-based drugs.  When it comes to pills, there is a well-developed manufacturing model.  Companies – often via chemical manufacturing plants in China and India – produce active drug through synthesis (i.e. they take a base substance and modify it several times chemically until they have an active drug someone can eat).  They then make a pill out of it by blending it with inert ingredients and literally pounding it into a pill shape.  This process yields pills that often cost 10-20 cents a unit.  Let’s say you take two pills a day for a year; the math says your pills cost $73-146 for that year.  On the biologically-based side, the manufacturing process is quite different.  While technological improvements are impacting costs in a good waythe vast majority of biologically-based drugs are made by causing living cells to make the active substance in a giant steel vat.  Once the manufacturer makes enough of the active substance, they filter out the impurities and freeze the drug in a specialized container.  These drugs don’t work if simply swallowed, so manufacturers take the active substance and fill syringes with it for injection.  This process yields injection systems that vary widely in terms of cost, but which might run several hundred dollars per unit.  It is typical for manufacturers to pursue biologically-based drugs that can be administered once every month (or even less frequently), which suggests that a year’s worth of drug might cost several thousand dollars to produce.  In sum – pills typically cost low hundreds of dollars for a year’s worth, while biologically-based drugs can run to several thousand dollars.   

Sales, Advertising, Marketing, Administration.  If you look at a pharmaceutical company profit-and-loss statement, you will find a line called “Sales, General & Administrative” or the equivalent.  Different companies use different terms, but it’s all the same stuff.  This line includes several discrete costs associated with a company’s attempts to maximize sales of a product.  As a rule of thumb, roughly one-third of a company’s employees are associated with sales and marketing.  Thus, in order to come up with the costs of promoting a drug, you might estimate what a “fully-loaded” employee costs (e.g. $200,000/yr.) and multiply that by the number of employees dedicated to this function.  Fully-loaded refers to an employee’s salary and benefits load, plus travel expenses, information technology, etc.  It is not clear that the industry needs as many sales and marketing employees as it has (a different topic for a different day), but this is where the industry has landed.  On the advertising line, folks jawboning for affordability often get this figure wrong.  It is rare for a company to support a product with a several hundred million dollar direct-to-consumer advertising campaign.  More often, this figure is much smaller or non-existent, either owing to financial or operational considerations.  Companies do advertise to prescribers, so most products receive advertising supporteven if the direct-to-consumer component is modest.  Overall, advertising spend is often a mid-to-high single digit percentage of sales.  Finally, administration includes costs associated with non-promotional support.  This can include human resources, finance, IT, etc.  Best-of-breed figures for administrative expense run 4-5% of sales in the pharmaceutical industry, and rarely hit double-digits.  Therefore, for a typical prescription drug company, total SG&A might reach 35% of sales, with G&A at 5-7%, advertising at 58%, and sales/marketing accounting for the remaining 20-25%.  If you want to look at this another way, pull up the slides of any major pharmaceutical industry merger.  You’ll see a cost savings figure that hovers around 7% of sales.  That 7% is the elimination of nearly all G&A redundancies, a modest amount of manufacturing rationalization, nearly no net R&D spend (any savings are usually reinvested) and a modest amount of improved vendor contracts. 

Research and Development.  Beyond advertising, R&D is the topic most debated by proponents and critics of the pharmaceutical industry.  It is also the topic where folks deliberately or inadvertently spread the most mis-information.  In most developed nations, there exists a regulatory body that determines whether a prescription drug can be sold and under what conditions.  In the United States, that body is the Food and Drug Administration (FDA).  The FDA requires that drugs are tested exhaustively before they are made available for commercial sale.  Companies have to test new drugs in mice and rats and dogs and monkeys; they then have to test new drugs in small handfuls of people for an initial look at safety, then larger groups of people for a look at both safety and efficacy.  There are two reasons why this is very, very expensive.  First, drugs fail.  For every ten drugs that get tested in a person, one makes it to market.  Second, running trials in people is (too) expensive.  Drug companies deal with specialized organizations that carry out the trial protocols.  They hire the doctors, run the tests and track the outcomes.  If the trial uses a comparator drug, they have to pay for that drug (at full price).  When thinking about the R&D cost of doing business as a drug company, these expenses are largely out of the industry’s control.  It is fruitless to complain about this expense on an individual project basis.  What is in the industry’s control is the number of projects to pursue.  Using comparative effectiveness data and accepted thresholds for what developed countries are willing to pay for improved health, the pharmaceutical industry overspends on R&D.  In other words, for the amount of sales and sales growth the industry generates, it delivers too many failures and too many approved drugs of questionable value.  On another day, I’ll walk through the numbers, but I believe that prescription drug companies ought to be able to spend about 12% of sales on R&D and achieve growth and returns in line with historical averages.  Instead, the average company spends about 20% of sales on R&D. 


Generics.  Advocates for improved drug affordability often suggest we need to speed generics to market as a solution.  This is a heavy lift.  Without changes to patent law, specifically related to prescription drug regulation, widespread relief is tremendously unlikely.  Prescription drug companies do aggressively participate in patent “evergreening” activities in order to maximize the period generics are not available.  However, they do so legally.  The second way prescription drug companies maximize the period generics are not available is by settling litigation in a way that benefits the litigants to the detriment of consumers.  Say a drug isn’t supposed to come off patent until 2030, but the patent is questionable and might be invalidated.  The brand company might settle with the generic challenger and allow that company to introduce a generic product in 2028 in exchange for ceasing its attempts to invalidate the patent.  Supporters of the status quo would assert that the two-year earlier introduction benefits consumers, while detractors would assert that the patent was going to fall anyway, so the generic is “delayed”.  As a practical matter, each case is different, and it would be very difficult to have a broad and material impact on drug affordability by pursuing this matter outside of legislation.  Finally, it is worth noting that only a handful of generic companies have the ability to manufacture biologically-based drugs at scale.  With the industry increasingly marketing these types of drugs, it will take time for generics to impact affordability in this area.   

Importation and Reference Pricing.  For a long time, many have highlighted the fact that other countries pay less for drugs than does the United States.  In order to improve prescription drug affordability, advocates have pursued two models that rely on overseas prices – importation and reference pricing.  Importation involves the purchase and physical delivery of overseas drugs, while reference pricing simply involves capping prices or reimbursement at a level tied to overseas prices.  First, let’s get past the quality issue.  Drugs marketed in developed countries are every bit as safe as those marketed in the United States.  The plants are just as clean, the personnel are just as ethical, and the doses and schedules are typically comparable if not equivalent, thanks to the globalization of clinical development programs.  Drugs marketed in under-developed countries can be less safe than those marketed in the U.S., so it is important that any importation program involve a rigorous track and trace protocol.  The issue with importation rests with logistics and supply.  Countries like Canada and France negotiate directly with manufacturers over what price they pay for prescription drugs.  They then have laws in place that govern the degree to which prices decrease over time.  While manufacturers do make drugs available at these prices, they do so because they make enough money in the United States and selected other markets to more than compensate for the reduced profits they make in places like Canada and France.  If the United States attempted to engage in a widespread drug importation program, the industry would probably make some very difficult and unappealing decisions around restricting supply.  When it comes to reference pricing, there is less the pharmaceutical industry can do beyond lobbying and litigation.  Thus, this is a theoretically tractable solution in the same way that permitting the government to negotiate directly on behalf of the Medicare program is a tractable solution.  From the point of view of the state of Colorado, however, there are probably some other items to consider.   

Colorado has expressed interest in capping permitted reimbursement for prescription drugs as a way of improving affordability.  Pharmaceutical companies would still theoretically have the ability to set their own prices, but insurance companies and retail pharmacies, among others, would not be permitted to engage in commerce at levels that exceeded state-established thresholds.  Think of it this way.  It would be as if Mercedes Benz set the price of its E-Class at $60,000, but the local dealership wasn’t permitted to sell it to you for more than $30,000.  Something would have to give.  The state might use overseas pharmaceutical prices as a reference point for the thresholds, but exactly how is an important element in the impact such a stratagem might have on affordability and the industry’s response. 

Middle-Men.  I include both insurance companies and pharmacy benefits managers (PBMs) in my definition of middlemen.  I could include retail pharmacies and wholesalers, which are certainly actors in the pharmaceutical supply chain, but these entities don’t make much money and aren’t really the problem (beyond being complicit).  Manufacturers and consumers should hate PBMs (and their siblings, the insurance companies).  The PBMs business model is to “save” consumers money on the cost of prescription drugs, but their value proposition is tied inherently to higher prices and price increases.  Rather than focus on whether the net price a consumer pays for a drug is fair, PBMs focus on how much of a discount they are able to negotiate off an arguably inflated list price.  I have a friend in the investment world who calls this the $95 burrito coupon.  Would it make any sense if Chipotle charged $100 for a burrito, but you could get a $95-off coupon from a group purchasing cooperative you belonged to?  bring this up because folks who talk about drug price inflation conflate a number of drug price definitions and confuse those who are trying to learn what’s really going on.  In short: 

  1. List prices are meaningless to all but two groups —  

a. Those paying cash because they don’t have insurance and the discounts insurance provides.  GoodRx (you’ve seen the commercials) has built an entire business around this problem. 

b. Those who have a co-insurance obligation tied to the list price of a drug (often those on Medicare). 

2. There is a tremendous amount of disparity and cross subsidization inherent in our delivery system.  Some of this is due to our reliance on a fragmented and free market approach to negotiating best prices, while some is due to the complex nature of how our governments regulate prices and reimbursement on behalf of programs like Medicaid and Medicare.  For example, HCPF director Kim Bimestefer talks about how Colorado Medicaid realizes rebates that keep drug price inflation under control for the state — that’s simply the law.  Prescription drugs aren’t permitted to increase prices ahead of CPI-U (about 1-2%) without rebating the difference.  The Kaiser Family Foundation goes over the details here: https://www.kff.org/medicaid/issue-brief/understanding-the-medicaid-prescription-drug-rebate-program/.

3. There isn’t just one culprit behind lack of drug affordability in the U.S., but two stand out from the crowd: 

a. Consumers are asked to pay too much of the bill.  Free market theorists love to talk about “skin in the game” and “moral hazard” when it comes to health insurance, but it is pretty shortsighted to ask a Type I diabetic to make a co-payment for a drug he/she can’t live without.  Affordability reforms should center on applying a little more sophistication here. 

b. Drug companies are free to set price and determine price increases.  This is a stickier wicket from a policy point of view.  In countries like Canada and France, drug companies are also “free” to determine prices, but whether they’ll be reimbursed is highly centralized and not assured: hence, the air quotes.  This is not the case in the U.S.  PBMs do have exclusionary lists tied to their formularies, but this is a relatively recent trend and there’s almost always a strong alternative available.  Again, because drug companies can cross subsidize lower overseas prices with higher U.S. prices, they usually agree to a lower price in Canada, France, etc.  In 2011, Eli Lilly and partner Boehringer Ingelheim did refrain from launching the diabetes drug Tradjenta in Germany because the authorized price was too low.  This represents a rare exception.


  1. Drug companies do make too much money, but reformers are chasing too many ghosts. 

a. Most pharmaceutical companies’ profit and loss statements are “legit”, if not slightly wasteful.  The model of pursuing high-priced, specialty pharmaceutical markets has left the industry earning margins above 40%! 

b. The Colorado debate focuses on pharmaceutical pricing and costs quite broadly, but mostly misses the real issues.  Most people in Colorado have drug coverage through their employer and these are the people 1) most likely to be happy with their insurance, 2) most able to afford their medications and 3) out of reach of the state in terms of regulations (they are more likely than not to be covered by ERISA plans).  Putting out 200-page reports and citing statistics selectively distracts from what problems really need to be addressed (benefit designs, inefficiencies) and what can be accomplished at the state level. 

2. Direct-to-Consumer advertising is not the problem.  Stop griping about it. 

3. Generic substitution is not the solution.  Focus elsewhere. 

4. Slashing sales and marketing while boosting R&D won’t get us anywhere. 

5. Similarly, calling for transparency around costs is pointless; there is no scope to regulate this, and costs are largely unrelated to price, but for short-term budgetary challenges. 

6. Getting tough on price can help, but just how matters. 

a. The Medicaid inflation-linked rebate has been immensely helpful.  Establishing such a mechanism for other populations (e.g. commercial risk and managed Medicare) could be helpful if it were to survive legal challenges. 

b. Rudimentary approaches to price-setting invite unanticipated knock-on effects.  For example, using another country’s price, where circumstances are much different, is much more likely to invite a legal challenge or non-compliance than is a price determined through a rigorous and informed return-on-investment approach.  It is also more likely to pressure ancillary industry participants in unanticipated and undesirable ways.

c. There may be simpler ways to improve affordability without attacking the industry’s pricing structure, which is considered sacrosanct.  One possibility would be to impose a luxury tax used to fund patient assistance programs.  Products subject to taxation could be determined by a pharmaceutical affordability board.


A Non-Scientific COVID Thought


The Case for Low-Occupancy Elevators 

I was listening to the Washington Post Reports on podcasts while running this morning.  At the end, the podcast had a little blurb on elevators that I found interesting, but unsatisfying.  In it, the reporter, Ben Guarino, talked about elevators being unique, enclosed, etc., then made reference to a few things that “we” should do (e.g. use high efficiency air filters, maintain spacing), primarily based on his opinions.  That was it.  If felt like the piece lacked a bit of what’s referred to as “solutions journalism”, which essentially means you report the information, but you also offer some specific (even evidence-based) advice.  Here’s just a bit more on the subject of elevators, if you are returning to work in the time of COVID: 

Case 1.  Touching. 

I’ll take the most liberties v/v science here, just based on personal experience.  Most people don’t touch one another in an elevator, unless it is packed.  In the era of COVID, I’m guessing people will try to avoid packing elevators.  Don’t touch other people if you can help it. 

Case 2.  Respiration and Synchronous Occupancy. 

Say you’ve been working from home and staying healthy.  You wake up Monday and get to the office first.  You ride the elevator alone up to your floor and begin work at your desk.  That elevator ride sure seems low-risk.  The chance of you giving yourself a new coronavirus infection is, um, zero.  Say, instead, you arrive at the same time as another eager beaver and ride the elevator together.  Now, the chance of one of you sneezing, coughing, breathing and giving the other coronavirus is non-zero.  However, it’s still low, because the chance of one of you having COVID is based on two persons, conditional probabilities and the prevalence rate for your population.  Say, instead, there are three of you.  Not only do the risks and consequences of transmission increase because there are now three people who might pass on the virus, but because there are twice as many potential recipients as in the two-person case.  The bottom line here is that you want as few people on the elevator as possible at any given time. 

Case 3.  Respiration and Asynchronous Occupancy. 

You might also be worried about riding an elevator after an infected person rode it.  If that person coughed or sneezed, are there droplets on the surfaces of the elevator?  Are there still smaller droplets floating around the elevator compartment?  Based on a review of some literature on the subject, I would assert that small droplets are the bigger concern.  According to an article by Justin Morgenstern, found here: https://first10em.com/aerosols-droplets-and-airborne-spread/, droplets are often “divided into small dropletsand large droplets. Large droplets drop to the ground before they evaporate, causing local contamination. Disease transmission through these large droplets is what we often refer to as “droplet/contact spread”, where disease transmission occurs because you touch a surface contaminated by these droplets, or get caught within the spray zone when the patient is coughing. Aerosols are so small that buoyant forces overcome gravity, allowing them to stay suspended in the air for long periods, or they evaporate before they hit the floor, leaving the solid particulate (“droplet nuclei”) free to float very long distances, causing what we often refer to as “airborne” transmission. (Nicas 2005; Judson 2019).”  Just as with other surfaces, you can wash your hands or use antiseptic after touching the surfaces of elevators (buttons, handrails, etc.).  Thus, large droplets are a risk you can manage.  Aerosols remain in enclosed spaces for several minutes after someone sneezes or coughs.  Just how much and for how long is determined by air exchange (e.g. elevator doors opening and closing, ventilation systems, etc.).  In a situation in which you enter an elevator and don’t know who was in it before you, it is hard to judge or control your aerosol risk. 

Case 4.  Combined Synchronous and Asynchronous Risk. 

Xiaoping et al., conducted a study in which the authors simulated respiratory droplet distribution that can be found here:  https://www-tandfonline-com.du.idm.oclc.org/doi/full/10.1080/10789669.2011.578699 

In the study, the authors found that there were two risks to a room co-occupant – direct and indirect. The greater risk, as modeled, was direct exposure to droplets.  This is when someone sneezes or coughs in your direction.  The lesser risk was indirect droplets (small droplets that aerosolized and filled the room).   

The following table comes from the Morgenstern article, although it’s adapted from a 2006 study by Morawska: 

Note the numbers and distribution of small aerosols.  While it’s highly unscientific, I draw the following conclusions from these data and my readings on this subject: 

  1. Wear a face covering.  Most people reflexively tell you to do so to protect others (which is true), but I also think it protects you in this case.  Check out the simulated cough data from the Xiaoping study: 

Ask yourself — would you rather have a barrier between you and the person doing the coughing?  Sneezes and coughs travel, so “social distancing” in an elevator isn’t sufficient.

  1. Exit the elevator if someone does cough or sneeze (maybe even hold your breath?).  As you can see from the time measurements above, it takes seconds for a room to fill with aerosolized particles (or carbon dioxide, as is modeled in this case), once someone coughs.  Indirect exposure is inevitable, but you can minimize the time you are exposed. 
  1. Don’t talk (or sing) in the elevator as a courtesy.  You may be infected and asymptomatic, and everybody should do their part.  Plus, who knows if you can carry a tune. 
  1. Encourage your company or building manager to take steps to reduce risk.  A simple rule might be to limit elevator occupancy to four people at once (if it’s an ordinary office-building sized elevator).  The building manager could also conduct cleanings more frequently, take elevators out of service periodically if there’s a concern around asynchronous transmission, etc.  Your employer might offer added flexibility around work hours in order to reduce peak elevator utilization. 
  1. Pay attention and adapt.  If you are worried about riding the elevator, use it at off-peak times or take the stairs.  Maybe even learn a bit about the elevator’s ventilation system and whether it helps with airborne viruses. 

The following two articles are interesting reads that provide some added information on the topic: 



Media:  Some Opening Thoughts

Media & Communications

After having spent some time reading, communicating and listening on the topic, I’m ready to start posting on my new passion, Media and Communications.  I intend these first posts to inform in the era of COVID, and to draw readers’ attention to the podcast, which I believe is (at least currently) a superior form of news dissemination.


In the movie industry, much has been made about the successful release of Trolls World Tour, which was released directly to streaming services in April.  According to an article by The VergeTrolls World Tour took in nearly $100mm in its first three weeks of availability, which is certainly quite respectable in the context of a $90mm budget and in light of a more favorable split of gross revenues to the studio.  However, I believe it’s important to remember that this is possibly a best-case scenario for such a release.  First, Trolls World Tour was released in early April, when the countrynew infection rate and travel restrictions were at a peak.  In other words, people had few alternatives but to tune into new theatrical releases over streaming services.  Second, Trolls World Tour was one of only a handful of movies to be released, rather than postponed.  This will almost certainly not be the case by next summer, when the industry’s inventory is bulging at the seams. 

United States new coronavirus cases – accessed May 28, 2020 

Source: University of Washington coronavirus model 

Arguably, the near-future presents significant challenges for studios.  The model had been to release new blockbusters to 4,000 screens and make a significant amount of money in a relatively short period of time.  Here’s Trolls’s box office take, according to boxofficemojo.com (accessed May 28, 2020):  

As states and theaters reopen, people won’t be spending as much time at home.  Studios won’t initially be greeted with the possibility of 4,000 open and packed theaters as a means for content distribution.  Only a fraction of these theaters will be open, and audiences will likely be much smaller for each showing.  Theaters, confronted with their own economics (i.e. that of making most of their profits on weekends) will have to make a calculated decision regarding when and whether to open at all. 

In others words, at least in my opinion, the economics of a theatrical release won’t look that great, and neither will a pure digital release.  For those that are interested in trying to read tea leaves, watch for news on Christopher Nolan’s “Tenet”, which is still slated for a July 17 theatrical release.  Warner Brothers spent over $200mm to make the film ($300-350mm, if promotion is included, according to IndieWire)so the stakes are certainly high.   


Switching gears, I wanted to highlight a recommendation.  For those of you who are interested in factual reporting and haven’t actively engaged with journalism podcasts, I am here to encourage you to do so.  Podcasts offer several advantages over other forms of journalism, and they may represent one piece of the remedy for the partisanship that seems to pervade mainstream and online journalism.  As I see it, podcasts offer you the following: 

  1. The truth (more or less).  I’m sure you need to be choosy, but I’ve found that many of the podcasts put out by even mainstream franchises offer a much less biased view of the facts.  The example I will give here is Rabbit Hole, by the New York Times.  While it’s true, Rabbit Hole is still a product of a north eastern narrator and narrative, the product is more of an exploration of the effects of social media outlets like YouTube than a polemic on the persons profiled within. 
  1. Access.  Podcasts are usually free.  I listen regularly to the Washington Post’s Post Reports podcast, where I’m unwilling to subscribe to the Post, which uses a hard paywall for its content.  As with Rabbit Hole, I find Post Reports to be relatively unbiased (borderline didactic in some cases), which makes for low blood pressure listening. 
  1. The voice.  Unlike with the written word, podcasts let you hear the voice of those doing the reporting and those being reported on.  It’s a different and often better experience.  The only thing you don’t get is a visual representation. 
  1. Time assurances.  For those with a schedule, podcasts are ideal.  If you are going on a run, you can pick a podcast that fits your budget.  It’s right there!  If you have 45 minutes before your next Zoom meeting, bingo! 

For anyone who wants a recommendation, my current three favorites are Inside the HivePost Reports, and Reveal. 



Why Governor Polis won’t sign a Public Option into law this year. 

First.  Sentence.  I am not here either to support or express opposition to the Colorado State Option for Health Care Coverage (the new name for the Public Option).  I am here to analyze the situation... 

It was January 14th, and state lawmakers descended on the University of Denver campus to kick off the legislative year with their “Big Ideas”.  (With the temperature hovering right around freezing, and with snow beginning to fall, I decided to take in the event via a live stream.)  Governor Polis kicked off the session by talking about a “Public Option” for Colorado citizens, and why it would both reduce health care costs and the ranks of the uninsured.  He has since advocated vociferously on its behalf.  However, by January 19th, the CEO of Centura Health posted an editorial to the Colorado Sun explaining how adopting the Public Option was unsustainable and would potentially cause employers to drop coverage, thereby reducing access.  At various times, hospital and health plan industry groups have expressed their opposition to the proposal. 

As I see it, there are at least two major reasons the Public Option will not be passed into law this time around.  One is a policy reason, and the other is a marketing reason.   


For those who still struggle with what the Public Option is, here is a concise version.  Some people buy health insurance the way they buy car insurance.  They shop for and buy an individual policy that covers them or them plus their family.  If there is a Public Option, the government would artificially set the price for hospital care below the price the hospitals would otherwise charge and pass that savings on to people who buy individual health insurance.  According to Connect for Health Colorado, about 170,000 Coloradoans have private medical insurance purchased through the exchange (roughly 3% of the state’s population).  https://connectforhealthco.com/metric-and-reports/


From a policy point of view, I believe the proposed legislation (HB20-1349 for those who want to look it up here: https://leg.colorado.gov/bill-search?search_api_views_fulltext=HB20-1349) lacks one key ingredient – carrots for Colorado hospitals and health plans.  As a consequence, it is not surprising to see those industry participants oppose the legislation.  Here are their respective statements: 

Colorado Hospital Association: 


Colorado Association of Health Plans: 


In order to help the hospitals partner to reduce health care costs, the Public Option needs to help hospitals become more efficient.  For background, here is an example of what a hospital’s financials might look like: 

By reducing the hospital’s revenue without helping reduce its cost, you are driving it from break-even to loss-making.  (Yes, there are many Colorado hospitals operating well above break-even, but there are also many who are notexplaining the bill’s varied intended effects offers a high degree of difficulty).  Politically, it is difficult to get after labor costs (50%), because those are salaried doctors, nurses and so forth.  It is also difficult to get after “other” expenses, b/c those are items like rent, repairs and maintenance, insurance, etc.  What might work is getting after supplies expense.  Just as with prescription drugs, many supplies are highly priced and quite profitable for those that manufacture them.  Hospitals pay very different prices for these supplies, and there is very little transparency around contracts.  Colorado might explore the creation of a purchasing pool for high-priced, high value supplies and let hospitals and other appropriate entities in the state participate.  If, by doing so, hospitals could reduce their supply costs by 15-20%, this would create room for the State Health Option.   

For the insurers, the main complaint, beyond the fact that you are creating a bad precedent, is that the Public Option proposal puts an awful lot of power in the hands of the Commissioner of the Department of Insurance.  Among other elements, which can be found in the Bill, the Commissioner would be required to ensure that there are at least two health insurance carriers offering the Public Option in every county in the state.  Currently, Anthem Blue Cross/Blue Shield is the only carrier in 22 counties.  Thus, if the Bill is not amended, the Commissioner would be authorized and compelled to make at least one other carrier compete in those counties.  This is the equivalent of telling Burger King – “folks in Summit County only have a McDonald’s in town, so you have to open a store”. 


Governor Polis and other proponents of the Public Option have primarily argued that “it’s the right thing to do.  Colorado hospital prices rank among the nation’s highest, and Colorado hospital profitability is second only to Alaska.  However, one of the main arguments against the Public Option is that it will hurt smaller hospitals and, potentially, force those to reduce services lines or, worse yet, close.  Indeed, in January, Memorial Regional Health in Craig closed its labor and delivery department.  According to the Colorado Rural Health Center, 18 rural hospitals in Colorado are loss making and, according to a report produced by FTI consulting in concert with the Partnership for America’s Health Care Future (an industry lobbying organization), 23 rural Colorado hospitals would be at risk of closing should the Public Option pass. 

Paradoxically, part of the intended effects of passing the Public Option into law is to redistribute wealth amongst the state’s hospitals.  Many rural hospitals would actually fare better financially with the Public Option in place, compared to the status quo.  However, the Bill’s proponents and sponsors have not latched on to this message.  The title of the Bill ought to be “Defending Access to Quality Health Care in Rural Colorado”.  Proponents could then speak to the fact that many rural hospitals need help, many rural communities do not have enough practicing physicians, and many rural residents have access to only one health insurance carrier. 


Before the Bill text came out and the world fell victim to COVID-19, it was not clear whether HR20-1349 would pass.  Now that 1) the proposal is in print, including not only the issues I present above, but the enumerated expansion of the Public Option to the small employer market2) stakeholders have developed their positions fully, 3) COVID-19 has ripped through hospital financials like a tornado, and 4the legislature is not set to reopen until May 18 (reminder: the fiscal year begins July 1), I think we’lbe revisiting this in 2021. 


EXAS: A Class Assignment Turned Investment Idea


As with everything that I will post to the investing section of this blog, the following should not be construed as investment advice.  It is simply meant to be the ramblings of a now-retired individual with some time on his hands.  I am not affiliated with any organization and have no interest in publishing other than for the intellectual exercise.  While I make an effort to be accurate with my facts, I do not assert that any of the following information is 100% reliable.  If I own a stock upon which I comment, I will always say so.  In  this case, I own Exact Sciences (EXAS) in a personal account.

So, the background to my interest in Exact Sciences stems from having done research on colorectal cancer screening for a class on multicultural health communications.  In doing so, I came to appreciate that efforts to improve screening adherence were significant, and that there were several populations that Exact could access with Cologuard.  In aggregate, these opportunities should allow Exact to grow at substantial rates for the foreseeable future. 

Quick Background: 

Exact Sciences sells Cologuard, the stool-based test that is approved for colorectal cancer screening and included in guideline recommendations as one alternative.  The company takes in about $480 per test and generates a mid-70s% gross margin.  These are good numbers for a medical technology company, since the price is reasonable, and the margin is strong enough to support high FCF margins at scale.  In the fourth quarter, Exact’s screening revenues grew 60% to $229.4mm (>$900mm annualized). 

Colorectal cancer is one that, if caught early, can be treated relatively effectively.  I won’t go into all the details, but local and regional CRC boast 5year survival rates of 90% and 71%, respectively.   Patients diagnosed with advanced CRC have a 14% chance of being alive 5 years post diagnosis. 

For years, the U.S. Preventative Services Task Force and the American Cancer Society (ACS) recommended that persons begin screening for colorectal cancer at age 50.  However, CRC impacts a lot of persons younger than 50, and they tend to be diagnosed with more advanced disease as a result.  These are persons in their prime, so the impact on them and loved ones is outsized.  The rate of CRC incidence in persons under the age of 50 is growing at an outsized clip, which is in part why the ACS recently changed their recommendation to persons aged 45 and above.



Given the weight of the ACS recommendation, a lot of other entities have begun to follow suit.  In Colorado, for example, legislators should eventually hear a Bill that would mandate that all insurance companies regulated by the DOI cover screening beginning at age 45. 

Racial/ethnic disparities exist when it comes to colorectal cancer screening.  I’ll skip the detailed data here, but there are several reasons for this.  African Americans, Latinxs and Asian Americans do not trust the medical establishment as much, they tend not to have access to colonoscopy facilities to as great a degree as whites, and there is a stigma associated with screening for some subpopulations.  As the U.S. ages, the percent of persons of color reaching the age where screening ought to begin is growing.  Today, 30% of candidates are non-white.  Importantly for Exact Sciences, 1) there are significant efforts being made to close these racial disparities (in the form of PSAs, outreach, etc.), and 2) many of the barriers to screening lie with colonoscopy, not Cologuard. 


There are a few approved and recommended CRC screening technologies.  Two of these, in theory, compete directly with Cologuard.  These are FOBT (Fecal Occult Blood Tests) and FIT (Fecal Immunochemical Tests).  However, FOBT and FIT are not as comprehensive as Cologuard, nor are they as easy to take.  Most importantly, however, they are much less well known.  I spoke with a friend recently who indicated she wasn’t even aware of the non-invasive alternatives until she saw the Cologuard commercials.  The other primary competitor to Cologuard is colonoscopy.  It is an entrenched way of screening for a couple of reasons.  First, it allows doctors to remove polyps (cancerous or pre-cancerous) during the exam.  If you get Cologuard and a positive result, you must schedule a colonoscopy as a reflex exam.  Second, colonoscopies are big source of revenues for gastroenterologists and the facilities in which they work.  Thus, I don’t think we’ll see colonoscopies go away entirely.  However, I do think Cologuard will fit into the continuum as a complement to colonoscopies.  For populations for which colonoscopies carry a big stigma (African American malefor example) or for which colonoscopy represents a monetary and structural challenge (rural populations, those of low socioeconomic status), Cologuard is clearly the better first option. 

Based on a review of Exact Sciences’ advertising and promotional activity, I think the company has some (productive) work to do.  Thus far, I think the company has largely ignored the low hanging fruit from an adherence point of view.  Advertisements target a white audience with white characters and messages.  There no Spanish-language advertisements I’ve been able to identify and the Cologuard patient welcome guide was only recently made available in other languages using a literal English translation. 

Governance (based on behaviors and documentation) and management appear to be pretty good.  I know and like several members of the B.O.D., although I don’t know the executive team.  Most of the executives from Genomic Health have left, so the transaction is clean.  Still, it remains to be seen how the cultures mesh (or don’t). 

Market Opportunity: 

According to Exact, there are about 106mm persons aged 45-85 in the U.S. at average risk of developing CRC.  We will never screen 100% of the recommended population.  Based on data for the most adherent populations (high socio-economic status whites), it’s possible we’ll achieve screening rates between 70% and 80% with time.  At 70% adherence and assuming persons get screened every three years (the current ACS recommendation and Medicare reimbursement schedule), the market opportunity in the U.S. alone is $12bn.  (In its presentation, the company points to an $18bn market, using a slightly higher price per test and not haircutting for practicality.) 

Today, the company has about 5% of the U.S. screening market.  Whether Cologuard runs out of gas at 15%, 25% or 35%, there’s a long way to go in theory. 

Other Assets: 

Genomic Health.  Exact is trying to build a diversified cancer testing company.  In July 2019, Exact announced it was buying Genomic Health for $2.8bn.  In November, the company closed the transaction.  Genomic Health is a breast cancer testing company, not dissimilar in focus to Exact.  The company sells a product called Oncotype Dx, which is used to grade breast cancer and determine what therapy to take, as well as a woman’s risk of experiencing recurrence.  It is not growing nearly as fast as Cologuard, but it is a valuable, high-margin diagnostic, and the business model is moreorless the same (in this case, the doctor obtains a specimen and sends it in).  There are potential integration risks, but there shouldn’t be any funky revenue-recognition alignment issues, etc. 


Liquid Biopsy.  I’m not sure if what Exact Sciences has in liquid biopsy is any good or not.  If it’s good, it’s very valuable.  If not, I hope the company realizes as much and shuts things down.  Liquid biopsy is probably the hottest area in cancer diagnostics right now.  It involves screening and diagnosing cancer from a blood sample, which turns hard to access and early cancers into tractable problems.  Guardant Health is probably the leading publicly-traded company pursuing liquid biopsy, and it has a near-$7bn market cap (on 2020 revenue guidance of $280mm at the mid-point). 


In rough numbers, EXAS bought Genomic Health for $1.1bn in cash and 17mm shares.  The company is now approaching 150mm shares outstanding, and the stock price is ~$60/sh.  Based on the timing of the close and EXAS’s cash balance, it looks like the cash has transferred — ergothe year-end balance sheet ($320mm cash/MS, $830mm debt) should represent the current stateofaffairs.  On these numbers, Exact’s EV is roughly $9.5bn, against previously issued revenue guidance of $1.6bn for 2020 (~6x).  Exact’s management recently withdrew 2020 guidance on COVID-19 disruption, so it’s unclear what the near-term run rate is going to look like.  I think it’s safe to say, though, it’s going to look quite bad.  Colorectal cancer screening is clearly not top-of-mind right now, and it probably won’t be for a quarter or two after COVID-19 fears subside.  For this reason, I think it probably makes sense to be patient with EXAS.  That said, when the dust settles, I think this is a very intriguing opportunity.   

Reducing Prescription Drug Costs in Colorado


An Evaluation of the Department of Health Care Policy and Financing Report, Reducing Prescription Drug Costs in Colorado

Last week, the Colorado Department of Health Care Policy and Financing (HCPF) published a report on prescription drug costs in Colorado and what might be done to bring them down. It’s an extensive report, so I thought I’d distill some of what was discussed, as well as provide an evaluation of some of the proposals contained within.

For those who are interested in a little background and rhetoric concerning trends in drug prices, costs and utilization, feel free to read pages 11-14 of the report. These pages are concise and informative.

The true conclusions HCPF draws begin on page 15, within a section entitled “Major Drivers of Prescription Drug Prices”. HCPF covers 11 drivers, to which I’ll add my two cents below:

  1. Patent Protections. HCPF faults the pharmaceutical industry’s habit of evergreening patents in order to extend the period under which companies enjoy high prices and exclusive marketing rights. A simple example of evergreening might be to reformulate a pill that’s taken three times a day in order to provide the convenience of once-a-day dosing. The manufacturer would then ask for a new patent on the improved formulation. While evergreening is definitely something the industry does, it is much less successful than it was years ago. Today, Pharmacy Benefits Managers (PBMs) and their clients (states, employers, etc.), simply won’t pay for these incremental improvements. Thus, in most cases, drug exclusivity and monopoly pricing usually expire at the time the composition-of-matter patent expires on a drug. What’s more, while evergreening does add to the cost of pharmaceuticals in the U.S., there isn’t an obvious fix to what we do already. Generic companies challenge patents all the time and now even use a new technique known as Inter Partes Review, which accepts a lower standard for defeating patents.
  2. Anticompetitive Practices and Price Fixing. In addition to evergreening patents, HCPF alleges that the industry engages in anti-competitive behavior in order to protect profits. Specifically, the report asserts that brand companies pay generic companies not to introduce low-priced alternatives. As a point of fact, this is a correct statement. However, the reverse payments brand companies make to generic companies aren’t terribly common, nor are they usually major drivers of pharmaceutical cost. The most important element is the fact that brand and generic companies “split the baby” by settling on a date upon which the generic company can launch. This is usually a date after the expiration of an early patent, but before the expiration of a later patent. By agreeing to a date certain launch, both sides take the risk of a total legal defeat out of the equation. In my experience, companies do abuse this stratagem, but not egregiously. What’s more, the issue has been challenged legally on numerous occasions, with the industry position being upheld virtually every time.
  3. Specialty Drugs. Look up the definition of a specialty drug online, and you’ll get 100 answers. In theory, a specialty drug is one that requires special handling, packaging, patient support, supply chain management, etc., but the practical answer you’ll get from pharmacists is that a specialty drug is just an expensive drug (usually for a small population). In its report, HCPF points out that the industry has focused its R&D efforts disproportionately on specialty drugs and that their introduction is contributing significantly to costs. This is all true. However, this is an artifact of a few factors. First, the industry is struggling to identify widespread diseases with addressable unmet needs. Certainly, this issue should be the industry’s to solve. However, because the industry hasn’t yet figured out a solution, it’s turned to charging very high and sometimes unjustified prices. Second, the Medicare Part D drug benefit splits the costs of catastrophic coverage 95% government and 5% patient. Thus, by charging extremely high prices, the industry knows it can put the onus on the Federal government disproportionately. There are some green shoots regarding new value-based models of drug pricing, as well as Part D reforms that might help blunt the specialty drug trend, but I don’t think we should expect any dramatic changes near-term.
  4. Hospital Pricing Mark-up and Site of Care Pricing Differentials. This is probably the first issue on HCPF’s list that both can and should be addressed. At issue is the fact that providers direct where a patient receives outpatient injectable drugs. Since health insurers and governments typically pay more in a hospital outpatient setting when compared to a clinic or doctor’s office, providers direct patients to get their infusions at the hospital. Drug companies certainly help sustain this practice when it is in their interest. Johnson & Johnson, for example, made it very difficult for physicians to prescribe Pfizer’s Remicade biosimilar, Inflectra, by contracting aggressively with hospitals and physician groups. Unfortunately, industry lobbying and litigation works, and both hospital and pharmaceutical trade associations have fought hard against “site neutral payment policies”, which is the term of art for this issue. In fact, the Trump administration is currently appealing an adverse ruling relating to its own site-neutral payment policy governing evaluation and management services. While I consider this to be a tractable problem under the umbrella of runaway drug costs, injected and infused drugs administered by medical professionals are a smallish part of the overall drug bill. For reference, the Kaiser Family Foundation estimates that Medicare Part D (patient-administered) drug spend runs nearly 4x that of Medicare Part B (drugs administered incident to medical professional services).
  5. Medicare’s Inability to Negotiate Prices. When the Medicare Part D drug benefit was created, legislators included what’s known as the “non-interference clause”, which prevents the Federal government from negotiating prices with manufacturers directly. HCPF would like to see this change, because it would no-doubt lead to lower drug prices. I agree. Perhaps we’ll see movement on this issue once the next election cycle has been concluded.
  6. Prescription Drug Rebates. The report covers a few of the elements of why rebates are ground zero in the debate over drug pricing. Conceptually, a rebate is a reduction in price offered after the achievement of some performance goal (for example, a certain level of market share), where a discount is a price reduction offered up front. What makes drug rebates so problematic is that PBMs and their counterparties keep all their rebate contracts secret. Thus, buyers don’t really know if they are getting the best deal, and patients don’t know what to expect from year to year in terms of out of pocket expenses. Because the rebates aren’t part of the net price known at the outset of a plan year, patients end up paying co-insurance on an inflated price.
  7. Pharmacy Benefit Managers (PBMs): Pricing, Profits and Consolidation. HCPF asserts that industry consolidation has helped engender an acceleration in PBM industry profits. This is probably true to some degree, but large customers (states, large employers) have never enjoyed many options when it comes to PBM services. Often there are only a few PBMs involved in a price check or Request For Proposal (RFP), and survey after survey suggests that price is only one component of a client’s ultimate decision. As with intellectual property reform and the pay-to-play debate, I doubt we’ll get relief regarding antitrust issues any time soon.
  8. Prescription Drug Promotional Marketing. Number eight on the list has to do with the fact that the U.S. is one of the only countries in the world that permits prescription drug companies to advertise directly to consumers (DTC). While I don’t have empirical evidence beyond the anecdotal here, I think that HCPF may have a decent argument. It’s not uncommon for a consumer to hear of a new drug and ask for a trial from his or her doctor. A doctor isn’t in the business of denying care, so he or she may comply so long as the drug is perceived to be safe and well-tolerated. Earlier this year, the Trump administration tried to take a small bite out of drug companies’ DTC advertising efforts by mandating that companies disclose their prices in DTC ads; however, industry challenged Trump’s rule and a judge subsequently ruled in industry’s favor.
  9. Marketing to Physicians. Drug companies still market aggressively to physicians. However, where efforts used to include lavish trips and gifts, the industry and physician groups have self-policed to a significant degree. There’s little question offering speaker bureau appointments and conducting continuing education symposia lead to higher levels of prescribing (if they didn’t, industry wouldn’t bother), but the impact of these activities is probably much reduced from years past.
  10. Lobbying Contributions to Drive Industry Policy. HCPF rightly raises lobbying efforts as a major driver of drug costs. As with clandestine rebate contracts, I put this one high on the list of culprits. Drug companies spend like no one else, and they defeat nearly every initiative designed to uproot their outsized levels of profitability (HCPF could easily write another 50-page report on the various wins industry has racked up over the past decade). I’m repasting a graph from the report for effect. For context, remember that drugs are only a small part of our health bill; however, the industry is immensely profitable and very well organized, which is why we rarely see Congress take action.
  11. Rising Prescription Drug Manufacturer Profits. Number eleven is simply a corollary to number ten. A typical prescription drug gross margin is better than 90%. Operating margins, before R&D expense, typically approach 50-60%.

(Pages 28 and 29 of the report highlight other states’ initiatives, in part to inform some of the recommendations for Colorado that HCPF covers in the ensuing pages.) 


What does HCPF recommend for Colorado, and does it make sense? 

Beginning on page 30, HCPF outlines its “Solutions for Colorado”.  The Department offers a long list of specific proposals and potential areas of exploration.  Thus, for the sake of brevity, I’ve classified these proposals into three broad areas – transparency, value-based pricing and drug benefit best practices.  I’ve also quickly included a fourth area – the notion of importation. 


HCPF offers several remedies intended to help customers 1) better understand how drugs are priced, 2) get the best deal, and 3) protect themselves from arbitrary price increases.  These initiatives make sense, and many should be enacted/promulgated immediately.  Here are some examples: 

  • Mandate that manufacturers provide ample notice when they plan to take a price increase of greater than some percentage (10% seems like a good #).  Moreover, demand that manufacturers provide an explanation for the price increase.  Sometimes, it might be justified:  for example, if they have to source from a different active ingredient supplier, leading to increased input costs.  Other times, it may have to do with nothing more than a desire to “hit numbers” or take advantage of a competitor’s supply issues. 
  • Mandate that PBMs disclose and pass on 100% of any remuneration received from manufacturers for market share, formulary access, etc.  This includes, but is not limited to, rebates.  For Colorado in particular, this kind of initiative could be very impactful.  The state’s Medicaid receives 100% of rebates from its PBM partner, resulting in the trend we see below (from the report): 

Notice not only the absolute dollars at stake ($557mm in 2018!) but the year-on-year trend in rebates paid (26% compounded over four years!).  Without 100% pass-through, Colorado’s pharmacy expenditures would have grown 14.7% instead of 5.7%, on a compounded basis.  As the report notes, Colorado is a small business state.  These are exactly the kinds of organizations that don’t have the negotiating power or sophisticated human resources consultants at the ready in order to obtain comprehensive pass through arrangements with PBMs.  Thus, it’s great to see the state supporting full transparency and pass through arrangements.  

  • In a section that bridges transparency and best practices, HCPF encourages the adoption of utilization best practices (implementation of tools like prior authorization and step therapy), as well as PBM negotiation best practices (e.g. working to avoid common PBM tactics like offsetting lower rebates with higher administrative fees, disadvantageous terms on mail order fulfillment, etc.).  HCPF suggests that there’s room to provide employers with information and support in this regard. 

Value-Based Pricing: 

Under the value-based pricing umbrella, HCPF riffs on ways to avoid unjustified price increases and paying for overpriced therapies.  The report does not specifically cover what I’ll call Intelligent Pharmacy Benefit Design (iPBD) — customized financial constructs that incentivize consumer and vendor behavior in a more bespoke manner – although this could, in theory, be a part of the solution. 

  • HCPF suggests that the cost of new treatments be compared to that of current treatments.  This is what’s known as comparative effectiveness, and really ought to be employed for all health care products and services.  Health Technology Assessment (HTA) organizations do this kind of work and already reside both within health insurers and independent entities.  
  • HCPF recommends evaluating patents for evergreening, and this too could be handled by HTAs.  If a new product only offers incremental value, it’s perfectly reasonable to incentivize the use of a currently available alternative. 

iPBD, a Term I Just Coined

For better or worse, health care coverage usually spans a year, at which time you choose to renew or change plans.  Obviously, you can stop paying premiums at any time, at which your coverage will lapse.  Drug benefits mirror this construct.   While today’s pharmacy management systems permit creative plan designs, most plans incorporate only a few blunt, and sometimes counterproductive tools (clinically speaking).  For example, each time a patient picks up a supply of medication, he or she pays a co-pay or co-insurance.  Insurers call this “skin in the game”.  However, co-payments don’t really make a ton of sense for most prescription drugs.  A patient can only receive supply enough for one individual (to go beyond this, the doctor would be committing fraud), and benefits and side effects are specific to that drug and disease.  If the patient ought to be getting the therapy (they’ve paid for access through their premiums and the physician thinks it’s appropriate), why provide them a financial disincentive to do so?  One obvious stopgap would be to have the patient pay a co-pay for the first script in a plan year, then nothing more so long as the patient continues to pay his or her premiums.  If this approach were to be adopted, significant consideration would need to be paid to two issues, 1) front loading any financial incentives to choose one therapy over another and 2) the comparative effectiveness of various alternatives.

  • Today, many plan designs include a deductible that must be met before benefits kick in.  Thus, for persons in high-deductible designs, the notion of a front-loaded year is already well understood.  HCPF, the DOI or others directing health policy in Colorado could take into consideration desired vs. current consumer behaviors in crafting a one-time financial obligation (deductible + co-payment) that must be met for therapies of various clinical values.  In my opinion, the state should have PBMs and payors do-away with straight co-insurance designs.  If a plan design incorporated enough granularity, it could do an adequate job of discriminating between a variety of net price points and product profiles without the need for percentages.  These dollar amounts could then be posted at the beginning of the year so that consumers wouldn’t be surprised at the pharmacy. 
  • Today, PBMs and manufacturers negotiate formulary status between tiers (generic, preferred brand, non-preferred brand, specialty), and the level of exclusivity that prevails within various therapy categories.  They could still do this, just with the new financial construct, and patients wouldn’t be put in a position of having to switch therapies or ration therapies throughout the year (this happens). 
  • Finally, PBMs and payors could keep in place prior authorization requirements (maybe even refine these) but might be able to forego step therapy (the idea of having to try a cheaper drug and fail it before being granted access to a more expensive therapy).  Frankly, this latter tool isn’t terribly well aligned with best practices anyway and is often gamed.   

Drug Benefit Best Practices: 

  • HCPF is negotiating with bidders to develop and distribute a prescriber tool for physicians.  Such a tool would be implemented in two phases, with the first phase providing a prescriber patient-specific copayment information, as well as his/her plan’s financial obligations for a given drug.  Phase 2 would provide the prescriber plan-specific health improvement program information to be considered and/or recommended.  HCPF believes making this tool available will help change prescribing behavior and improve clinical and financial outcomes for the state and its residents.   
  • HCPF suggests that the state explore options relating to manufacturer coupon programs.  This is a good idea, if implemented carefully.  To my prior point, the state shouldn’t dissuade consumers from remaining compliant with their medications.  However, manufacturers don’t coupon old, low-margin drugs; they coupon new, expensive drugs.  Thus, the state should consider comprehensive programs that blunt unjustified efforts to promote low-value-added prescription drugs. 
  • Two new boards?  HCPF suggests that Colorado could benefit from the establishment of a Prescribing Best Practices Board, and a Prescription Drug Affordability Board.  Arguably, these boards would sit at the intersection of best practices and value-based pricing/reimbursement.  Experts would make recommendations that would feed into prescribing tools and electronic medical records, and the affordability experts might be called upon to recommend upper limits to what the state and other customers pay for certain drugs. 


  • HCPF recommends that SB 19-005, which already permits drug importation from Canada, to be amended to include other countries.  I guess this can’t hurt should the notion of importation take hold.  Developed territories like Australia and western Europe might offer opportunities to augment affordable supply.  However, I just hope that the state of Colorado appreciates how different the environment can be from country to country, even in areas falling under a single regulatory body like the European Union.  I’d also stress that compliance and inspection conditions vary from country to country even if facilities are FDA approved. 

(Pages 42-45 cover solutions for “All Americans”, which I don’t cover in this evaluation.) 


My Summary in Brief: 

Our drug delivery system is a Frankenstein monster built over many years and with many perverse incentives incorporated for non-clinical reasons.  We should consider starting from a clean slate where doing so provides the biggest benefit with the least disruption.  What HCPF concludes then proposes in its Reducing Prescription Drug Costs in Colorado report makes a lot of sense.  However, the two areas, in my opinion, that best fit the bill from the point of view of the state are 1) mandating rebate reform and 2) drawing a hard line on value-based pricing.  We should also develop a scorecard for our state representatives and hold them accountable for their willingness to accept support from prescription drug lobbying groups. 

Here’s a link to the full report:


Et Tu, Drug Price Reform?


Drug Prices:  Is Ceding Political Victory No Longer a Showstopper? 

Tuesday, the Congressional Budget Office (CBO) scored the Elijah Cummings Lower Drug Costs Now Act (H.R. 3).  This is the U.S. House of Representatives’ current best effort to provide drug cost relief.  The Senate has its own drug cost bill known as the Prescription Drug Pricing Reduction Act of 2019 (S. 2543); it too has received a preliminary CBO score.  While many are skeptical we will witness the passage of drug pricing legislation in an election year and in light of the vituperative discourse between Democrats and Republicans, I am struck by two observations.  First, it appears legislation can get done, if both sides can claim victory.  On the day that Democrats in the House introduced articles of impeachment, they also announced an agreement with the White House on a revised U.S.-Mexico-Canada Agreement on trade.  Second, the guts of drug price reform don’t appear to be radically different from the House to the Senate to the White House.  Below, I describe some of the key elements of the two lead bills, as well as what the White House has proposed: 

According to the CBO, the Elijah Cummings Act: 

  • Would require the Secretary of Health and Human Services to negotiate prices of selected drugs such that these prices didn’t exceed 120% those paid in a reference group of developed countries.  These prices would be required to be used for Medicare Part D plans, and available to commercial plans.  Manufacturers that failed to comply would be subject to an excise tax that would not be deductible for income tax purposes. 
    • Medicare would spend about $448bn less from 2023 through 2029 as a result.  This is a huge amount of money relative to what is spent today.  For reference, CMS estimates that the Medicare Part D program spent about $155bn on drugs (gross) in 2017.  In 2027 alone, the CBO projects the program would spend $94bn less than if we kept the status quo.  
  • Would limit annual price increases to the rate of inflation in the Consumer Price Index – Urban (CPI-U), with manufacturers rebating back any increases in excess of this rate. 
    • As a result of this change, Medicare would save $37bn over the planning period, according to the CBO. 
  • Would upgrade the benefit Part D beneficiaries receive.  Specifically, the Act would eliminate the coverage gap commonly known as the doughnut hole, introduce an out of pocket maximum at the point at which catastrophic coverage kicks in today, and modify other elements of the benefit. 
    • These changes would increase direct spending by $9bn over the planning period, according to the CBO. 
  • Would require higher levels of cost and price transparency from manufacturers, increase the number of seniors eligible for low-income subsidies, add dental, vision and hearing care benefits to Medicare, and increase government funded research. 

At this time, the CBO has not yet issued an updated cost estimate for S. 2543, which the Senate Finance Committee (SFC) introduced on September 25.  However, the CBO has provided a preliminary estimate for the bill, based on the Description of the Chairman’s Mark provided to the CBO on July 25.   

According to the CBO, S. 2543: 

  • Would require that manufacturers include coupons in their estimate of Average Selling Price for their drugs. 
  • Would modify Medicare Part B reimbursement with a goal of increasing the adoption of biosimilars. 
  • Would require that Part B drug price increases above CPI-U be rebated back to Medicare. 
  • Would upgrade the benefit Part D beneficiaries receive.  Primarily, the Act would introduce an out of pocket maximum at the point at which catastrophic coverage kicks in today. 
  • Would require that manufacturers provide drug payment information to Medicare and Medicaid advisory groups, including certain rebate information.  The Act would also require that HHS publish less sensitive information on pricing and discounts on its website. 
  • Would require that Part D drug price increases above CPI-U be rebated back to Medicare. 
  • Would make modifications to Medicaid requirements, including the use of Pharmacy and Therapeutics committees and Drug Use Review boards, rebate oversight and price calculations. 

The White House: 

While it doesn’t appear that Alex Azar and Seema Verma are likely to sip hot cocoa by the fire together this holiday season, the one thing they have in common is a desire to impress the President with their loyalty.  Thus, I think it’s reasonable to expect that HHS and CMS will tout the President’s initiatives publicly, while working cooperatively with those working to reduce prescription drug prices.   

Specifically, I would remind readers that the President’s Blueprint to Lower Drug Prices: 

  • Was the first to introduce the notion of a reference pricing mechanism. 
  • Promotes the idea of improving transparency through the Medicare pricing dashboard. 
  • Contemplates measures to limit drug price increases, including inflation caps. 
  • Promotes the idea of introducing an out-of-pocket maximum for seniors. 

The President is also in favor of drug importation from countries like Canada and HHS is currently working with several states to establish guidelines for how this might be accomplished more broadly. 

With these various facts in place, I think it’s natural to ask — can legislation be passed, what will it look like, and what are the implications? 

As far as I can tell, reducing the cost of drugs is a bi-partisan issue.  The Republicans certainly view it as a winner for the upcoming elections, and the initial spark for reform actually came from Hillary Clinton in the fall of 2015.  According to a recent Kaiser Family Foundation poll, lowering prescription drug costs is the top health care priority amongst voters.  Obviously, we now have a Democrat-led bill in the House and a bi-partisan bill in the Senate that 1) don’t look to be at odds with one another, and 2) incorporate many of the changes the President would like to see implemented.  The trick, as is customary, is to keep fringe elements from blowing up the final bill while positioning the passage of such a bill as a victory for both political parties and the president. 

Kaiser Family Foundation Tracking Poll (September 12):

I believe that the Senate’s bill will form the corpus of anything that’s likely to get done.  First, it focuses more narrowly on the drug benefit and delivery system.  Second, it contemplates reforms that are limited to government programs, rather than both government and private plans.  Third, it focuses on pragmatic solutions with moderate financial impact and modest operational impact.  Fourth, it arises from the legislative body where consensus matters to a greater degree (i.e., notwithstanding the occasional fringe caucus revolt, the Speaker can usually get her way in the House). 

I think that it should be relatively easy both to implement a price inflation cap and establish an out-of-pocket maximum for Part D beneficiaries (seniors).  Both sides of the aisle generally agree that these wouldn’t be disruptive operationally and would like to see industry pay for a greater percentage of the benefit.  However, both worry that insurers will raise premiums if the government shifts to much of the bill onto their collective backs.  Thus, I envision the government picking on the drug manufacturers when it comes to determining how much of the doughnut hole and catastrophic benefit reforms each entity picks up.  I also think that we should expect the government to demand greater levels of price transparency from insurers, pharmacy benefits managers and manufacturers. 

On the other hand, I don’t think we’ll witness the passage of anything that includes a reference pricing mechanism, direct negotiations between CMS and industry, or the addition of new entitlements (e.g. dental benefits).  These are very disruptive from an operational point of view and are likely to invite much more vociferous and widespread opposition. 

According an article by The Hill1, Mitch McConnell and selected republicans aren’t in favor of certain elements of the Senate bill, including the inflation cap.  While the article goes on to say that opponents equate such a cap to price setting, I think it’s important to note that such a cap already exists under Medicaid.  Thus, this argument represents little more than a straw man, in my opinion.  For now, it doesn’t appear that President Trump is twisting any arms in front of the election cycle (perhaps he’s sensitive to the fact that the impeachment trial is about to begin?).  However, I expect that as the groundswell of support grows amongst voters, we’ll see more jawboning and increasing Congressional support for a simplified proposal, and that we may truly be talking about passage in the Spring. 

If we do get a new drug price reduction act, I don’t think we’ll see a big impact on productivity and access, broadly speaking.  Nor do I think we’ll see a big impact on access one way or another.  However, there could be pockets of pharmaceutical business that become less attractive as a result.  If a bill were to pass along the lines I’ve described above, high priced medicines for the elderly population become less attractive, all else equal.  Let’s take a simple example – a person being treated with a cancer medication beginning January 1st under the standard Part D benefit design.  Here’s the current construct: 

If this medicine costs $10,000 per month and is used for 10 months, the drug company receives $95,680.46 — $3,820 up to the doughnut hole (from the enrollee and plan), 30% of the gross costs up to $8,139.54 (split 25% enrollee and 5% plan), and 100% of everything thereafter (via enrollee, plan and Medicare). 

Under the Senate proposal, which still may change, this same medicine would provide the drug manufacturer only $80,620 – 100% of payments up to $3,100, then 80% of any payments made above this threshold.   

A lot obviously still depends on the final agreed-to split between manufacturers, plans and Medicare above the catastrophic threshold, as does the practical matter of whether a beneficiary is on other medications that count towards the out-of-pocket max.  Still, I think that the companies most affected by these changes would be those already selling oral cancer medications (pills), since those companies would be unable to change prices meaningfully in order to respond.  Injected/infused cancer medications are typically covered under Part B, which is a separate benefit.  Amongst multi-national branded biopharma companies, Pfizer probably has the most to lose, although there are some biotechnology companies that sell only oral cancer medicines.  In addition, any other drugs disproportionately used amongst the elderly would theoretically be affected, subject to pricing and the catastrophic threshold (e.g. certain antiviral medications and anticoagulants).  

Informal Thoughts on BDXA


As with everything that I will post to the investing section of this blog, the following should not be construed as investment advice.  It is simply meant to be the ramblings of a now-retired individual with some time on his hands.  I am not affiliated with any organization and have no interest in publishing other than for the intellectual exercise.  While I make an effort to be accurate with my facts, I do not assert that any of the following information is 100% reliable.  If I own a stock upon which I comment, I will always say so.  In  this case, I own BD Depository Shares Representing the Mandatory Convertible Preferred Stock (BDXA) in a personal account.


The Mouthful:  Becton Dickinson Depository Shares Representing 1/20th of One Share of 6.125% Mandatory Convertible Preferred Stock, Series A

Thoughts on Becton Dickinson

For those who don’t know that much about the company, Becton Dickinson is essentially a medical products supermarket. The company manufactures and distributes a wide variety of products, including the Vacutainer tubes technicians and nurses use when drawing blood, sharps (e.g. pen and safety needles), catheters (e.g. urological catheters for drainage, therapeutic catheters, etc.), diagnostic reagents and instrumentation, infusion pumps, surgical materials, medication management products and others. The company’s operations are well diversified from a geographic point of view, with roughly 44% of revenues generated overseas. Finally, I believe it’s important to recognize that, while BD operates in highly regulated markets, 1) its products don’t typically rise to the level where customers feel the need to “do something” about their costs, and 2) BD is somewhat insulated from the economic cycle, given the amount of business that is reimbursed under fee schedules comprising both medical devices and medical professionals’ reimbursement. While analysts get worked up over whether the company grows its top line 4%, 5%, or 6% in a given year, I think that the ability to grow reliably is more important for long-term, income-oriented investors. In this regard, BD is hard to beat.

Over the years, it appears that BD’s strategy has been to move up the value chain and become more important to its primary customer base – hospitals and clinics. While the organization spends about 6% of net revenues on R&D, its principle method for doing so has been by making acquisitions. Every few years, it seems, BD makes a significant acquisition. Most recently, the company closed the $24bn acquisition of C.R. Bard, in late 2017, bringing the company a host of interventional and surgical products. Before that, it was the infusion pump company, Carefusion, which BD bought in 2015 for $13bn. Given that BD is about a half-turn away from its leverage target post the acquisition of Bard, I think it is reasonable to expect BD to begin shopping for its next target.

Not surprisingly, BD’s willingness to return cash to shareholders ties to its M&A strategy. As debt comes down as a multiple of EBITDA, the company raises its dividend more aggressively. In the early periods post an acquisition, dividend increases are more modest. Most recently, the company announced a 2.6% increase to its quarterly dividend (to $0.79/sh.), suggesting the company is still in debt pay-down mode. The forward yield on common equity is only 1.2%. Over the longer-term, BD ought to be able to grow earnings in the high single digits, organically, and its dividend growth ought to match. This is certainly consistent with the company’s history. Capital intensity has been coming down, and capital expenditures clocked in at 5.5% of net revenues in BD’s Fiscal Year ending 9/30/19.

An Investment in BD

BD’s shares trade at roughly 20x forward earnings. That’s not cheap in an absolute sense, but it’s cheaper on a relative basis than they’ve been in a while. This valuation is also arguably attractive when you consider where “defensive” stocks typically trade and the shrinking list of investable companies that are truly defensive. Consequently, I’m O.K. owning BD common at these levels.

However, when it comes to what I actually own, it’s the Becton Dickinson 6.125% Mandatory Convertible Preferred Stock depository shares (BDXA). Becton Dickinson issued these securities in conjunction with the financing it did in order to complete the C.R. Bard acquisition. The key features of this issue are that the Preferred shares 1) sit higher in the capital structure (not an issue for BD), 2) pay a higher dividend and 3) convert into common according to specified terms. On this latter point, the Preferred converts into BD common according to a fixed ratio when the common trades above $211.80 and below $176.50, but along a sliding scale between these two prices. In other words, as BD common approaches $211.80, the Preferred stock ought to start offering better downside protection.

Today, BD common trades at roughly $257/sh., or roughly 21% above the Threshold Appreciation Price of $211.80. Thus, we’d have to undergo a rather violent correction between now and May 2020, by which date the Preferred shares must be converted into common, for the Preferred shares to stand out. In other words, BD Preferred share receipts really aren’t much more interesting than BD common right here, right now. Still, I bring this security and its feature up in consideration of what I outlined earlier. Specifically, should BD engage in another acquisition of size, this form of the financing might be included and offer total return investors a solid investment opportunity that fits their objectives. If it informs the potential timing of such an event, BD should be at 3.0x D/EBITDA by the third quarter of calendar 2020, at which time significant M&A again becomes a possibility; BD did the financing for Bard roughly a month after having announced the proposed deal.