Industry Expert: Specialty Pharmacy Market Is at ‘Inflection Point’

Multiple trends are occurring within the specialty pharmacy industry that could have a huge impact on the space, maintained longtime industry expert Adam J. Fein, Ph.D., CEO of Drug Channels Institute, during a recent webinar. Those include greater competition among specialty products, a slowing of payer spending on specialty drugs and more vertical integration among both payers and providers. “We’re at kind of an inflection point in the specialty market,” he contended during the July 29 webinar, titled Specialty Drugs Update: Trends, Controversies, and Outlook.

Among PBMs reporting their commercial plan sponsor clients’ spend, the average share of prescriptions by specialty drugs, both generic and brand, was 2% in 2021. The share of pharmacy revenues for specialty drugs was 38%, and the share of commercial payers’ net spending was 51%. “For the last few years, drug spending has been growing in the low-to-mid single digits, and that’s really the blend of traditional drugs” that have gone down in price due to generics, as well as the gross-to-net bubble — the growing difference between a drug’s gross sales at list price vs. its sales at net price, which includes rebates and other concessions. “Specialty drug spending has also been slowing down. It spiked quite a bit with the introduction of hepatitis C treatments and has been hovering in the 10% to 15% a year range,…but more recently, i.e., last year, it actually dropped.” He pointed out that CVS and Express Scripts reported that their specialty drug spending growth was only 5% to 6%.

While utilization is driving much of the increase in specialty drug spending, he noted that factors such as “intense formulary competition for specialty drugs”; exclusions of these medications on formularies, including exclusions for specialty generics; and copayment accumulators and maximizers are behind the decline of net costs.

The launch of non-biologic specialty generics is “one of the big factors behind the slowdown in specialty spending growth,” he explained. For instance, the average pharmacy acquisition cost per Gleevec (imatinib) pill as of July 22 is $90, while the average cost of a pill of generic imatinib — which is being manufactured by 16 companies — is $0.89, a 99% decrease in price. “Ninety cents a pill is not free, but for a drug that used to be $90, that’s a pretty big discount,” he said.

Other drugs that are seeing much less expensive generic competition include Tecfidera (dimethyl fumarate), Atripla (efavirenz/emtricitabine/tenofovir disoproxil fumarate), Exjade (deferasirox) and Truvada (emtricitabine/tenofovir disoproxil fumarate). And in the pipeline, Revlimid (lenalidomide) and Iressa (gefitinib) are among specialty drugs expected to have generic competition soon.

With the increase in availability of generics, said Fein, “some of the heat on specialty has come off. Now there are some presumably newer therapies coming out, but just like we see newer therapies for other categories, these newer therapies have to first compete against a drug that is very, very cheap. We saw this with, for example, the PCSK9s when they launched” and were competing with generic statins, which were significantly cheaper and were appropriate for many but not all patients.

“This has become very good news for the distribution channels, for PBMs that have mail order pharmacies or wholesalers, retailers.…There’s some good money to be made as the price goes from $90 to 90 cents. Payers don’t mind a little profitability for the channel because it encourages very rapid generic substitution. We’ve seen this for years with traditional drugs, and now we’re seeing it for specialty drugs.”

According to Fein, “the real action is in the biologics. Some of these drugs are kind of long in the tooth and weren’t facing any competition, and prices weren’t dropping. But now that the biosimilar boom is upon us, things have totally changed.”

That boom for now is focused on the medical benefit. So while utilization — particularly in Medicare Part B — is up, “net costs are actually starting to decline due primarily to biosimilars.” Much of the available information on the impact of these therapies is for the most part dated, he contended, because this is “a recent phenomenon. Perception has not caught up to reality.…People writing articles about how biosimilars don’t save money are using data from 2018 and 2019, which is basically irrelevant.”

Fein pointed to a recent Amgen report that looked at the top six biosimilars in the medical benefit — for Avastin (bevacizumab), Herceptin (trastuzumab), Epogen (epoetin-alfa), Neulasta (pegfilgrastim), Rituxan (rituximab) and Remicade (infliximab) — and compared how the reference drug prices would have continued to grow at the same rate before biosimilar entry with what prices actually were following biosimilar entry. The change in total drug spend for classes facing biosimilar competition after biosimilar entry declined $1.4 billion in 2019, then dropped $5.3 billion in 2020 and $9.5 billion in 2021, with an estimated decrease of $14.5 billion in 2022.

He noted that the biosimilars space is seeing two trends: First, innovator companies “defending their market share and slashing their prices,” such as in the case of Remicade, whose average sales price has decreased about 60%; and, second, some of the innovator oncology companies “essentially giv[ing] up all their share to the biosimilars,” whose net prices are about 60% to 70% below those of their reference drugs. The oncology biosimilars “didn’t come in with low list prices; they came in with list prices that were maybe 15% lower than the innovator product. But they immediately started rebating to commercial payers and offering rebates and discounts into the channel so that both wholesalers and providers started adopting these products.”

“For many of these [biologic brand] products, there is already substantial competition,…and, at the same time, there are even more in the pipeline,” he observed. “And as a result, we’ve seen dramatic decreases in biosimilar prices and some big shifts in market share.”

“On the pharmacy benefit side, it’s a little trickier because we haven’t seen these products launch.” Four of the biggest products in the pipeline are Enbrel (etanercept), Humira (adalimumab), Stelara (ustekinumab) and Xolair (omalizumab). “Half of the inflammatory drug category” — one of the specialty categories with the highest spend — “is going to be facing biosimilar competition within two years.”

Humira, which is the No. 1 selling drug in the world, is the big story to keep an eye on when it finally faces biosimilar competition in 2023, he contended. Those competitor companies may follow Viatris Inc. and Biocon Biologics Ltd.’s lead with Semglee (insulin glargine-yfgn). Viatris launched two versions of the interchangeable biosimilar in November — branded Semglee and insulin glargine, an authorized interchangeable biosimilar — that had different wholesale acquisition costs.

The industry “will potentially see some companies come in and try to zag when everyone else is zigging and try with a low list price strategy, basically come in and say, ‘We’re not going to play that game; we’re going to do something different.’ What I think is interesting about the Humira story is that everyone is launching at a different time, so although obviously, negotiations are happening now,…there are going to be some varieties of strategies,” said Fein. He asserted that 2023 will be a “transition year” but that “2024 is going to be the year that this all hits. And if Humira’s net price…is anything more than 70% off where it is today, I’ll be stunned. This is going to be a massively competitive category — it already is a competitive category — but it is going to be dramatically more competitive, and I predict we’re going to see some companies come in with a differentiating strategy on price and other companies come in with a we’re-going-to-play-the-rebate-game strategy.”

“At the same time, payers, and PBMs in particular, have gotten much more aggressive about managing specialty drugs,” he stated. “It used to be that these drugs dealt with so few patients that we didn’t have a lot of formulary exclusions.” But as of last year, more than half of the exclusions for oncology medications were single-source brand drugs as opposed to therapies with generic or biosimilar competition. “Oncology is a category…where they’re not all substitutable,” which will pose some “interesting issues.” He also maintained that indication-specific exclusions, which started within immunology, are "going to be booming,” which will put pressure on specialty drugs that have not traditionally offered rebates. “So the world of specialty, which used to be kind of protected, is essentially being completely exposed.”

Because many specialty drugs may have out-of-pocket annual costs in the thousands, many manufacturers often offer copay support. More than 700 patient-support programs exist, he explained. And while payers and plan sponsors used to “hate” copay support, a recent report from Pharmaceutical Strategies Group, an EPIC company, found that 65% of benefits leader respondents (employers, unions/Taft-Hartley plans and health plans) offering specialty drug coverage through pharmacy and medical benefits believed that “copay assistance programs provide a good way to help plan sponsors save money,” compared with 28% of respondents four years ago. That finding, said Fein, “really blew my mind.”

While the use of copay accumulators and maximizers has risen, “there is another newer trend that’s even scarier, and that’s the business of what some people call specialty carve-outs,” he said, calling this “the shady business of specialty carve-outs.” Vendors such as ImpaxRx, Payd Health, SHARx, PayerMatrix and Script Sourcing get payers to exclude specialty drugs and then get those drugs covered via patient-assistance programs at manufacturers or charitable foundations. “Many manufacturers and charities are not aware of what’s going on yet,” he asserted. “So this is another source of money that’s flowing and, in some sense, changing the game in specialty.”

Many problems exist with these programs, he said, including the ethics around them: “You’re basically trying to access money that is explicitly intended for needy, uninsured, financially strapped patients. This is not copay support for commercial benefits, where the benefit kind of stinks or they over-cost-shifted.” He revealed that he’s heard anecdotally “that some patients are being put on therapies that have easier-to-fool charities or easier-to-fool foundations than one that isn’t.”

The provider-administered specialty drug market “is really messed up,” he maintained. “Hospitals have consolidated, they have enormous bargaining leverage against payers in the commercial market, and there’s piles of studies that show this.” He noted one study that looked at the monthly average cost of four provider-infused therapies and found that negotiated rates were “roughly half as much at either a physician office or home infusion” than they were in a hospital outpatient facility. And a JAMA study of National Cancer Institute sites found average markups of 200%, with some oncolytics marked up 600%.

“Attempts by payers to press these down have not been successful.…Even the same payer may be paying different amounts for the same hospitals in the same city. So it’s a totally chaotic market right now — a very inefficient one. And attempts to drive people from one site of care to another have been unsuccessful.”

White bagging — where payers take a provider-administered drug out of the buy-and-bill channel and have a specialty pharmacy dispense it — has been one strategy to counter vertical integration within the provider space. 2021 data from MMIT, of which AIS Health is a division, show this approach continuing to grow as a “significant part of sourcing,” particularly as payers mandate this strategy. Fein cited UnitedHealthcare — “one of the most vertically integrated entities in the country” — which launched such a program in 2020 with about 53 drugs and now requires more than 90 to be dispensed this way.

And while vertical integration is most often thought of as an insurer/PBM/specialty pharmacy, this practice “has actually overtaken the entire provider market.” Within the oncology space, “I estimate that almost 60% of practices are now part of hospitals” compared with 2007, he said, a trend that accelerated during the pandemic, according to one report.

“As a result, this has also changed the channel for specialty drugs,” he observed. Previously, specialty distributors sold “their products almost exclusively to physician-owned and -operated” practices. But 2020 data show that this share has been “cut almost in half” from 2011 and replaced primarily by hospitals. “So essentially this vertical integration on the provider side is creating very powerful, local, monopolistic, oligopolistic organizations that have power to push back against white bagging if they want but also to try to push back against what they perceive as the power of these insurer/PBM/specialty pharmacy organizations.”

And this integration trend is snapping up specialty pharmacies. At the end of 2021, he said, there were about 1,600 URAC- or ACHC-accredited specialty pharmacy locations, but “40% of them are now hospitals or physician offices or other types of providers. That has become almost the single biggest category of specialty pharmacies. Now, a lot of them are small, but essentially there’s been a boom in in-house specialty pharmacies. In fact, some manufacturers don’t even treat this as a channel. I think that’s a big mistake because these hospitals are getting much savvier about what to do with their in-house specialty pharmacies. They’re relying on external companies [to manage these specialty pharmacies] like Shields, which is majority owned now by Walgreens, or Trellis or Acentrus, which is part of Apexus, which runs the 340B program, coincidentally. And Apexus is part of Vizient, which is a GPO owned by hospitals.”

And many hospitals are steering their employees to their in-house specialty pharmacies, “basically taking a page from what the PBMs have done in the specialty pharmacy market,” stated Fein. And while these organizations may not be the best managed, “they have a lot of influence and a lot of power.…Historically, many manufacturers have a trade that deals with wholesalers and…a group that deals with pharmacies and a group that deals with payers and PBMs and a group that deals with physicians and a group of institutional people that deal with hospitals. You know those separations don’t mean as much as they used to when it comes to specialty drugs.”

Payers that have been concerned about high-cost specialty drugs are now shifting that concern to cell and gene therapies, which cost between $400,000 and $3 million. “And everyone is nervous about what this might mean,” he said, although only a handful have been approved so far. Payers are “attempt[ing] to create alternative channels” for therapies such as Luxturna (voretigene neparvovec-rzyl) and Zolgensma (onasemnogene abeparvovec-xioi). And chimeric antigen receptor T-cell (CAR-T) therapies “are expensive and have enormous medical expenses associated with them. But if you look at what’s actually happening, you’re seeing the buy-and-bill market kind of really scare payers.”

The CAR-Ts Yescarta (axicabtagene ciloleucel), Kymriah (tisagenlecleucel) and Tecartus (brexucabtagene autoleucel) all cost around $400,000. “Hospitals would typically mark them up 200% to 300% on their chargemaster. They would say, ‘Yes, this drug costs $400,000, but for you, $1.3 million.’ And then they would discount it by 20% to 30%. So that was the negotiation that payers would do; they would negotiate and say, ‘I’ll pay you $870,000’.… But this kind of stuff really scares the payers,” which are trying to determine the best way to control these products’ prices.

“So cell and gene therapy is kind of that next frontier,” said Fein. “Everyone is still kind of screaming about specialty, but those problems are essentially going to work themselves out very aggressively in the next few years. Spending is still going to grow, but the trends change, and the fear is what’s over the horizon?”