[kellanem]

The article does a good job of starting to explain the forces, but it's actually even more complicated.

A number of the PBMs are cross invested in pharmacies and insurance companies, and the incentives of 2-3 large pharmacies that control the majority of the market (and how they get paid) is very different than how small pharmacies get paid.

Additionally the way the generic market works vs the branded (patented) meds is completely different. (and the system of how drugs move from patented to generic is _nothing_ like the way patents work in software)

Which is all to say, it's a fascinating space. It's very ripe for innovation.

If you're interested in this kind of thing at Blink we're building a price transparency and payment platform that both routes over and routes around PBMs and gives a unified fair price for everyone in the US.

If you're interested in roughly what the wholesale price is plus a very small markup, you can find it on https://blinkhealth.com

And we're hiring. https://www.blinkhealth.com/careers

Also the re-importing from Canada is a total red herring. As is implied in the term "re-importing" these drugs are made here in the US, there is nothing special about sending them to Canada and bringing them back. There just needs to be a payment platform that allows people to pay the wholesale price with a small markup (vs the "Average Wholesale Price" which is often a 2000-3000% markup over the real wholesale)

Finally one of the challenges with moving to a centrally managed pricing solution like what works so well in Canada and most of Western Europe is right now R&D into pharmaceuticals is largely financed by the opportunity size available in the US market. If you were to just adopt the centralized model tomorrow R&D would grind to a stop, at least for some period of time until we found new ways to finance it.

[DarkKomunalec]

Proportionately to their revenue, pharma doesn't spend that much on R&D: https://www.washingtonpost.com/news/wonk/wp/2015/02/11/big-p...

And that's just compared to advertising - throw in other overhead, and separate R&D into genuinely new drugs vs. generics and flavoured aspirin, and the numbers are even worse.

Of course it's hard to get such comprehensive financial data, but that's just one of the advantages of private healthcare - hiding data to hide how much you're being exploited.

[refurb]

Drug companies spend the most on R&D out of any industry. The average is almost 20% of revenue. That means if you buy a drug for $1000, $200 of that goes back into R&D.

And no, the sales and marketing in that article is not advertising alone. It's mostly sales people who go and visit medical professionals to talk about their products.

[DarkKomunalec]

> And no, the sales and marketing in that article is not advertising alone. It's mostly sales people who go and visit medical professionals to talk about their products.

That's advertising.

You mentioned 20% of their revenue is R&D - do you have a source, ideally listing what the other 80% goes to? That's a lot of unaccounted revenue, especially given how many drugs were shown to be dirt cheap to manufacture.

[brandonmenc]

> That's advertising.

Anecdotally, a friend of mine was doing post-doctoral work researching and developing cancer drugs. He now works on a pharmaceutical sales team as a scientific liaison.

"Advertising" a drug involves a lot more than running TV commercials - it also includes former scientists making the current research digestible for doctors who don't have the time or specialized knowledge to do that in between seeing patients.

The notion that every practicing doctor has enough free time - or is even smart enough - to keep up on the latest pharmaceuticals, is ridiculous.

[vkou]

> The notion that every practicing doctor has enough free time - or is even smart enough - to keep up on the latest pharmaceuticals, is ridiculous.

How do doctors in other countries with functional medical systems deal with this problem? Health outcomes across the developed world are very similar.

[Retric]

There are only ~50 new drugs a year, and many of those are highly specialized. So, it's really not hard to keep up with new drugs. The hard part is actually staying fresh on all the existing knowledge that you don't use regularly and some changes to best practices.

[refurb]

You realize that new data comes out on drugs constantly? Even drugs launched 10 years ago. Just take a look at all the medical journals.

It's not a one-and-done thing with learning about drugs.

[dikdik]

>The notion that every practicing doctor has enough free time - or is even smart enough - to keep up on the latest pharmaceuticals, is ridiculous.

That's part of the doctor's job, if they can't keep up with new medical/pharma literature then they need to find a different job. Further, most doctors know taking a ton of info from a pharma rep is just asking to be misinformed. A lot of pharma sales reps have no science background and many lie about approved populations and other aspects of a drug (just see the many, many lawsuits out there).

[refurb]

That's part of the doctor's job, if they can't keep up with new medical/pharma literature then they need to find a different job.

Do you know any doctors? Have you talked to them about how they spend their days? Most want to maximize the time they spend with patients. Any way they can keep up to date on the latest technology is helpful.

[tclAmockingbird]

> > And no, the sales and marketing in that article is not advertising alone. It's mostly sales people who go and visit medical professionals to talk about their products.

> That's advertising.

It's also keeping physicians up to date on the current science, applicability, and best practices of their products. I think it's a good thing for sales reps and MSLs to inform or remind physicians that there are alternatives to writing a script for Epipens, for example.

> You mentioned 20% of their revenue is R&D - do you have a source, ideally listing what the other 80% goes to? That's a lot of unaccounted revenue, especially given how many drugs were shown to be dirt cheap to manufacture.

Many drugs are cheap to make, but that neglects the astronomical development and regulatory costs.

[galdosdi]

FWIW the anecdotal experience of people I know in the health field in the US is that pharma sales reps know nothing about medicine, are hired for their sales / "relationship building" ability, and can't answer any question about the drug they are touting that can't be answered by looking at the brochure. Very disappointing.

You can't expect to get unbiased, quality advice from someone with such a strong incentive. The right way for doctors to stay up to date is for doctors to stay up to date! They need to read a damn book or journal article once in a while and takes responsibility for their own professional development. If doctors aren't doing that, regulators need to suspend their licenses.

[tclAmockingbird]

> FWIW the anecdotal experience of people I know in the health field in the US is that pharma sales reps know nothing about medicine, are hired for their sales / "relationship building" ability, and can't answer any question about the drug they are touting that can't be answered by looking at the brochure. Very disappointing.

MSLs have advanced degrees in medicine or biomedical research. It's preferred that the traditional sales reps now have bachelor's degrees in the sciences and it is expected that, within the narrow scope of their product's science, they be well-informed regardless of prior academic background. It's preferred because they are more effective reps.

> You can't expect to get unbiased, quality advice from someone with such a strong incentive. The right way for doctors to stay up to date is for doctors to stay up to date! They need to read a damn book or journal article once in a while and takes responsibility for their own professional development. If doctors aren't doing that, regulators need to suspend their licenses.

Continuing medical education is a requirement to maintain licensure. I don't think I get your point here.

[drugpusher]

Hah. I've actually spent months of my life working with drug reps - including going with them on doctor's visits. They will get five minutes max to go through their spiel, and they are very focused on selling the specific uses or differences to get doctors to switch.

What is also amazing is that it is easy to get doctor level data on your drugs market share in their prescription patterns. So you can target very effectively. Then it's all discipline of frequency and hitting the right docs.

Why do you think so many drug reps are blonde girls? Because the doctors will make time to see 'em.

And what is doubly amazing is how effective this brute force sales technique is. I have graphs of visit frequency vs market share and it is DEADLY effective if you get it right. (Of course there are diminishing returns. Drug reps will game their visit stats by overvisiting friendly docs. So you can't​ give them credit for those visits.)

Source: I'm a healthcare sales management consultant

[DarkKomunalec]

> It's also keeping physicians up to date on the current science, applicability, and best practices of their products. I think it's a good thing for sales reps and MSLs to inform or remind physicians that there are alternatives to writing a script for Epipens, for example.

There are many very cheap ways of keeping physicians up-to date, such as a conference presentation of the drug, followed by a Q&A session, with a recording freely available online.

> Many drugs are cheap to make, but that neglects the astronomical development and regulatory costs.

Which are covered in the already mentioned 20% that goes to R&D (source pending). Are you purposefully ignoring information you dislike?

[dpark]

> There are many very cheap ways of keeping physicians up-to date, such as a conference presentation of the drug, followed by a Q&A session, with a recording freely available online.

Because most doctors are happy to spend hours watching recordings of drug presentations.

For better or worse, doctors are just people and if you want them to understand the benefits of your new drug, it will fall to you to convince them. Most doctors are not going to thoroughly study every new drug.

[tclAmockingbird]

> There are many very cheap ways of keeping physicians up-to date, such as a conference presentation of the drug, followed by a Q&A session, with a recording freely available online.

5 minutes of face time with a busy physician and supplying them with a useful article targeted to their specific needs can be far more effective.

> Which are covered in the already mentioned 20% that goes to R&D (source pending). Are you purposefully ignoring information you dislike?

The dev part was an honest error while I was editing, and I don't think the accusation is called for. Regulatory costs, and I think of quality also being in that group, is not an R&D cost and is substantial.

[John23832]

AWS keeps me up to date with their products and best practices too... It's still advertising.

[xadhominemx]

you're speaking very authoritatively for someone who apparently does not know the difference between sales, marketing, and advertising and also does not know how to pull basic financial information of publicly-traded companies

[DarkKomunalec]

What a great opportunity for you to pull this so easily available and understandable information, and destroy my entire argument by showing how efficiently pharma allocates revenue to important drug research, and how little is wasted on marketing, sales, generics, and other stuff!

[triangleman]

Someone had just posted a really useful post that was deleted about 15 minutes later. Here is the post copy/pasted in its entirety:

EDIT: Wall of Text warning.

>The average is almost 20% of revenue.

This isn't exactly true. In fact the pharma industry lies so prodigously about it's own costs that it's almost impossible to know what they actually are spending on R&D. We can trace back the source of these numbers to various PhRMA reports like this one:

http://www.phrma.org/sites/default/files/pdf/2015_phrma_prof....

Which gives us this:

PERCENTAGE OF SALES THAT WENT TO R&D IN 2013

Domestic R&D as a percentage of domestic sales = 23.4%

Total R&D as a percentage of total sales = 17.9%

which basically supports your point. Their methodology though is quite interesting.

>In 1991, Joseph DiMasi and colleagues from the Tufts Center for the Study of Drug Development published a widely quoted, comprehensive study of drug development costs. Using project data from confidential surveys, the study estimated cash outlays of around $169M to successfully bring a drug to market during a period beginning in the 1970s. PhRMA relies on this research as the foundation for their statements about the cost of drug development. However, PhRMA uses different assumptions about a "hidden" expense called "opportunity cost" that boosts this estimate to the $500 million mark.

>PhRMA's assumptions begin with DiMasi's original estimate of R&D outlays with opportunity cost set at 9% and a 12-year development period. A review of the Tufts study performed by the US Office of Technology Assessment (OTA) subsequently calculated opportunity cost at a higher rate, which pushed the estimate towards $360 million. According to Public Citizen, this figure, when adjusted for inflation and rounded up, became PhRMA's $500 million.

>But Public Citizen says the OTA report also offers an alternative analysis of development costs. R&D expenses are tax deductible, but DiMasi's 1991 figures didn't consider the discount this offers. If the original Tufts estimate is reduced by 34% in tax savings and opportunity cost is subtracted, Public Citizen says the actual cash outlay for bringing a new drug to market during the seventies and eighties was actually closer to $65 million.

http://www.thebody.com/content/art13514.html

Furthermore:

>Notably, as in the Center's previous estimates, nearly half the cost of drug development was accounted for not by research expenditures but by the cost of capital. The analysts justified that assumption by noting that during the years a company spends developing a new product, it incurs opportunity costs by not using those dollars for other purposes. That argument is plausible, and such calculations can be an appropriate component of such analyses. However, nearly half the total cost of developing a new drug ($1.2 billion) was ascribed to this cost of capital, with only $1.4 billion attributed to funds actually spent on research. These capital costs were assessed at 10.6% per year, compounded — despite the fact that bonds issued by drug companies often pay only 1 to 5%.

>The Tufts calculations also explicitly do not take into account the large public subsidies provided to pharmaceutical companies in the form of research-and-development tax credits or substantial payments received from the federal government for other research activities, such as testing their products in children. Perhaps most important, because the calculations are based only on products that the companies described as “self-originated,” the $2.6 billion figure does not consider drug-development costs borne by the public for the large number of medications that are based on external research that elucidated the disease mechanisms they address. One recent analysis showed that more than half of the most transformative drugs developed in recent decades had their origins in publicly funded research at nonprofit, university-affiliated centers.4

http://www.nejm.org/doi/full/10.1056/NEJMp1500848#t=article

Now this is obviously just absurd. These R&D numbers are totally meaningless! They've been biased at literally every step of the process to be shown as larger than they really are.

[refurb]

Ummm... the numbers reported by pharma companies has nothing to do with the estimate DiMasi's group did. The pharma numbers are SEC approved financial statements. That real cash going to R&D, not some pie in the sky estimate.

[AstralStorm]

But no idea how much of that is going into new or more effective versions of the drugs, how much to manufacturing process research, how much on sales research etc.

[refurb]

Sales research wouldn't fall under R&D. That's sales.

And why do you need to know how much goes into manufacturing process research? That's as valid as any other R&D process.

[rayiner]

Let's take the middle two from each row: Pfizer and AstraZeneca. In 2013, Pfizer spent 13% of revenue on R&D, while AstraZeneca spent 17%. Google spent 12.9%, Intel spent 20.1%, and Microsoft spent 13.5%. Apple typically spends only 3-4% of revenues on R&D, but it's an outlier in the tech industry.

[spangry]

"Finally one of the challenges with moving to a centrally managed pricing solution like what works so well in Canada and most of Western Europe is right now R&D into pharmaceuticals is largely financed by the opportunity size available in the US market. If you were to just adopt the centralized model tomorrow R&D would grind to a stop, at least for some period of time until we found new ways to finance it."

That would be bad. Based on 5 minutes of googling and 10 minutes of reading, the largest US pharma company is Johnson & Johnson. Their latest earnings report has the following for the 12 months in 2016 (not all expenses are listed here):

- Sales (i.e. revenue): $71.8bn

- Marketing expense: $19.9bn

- R&D expense: $9.1bn

- After tax, after expenses profit: $16.5bn

So, on behalf of my fellow Australians, I'd just like to thank J&J for selling into my country at a substantial loss (and, in doing so, bravely running the risk of breaching their fiduciary duties to their shareholders).

I'd also like to express my gratitude to consumers in the United State, who are apparently so generous that they are willing to subsidise my country's single-purchaser medical system. It's a shame you can't have one as well, but at least you have the world's gratitude for your sacrifice. USA #1!

EDIT: Link - http://files.shareholder.com/downloads/JNJ/4178180194x0x9249...

[jessriedel]

With all the sarcasm, it's hard to tell how broad of a point you're trying to make. Do dispute the fact that Australia free-rides to a non-trivial extent on US medical R&D?

[spangry]

Yes I do dispute that notion. Actually I dispute the entire idiot notion that the US is somehow subsidising the rest of the worlds' healthcare.

In actual fact, pharmaceutical / medical device companies will simply charge whatever the market will bear, and it just so happens the US market will bear almost any price. If some market won't bear a profit making price, pharma companies simply won't sell into it.

It makes utterly no sense to sell at a loss and then cross subsidise using the massive rents extracted from US markets, yet that is exactly what most people here seem to think is happening. Although maybe Trump really has managed to 'make America great again'. Speaking of great...

The US spends 17.1% of of its GDP on healthcare. The 5 countries that are richer than the USA (GDP per capita) pay an average of 7.77%. Excluding Qatar, it's 9.03%. The top 10 richest countries (excluding the USA) spend an average of 8.03% of their GDP on healthcare, and I'm pretty sure at least a few of these have universal public health insurance.

You're paying more than DOUBLE compared to the 9 other richest countries in the world. You're simply getting gouged. If you can't even admit that maybe there's a problem here, and instead want to persist with all these insane American exceptionalist fantasies, it's unlikely anything is going to change in American healthcare.

Data from here: http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS?end=2014&...

And here: https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi... (using IMF GDP figures)

[jessriedel]

That's a long rant that doesn't even address the standard econ 101 argument. It's especially weird to quote spending data since that's what one would expect if the US was subsidizing the world.

[spangry]

It's also what one would expect if US consumers are getting horribly gouged on prices. But then I guess you'd also expect to see pharmaceutical companies enjoying super high profit levels... Oh wait...

EDIT: Given I am unable to address the 'econ101 argument', would you care to take a shot?

[jessriedel]

No, I think your tone is completely inappropriate for HN and is not compatible with a constructive discussion.

[vonmoltke]

> Marketing expense: $19.9bn

Here I go tilting at this windmill again...

"Selling, marketing, and administrative expenses" (SMA) is not just marketing or advertising. It is all the costs of operating the company that are not either R&D or direct costs of producing products sold.

[xadhominemx]

Less than half of JNJ's revenues is pharmaceuticals, so not a great example to be honest.

[spangry]

Actually it's a pretty good example. In Australia, medicines and medical devices (i.e. 81% of J&J revenue) are regulated by the same body (the TGA) using the same approach, craftily reasoning that sick people need both. I realise you might see thing differently (i.e. better) in the USA, but I guess that's just part of what makes you exceptional!

[xadhominemx]

Medical devices and pharmaceutical companies have different cost structures, so I maintain my point that J&J is not a good example of a pharmaceutical cost structure.

But you did 10 minutes of Googling so I defer to you I guess.

[WalterBright]

"Johnson & Johnson's brands include numerous household names of medications and first aid supplies. Among its well-known consumer products are the Band-Aid Brand line of bandages, Tylenol medications, Johnson's baby products, Neutrogena skin and beauty products, Clean & Clear facial wash and Acuvue contact lenses."

  -- https://en.wikipedia.org/wiki/Johnson_%26_Johnson

[spangry]

Literally every single one of those products listed fall under their 'Consumer Segment' (see pages 7 & 8 of financial statements in original post). The entire consumer segment accounts for 18.5 per cent of their total revenue.

The remaining 81.5 per cent of their revenue comes from the sale of pharmaceuticals and medical devices.

[WalterBright]

The original post was listing the "consolidated" figures. Marketing of consumer products was not broken out separately from the consolidated figures.

The information in the pdf does not support the narrative of the original article, because of the use of consolidated figures.

[WalterBright]

Your link says that $19.9 is marked as "selling, marketing, and administrative expenses".

It looks like a dumpster category for all kinds of expenses, not just "marketing".

[vilmosi]

>> So, on behalf of my fellow Australians, I'd just like to thank J&J for selling into my country at a substantial loss

Are they really making a loss in Australia? Your source doesn't say that.

[svskeptic]

"roughly what the wholesale price is plus a very small markup" .. is not my experience. I just had a pharmacist friend show this to me.

Blink charged the customer $10 for generic Lipitor (atorvastatin) 20mg, 30 pills. And reimbursed the pharmacy $4.90. Hence keeping > 50% of what the customer paid. As per the pharmacist, he would be happy to fill the prescription in cash for $7.50, lowering the price for consumer and making him more margin.

These are real numbers. Blink is in fact contributing to increasing the price for consumers, while being yet another middleman in the process.

[jjmorrison]

Just to provide more info - for a given pharmacy, Atorvastatin 20mg is $.0629 per pill, so $1.887 at cost. For most pharmacies the real cost is going the pharmacist filling the rx. An insurance company would probably reimburse <$5 and may or may not just make that the copay. $10 is way higher than pharmacies would charge for generic lipitor.

Also claiming: Avg. retail: $132.52 You save: 96%

Is the complete OPPOSITE of transparency. $132.52 might be a realistic price for branded Lipitor, but that's not at all what is being sold here.

[ch4s3]

> what works so well in Canada and most of Western Europe is right now R&D into pharmaceuticals is largely financed by the opportunity size available in the US market. If you were to just adopt the centralized model tomorrow R&D would grind to a stop

This is really hard to explain to people.

[AnthonyMouse]

> This is really hard to explain to people.

It's not that it's hard to explain, it's that it causes people to want to switch from the US system even more, because as soon as you understand it you realize that US patients and taxpayers are being unfairly forced to subsidize more than their share of drug R&D for Canada and Europe.

[ch4s3]

To quote your sibling comment:

>Probably because saying something is "financed" by demand is counter-intuitive.

Since Healthcare is in economic terms a superior good, people spend a larger share of income on it as their income rises. And because the US is such a large, wealthy market, demand is sufficient to to pay down R&D costs that other markets could no bear. It's still a shitty deal, but it makes perfect sense that it turned out this way. That's just hard to articulate to people who are not familiar with the industry or economics.

[AnthonyMouse]

That's not it though. Canada and Europe are not poor.

The problem is that drug patents are fundamentally incompatible with single payer. The premise of the patent system is that you get to charge outrageous monopoly rents temporarily in exchange for creating something that didn't exist. If you have a monopsony buyer setting prices then curing cancer isn't as profitable, so companies spend less money on research and long-term more people die.

There is another way to fund medical research. Tax dollars. But if you're paying for it with tax dollars then patents are waste; the research happens regardless because the government is paying for it. Then you lose the "market efficiency" -- people have better incentive to succeed without wasting money when they only get paid for succeeding and the money they waste is their own, than when they get paid either way and are spending someone else's money. And then people die because you spent more money curing fewer diseases.

But for the patent system to work, you need the patient to pay the monopoly price, not the government or a monopsony insurance company. Otherwise they can use their market power to pay less than what the drug is worth. Or worse, pay more than it's worth over alternative treatments because they're spending someone else's money or are victims of regulatory capture (as in the US). Either of which destroy the efficiency the patent system is supposed to bring and make it so that we might as well not have it.

[rhizome]

Probably because saying something is "financed" by demand is counter-intuitive.

[metaphorm]

> Which is all to say, it's a fascinating space. It's very ripe for innovation.

is that a euphemistic way of saying its a train-wreck, where society is hobbled by rent-seeking behavior by monopolist cartels that have used a combination of anti-competitive business strategy and regulatory capture to extract massive amounts of wealth from their captive audience of sick people?

[bradleyjg]

> If you're interested in roughly what the wholesale price is plus a very small markup

What about the rebates mentioned in the article several times? I know in the car industry one trick is to go on and on about "dealer invoice" and how great a deal you are getting while ignoring that rebates make that number fairly meaningless.

[kellanem]

Two things going on with the rebates.

1. I think the article is a little one sided in their explanation of the rebate system, though it certainly more opaque than it should be. (some of which is just healthtech is stuck in the dark ages)

2. The rebates really only apply to the branded meds, which are approximately 20% of the market.

[mattieuga]

I think that's very dismissive of the importance rebates play. The PBMs' defensibility comes almost entirely from their ability to use their scale to drive up branded/specialty medication costs up by demanding larger and larger rebates from pharma. In terms of revenue, branded and specialty meds already make up more than 75% of the market today. They are the real problem here, not generics.

[bradleyjg]

With all due respect, saying the article is a little one sided doesn't tell me much. Can you outline what the other side of the story is?

[kellanem]

The story isn't _good_, it's just a bit more complicated.

The pharma company's trade association published this recently which talks about it in depth: http://www.phrma.org/report/commercially-insured-patients-pa...