The prescription drug supply chain's sky is not falling ... yet
On May 19, CMS published its latest update to the National Average Drug Acquisition Cost (NADAC) database. For the uninitiated, NADAC is the best national public database of surveyed pharmacy invoice costs to acquire prescription drugs (which is not hard, because it’s also the only one). In other words, if you are looking to understand what pharmacies are paying to purchase drugs from their wholesalers each month (before rebates), and you don’t want to cough up a boat load of money to pay for it, NADAC is where you must go.
But unfortunately, just like all good things in life, NADAC makes you wait. It’s not NADAC’s fault. All surveys have some amount of reporting lag. But in NADAC’s case, it’s roughly two months (e.g. May survey results reflect March invoice prices), which was an unbearable wait to get an answer to the question, “what happened to generic drug prices as the world started shutting down due to COVID-19?”
But now we finally have the answer … and that answer is 42.
Actually, we wish the answer was that simple. It turns out the answer depends on how you are measuring drug price increases. On an unweighted basis, May 2020’s NADAC update was the most “inflationary” month for generic drug prices that we’ve seen in a year. But on a weighted basis (which can be tracked using our NADAC Change Packed Bubble Chart), May’s inflation was quite tame, clocking in at $12 million (based on Medicaid’s drug utilization).
Figure 1
Source: Data.Medicaid.gov, 46brooklyn Research
Now, if you have been following our NADAC monthlies for the last year and change, you’ll recall that monthly inflation/deflation has worked its way up to nine digits from time to time in the “Before COVID” era. With that as context, $12 million of weighted generic drug price inflation in the first “During COVID” month is an impressive showing for all of the generic manufacturers and wholesalers out there, who in March appear to have worked quite diligently to keep prices in check as the pandemic descended upon the U.S.
Take the king of over-hyped COVID-19 drugs for example, hydroxychloroquine, a.k.a. HCQ, or now, “the hydroxy.” According to the New York Times, the White House’s March 19th briefing touting the at-the-time unproven, and now simply inaccurate, perceived benefits of HCQ for COVID-19 treatment sparked a nationwide run on this decades-old malaria treatment, with prescriptions pouring “into into retail pharmacies at more than 46 times the rate of the average weekday.” Whether the prescriptions were for legitimate human need, or for highly questionable dogs and arthritic goldfish, the hydroxychloroquine rush was real.
Against this backdrop of unprecedented demand for hydroxychloroquine, from February to March, U.S. pharmacy invoice acquisition costs for the drug rose by 9 cents per pill, going from $0.27 to $0.36 – a 32% increase. Doesn’t sound great, but historically speaking, this is a blip on the radar for this drug, which as we highlighted back in 2018, spiked above $2.50 per tablet back in late 2015 when most of the U.S. supply vanished due to FDA import restrictions placed on Ranbaxy facilities producing the drug. While we are still very early on in this COVID-19 marathon, clearly this increase could have been much worse.
Figure 2
Source: Data.Medicaid.gov, Elsevier GSDD, 46brooklyn Research
But let’s be honest here. Even though these results are somewhat surprising for us, maybe they shouldn’t be. Is it really all that surprising that overall generic drug prices (at least on a weighted basis) remained in check this month? Let’s play through an alternate universe scenario where prices rose uncontrollably on all sorts of high-utilization generic medications in March. We would have likely led with this not-so-subtle headline:
“Generic drug supply chain jacks up drug prices en masse just weeks into COVID-19 nightmare”
From a PR standpoint, that wouldn’t have played out so well, especially given the nation’s collective frustration with drug prices. So we shouldn’t be surprised to see everyone keeping things in check, at least back in March. Hopefully we’ll see this collective pricing reticence continue as more time passes. Either way, there is only one thing that is certain. We will be crunching the data each month and delivering it to you through our visualizations. Every month. Every drug. So we’ll see how this all plays out in time. All we need is just a little patience.
Let’s get into more of this month’s drug pricing details:
1. Unweighted drug price change analysis makes it look like we have a problem
Each month, we first look at how many generic drugs went up and down in the latest month’s survey of retail pharmacy acquisition costs, and compare that to the prior month. As shown in Figure 3, the May NADAC survey results showed that the number of generics with price increases outnumbered those with decreases – by a ratio of 1.2 to 1.
Basically, the quick way to read the chart below is to look for blue bars that are taller than orange bars to the left of the dotted line and exactly the opposite to the right of the dotted line. That would indicate a good month – more generic drugs going down in price compared to the prior month, and less drug prices going up. The opposite happened this month … but recall that April was the best deflationary month we have on record since we started tracking all of this in late-2018, so it was going to be tough to beat. Translated for our friends in the financial world, April was a “tough comp.”
Figure 3
Source: Data.Medicaid.gov, 46brooklyn Research
Still, we can’t blame this all on a tough comp. There were 312 generic drugs (technically, “NDC Descriptions” in the NADAC database) that increased between 10% and 20%, and 174 that increased by more than that. On first glance those struck us as high counts, but to gauge exactly how high they were, we needed more than one comparison month.
So we gathered up all of the increase counts from our historical NADAC monthlies (dating back to the start of 2019) and threw them all in one chart (Figure 4). It turns out that the 1,243 drug price increases between 0% and 10% this month was the most over this 17-month period. Also, the 486 increases greater than 10% was second only to the disastrous May 2019, a month in which all generic drug price changes netted out to a whopping $86 million in inflation based on Medicaid’s annual utilization.
Figure 4
Source: Data.Medicaid.gov, 46brooklyn Research
While this doesn’t look so good, in our view, it’s premature to jump to conclusions based on one month of data. It could be an errant data point that coincidentally occurred right as COVID-19 hit the scene. It could be due to changes in the NADAC-surveyed pharmacy population, which can be more meaningful for lower utilization drugs. Or it could be a sign that the generic supply chain is starting to adjust prices on a lot of these off-the-radar generic drugs. It’s too early to tell. But we’ll find out soon enough.
2. Weighted Medicaid generic inflation makes it seem like we don’t have a problem … yet
As we’ve written in prior updates, knowing the price changes alone are not enough. We need to apply utilization (drug mix) to the price changes, which is the purpose of the NADAC Change Packed Bubble Chart (Figure 5). We use Medicaid’s Q4 2018 through Q3 2019 drug mix to arrive at an estimate of the total dollar impact of the latest NADAC pricing update. This helps quantify the real impact of those price changes from a payer’s perspective.
The green bubbles on the right of the Bubble Chart viz (screenshot below in Figure 5) are the generic drugs that experienced a price decline in the latest survey, while the yellow/orange/red bubbles on the left are those drugs that experienced a price increase. The size of each bubble represents the dollar impact of the drug on state Medicaid programs, based on utilization of the drug in the most recent trailing 12-month period. Stated differently, we simply multiply the latest survey price change by aggregate drug utilization in Medicaid over the past year, add up all the bubbles, and we get the total inflation/deflation impact of the survey changes.
Figure 5
Source: Data.Medicaid.gov, 46brooklyn Research
Lots of moving parts for sure, but it all nets out to $12 million of net inflation using Medicaid’s drug utilization. With over $11 billion in Medicaid spending on generic drugs in 2018, if the next 12 months mirrored this one, that would still only amount to 1% generic drug inflation. It’s not the deflation we need to offset brand drug price increases and ever-escalating launch prices, but it’s not “sky is falling” generic inflation either.
Our collective nerves should start to ease even more when looking at the year-over-year generic deflation trends. Recall, we told you that last May was a horrible month for generic pricing changes, with all sorts of generics jumping up by double digit percentages. It was a bonefide generic inflation virtual Zoom dance party. Well, now we get to compare this May’s NADAC price changes to last May’s inflationary rave. This, folks, is what is called an “easy comp,” which we believe is what’s responsible for the uptick in generic deflation to 9.7% for oral solids and 7.2% for all generics. But going back to our point, again, there is no sky is falling takeaway from this chart (Figure 6).
Figure 6
Source: Data.Medicaid.gov, 46brooklyn Research
3. ADPIT also tells us there’s no reason to panic, yet
We probably could end this report right here, having provided enough evidence to conclude that while a lot of generic drugs went up this month, these price increases didn’t translate into meaningful generic drug inflation, as they did not occur in heavily utilized drugs.
But there is a reason we have over a dozen visualizations available for you here at 46brooklyn. Drug pricing research requires looking at the same problem from different angles. Even if these other angles don’t completely upend the conclusion forming in your mind (spoiler alert, they didn’t here), they may unearth some new plot twist that may take you down another path altogether that you never expected (spoiler alert, they did here).
So with that in mind, let’s turn to our Abnormal Drug Pricing Increase Tracker (ADPIT). As a reminder, ADPIT takes all of the NADAC prices for one drug over any given 52-week period, ranks them, finds the 90th percentile for the price, and then compares the current price to that 90th percentile price. If the current price is above the 90th percentile, we consider the current week’s price to be “abnormal” and add it to the list for you to peruse. Then we do this for another 20,000 or so drugs for good measure to complete the list, shown in Figure 7.
If this is the first time you are seeing this, we include the number of annual Medicaid prescriptions for each of these abnormally priced drugs, and then two metrics we created – one called Relative Impact Ratio (RIR) and another called Relative Impact Score (RIS). RIR simply tells you how far above the 90th percentile a drug’s price currently is (i.e. Metformin HCL 1,000 MG Tablet at 1.09 means its 9% above its T-52 week 90th percentile price). RIS multiplies the number of annual Medicaid prescriptions by (RIR - 1) to size the impact of the “pricing abnormality” (for Metformin, 9% x 4,066,751 prescriptions = 377,228). Add up all the RIS for all of the drugs each week, take the four-week moving average, and you get the chart in bottom right (which sizes the aggregate weighted impact each week). We then divide the bottom right chart into drugs with active ingredients in ongoing COVID-19 clinical trials, and all other drugs. Check out our interactive ADPIT tool here, and find more information on how to use it here and here.
Figure 7
Source: Data.Medicaid.gov, ClinicalTrials.gov, 46brooklyn Research
OK, now that we’ve reviewed the nerdy stuff, the key call out here is the chart on the bottom right. Notice the latest bar ticked up a bit, but its still quite low. In other words, the weighted impact of the abnormal price changes this week were not significant enough to move the needle on the four-week moving average RIS.
Moreover, as shown in Figure 8, while the total count of abnormally-priced generic drugs increased, it’s not numerically out of line with where it’s been over the last year.
Figure 8
Source: Data.Medicaid.gov, ClinicalTrials.gov, 46brooklyn Research
Yet another couple feathers to put in our “sky is not falling yet” cap.
And speaking of caps, we better go ahead and put that on now (or better yet, a helmet) and brace ourselves, because here comes the plot twist.
4. The coming cost impact of bringing generic production back onshore
As we sat staring at the ADPIT leader-board shown back in Figure 7, we couldn’t help but notice a common thread tying together all of these drugs, except diphenhydramine. Can you see what they have in common? That’s right! They are all cheap. DIRT CHEAP.
Think about the implications of this for a minute, especially as we start to have very real discussions about (and start spending real dollars on) on-shoring our generic production. The #1 drug in ADPIT this week from a cost impact standpoint was the ancient diabetes treatment Metformin, which increased from 2.697 cents per pill to 2.971 cents per pill. That’s right, a 0.274 cent increase per pill (i.e. $0.00274) drove Metformin HCL 1,000 MG Tablets to the top of the ADPIT leader-board. This happens, of course, because gobs and gobs of people take metformin.
Figure 9
Source: Data.Medicaid.gov, 46brooklyn Research
So this got us thinking. What percentage of generic prescriptions dispensed in Medicaid are for drugs like Metformin? Dirt cheap drugs taken by millions of Americans that due to their widespread use, will more than likely be cast as “critical” to our national supply and pushed to be produced locally?
The answer is A LOT. Take a look at Figure 9. This shows the percentage of all generic prescriptions dispensed between Q3 2018 and Q2 2019 that had a NADAC per unit less than or equal to a whole slew of different unit costs. Take 5 cents for example. Twenty-six percent of all generic prescriptions dispensed in Medicaid had an invoice cost of less than or equal to just 5 cents per unit. Forty-eight percent of all generic prescriptions had a cost of less than or equal to just 10 cents a unit.
Figure 10 is another striking way to look at this issue if you fancy charts over tables. In this chart, we show the NADAC per Unit on the x-axis, increasing from left to right, and the cumulative percentage of Medicaid prescriptions on the y-axis. Look how rapidly the curve rises towards 100% as we work our way up in generic cost. By the time we get to $0.60 per unit, we’ve accounted for 90% of all Medicaid generic prescriptions.
Figure 10
Source: Data.Medicaid.gov, 46brooklyn Research
About a week ago we came across a quote from Ronald Piervincenzi, chief executive of US Pharmacopeia, within an enlightening drug supply chain report called, Stretched, secret supply chains hold Covid-19 patients' lives in the balance. His quote, in regards to pricing of medicines, was that as “we go down to rock bottom price, we leave no room for resilience.”
“We go down to rock bottom price, we leave no room for resilience”
Look, we don’t know what the definition is of “rock bottom” price for a generic drug. It clearly depends on a lot of factors, chief among them being scale. But when we are talking about prices in the one digit cent level, we suspect we are in the “rock bottom” neighborhood. And we now know that nearly half of all generic prescriptions dispensed in Medicaid live in this neighborhood.
This finding clearly has big implications for generic supply chain discussions going forward. There is little debate that we should have more resilience and better quality, but how much are we willing to pay for it? Globalization has wrung just about every penny (literally fractions of a penny) out of arguably half of the generic drugs we pop in our mouths. Anyone who’s followed Katherine Eban’s work knows where that’s left us. It would seem quite prudent to add a few pennies back to buy better quality and resiliency.
But what if we find out that on-shoring production of APIs and finished products for a drug like Metformin won’t just add a few pennies, but will add a few dimes, or even a few quarters per pill? What do we do then? We honestly don’t know, but it’s going to be a fascinating discussion to have as 1) the White House expresses interest in capping state Medicaid payments, 2) more people enroll in Medicaid, and 3) COVID-19 wreaks havoc on state revenues leaving states potentially unable to pay for more expensive American-made generic drug options.