Category Archives: Business

Will Amazon provide pharmacy services that take market share from Walgreens and CVS in the future?

Business, Pharmacy, ,

I wrote an answer to this question on Quora back in 2013.

Will Amazon provide pharmacy services that take market share from Walgreens and CVS in the future?

In other words, will Amazon be able to take market share from those companies that fill your prescriptions?

It’s unlikely, because it’s outside Amazon’s core strengths (warehouse automation and computing infrastructure), and there’s little benefit (for consumers or Amazon) in having Amazon fill your Rx’s.

A couple of things about filling a prescription that might help you understand the problem a little better:

  • Every prescription must be checked by a pharmacist before it is dispensed to a patient to ensure correctness. Therefore Amazon would have to hire a lot of pharmacists.
  • Copayments are, the same for at every pharmacy, assuming the pharmacy takes your insurance, and the cost of the medication is greater than your copayment in the traditional $10/$25/$50-type Rx copayment structure. The exception to this is when your pharmacy benefits manager (PBM) decides to offer you 3 months for the price of one (or two) if you do your Rx by mail. Sometimes retail chains will match this–but not often–and they’re effectively eating the loss when they do.
  • Not all prescriptions are recurring. You’re not going to get your antibiotic or painkiller filled at Amazon, because you need it now. These immediate prescriptions are 40-50% of pharmacy volume… this is enough volume to sustain neighborhood pharmacies well into the future.

The fact of the matter is, your PBM probably already offers the benefit of prescriptions by mail, and they do it cheaper than Amazon could.

Dispensing medications doesn’t scale well, and the people who have licenses to do it are expensive. When a pharmacist does QA on a prescription they’re checking a couple of things:

  • Does the drug match the prescription?
  • Are the instructions clear? Do they make sense?
  • Is the medication contraindicated with any of the other drugs the patient is taking?
  • Is the medication contraindicated with any of the medical conditions the person has?
  • Does it make sense from an age/weight/gender perspective?
  • Does the prescription itself make sense? (You’d be shocked at the percentage of prescriptions that have to be changed, which necessitates a call to the prescriber to correct whatever the problem is. IOW, it’s very labor-intensive.)

Electronic prescribing is a panacea for exactly two things:

  • It solves the bad handwriting problem
  • Drugs match the dosages they come in (I.e. You won’t see an Rx for Celebrex 15mg, because no such thing exists.)

It does not solve the:

  • Idiotic directions problem
  • The nonsensical quantity problem
  • The wrong drug selection problem
  • The wrong dosage problem
  • Any number of sanity problem permutations (which are alarmingly common)

Essentially, you have to solve the GIGO problem in a very, very reliable way in order to automate the practice of retail pharmacy. Most medication errors are prescriber errors, not dispensing errors. Error checking in health care is very hard to automate, because there are always exceptions to the rule, and you always need to be able to override normal parameters to account for it.

College is broken

Business,

I watched College, Inc. the other day, a documentary about the rise of for-profit colleges. Everyone with an internet connection has no doubt seen their advertisements all over the place: UoP, DeVry, etc. Even some medical schools that have opened recently are for-profit, and for-profit pharmacy schools have existed for a while.

Education as byproduct

Being for-profit doesn’t necessarily make a school “bad”. I was a little annoyed with the PBS interviewer who kept asking whether education should be a business. Education is and always will be a business. Just ask any student who’s taken money out in student loans to pay for school. Ironically, I suspect that for-profit institutions probably have incentives that are more closely aligned with the majority of students’ motivations than their non-profit counterparts. Broadly speaking, students seem to fall into two basic categories: those who are there to learn stuff, and those that are there for the “college experience” which may or may not include learning something. By and large, the students that for-profit institutions attract are those that fall into the “want to learn stuff” category, because they don’t have a lot of amenities that contribute to a traditional college experience.

As a result, colleges and universities engage in quite a bit of activity that has very little educational merit. Building $40MM gymnasiums adds little value to a student’s education, but it does add to an institution’s “sex appeal”. That means it’s fluff. It’s not just athletic complexes and fancy dorms, though. Look at the job postings at these institutions:

How many of these positions directly contribute to a student’s education the way that excellent classroom instruction and strong ties to the public and private sector would? Not many. Instead, most of these job postings piggyback on education itself, increasing overhead, and contributing very little to the success of its customers. In this respect, institutions are more interested in the furtherance of their own legacy and building their brand than they are in educating students. Now I’m not suggesting that these positions are worthless to students; there will always be some overhead in any organization, but the sheer vastness of this overhead in higher education is what’s staggering. Institutions that are directly funded through taxes* have less of this, just like high schools would never have this kind of overhead, simply because the budget doesn’t afford it.

This inefficiency supports a lot of salaries. Luckily for them, demand for education at these institutions is relatively inelastic, so there’s very little incentive to change organizational behavior.

Overbuilding and under-using

The traditional two-semester school year is broken, too. 3.5 months of school twice a year, for four years? That’s dumb. We don’t live in an agrarian society any longer. Change to a trimester or quarter system and go to school year-round. You could even build-in a mandatory co-op program so students can make money in their industry while still being students. One quarter or trimester would be co-op, and the rest of the year would be traditional didactic education. Even with co-op, students could finish in 3 or 3.5 years instead of 4, and be better rounded for it. Perhaps even less if some other changes are made. (Read on.)

Classrooms go unused for 5 months out of the year, limited summer class offerings notwithstanding. Schools’ capital isn’t being utilized efficiently. On top of this, there’s quite a lot of IT infrastructure on your traditional college campus that doesn’t need to exist anymore. General purpose computer labs aren’t necessary for most majors, because computing is now commoditized. Most students have laptops and/or desktops. (Engineering is probably the main exception here, as licensing for engineering software packages is prohibitively expensive for all but the richest students.)

For everyone else, academic discounts exist. Steeply discounted versions of Office Ultimate ($60) and Windows 7 ($65), are available so the argument that students can’t afford Office doesn’t really hold much water. Switch to an open-access wireless network, and you’ve suddenly eliminated quite a lot of physical overhead.

Wealth and ideas are created when smart, motivated people interact with one another. Universities are havens for this kind of interaction. In computer science, for example, getting rid of the computers doesn’t mean you get rid of the student interaction. A school could continue to foster it by making space available that only CS students have access to by taking the computers out of the computer lab but leaving the tables and chairs. Besides, when you break your own stuff, you have to fix it, which is itself a learning experience…

For everyone else, the same principle works, too: get rid of the computers but leave the tables and chairs.

Education vs instruction

Education isn’t the same as instruction. It’s dumb to think that making an engineering student take 10 liberal arts classes makes him “well-rounded”. This is the difference between education and instruction. Instruction is what happens when a student sits in a classroom. Education is the gradual process of acquiring and assimilating knowledge.

Conflating the two is dangerous and ignorant.

For this reason, I think that changing the US model of higher ed to be more like the British model makes a lot of sense. Let college students study what they want within their field. Don’t make them take a bunch of classes that they care nothing about. They’re not going to learn anything in them, and they waste time, money, and attention. Ensure that they can write — and if they can’t, fail them — and set them loose on their CS classes, EE classes, or History classes. The rest is unimportant.

Educated people will learn the other stuff just by being attentive, observant participants in life. And those that won’t learn this information on their own certainly won’t retain it as a result of sitting through some class they hated.

Oh, and let students test out of any class without needing to take an AP exam. If you think one test isn’t enough, then there’s something wrong with your testing methodology, not the student.

Teacher quality transparency

I don’t think a professor’s degree matters. Whether they have a Master’s or a PhD is irrelevant. The only things that matter are that they:

  1. Understand the material
  2. Can effectively communicate the material to students

In this respect, I think sites like Rate My Professors are absolutely brilliant. Throughout my time as an undergrad, whenever possible, I checked the site to scope out who I would try to take, and who I’d avoid. I used to build small dossiers on potential professors based on RMP comments and ratings, and build my curriculum from there, inasmuch as this was possible.

Unfortunately, a lot of professors (and institutions) dislike RMP. You see, RMP brings transparency to an otherwise opaque — and unimportant from the school’s perspective — part of the educational process: teacher quality. RMP isn’t perfect; there’s a lot of crap on there written by idiots for idiots (business opportunity!), but there’s also a lot of quality there if you look closely enough. If RMP built in a meta-review tool like Amazon has, it would suddenly become a lot more useful.

The last semester I was in school, one of my professors told students considering graduate school to check Rate My Professors first, and avoid any program where the professors got consistently bad ratings. I thought this was wonderfully enlightened of him, and of course he was one of the best profs I ever had.

Final thoughts

Y Combinator exists to mass produce successful startup companies. I don’t see why higher education can’t be rebuilt to mass produce effective people. I think the for-profit education sector has a lot to teach the non-profit sector with respect to leveraging the Internet and using capital efficiently. Most students don’t go to school with the goal of being an academic. They go to school because society expects it of them (degree inflation) and/or they want to learn something so they can have a cool job and make money.

In this respect, I’d like to put forward some modest reform proposals:

  1. Have classes year ’round
  2. Let students test out of any class in the curriculum
  3. Get rid of mandatory, off-topic courses
  4. Get rid of unnecessary computer labs
  5. Offer all courses that can be reasonably be offered online, online
  6. Make co-op mandatory, and based on ability as measured by progress through the program (see #2)
  7. Reward teaching excellence rather than research excellence

This might mean a talented CS student finishes his degree in a year. This might mean an English student never sets foot in a classroom. These things are okay. They should be embraced.

 

* All institutions are funded through taxes, even for-profit schools, albeit indirectly. Most student loan programs are government funded or subsidized, which means they’re paid for by taxes.

Stimulus efficiency in a post-industrial economy

Business, Economics, Politics

As we move into the middle portion of 2010, we’re hitting the fattest part of the ARRA stimulus allocations. While there was a lot of pre-passage wrangling on both sides of the aisle about efficiency and multipliers, there hasn’t been much talk about the stimulus money’s effect on unemployment in recent months. Not since the unemployment rate has been trending in a positive direction. That means it’s a great time to examine stimulus.

Recovery.gov lists 682,779 jobs as “created” or “saved” as a result of the stimulus package. ARRA started doling out money on Feb 17, 2009, and through March 31, 2010, $205.3bn has been laid out. This means that $205.3bn has puchased 682,779 jobs, at a cost of $300,686 per job.

That’s pretty horrible. Apparently it’s not quite as straightforward as this, though, thanks to some fancy hand-waving that magically brings this number down to ~$160,000 through methods that I’ve yet to see explained. Regardless of what you believe, it’s really expensive for Uncle Sam to create jobs using good old fashioned Keynesian stimulus.

Capital intensity

The neoclassical production function is y = (K,L); that is, output is a function of capital (K) and labor (L). Modern macroeconomics throws a lot more into this function to account for other factors, but using the older capital-labor tradeoff is good enough to illustrate my point. In general, there is a tradeoff between capital and labor. You could hire 1,000 men to shovel the streets in the winter, or you could hire one guy with a plow, and the guy with the plow will do more in less time. This is why nations tend towards industrialization.

The United States is a post-industrial economy. Watch a documentary on the Hoover Dam and look closely at the sheer number of men at work. In today’s economy, a large percentage of these men would be replaced with machinery designed to do a specific job.

That means that money is being spent on capital instead of labor because stimulus money is allocated for specific tasks — not to employ workers, which is merely a fringe benefit — and then these tasks are completed by either the public or private sector (or both) using whatever mix of capital and labor is appropriate for the job.

Capital flight

Capital has to come from somewhere. In terms of traditional stimulus spending on infrastructure, you’re mostly dealing with heavy equipment manufacturers, the majority of which are located overseas. In some cases they’re headquartered elsewhere, and in some cases, their manufacturing is located elsewhere. Sometimes both. When one or both of these conditions is met, profit, jobs, or both are shipped across borders into other nations. In this respect, stimulus money is being used to create or sustain jobs in other countries.

It is possible to mandate that firms using government money buy from American corporations — the Fly America Act is an example — but this isn’t possible or desirable in all cases. American heavy equipment manufacturers don’t make all of the machinery necessary to complete some of the larger infrastructure projects that are on the table.

Job destruction and obsolescence

Another problem with stimulus spending is that quite a bit of the funding is to improve efficiency, particularly in sectors like health care. Unfortunately, “improving efficiency” usually means shifting away from labor. In a sector like health care, capital takes the form of computers and software. Primarily the latter. Automating billing, cutting back on administrative personnel, decreasing overhead, getting rid of physical records. These are the things that software is great at; it is a substitute for labor.

Software is a unique example, too. Not only does it destroy jobs in the short run, but it doesn’t create new jobs very quickly, except in the software-based industries themselves, because it’s a virtual good: all you need is a computer, an Internet server, and the intellectual capital required to make it. This breaks the normal supply-demand models in some interesting ways, because supply is functionally unlimited, but price doesn’t go to zero, even after a firm’s fixed costs have been covered. This leads to some very high profit margins.

History is littered with examples of capital displacing entire workforces. Textile manufacture during the Industrial Revolution is the most prominent example in modern history, with huge numbers of people losing their jobs thanks to the electric loom. The upside is that because of this creative destruction, whole new industries are born, and more jobs are created than were destroyed.

This doesn’t lessen the pain in the short term, however. While the labor market can and does adjust for this creative destruction, this obsolescence is occurring so quickly that many of these displaced workers are unable to acquire the skills necessary to find new kinds of employment in the new economy that’s being created. In times past, the technological increase was on the order of 3% per generation (pre-Industrial Revolution), but now stands at about 3% per year. The rapidity of this kind of change is difficult for the labor market to absorb. This is one of the causes of a jobless recovery: technology increases wealth (GDP) without using more workers to get the job done thanks to software advances and other capital-based technologies.

Conclusions

If the goal is mass job creation as quickly as possible, then the government should employ fiscal stimulus as inefficiently as it can. Employ workers where the private sector would use machinery. Employ dozens of people with slide rules instead of one physicist with a computer. Build roads by hand instead of using machinery. In short, pretend we’re a pre-industrial civilization instead of a post-industrial one. This will get you the biggest bang for your buck in terms of rapid, low-cost employment. The work isn’t desirable, and people will jump ship back to the private sector when it starts creating jobs as a result of people spending their money.

In this case, inefficiency props up the labor market in the short term.

The downside to this is that it doesn’t create jobs in the long-term growth sectors like technology, health care, and education, which are physically and intellectually capital intensive. It does, however, get a lot of people employed very quickly.

Revisiting talent in the public and private sectors

Business, Economics, Finance

At the end of November, I mused about public sector’s problem of attracting and retaining top-notch talent:

Ben Bernanke’s salary as chairman of the Fed is just over $191,000. Henry Paulson as CEO of Goldman Sachs made $16.4 million according to Forbes. […] I find it very hard to believe that compensation plays no role whatsoever in an individual’s choice of employment.

This all seems terribly obvious to anyone who thinks about it, and Nate Silver has commented on the same phenomenon with a real-world example:

In retrospect, it is clear that regulators did not have the human capital to keep up with the financial industry, and to understand it well enough to be able to exert effective regulation. Given the wage premia that we document, it was impossible for regulators to attract and retain highly-skilled financial workers, because they could not compete with private sector wages. Our approach therefore provides an explanation for regulatory failures.

That is, the excessive wages paid by Wall Street not only lure talent away from other parts of the private sector, but also from the public sector, where employees are subject to government wage controls. The very people who might be the most capable of enforcing regulations on the banks instead wind up working for them.

This is a very real problem. Some of the work that I did in my first job after college at KPMG involved valuing intellectual property in conjunction with international tax disputes. We had our economists, and the IRS had theirs. The thing was, however, that our economists were better than the IRS’s, because if someone at the IRS was any good, we’d hire them away and treble their salary. Part of a good regulatory reform plan, then, would be to increase the salaries paid to employees at institutions like the Fed, the Treasury, the IRS, and the FDIC.

So how do we solve the problem? Tripling an IRS economist’s salary probably means they’re making in excess of $400K/year, which is more than the President makes. Is it feasible to have regulators that make more than the President?

More on YouTube and big content

Business, Culture, , , , ,

A friend told me she disagreed with my post the other day on big media’s relationship with YouTube:

I totally disagree with your media article. NBC gets revenue from Google for sharing their content–this will never happen in a way that works for both. NBC should be allowed to host the shows on their own site with the ads they would like to include on their own site.

I think YouTube needs to take off all its questionable content. Just because people have trouble enforcing certain rules doesn’t mean that there is no reason for intellectual property protection. YouTube makes most of its revenue off of encouraging people to rip things off of other sites. It doesn’t produce anything, and, as a platform, I don’t even like it that much.

It struck me that I didn’t flesh out my argument on what YouTube is good for very well — mostly because it wasn’t the point of my post — but that I probably should. First off, a couple of things.

NBC can do whatever it likes with its content. It owns it, and should be allowed to do whatever it wants with it. I think it’s in their best interest, however, to leverage YouTube rather than fight it wholesale. (The same holds true for the music industry.)

In fact, NBC does host their own content at NBC.com and in other places (Hulu). You can watch whole episodes of e.g. Heroes and many other shows for free, on demand. I think they’ve done a remarkably good job in leveraging the excitement of the fans as well as doing some interesting stuff by embracing other kinds of media, most notably the Heroes webcomic.

It terms of showing TV shows that have actors and scripts and story arcs, YouTube isn’t the best platform. Hulu is preferable for a number of reasons:

  1. Hulu is more reliable. YouTube streams die on me 20-25% of the time no matter their quality.
  2. Hulu’s UI is better for streaming a whole show.
  3. You can pause and restart an episode later on even after you’ve closed your browser.
  4. Queueing is excellent. Subscriptions are excellent.
  5. It is trivially easy to download content from YouTube without anything more fancy than a bookmarklet. (Note: I didn’t use that script, I wrote my own for Chrome but it looks similar.)

Where Hulu does NOT shine is permanence. This is driven largely by content deals with networks, so Hulu isn’t to blame, here. It is frustrating to embed a Hulu clip in something like a blog post and have it be expired in two weeks. This breeds ill will towards Hulu, even though the network is the real culprit.

YouTube’s strengths are:

  1. Permanence (copyright infringement claims aside)
  2. Quantity and quality of HD clips
  3. Sheer ubiquity
  4. The UI lends itself better to interacting with shorter clips than any other web video service

If I were NBC, would I want Heroes on YouTube? Not in its entirety, no. I would certainly have some HD trailers and teasers for the various episodes available, and if viewers wanted to upload their favorite short scenes and mashups, I wouldn’t want them deleted. It’s all good publicity for the brand and it costs me nothing. (And indeed NBC is pretty lenient, as far as I can see.)

I would use these clips to drive people to the homepage for Heroes at NBC.com, and/or on Hulu.

But it was the news program format that I was mainly concerned with the other day. YouTube does shine when it comes to interviews with public figures. In this respect, news organizations almost perform a public service, but the problem with their ownership of their content means that if a politician does something boneheaded, it’s largely forgotten in a relatively short time as the content is locked in a media company’s footage archives, relegating it to little more than ephemeral conversation for the public’s needs and wants.

Of course, it’s not NBC’s job to do what’s in the public’s best interest, it is their fiduciary duty to maximize shareholder value. However in this case, I believe that these goals are one and the same. After all, we can’t be sure that The Daily Show will be around forever…

YouTube is a perfect environment for these single-issue clips thanks to its ubiquity and permanence. If a content owner like NBC wants to keep whole episodes for their own web property, that’s fine. But I think they should allow (and promote) uploading of shorter clips, like the segments from Meet the Press that I lamented the other day. Use these clips to drive people to NBC.com. Your brand gets free publicity, the public benefits, and it has cost you nothing.

If CBS has filed copyright infringement notice with YouTube, would most of us have seen the first-hand footage of the trainwreck that was Sarah Palin this past election season? Probably not — the number of folks in my generation that watch news programs on TV is vanishingly small…

When are big media companies going to figure it out?

Business, Culture, , , ,

I regularly embed YouTube videos into some of my posts. Mostly they’re interviews and the like. This morning I was scrolling through some of my older entries, and I wanted to re-watch Tom Brokaw quizzing President Obama on Pigouvian gas taxes. So I clicked play, and lo and behold, the video has been removed due to a copyright infringement claim from paramount_vfp.

Um… what?

As a large media organization, how stupid could you possibly be?

Look, people of my generation rarely watch shows like Meet the Press. Most people of my generation have never even heard of Meet the Press, let alone know what it is. They do, however, know what YouTube is. They know what search is. They know that you find video content by searching YouTube for whatever it is you’re looking for. Ergo, YouTube is the perfect platform for spreading your brand if you are a media company.

This isn’t rocket science, folks.

I understand that NBC wants to keep their content all under one roof, but frankly, they do a crappy job of it.

  • The search interface sucks
  • You have to watch an ad before you can view the shortest of clips
  • Consumer’s don’t go to NBC.com to find A/V material because they don’t know or care that MTP is an NBC show
  • NBC has a crap API for embedding videos. (Want a video to start at a specific point? Think again.)
  • Google is the largest search engine, but it doesn’t find MTP clips very effectively.
  • YouTube is the second largest search engine (larger than Yahoo!, even), and MTP clips are nowhere to be found.

Old media hasn’t figured out that consumers aren’t going to keep searching for that clip unless they really need it, and most video watching on the web isn’t done out of necessity — it’s done out of a casual desire to see something, and if the barrier to watching this content is too high, the consumer will simply give up. Everyone loses. (Note that this doesn’t necessarily apply to television shows.)

The NYTimes figured this out the quickest of all large media companies. They discovered that people aren’t interested in paying to access content that they only read casually. (Newspapers aren’t essential daily reads anymore — they’re third class media citizens that just happen to to most of the journalistic heavy lifting.) So they decided to open up the archives of the paper itself and make as much of their content freely available as they possibly can, in as many ways as they can. 28 years of content starting yesterday. If that’s not capitalizing on the long tail (ugh), I don’t know what is.

By constructing useful metadata, the NYTimes will allow individuals to find what they’re looking for either by using search engines like Google, or by using the NYTimes’ own search engine. By getting the metadata right, they’re going to maximize the impact they have on the Internet, which in another ten years will be more important than a stack of cheap paper sitting on the breakfast table.

What NBC should be doing is partnering with Google and uploading entire programs to YouTube in HD, particular news programs like Meet the Press that lend themselves to cropping into shorter news segments where specific sections can be embedded by bloggers, further maximizing a program’s impact. So an entire Meet the Press episode might consist of an NBC-constructed playlist residing in a Meet the Press YouTube channel that you can “Play All” on, with each discreet topic having its own video that can be linked to or embedded. Think President Obama’s Change.gov channel, applied to a Meet the Press concept.

NBC would then provide a brief synopsis of the episode so people can actually find the video they’re looking for. Better yet would be a full transcript like they currently provide for shows just like MTP and 60 Minutes. However if that’s asking too much, they could still drive traffic to their own website by providing a link to the fulltext transcript on the YouTube page itself.

Everyone wins in a model like this:

  • Bloggers get, great, embeddable, first-hand material
  • NBC maximizes consumer exposure to one of their premier brands in a way that a home-grown system never could
  • NBC gets revenue from Google for sharing their content
  • NBC doesn’t have to pay the costs associated with developing their own video-serving platform and hosting their own videos

When are the large media organizations going to figure this stuff out? When are they going to learn that they can still win in this new medium simply by sharing their own content in higher quality than others can copy and upload? When are they going to figure out that you can sell a lot more by doing this? (Just ask the guys from Monty Python.)

When are they going to figure out that lawyers and DMCA takedown notices are expensive and counterproductive and piss off potential customers? Everybody loses in a protectionist business model.

(In an amusing bit of irony, the Meet the Press website actually links to the very video that I originally embedded. This is not unlike yesterday’s blunder by Universal.)

Bullets for a snowy Wednesday

Business, Science & Technology, , , ,

A smattering of things I’m consuming:

Profit maximization in pharmaceuticals

Business, Economics, , , , ,

From a microeconomics exam recently. The source article is “How a Drug Maker Tries to Outwit Generics” from the WSJ. (If that link doesn’t work, here is a PDF of the fulltext.)

Describe the nature of demand for Provigil. How much market power is there and why? If Cephalon raised the price of Provigil by 74%, with no apparent increase in production costs, does that mean that Cephalon was not initially pricing to maximize profits from Provigil? By raising the price, are they now profit-maximizing? Discuss. How would you expect the introduction of generics to affect the demand for Provigil? The price of Provigil has been raised before Nuvigil is launched. Discuss how the demand for Nuvigil would have been affected if the price of Provigil was not increased. Evaluate Cephalon’s strategy as a means of achieving its goal of corporate profit maximization.

Provigil is in extremely high demand; the trouble is that it is expensive, and it is almost never covered by people’s insurance. Right now, the average wholesale price (AWP) for 30 count of Provigil 200mg is $361. Provigil is also in an interesting place in terms of patent protection. It’s not a new drug, and through manipulating pharmaceutical patent law, Cephalon (who acquired the IP for the drug when they bought out Lafon) has been able to extend the life of the patent two or three times.

In healthcare, supply and demand do not function freely. In Provigil’s case, there is a distortion: one needs a prescription to buy it. In terms of price, there is another distortion: third party insurers will not pay for it. (9 out of 10 times it requires a prior authorization, which is almost always denied.) There are substitutes for Provigil. While it is the only drug of its kind, the stimulant ADHD medications promote wakefulness as well, though they often have other undesirable side effects, and are contraindicated in patients with anxiety and panic disorders and in patients with cardiac arrhythmias, hypertension, etc. Provigil, with its different mechanism of action, does not have these limitations because it does not function like drinking a cup of coffee. It simply removes fatigue and promotes wakefulness in the same way that it’s opposite, Benadryl, makes you sleepy and dopey. (Indeed, Benadryl is a messy antihistamine that works in the body and in the brain, and Provigil is a pro-histamine that works only in the brain.)

Because of the lack of competition within the pro-histamine drug class, Cephalon does have some market power. In my view, Cephalon was not profit maximizing for the long-term until these recent price hikes (more on that in a bit), because Provigil has always been expensive relative to its other patent-protected, cross-class competition (ADHD meds). Had they priced their medications right along at $100-150/month, they might have made up in volume what they would have lost in price. It’s not possible for me to know that, but I know that there is quite a bit of off-label demand from prescribers who would like to use Provigil, but cannot because it’s too expensive to buy out of pocket for most patients, and the majority of insurers will not cover it. The only way to know this for sure is to wait until the generic is released, and then see if there is a generic modafinil boom. I expect that there will be because it’s an excellent drug for many conditions that it’s not technically indicated for. (When I did graduate psychopharmacology, the one of the answers for many of our case studies was often modafinil, with the inside joke being “Just kidding, it won’t be covered so let’s not waste our time.”)

Now that Cephalon has raised the price by 74%, they are potentially sacrificing profits for the short-term, but maximizing them for the long-term. In the short-term, they are only potentially sacrificing profits because Provigil is never covered without a prior authorization to begin with. As patients not buying the drug out of pocket all have PAs in effect, that authorization does not expire just because there’s a price bump. Those prescribers who are successful in getting Provigil approved for their patients are unlikely to have a harder time getting it approved now that the price has gone up, because that’s not how the PA process works (even though I know that’s probably counter-intuitive).

What Cephalon will do is bump Provigil’s price while there’s still a brief amount of time left on its patent. Then they will release Nuvigil, while Provigil still has some patent life left. (Usually it’s a 6 to 9 month window on the patent for the old drug.) Nuvigil, priced in a more friendly fashion will almost immediately replace Provigil as the drug of choice. Cephalon will fund lots of studies that show that Nuvigil works great for those off-label things that prescribers have been using Provigil right along for, they will win FDA approval to use Nuvigil for these now-approved indications, and they’ll market the hell out of Nuvigil for these new uses.

In the meantime, the patent protection on Provigil will come to an end, just as Cephalon’s marketing campaign for Nuvigil is winding down, and most patients that were on Provigil will have been switched to Nuvigil (because it’s cheaper and ostensibly “better”), and then generic Provigil will hit.

For about two months, the prescription benefit managers (PBMs) will do nothing. People will fill their monthly Nuvigil scripts, and then the clinical pharmacists working for the PBM will have finished their research, made their recommendations, and the formularies will change. Nuvigil will suddenly require a prior authorization, and pharmacies will begin faxing doctors’ offices to change from Nuvigil to the newly-generic Provigil. And doctors will sign off on this switch back to the old drug because doing prior authorizations is a giant pain in the rear, and the opportunity costs associated with taking 15 extra minutes to fill out paperwork for each Nuvigil Rx is enormous.

Nonetheless, Cephalon is profit-maximizing in the long-run by doing this because despite the delayed shift from Nuvigil back to the generic Provigil, there will be some folks that remain on the Nuvigil. How many will depend on pricing. So long as Cephalon isn’t price-gouging on the new drug the way they are on the old one, PBMs may be more lax about requiring PAs or trials of other drugs before approving the Nuvigil. (Instituting a PA, after all, creates inefficiency and requires the hiring of more personnel to process the PAs, etc.) Gouging is, of course, a relative thing.

This kind of behavior happens all the time in the prescription drug industry. AstraZeneca did it with Prilosec. They jacked the price of 40mg Prilosec way up (AWP is currently $247, though it was over $300 just a few months ago), released 40mg Nexium at a lower price (AWP currently at $181), and then generic Prilosec hit the market, and took back a bunch of marketshare, but not all. Nexium remains a very profitable drug, despite there being the evidence that suggests that it is only marginally better than Prilosec, if that. (Most AstraZeneca-funded studies compared 20mg of Prilosec to 40mg of Nexium, and only published this detail in the fine print. I actually had a talk with an AstraZeneca sales manager about it a few years back after he moved to Forrest, and he admitted that Nexium was only created to perpetuate the revenue stream.) In the industry, we call this game of patent-extension “evergreening” and there are a huge number of drugs that bear this label: Lexapro (based on Celexa), Nexium (Prilosec), Nuvigil (Provigil), Clarinex (Claritin), Xyzal (Zyrtec), Pristiq (Effexor), Trexima (Imitrex+Naprosyn); the list goes on and on and costs the healthcare system billions every year.

An example of a company that didn’t do this, and is NOT profit-maximizing is Sanofi-Aventis with Xyzal, which I mentioned above, and they ended up with a drug that was dead in the water on arrival. Xyzal was supposed to replace Zyrtec which was losing its patent protection, but because SA didn’t take the necessary steps the way Cephalon is and AstraZeneca did, their drug went nowhere. It was released about a year ago, and I can count on one hand the number of prescriptions I have filled for it. Zyrtec, on the other hand, was one of our fastest movers. (And is now available over the counter which killed script volume for it.) On the other hand, Sanofi-Aventis is still making money from the over-the-counter sale of the old Zyrtec, so they are maximizing profits in the second best way. (Having a patent monopoly for an Rx-only drug is more lucrative because you can charge prices that you’d never make up for even with the oceans of relatively undistorted free-market OTC volume.)

In my 8 years in the pharmaceutical industry, Cephalon is a company that I simultaneously loathe and admire. I dislike them because their drugs are very expensive when common sense suggests that they probably shouldn’t be (Provigil was invented in the 1970s). On the other hand, I find myself admiring them because they are incredibly legally savvy. If this savvy is present in their pricing discussions — and I have no reason to think that it is not — there is a good possibility that they are indeed profit-maximizing within their legal constraints. I know that earlier I suggested earlier that they might make more money in volume if they lowered their prices, but most PAs will not be approved unless the indication is on-label or you are a specialist, and since Provigil only has one indication, they might indeed be profit maximizing inasmuch as they can realistically be in a heavily distorted market. The information asymmetry here means I can do no more than speculate.

The best and the brightest: Private vs public sector

Business, Economics, ,

The Portfolio article that I linked in my last piece made reference several times how people involved in both regulatory affairs and investment banking weren’t “smart enough” to understand the toxic investments they were buying, selling, and (supposed to be) rating. That got me wondering whether there is a correlation between employee intelligence in the private sector vs the public sector for finance types and economists. Theoretically, the private sector should attract the best and the brightest because it pays the most.

The highest paid government official in the United States is the President himself, who makes a salary of $400,000 a year, not counting ancillary benefits.

While it’s never been easy to make this kind of money in the private sector, it’s certainly possible. Ben Bernanke’s salary as chairman of the Fed is just over $191,000. Henry Paulson as CEO of Goldman Sachs made $16.4 million according to Forbes. There’s two orders of magnitude difference there. Obviously there are other benefits associated with being a highly-ranked government official, but those benefits are generally in the future when one leaves the public sector for the private. I won’t get into discount rates and net present values, but generally this road can be profitable, though probably not profit-maximizing.

Another common trend is for an individual to make his or her fortune in the private sector and then move to the public sector. Henry Paulson is probably the epitome is this type of individual. I think this road is probably the more profit-maximizing of the two possible pathways thanks to compound interest.

But there are many people who don’t migrate from one to the other, and is there a correlation with relative intelligence of one sector over the other? Firms are profit maximizing, and people are theoretically utility-maximizing, with money being the most fungible obvious resource for maximizing that utility. That suggests that the private sector should, on the whole, be able to “outwit” the public sector much of the time because they’re able to cherry-pick the best and the brightest with the leftovers going into the public sector, all other things being equal.

Finding public sector work more rewarding than private sector profit maximization will always play a role in determining which jobs people take. If a person gets greater utility from the fulfillment doing work in the name of public service or teaching than they would get from a greater salary in the private sector, they won’t migrate. On the other hand, I find it very hard to believe that compensation plays no role whatsoever in an individual’s choice of employment.

Thoughts?