NOVEMBER 2016 SPECIALTY DRUG FORECAST: Archimedes, LLC. All Rights Reserved

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1 NOVEMBER 2016 SPECIALTY DRUG FORECAST: Archimedes, LLC. All Rights Reserved

2 INTRODUCTION Several years ago, health care industry analysts identified a development that employers and managed care organizations had already begun to notice: although used by only about 1% of plan members, specialty medications occupied a share of total drug expense that was both conspicuous and growing at an alarming rate. 1-4 Since that time, specialty drug trend has outpaced even those forecasts, 5-8 and additional cost growth is likely because of several key marketplace developments, including: The launch of several specialty medications for high-prevalence and/or chronic conditions, including multiple drugs costing between $85,000-$150,000 per treatment for hepatitis C viral infection, which affects about 3 million U.S. residents Accelerations in the rate of drug price inflation, with some commonly used specialty medications more than doubling in price over the 5-year period ending in Diminished outlook for biosimilar cost savings due to price reductions and marketplace penetration that have underperformed relative to original projections Given these significant market developments, Archimedes developed a 5-year specialty drug forecast that spans the pharmacy and the medical benefit. The forecast represents commercial plan sponsors that cover specialty drugs as a part of their benefit offering. RESULTS Figure 1: Specialty Drug Spend Forecast PMPY, Pharmacy and Medical Benefit $1,200 $1147 $1026 $1,000 $915 $361 $800 $600 $400 $722 $292 $811 $308 $326 $589 $343 $683 $786 Medical Pharmacy $430 $503 $200 $ PMPY=per member per year expenditures, measured as total allowed amount Archimedes, LLC. All Rights Reserved 02

3 Findings of the Archimedes analysis indicate that specialty drug spend will increase by an average of more than $100 per member per year (PMPY) from 2016 to 2020, exceeding $1,000 PMPY beginning in approximately The forecasted 2020 spend represents a 220% rate of growth more than a 3 fold increase since We estimate that the percentage of specialty drug cost incurred under the pharmacy benefit will increase from 60% in 2016 to 69% in 2020, due to the growing number of oral oncology drugs and higher inflationary trends for specialty drugs under pharmacy. DISCUSSION The combination of therapeutic potential and rapidly rising costs has made specialty medication management one of the most critically important challenges facing plan sponsors today, leading some even to question whether the prescription drug benefit will remain financially viable in the coming years. 14,30-31 Our findings certainly do nothing to allay those concerns, suggesting that for many plan sponsors, specialty medications have the potential to occupy such a large proportion of plan spending that it will be difficult if not impossible to cover other drugs and services. However, the factors underlying this rapid cost growth provide clues to effective management techniques. Three key actions, taken now, will help plan sponsors stem the tide: Prior authorization. Use prior authorization programs under both the pharmacy and medical benefits to target specialty medications to patients for whom they are clinically appropriate and promote cost-effective utilization. Managing inappropriate use is critical to counter the unintended effects of direct-to-consumer advertising and to combat high rates of specialty drug use inconsistent with approved labeling and/or treatment guidelines. 27,32-36 It is important that plan sponsors not only implement prior authorization programs but also routinely monitor their performance to ensure the intended results are being achieved. Site-of-care management. Direct infusions to the least costly, clinically appropriate site of care to address the growing use of the outpatient hospital setting, a costly and frequently unnecessary site of care for specialty drug infusions. 37,38 Rebates from pharmaceutical manufacturers. Ensure that the PBM contract passes through all revenues from manufacturers for both the pharmacy and medical benefits, including rebates, administrative fees, data fees, and price protection. In recent years, price protection provisions, which provide a cost threshold above which additional rebates are paid, have become more common in rebate contracts as a way to mitigate the impact of drug price inflation, which was 16% in ,39, Archimedes, LLC. All Rights Reserved 03

4 METHODOLOGY Archimedes reviewed Medline-indexed and gray published literature, including PBM trend reports, published analyses of exchange enrollee characteristics and utilization, payer surveys, and policy assessments. We conducted quantitative analyses of these sources, as well as payer claims data. Assessments of the effects of biosimilar introductions were based on current pricing, as well as market uptake patterns for the 2 biosimilar and generic drugs introduced at the time of our analysis. The study s primary outcome was total specialty drug cost measured as allowed amount, i.e., total payments received by providers from all sources including payers and patients. Additionally, because the influx of new drugs could influence the mix of utilization in the pharmacy and medical benefits, we assessed trends in the proportion of expense incurred in each benefit. The forecast does not take into account rebates for specialty drugs as rebate dollars are not routinely disclosed by PBMs or health plans. The forecast does account for differences in the ways that specialty drugs are defined by various organizations, to the extent that these definitions were disclosed in the reports currently available. CONTACT For more information, contact: Brenda Motheral, PhD CEO and Co-Founder, Archimedes bmotheral@archimedesrx.com Archimedes, LLC. All Rights Reserved 04

5 REFERENCES James D. Top 10 trends in specialty pharmacy. Specialty Pharmacy Times. October 24, Available at: Navarro RP, Johnson KA. Opportunities and challenges of specialty pharmaceuticals. J Manag Care Pharm. 2013;19(1): Available at: Prime Therapeutics. Specialty today and tomorrow. September CVSHealth. Specialty costs: can they be contained? Available at: cvs-health-research-institute/specialty-costs-can-they-be-contained. Express Scripts Lab. The 2014 drug trend report. March Prime Therapeutics. Spotlight on specialty. June Gleason P. Specialty medications: implications for pharmacy practice, patients and research. Presentation to APhA Annual Meeting and Exposition. March 4-7, Centers for Medicare & Medicaid Services. National health expenditure projections : forecast summary. Available at: ExpendData/downloads/proj2014.pdf. Prime Therapeutics. Looking back, moving forward: 2014 report on prescription drug costs. Express Scripts Lab. Super spending: U.S. trends in high-cost medication use. May 13, Available at: Express Scripts Lab. Express Scripts 2015 drug trend report. March Lopes M, Rebello J. Snapshot of the HCV landscape: moving forward from Magellan Rx Report.Spring 2015: Brennan T, Shrank W. New expensive treatments for hepatitis C infection. JAMA. 2014;312(6): America s Health Insurance Plans. Specialty drugs: issues and challenges. July Available at: Magellan. Potential budget-busters for 2015 and beyond. Magellan Rx Report. Spring 2015: U.S. Centers for Disease Control and Prevention. Viral hepatitis surveillance. United States, Available at: Denniston MM, Jiles RB, Drobeniuc J, et al. Chronic hepatitis C virus infection in the United States, National Health and Nutrition Examination Survey Ann Intern Med. 2014;160(5): Humer C. Exclusive: makers took big price increases on widely used U.S. drugs. Reuters. April 5, Available at: Bennette CS, Richards C, Sullivan SD, Ramsey SD. Steady increase in prices for oral anticancer drugs after market launch suggests a lack of competitive pressure. Health Aff (Millwood). 2016;35(5): Dusetzina SB. Drug pricing trends for orally administered anticancer medications reimbursed by commercial health plans, JAMA Oncol. April 28, [Epub ahead of print]. Express Scripts. The Express Scripts prescription price index. Available at: drug-trend-report. Express Scripts. The $250 billion potential of biosimilars. April 23, Available at: ab/insights/industry-updates/the-$250-billion-potential-of-biosimilars Archimedes, LLC. All Rights Reserved 05

6 REFERENCES (continued) Kopenski F, Holcomb K. Understanding biosimilars and projecting the cost savings to employers update. Milliman. June 29, Available at: Hirschler B, Shields M. Novartis launches first U.S. biosimilar drug at 15 percent discount. Reuters. September 3, Johnson SR. One year after Zarxio approval, future of biosimilars remains unclear. Modern Healthcare. March 23, Rockoff JD. Knockoffs of biotech drugs bring paltry savings. Wall Street Journal. May 5, Available at: Magellan Rx Management. Medical pharmacy trend report sixth edition. 2015:36,51. Express Scripts drug trend report: a market and behavioral analysis. April 2011:27. Express Scripts drug trend report. April 2012: 39. Joszt L. The future of specialty pharmacy: where do we need to go? AJMC.com. April 19, Available at: Prime Therapeutics. US drug pricing is broken let s work together to fix it. April 25, Available at: Waters GE, Corrigan P, Gatesman M, et al. Comparison of pegfilgrastim prescribing practice to national guidelines at a university hospital outpatient oncology clinic. J Oncol Pract. 2013;9(4): Available at: Choosing Wisely ASCO. Five things physicians and patients should question. Released April 4, 2012 (items 1-5) and October 29, 2013 (items 6-10). Available at: Choosing-Wisely-List.pdf. Kim H. Trouble spots in online direct-to-consumer prescription drug promotion: a content analysis of FDA warning letters. IJ Health Policy Manag. 2015;4(12): Available at: articles/pmc /pdf/ijhpm pdf. Mintzes B, Barer ML, Kravitz RL, et al. How does direct-to-consumer advertising (DTCA) affect prescribing? A survey in primary care environments with and without legal DTCA. CMAJ. 2003;169(5): Kim Y, Kornfield R, Shi Y, et al. Effects of televised direct-to-consumer advertising for varenicline on prescription dispensing in the United States, Nicotine Tob Res. 2016;18(5): Lotvin AM, Shrank WH, Singh SC, et al. Specialty medications: traditional and novel tools can address rising spending on these costly drugs. Health Aff (Millwood). 2014;33(10): Maas A. Focus on site of care can boost patient outcomes, payer savings. AIS Health. May Available at: Kaczmarek S. Pharmacy manufacturer rebate negotiation strategies: a common ground for a common purpose. November 17, Available at: Anderson BN. Practical strategies and tactics to manage rising rx costs. ECHI Pharmacy Program meeting. May 19, Available at: Archimedes, LLC. All Rights Reserved 06