Pharmacy Management Conference NYBGH Pharmacy Management Conference Bill Resnick Dr. Aran Ron July 22, 2010

Current and future state of specialty medications Agenda Introductions Current and future state of specialty medications Financial impact of specialty medications Strategies plan sponsors can adopt to control cost and adherence of specialty medications Wrap Up/Q&A 2 2

Who is SBG A boutique consulting firm with a specialty practice in pharmacy benefits management 50+ years of experience with a team of seasoned professionals with complementary skill sets in all aspects of pharmacy and health care management Areas of expertise include: insider knowledge of the PBM business model and pricing tactics procurement/contract negotiations clinical expertise (Medical Advisor on staff) plan design modeling ongoing management financial performance audits SBG currently provides PBM consulting services for over 850,000 commercial members and over 30M additional members through our work with a combination of regional and national health plans across the country 3 3

Current State of Specialty- Why it’s so Unique? Evolving definition-usually a large molecule injectable – but increasingly a small molecule oral drug (more than just a biologic) Drug that targets a disease with unmet medical need for relatively small populations and include one of the following: Premium price (very high cost medicines) Coverage under the medical benefit but increasingly under the pharmacy benefit Generally prescribed by a relatively small number of physicians Specialized pharmacists/care coordinators Often requires special handling and storage Very few generic alternatives available-expectations of development of “bio-similars” or follow-on protein products --Many specialty drugs treat small patient populations and have limited competition --While legislation facilitating “biosimilars” – providing a pathway for generic equivalents to specialty drugs – has been widely discussed, there are no meaningful biosimilars or generics to date for specialty drugs --Many specialty drugs have been determined by Medco’s P&T Committee to be unique, without viable therapeutic alternatives, resulting in Formulary “Must Add” status --Must Add status significantly limits ability to implement step therapy and similar programs, and to negotiate substantial discounts --For most specialty drugs, even in cases where P&T permits formulary exclusions, PA’s and other UM rules, “Grandfathering” of patients taking non-preferred drugs is generally required, so that PA type rules are limited to new patient starts only --Grandfathering requirement means that it takes significant time to achieve meaningful share shift against non-preferred agents, while any manufacturer discounts are discontinued once any disadvantaging activity occurs, even if limited to new starts --Grandfathering also results in reluctance of “preferred” manufacturer to provide substantial additional value for preferred status given length of time it may take to achieve ROI reduces impact of utilization shift (naïve patients only ~10% of utilization) limits value to manufacturers --A significant portion of specialty drug spend is covered on the medical benefit, which is separately administered under different plan design, with rx cost often bundled with administrative costs --Many specialty drugs span numerous indications, resulting in complex rules addressing, for example, drugs having “Must Add” status for one indication but “May Add” status for other indications market basket considerations, custom coverage rule creation and maintenance costs, FDA warnings, etc P&T “must add’s for some indications but “may adds for others --The easiest agent to remove from formulary may be the least expensive agent, increasing net cost to plan contracting philosophy for BoB, contract expiration timing, client benefit considerations, etc. shifting share to preferred often means forfeiting rebates/discounts from non-preferred mfr. “zero sum gain” 4 4

Trends in Specialty That Impact Growth Expanded indications for currently approved therapies Expansion of adjunctive therapies for multiple disease states Growing number of oral therapies, particularly Cancer Biotech’s being prescribed earlier in disease progression New FDA drug safety program “REMS” ( Risk Evaluation & Mitigation Strategies)-to ensure benefits of drug outweigh the risks 5 5

Latest Trends In 2009 specialty drug spending increased 19.5%, and is expected to grow at rates of 20% and higher in each of the next three years. Here’s a look at how traditional medications compared to specialty medications Traditional Specialty Total Overall 4.8% 19.5% 6.4% Prevalence 3.5% 5.7% 3.7% Cost/Unit 5.3% 11.6% 6.0% Units Per Rx 0.4% -1.1% 0.2% Patent Expirations -2.4% 0.0% -2.1% New Drugs 0.3 1.5% 0.5 Intensity 0.6% -1.0% 0.4 Mix -2.9% 2.7% -2.3% Prevalence-changes in the % of patients taking meds, Cost Per Unit -changes in ingredient cost+taxes+admin fees-rebates, Units/Rx-changes in the # of units prescribed per fill, Patent Expirations -the impact of branded medications expiring, New Drug Entrants -the impact of new branded drugs in 2009 on spend, Intensity-changes in utilization among those using drugs, Mix-changes to lower cost or higher cost products 6 Source: ESI 2009 Drug Trend Report 6

Amounts above are averages based on SBG client sampling Common Specialty Drugs and Avg. Cost Drug Average Cost Per Month Enbrel Rheumatoid Arthritis $1,800 Copaxone Multiple Sclerosis $2,800 Avonex $2,400 Humira Cellcept Transplant $1,300 Xolair Asthma $1,900 Betaseron $2,900 Gleevec Cancer $4,900 OBJECTIVES Bring attention to the high cost of specialty products DISCUSSION ITEMS Say “As we mentioned on the last slide, the specialty market contains some very high cost products. The table on this slide provides an overview of some of the most widely used specialty products, the conditions they are prescribed for, and the average cost per claim” [READ INFORMATION FROM TABLE] Amounts above are averages based on SBG client sampling On average 1% of population will utilize these Meds—and can skew the average PEPY cost of $1500 to easily $2500+ in the next few years Average cost of a traditional medication is $67 vs. $1867 for specialty 7 7

Top Specialty Products Top 10 Specialty Drugs dispensed during the first quarter of 2010 for SBG Sample Client Disease State RA/Ps RA MS Cancer PPH Member Contributions are generally immaterial in relation to the price of the product, however, member cost must be balanced against the risk of non-compliance Average Member Cost share is 24% for Generic and 16% for Brand 8 8

Specialty Drugs Unique Clinical Characteristics Can be highly effective treatment – move from control of symptoms to slowing disease and potentially achieving remission Mechanism of action includes immune modulation, targeted protein synthesis and other unique focused functions Disease states include Rheumatoid arthritis, oral oncology, multiple sclerosis, hepatitis C, infused oncology, transplants, growth deficiency, blood cell deficiency, respiratory conditions, infertility, pulmonary hypertension Oncology accounts for half of the specialty drug expenditure – cancer treatment as a chronic disease with declines in cases and deaths 9 9

Over 250 specialty medications have been approved by FDA Growing Pipeline Over 250 specialty medications have been approved by FDA Pipeline is robust with specialty drugs likely to outnumber small molecule drugs 633 specialty drugs in development for more than 100 diseases (254 for cancer, 162 infectious disease, 59 auto immune) Approvals will outnumber other new drugs 10 10

Examples of specialty pipeline drugs Replagal – treatment of Fabry disease with enzyme alpha-galactosidase A manufactured by human cell line, $250 million projected sales approval 2010 Motavizumab – second generation respiratory syncytial virus antibody, $950 million projected sales, approval 2010 Telaprevir – Protease inhibitor for treatment of hepatitis C, $1.9 billion projected sales, approval 2011 Benlysta – inhibitor of B lymphocyte stimulator for treatment of lupus and RA, projected sales $1.1 billion, approval 2011 11 11

Challenges in Clinical and Fin. Mgmt of Specialty Drugs Often the only option for treatment of a complex serious illness Production by small number of biotech manufactures allows for high pricing and limited leverage Multiple routes of administration and benefit coverage presents utilization control and reporting issues Traditional methods of pharmacy management not applicable Use of drugs for off label indications Complexity of data capture and coverage – medical, pharmacy and specialty rider 12 12

Coverage of Specialty Pharmaceuticals –Med vs. Rx Historical coverage driven by location of administered - self administered drugs under pharmacy and infusions under medical Medical vs. Pharmacy Two thirds of plans cover self injectables under pharmacy 70% cover drugs requiring administration by a health professional under medical 5% have a separate rider Differences in reimbursement rates, billing systems, cost share and utilization management approaches Example – Humira (injectable) vs remicade (infusion) 13 13

Coverage of Specialty Pharmaceuticals –Med vs. Rx Integration under pharmacy specialty medications benefit allows for alignment of incentives, data collection and standardization of benefits Allows for management of me-too drugs or appropriate substitutes Can implement co-pay differentials if substitutes exist Co-insurance and out of pocket maximums – requires integrated processing Allows for data tracking and management 14 14

Limitations of Traditional Pharmacy Management Many traditional management methods not effective Generic substitutes Creation of formularies Maximization of manufacturer’s rebates Therapeutic substitutions Quantity restrictions Patient cost share through tiered copays Requires more complex and sophisticated tools 15 15

Adherence and Affordability Limitations of cost shifting Adherence to treatment is multi-factorial (costs, complex regiments, side effects etc) Can have a significant impact on outcomes and medical costs Increasing cost share may reduce employer/plan drug costs - but will likely impact hospital/ER costs and clinical outcomes Studies have found decrease in fill rate 4.6 more likely if out of pocket costs greater than $250 vs. less than $100 16 16

Categories of approaches to manage specialties More clinical and utilization management Provider reimbursement New specialty provider strategies Benefit design 17 17

Most common recent changes specialty pharmacy Created new copay - 90% New benefit – 75% Mandatory specialty pharmacy program – 70% Decreased reimbursement for drugs - 67% Selected preferred products – 40% Utilized lab values 36% Step edits – 33% More prior auths – 31% Genetic testing – 22% Source EMD Serono Injectable 5th edition 18 18

Clinical Strategies to Manage Specialty Drugs Vary by therapeutic class Optimize clinical outcomes (MS, Hepatitis C, oral oncology) Limit off label use (Oncology) Prevent inappropriate use based on national guidelines (respiratory syncytical virus, growth hormone) Require trial and failure of other agents first (rheumatoid arthritis, psoriasis and asthma) Future strategies focus on targeting based on laboratory values and genetic testing 19 19

Clinical Utilization Management Goals include: Appropriate use based on disease severity and diagnosis, Limit non-FDA approved use (up to 33% in oncology) Ensure tried and failed first line therapy Strategies include Step Therapy Preferred drugs for select classes (impose prior authorization, tiered copays, on line edits, payment lockout) Preferred drugs when available in therapeutic class (growth hormone, multiple sclerosis, hepatitis) Coverage criteria and review for select drugs assure appropriate use according to national guidelines 20 20

Case and disease management Clinical Utilization Case and disease management Coordination with current programs Rare disease management programs Management of individuals with multiple conditions/co-morbities Role of education and patient care management Compliance Administration Expectation management Avoidance of unnecessary hospital and emergency utilization 21 21

New drugs being approved and utilized at a rapid pace Clinical Utilization Pipeline management New drugs being approved and utilized at a rapid pace Need information and analysis of new approvals Understanding of clinical and financial impact of the drug Assuring placement in correct therapeutic category and implications for current drugs Development of clinical strategies 22 22

Financial Utilization Management Distribution management Use of specialty pharmacies vs open network or buy and bill Reimbursement methodology Discounts off average wholesale price (AWP) vs average sales price (ASP) Site of care management Modification in provider reimbursement and large margins on administering drugs Better capture of claims submission data (move from non-specific J codes) Claims management Retrospective and concurrent DUR 23 23

Survey of most effective strategies Implement prior authorization Implement step edits Mandate use of specialty pharmacy programs Select preferred products Create guidelines 24 24

Increase in the number of specialty products Summary Increase in the number of specialty products Continued cost pressure and irrational price increases Highly effective treatments-which often lead to lower medical expenses Heightened emphasis around clinical programs and ongoing oversight Different strategies required to manage specialty vs. traditional medications 25 25

Copies of the presentation will be made available Q&A Copies of the presentation will be made available Contact information: bresnick@sbgbenefits.com aron@sbgbenefits.com 26 26