The pharmacy benefit management industry has grown leaps and bounds in recent years as the health care sector continues to grapple with cost-saving efforts. As the cost-effectiveness of pharmaceuticals have come under closer scrutiny, pharmacy benefit managers, or PBMs, have enjoyed a boom as intermediaries between insurance companies and pharmacies by offering cost containing services including prescription data analysis, client and payor negotiation, and enforcement of approved drug formularies.

While it's a relatively small industry, a solid majority of Americans -- nearly 210 million patients -- receive their prescription drug benefits from a plan under the auspices of a pharmacy benefit manager, often times without knowing it. As a result, these organizations hold a significant degree of influence over the services distributed and received by patients, payors, and even manufacturers.

Market leaders CVS Caremark (NYSE:CVS) and Express Scripts (NASDAQ:ESRX), which together hold nearly 25% of total PBM market, recently made public a number of formulary changes that will likely cause many patients to lose coverage of several well-known medications. Among the medications being dropped include a number of major GlaxoSmithKline (NYSE:GSK) respiratory products being marketed in the US.

Off the team
By far the biggest name to lose coverage from Glaxo's product roster is its blockbuster Advair Diskus inhalation device, used by patients suffering from chronic obstructive pulmonary disorder and severe asthma, which is being dropped by Express Scripts on Jan. 1. As part of an unprecedented move, Express Scripts is moving Advair, along with several other major branded medications, to the "Not Covered" category on its preferred drug formulary, citing high costs disproportional to clinical benefit compared to other similar inhalation products.

In other words, Express Scripts' decision effectively singles out Advair as an overpriced therapy in a field of cheap alternatives, a move that will require Advair patients to either switch or pay out of pocket if they really want the drug. To add insult to injury, remaining on formulary as recommended substitutes to Advair are AstraZeneca's (NASDAQ:AZN) Symbicort and Merck's (NYSE:MRK) Dulera; both competing products are combinations of drugs similar to the ingredients found in Advair but at a reduced cost.

This development does not bode well for Advair's prospects as patients paying out of pocket may need to shell out as much $300 per refill of the patented inhaler. Domestic Advair sales accounted for more than $1 billion of GlaxoSmithKline's third-quarter sales that totaled just over $10 billion in the same period. Additionally, the U.S. domestic Advair market represents more than half of the total global market for the drug, which is ubiquitous in many retail pharmacies and drugstores.

Revenues from Advair are likely to decline beginning Q1 2014 as the prohibitively high out-of-pocket price of Advair and availability of cheaper, covered competitors begin to push patients away.

Misery loves company
Unfortunately, the Advair Diskus is not the only Glaxo product affected by changes to PBM formularies. Workhorse asthma inhalers Flovent Diskus and Flovent HFA are also among the products being excluded by Express Scripts and a PBM double-whammy will befall newly approved Breo Ellipta, which is being excluded by both Express Scripts and CVS Caremark. Like Advair, Breo Ellipta, which has only been available for a few months, is being tossed by both PBM behemoths in favor of AstraZeneca and Merck substitutes. 

GlaxoSmithKline has taken measures to alleviate some of the headache patients will experience in the near future by introducing co-pay assistance cards and other discount programs. However, the recent cost-saving actions being implemented by pharmacy benefit managers is still likely to sting one way or another.

While CVS Caremark and Express Scripts represent a significant minority of all PBMs, it will be an important trend for investors to watch if other PBMs choose to follow suit and if any additional Glaxo products also come under increased efficiency pressures.

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