Image source: Flickr user stockmonkeys.com.

Pharmacy benefit manager Express Scripts (NASDAQ:ESRX) runs drug programs for major health insurers and self-insured employers and that means that it's faced with the tough task of negotiating prices for new drugs, including Amgen's (NASDAQ:AMGN) Repatha and Regeneron (NASDAQ:REGN) and Sanofi's (NYSE:SNY) Praluent.

Both Repatha and Praluent got the green light from regulators this past summer to lower cholesterol, and in each case, the companies announced prices for these drugs that were north of $14,000 per year. Because millions of Americans suffer from high cholesterol levels and most of them are currently treated with inexpensive statins, those prices quickly drew heat from payers, including Express Scripts, which warned that payers could be hit with billions of dollars in new spending.

Fortunately for payers, after sitting down and hammering out a deal with these drugmakers, Express Scripts believes that the financial impact of Amgen's and Regeneron's new drugs will be less than initially feared due to negotiated discounts. However, even with those discounts Repatha and Praluent are likely to be billion-dollar blockbuster drugs next year.

Keeping a lid on costs
As part of its deal with Amgen and Regeneron, Express Scripts will list both Repatha and Praluent in its preferred formulary, which covers 25 million Americans. In exchange, Amgen and Regeneron have agreed to sell their drugs to the company at a discount.

Everyone is staying tight-lipped about the size of those discounts because negotiations with other pharmacy benefit managers are ongoing, but it wouldn't be surprising if the discount is in keeping with the typical 30% to 40% discount.

In addition to controlling costs via lower prices, Express Scripts is also focusing more attention on vetting patients to make sure that only those who would benefit most would be prescribed Repatha and Praluent.

Initially, that would seem to indicate that prescription volume will come predominately from people with stubbornly high cholesterol levels caused by specific genetic mutations that don't respond to statin therapy. Repatha and Praluent are also approved for use in people with high cholesterol who have also suffered a major cardiac event, such as a heart attack or stroke. 

Overall, the combination of price discounts and managing utilization has Express Scripts thinking that its clients will spend roughly $750 million on Amgen's and Regeneron's drugs in 2016. That's still a lot of money, but at least it's far more manageable than it would have been otherwise.

Image source: Express Scripts.

Improving outcomes
Repatha and Praluent, which increase how much cholesterol can be cleared from the bloodstream, work differently than statins, which lower cholesterol production in the liver, and because of that, Repatha and Praluent will likely be used alongside statins, rather than instead of them.

During clinical trials, patients receiving both of these drugs, plus statins, saw remarkable reductions in their bad cholesterol levels. Repatha patients' cholesterol levels fell by about 60% compared to placebo and Praluent patients' cholesterol levels dropped between 36% and 59% versus placebo. Historically, conventional wisdom has held that lower cholesterol levels equate to a reduction in the risk of cardiovascular disease and death; however, that has yet to be proven for Repatha and Praluent. Studies are underway that are evaluating whether these drugs can improve outcomes, and if results are positive, then you can bet that Repatha and Praluent will become far more commonly prescribed.

Looking ahead
Price negotiations are standard within the industry, so investors shouldn't worry too much about the potential impact of Express Scripts' deal on Amgen, Regeneron, and Sanofi on its top and bottom lines.

In fact, given that Express Scripts expects to spend $750 million on these drugs next year through its preferred formulary and that formulary covers less than 8% of the U.S. population, it would seem that these medicines are destined for blockbuster status.

It will be a while before we know for sure what the sales potential is for these drugs, but we should get an indication over the next couple of quarters, so stay tuned in to their upcoming Q3 and Q4 earnings reports. 

Todd Campbell has no position in any stocks mentioned.  Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.