Cvs Pharmacy

Image source: CVS Health

Next-generation cholesterol-busting drugs are here, but many are warning that they'll wreak havoc on healthcare spending. CVS Health (NYSE:CVS) is right in the middle of the dilemma -- and it made a risky decision that could come back to bite it.

First, some background
Some 100 million Americans have high cholesterol, which has been treated for years by statins that reduce cholesterol production in the liver. Although 25 million or so Americans take statins, they don't work for everyone.

Cue Amgen (NASDAQ:AMGN), Sanofi (NYSE:SNY), and Regeneron (NASDAQ:REGN), who developed a new way to reduce cholesterol by instead inhibiting the protein PCSK9, which when left uninterrupted gets in the way of the destruction of bad cholesterol in the liver. Sanofi and Regeneron's Praluent and Amgen's Repatha were the first in the PCSK9 inhibitor class to gain approval.

These approvals, which came over the summer, were game-changing. In fact, PCSK9 inhibitors recently made our list of the top three drug approvals of 2015. (If you're interested, you can listen to our free podcast and learn about the other two drugs on the list on iTunes or Stitcher!)

Low cholesterol, high cost
Long before Repatha and Praluent were approved, those on the paying end of the healthcare industry were warning that the cost of these drugs could wreak havoc on the entire industry. CVS Health even claimed that the drug class could increase healthcare spending by $150 billion per year!

Scale is the name of the game here since so many people are affected by high cholesterol and the corresponding heart problems. High cholesterol is a major risk factor for heart attacks and strokes, and heart disease kills 1 in 4 people in the U.S. each year.

These new drugs represent a new hope in an area with unmet need. In trials, PCSK9 inhibitors used alongside statins were shown to reduce cholesterol levels by about 60%, as compared to using statins alone.

Estimates for these drugs' peak sales are all over the place, but those on the higher end (think $6 billion a year in sales each) seem to be derived from an expectation of label expansion. As of right now, only people who have suffered a cardiac event or who have high cholesterol caused by genetic mutations are approved to take PCSK9 inhibitors. But, if the labels are expanded, the opportunity could be huge.

A sticky situation
And therein lies the catch-22. Repatha and Praluent could be game-changing for millions -- but it's this very scale that makes them such a threat to the industry. Wholesale price for each is roughly $14,000 a year. While this doesn't carry as much sticker shock as some innovative cancer therapies and rare disease drugs, what you need to remember is that this isn't a one-and-done therapy -- patients would take the drugs for potentially the rest of their lives.

This is where pharmacy benefit managers (PBMs), such as CVS and Express Scripts (NASDAQ:ESRX), come in. PBMs are the intermediaries between drug companies and payers. They use scale to bargain, offering drug companies access to their formularies (i.e. lists of approved drugs), often in exchange for price discounts.

Treading carefully
The danger here, though, is when a superior drug is excluded from a PBM's formulary in favor of an inferior but cheaper drug. We saw this happen last year with Express Scripts' decision to block Gilead Sciences' hepatitis C drugs from its formulary in favor of AbbVie's Viekira Pak. Gilead's Harvoni and Sovaldi are the more attractive drugs from a dosage/compliance standpoint, but AbbVie was willing to offer the better price to Express Scripts.

What at first looked like a slightly tacky decision started to look even worse in October when the FDA released a warning that AbbVie's Viekira Pak came with serious toxicities. The FDA's demand for a label update only solidified Viekira Pak's inferiority.

Perhaps not surprisingly, Express Scripts chose to include both Repatha and Praluent on its formulary. (I'd imagine in the hope of avoiding similar potential embarrassment.)

Is history repeating itself?
What really baffles me about this situation is that CVS Health announced an exclusive deal with Amgen to include Repatha as the one and only PCSK9 inhibitor in its formulary. CVS claimed that the two drugs were "therapeutically equivalent", which if you read between the lines means price was probably the deciding factor.

Whoever made this decision is missing a key point: The most important thing for chronic drugs is long-term safety. And that's data we don't yet have.

Both Amgen and Sanofi are running huge cardiovascular outcomes trials to determine the effects of their drugs in patients over the long term. These studies will have results by 2017 -- and if Sanofi reports that its drug lowers cardiac risk more than Repatha, CVS could end up in the same situation Express Scripts has probably been kicking itself for lately.

This doesn't seem like a typical move for CVS. Remember, this is the same company that stopped selling cigarettes in its retail pharmacies because it didn't think it was appropriate for a health-driven company to sell tobacco. This decision, which was first and foremost brand-driven, cost the company $2 billion annually in lost sales.

It's a reasonable assumption, then, that CVS thinks its brand is "worth" $2 billion, at the very least. And while the numbers behind the Amgen deal weren't officially announced, I somehow doubt that the savings there are worth the potential hit to the CVS brand.

This deal remains a bit of a head scratcher to me, but we'll have to wait for the outcomes trial data before we can actually point any fingers. It's quite possible that Amgen's Repatha ends up being the better PCSK9 inhibitor, in which case CVS will look brilliant. Still, I think it's a gamble.

Kristine Harjes owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Express Scripts and Gilead Sciences. The Motley Fool recommends CVS Health. 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.