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New partnership aims to ease surging generic drug costs— by making its own

Anjalee Khemlani
Senior Reporter

A new partnership is moving ahead with plans to bolster the U.S. supply of generic drugs, as part of a wide ranging effort to help drive down spiking costs and ease shortages.

CivicaRx — a group of 1,200 hospitals around the country— recently partnered with the Blue Cross Blue Shield Association, which included a $55 million infusion, to create a spinoff of its existing manufacturing list.

After two years, Civica has already produced more than two dozen drugs and is supplying it to its member hospitals. The insurer partnership is targeting 10 generics, the first of which will be available by 2022 — and employers are keenly watching to see whether the efforts can stabilize a market characterized by sudden price spikes and supply shortages.

Launched in 2018, Civica’s partners include the U.S. Department of Veterans Affairs and some of the largest health systems in the country, including Ascension, Intermountain Healthcare, SSM Health and Trinity Health.

Their purpose was to curb the cost of drug shortages on hospitals, which CivicaRx estimated cost U.S. health systems hundreds of millions per year. Those shortages exist because of market complexities that lower margins, causing manufacturers to exit the market in search of alternative products.

Large employers with self-funded plans could potentially enter the market, by following an existing infrastructure and pipeline for the most common drugs their employees use.

“Employers welcome efforts to stabilize the supply of essential generics and increase competition by challenging the legacy economic model and existing market conditions,” said Brian Marcotte, president and CEO of the National Business Group on Health (NBGH), a nonprofit health policy advocacy group.

Boom and bust

Syringe being filled.

Civica has achieved its manufacturing goals by partnering with existing drug makers such as Thermo Fisher and Xellia Pharmaceuticals, and has plans to open its own manufacturing plant. Separately, California is also seeking to launch its own brand of some generic drugs in order to lower costs, as well as mulling a plan to bulk-buy others.

The goal of self-manufacturing for drugs where Civica currently doesn’t have supplier relationships will help with more market stability.

“When we add our own manufacturing plant into the mix, as we intend to utilize a variety of manufacturing approaches in the future, we will be able to take those sustainable savings one step further to cover only the actual manufacturing costs and Civica’s G&A costs of operating the company,” a spokesperson told Yahoo Finance in an emailed statement.

However, building a plant could be a costly endeavor, and may end up being passed along to consumers. According to Civica, the company estimates a manufacturing facility will cost at least $40 million, but depends on the volume the plant will process.

Winston Black, CEO of investment firm SWK Holdings, compared generic drug manufacturing to the oil and gas sector — which requires heavy initial investment and tends to pay off later down the road.

“Most of the time they lose money, and then there are periods of over-earning,” Black told Yahoo Finance.

“That’s when you start having shortages and things get too low, and then pricing comes back up and people make money again. It’s a boom and bust. It’s a really interesting market dynamic,” he added.

Steve Wojcik, NBGH’s vice president of public policy, told Yahoo Finance that the relationships built by Civica with existing manufacturers and suppliers may set a tone for success with insurers.

“I think it will have a positive spillover effect...to reduce prices in the overall market for generic,” he said.

“This initiative also draws attention to the fact that current pricing and supply chain models for prescription drugs, brand and generic, are broken and unsustainable.”

Anjalee Khemlani is a reporter at Yahoo Finance. Follow her on Twitter: @AnjKhem

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