Overview
Watch the replay below or check out the summary notes from our October 15 interview with Satish Srinivasan, Founder & Chief Executive Officer at DiRx. Hedgeye Health Care Sector Head Tom Tobin led the discussion, which covered why consumers are still struggling with drug costs despite high generic penetration, the addressable market for drug coupons and a new offering like DiRx's (incl. mail penetration), rising customer acquisition costs for digital/direct-to-consumer (D2C) health companies like HIMS, what Amazon is up to, and the benefits of direct purchasing. There is a clear opportunity to circumvent PBMs. It may not be soon, but while GDRX is taking advantage of the market problems for consumers, there are companies like DiRx rapidly innovating behind them.
Highlights
- Generics and generic penetration are helpful, but with 65% of out-of-pocket cost on Rx spent on generics, there's an underappreciated consumer pain point.
- The TAM for DiRx [and GDRX] is deceivingly large and includes under insured, uninsured, and a large percentage of the insured population
- Amazon's entry into the pharmacy market has driven up CAC for D2C players
CLICK HERE to access the associated slides (Hedgeye)
CLICK HERE to access the DiRx Health slides
CLICK HERE to listen to the audio-only replay
Call Notes
Edited for length and clarity.
Background: Satish has been around the generic manufacturing industry for ~25 years. He approached the digital pharma market from a generic manufacturing, strategy, and commercialization perspective, which is somewhat unique relative to others in digital pharma with more of a tech or digital marketing background. He started DiRx to address a couple of issues around the affordability of drugs, namely access and affordability. We all know that there are a plethora of cost inflating factors separating the actual cost of a drug from what's being charged to the system ("it's reimbursement minus vs. cost-plus"), but we've all grown up in a health insurance reimbursement system and so we take things for granted. Satish hired a team with diverse experience ranging from supply chain operations to marketing at Optum and aims to fix this disconnect. The roll out started 6-7 weeks ago and has gone national - expect to see a bigger roll out soon.
Why are you confident in the market opportunity/size of the market?
-
$43B is spent on generics and 90% of scripts are in the form of generic medication. The issues revolve around 41% of Americans being uninsured or under insured - at the end of 2020, 13% were completely uninsured. The only way to access care or Rx for them is to pay full cash price. 28% of Americans have an insurance framework but out of pocket costs are high… these numbers are real and growing.
How do you think about the uninsured and them not accessing the system?
-
Great question. The distribution system is very complex and there's a huge variance between cost of a drug and what it costs consumers. That gap, the cost inflation, is only a problem for the uninsured or under insured - the people that are sufficiently insured? The system works well for them.
-
Three players control over 90% of the product in the supply chain and at what pharmacy, and then then the PBMs control who pays how much out of pocket (i.e., the cost of access). I thought by becoming a pharmacy and bypassing the sourcing cost, we could bridge the gap and bring a lower price to 41% of people. Somewhat related - per KFF, 29% of adults don’t take medication as directed due to cost reasons.
-
Also, per IQVIA data, 65% of out-of-pocket cost on Rx is spent on generics, and only a mid-single-digit % of people ever exceed the high deductibles of most HDHPs, so you can see that drug spending, even on generics, is pinching consumers’ pockets… that’s why they don’t even go and pick up the meds.
Who is your first customer? Is it someone in the donut hole filling 5 scripts per month or a shopper that's cost-sensitive? How do you reach them?
-
Whole start/idea was that it'd be the uninsured and under insured – we’ve done extensive research to see who is hurting, what matters, and where they are. What we found was there's a sufficient # of people that are sufficiently insured but have high copays that'd be interested too. GDRX says that 65% of the people using it are sufficiently insured. That surprises most people...why are those consumers looking for cash options? That tells you something.
What about mail order being so under-represented?
-
Mail order is designed to be a certain percentage by the current participants - insurance and PBMs.
-
However, leave it to people to say where best deal is - freedom, cost, and access, and there's no way mail is only 10%. There's no data on the number of scripts from Ro or HIMS - if you're not in the reimbursement loop, there's no tracking. There's life outside the loop and it's getting bigger.
Do you have a natural partner outside of D2C? Advanced primary care?
-
D2C is one but we are already talking to several groups – employers, TPAs. Everyone is looking to save.
-
There's a lot of new innovation in digital health – device-based, care-based, doctors going to peoples' homes (health at home).
Competitors – Ro, HIMS, Amazon Pharmacy – where are you and why launch now? What does the competitive landscape look like to you?
-
Why not now? Healthcare is very complex – everyone is confused by the system. There’s no other industry with so many disjointed control points. Patient doesn’t control what they get, the doctor does the prescribing. But not at what price and where. Every part of health care is like that. Now, investors and tech have caught up and there are enough tools to look deeper and open up the curtains and disrupt.
-
We launched with over 1,000 SKUs. That's different - directly sourced. We have our own digital social media marketing, our own fulfillment pharmacy, and our own digital platform. So, we can roll out B2B w/ APIs, and there are lots of angles for disruption. It's simpler - there are no complex charge backs, rebates, etc. No "smoke and mirrors."
Talk to us about price competitiveness and the sourcing piece… how receptive are manufacturers?
-
We replaced complexity w/ simplicity. We don't use WAC anywhere - it's transparent straight price negotiated with the manufacturers. We avoid admin costs and fees associated with PBMs, and all that cost savings gets shared with consumer. On average, and it varies by product, we're showing a 15% - 40% savings.
-
[Last question of the call on DiRx pricing] For the 1,000 SKUs, we have DiRx Choice - 90-day order refill, and the lowest price starts at $3/mo., and then we have over 100 at $5/mo. w/ no insurance/copays, etc. At this point, there's a promo for free delivery for the first 90 days, but once the promo is over, it's still a low charge of $2.49 for family of 4 to get free shipping (monthly). That combined w/ pricing is a good value. Some pharmacies may not charge for delivery but have higher prices. We think that's a compelling product.
-
3 large groups control all purchasing, but there are many suppliers. Most products have 5-6 suppliers, so there's always some FDA-approved manufacturers looking for a customer. We're not taking anything away - it's a direct purchase.
Amazon – PillPack, Amazon Care, Pharmacy - they are constantly a threat to everyone… how do you view what they are up to?
-
I've always felt like they'll come in and play for a long time. They have $Bs to spend and are trying to figure it out. They are all over the map w/ PillPack, Care, and Amazon Pharmacy… if you look at the offering, it's predominantly focused on the insured. There's no delivery free for prime members, but you're still paying in the insurance framework (copay) and for prime membership.
-
Also, they haven’t integrated PillPack into Amazon Pharmacy, yet. Eventually they’ll probably get to it.
-
Amazon Care may bring in prescribing power, but in the course of our discussions with employer groups, people seem wary of dealing with a giant like Amazon.
-
They’ll stick with it and be a big player, but there’s a lot of room for everyone. Amazon's offering isn't comparable to DiRx on price.
Tell us about customer acquisition costs and PMPM, health plans, employers...
-
CAC is higher than we'd like, especially since Amazon got into pharmacy. It's more expensive initially, but we expect it to settle in the mid-$100s range eventually.
-
In additional to D2C, we're looking at B2B which doesn’t have a CAC - it's more of a business development activity. With the right balance – a "twin engine model" – we think we can optimize the overall cost of acquisition over a couple of quarters.
What's your take on where we go from here? Do we see exponential change or steady with small changes at the margin?
-
It’s a mammoth iceberg that won’t melt quickly – three things:
-
One is Optum launching a direct-to-home cash-based model… they are getting into it. Amazon is here trying to figure it out. These big players provide a tailwind.
-
Technology coming in – telemed, doctors visiting at home, reimbursement for it all.
-
There's a virtual framework - the concept of physical distance and being electronically connected.
-
We probably won't melt the whole iceberg, but I think we'll see change over 3-5 years.
Ro, HIMS, telemedicine...
-
HIMS is different - they specialize in men's and women's health. Ro is primary care and more similar [to us]. But neither is direct sourcing.
-
DiRx plans to expand beyond Rx generics – but if you need a script that evening, we're not the best choice.
-
Telemedicine is an active area of interest – uninsured/underinsured market – all full cash pay patients. For the same reason they struggle to afford medication, they struggle w/ the cost of seeing a provider. Lower-cost platforms allow people to see a provider, leverage devices for RPM, and cover several health conditions.
-
Capsule is digital but within a physical delivery radius – they also did COVID-19 testing, so that's more acute.
About the Speaker
Satish Srinivasan is the Founder & CEO of DiRx (Direct + Rx, pronounced Directs; July 2020 - present), a new digital health platform designed to improve medication affordability for Americans who are unable to access it under the health insurance framework. He has over 25 years of experience in building and managing generic pharmaceutical companies, which gives him a deep understanding of channel economics and global supply chains as they relate to the broader healthcare system. In addition to a strategic mindset, his ‘people first’ approach has been the hallmark of his professional track record and successes. Satish's recent prior experience includes President - North America for Sentiss Pharma (May 2018 - March 2020), which specializes in the development, manufacture, and commercialization of sterile generic and specialty pharmaceutical products focused on the ophthalmic and inhalation segments; as well as leadership positions at other generic manufacturers including Rising Pharmaceuticals, where he was President & COO (July 2013 - December 2016); and OrchidPharma, where he was President & CEO (July 2010 - June 2013). Satish holds a Master’s in Science, Pharmacy Administration.
Please reach out to with any feedback or inquiries.
Have a great day out there!
Thomas Tobin
Managing Director
Twitter
LinkedIn
