This Week in Startups - Solving prescription drug pricing in the US with Cost Plus Drugs & Capital RX CEOs | E1518

Episode Date: July 26, 2022

Today, we have two interviews with founders innovating in the US prescription drug market to bring prices down for consumers. First up, Molly talks with Alex Oshmyansky, CEO of The Mark Cuban Cost Plus Drug Company, about building a "parallel supply chain", the importance of transparency, and a breakdown of the "financial engineering" in the industry. (3:22) Then, she talks to Capital RX CEO AJ Loiacono for a full breakdown on PBMs (pharmacy benefit managers) and the opaque pharmaceutical supply chain. (40:35) (0:00) Molly intros today's two interviews (3:22) Mark Cuban Cost Plus Drugs Company CEO and Founder Alex Oshmyansky on operating a startup while still being a practicing doctor and Cost Plug Drugs' business model (11:21) Harmonic - Get $4000 off at https://harmonic.ai/twist (12:43) Alex explains the state of the US drug space, why they're trying to build a "parallel supply chain", the importance of transparency, and the origin story of the company (23:44) Prometheus - Go to https://prometheusalts.com or download it on the App Store and use the access code TWIST to sign up (25:11) Drug production, hot button drug issues (32:16) Alex explains the "financial engineering" and profiteering in the prescription drug space (39:15) BairesDev - Go to https://baires.dev/twist and get $10,000 off when you sign your first contract (40:35) Molly intros the next guest: Capital RX CEO AJ Loiacono, who explains the convoluted and opaque pharmaceutical supply chain (54:30) Understanding PBMs (pharmacy benefit managers) and the broader healthcare industry (1:04:09) AJ gets into his background, starting Capital RX, and how it fits into the ecosystem

Okay, everybody, welcome to this weekend startups. We have two amazing interviews for you today, both startups and both in the same industry and both incredibly newsworthy, actually. This is two amazing founder CEOs that are trying to disrupt drug pricing in the United States. I understand that Congress occasionally takes a stab at this, but right now we're going to leave it to the startups. They're trying to figure out the root causes and fix them when it comes to the overpriced US prescription drug industry. So first up, we have the CEO and founder of the Mark Cuban cost plus drug company, Alex Ashmiansky, Dr. Alex Ashmiyonsky, who's an amazing interview. He goes into the founding story, how hard it was to raise capital, his multiple incorporations, and then

getting Mark Cuban on board and having him up in his business all the time. He also reveals his very funny but kind of sad inspiration for starting the company in the first place. Martin Schrelli is involved. It's an excellent interview. And then we're doing something new. We're kind of doing a back-to-back, pairing these two things together because we actually ran this interview with Capital RX CEO and founder, AJ Loyocono on episode 1491 last month. But it was this big, long, beefy episode like we do. And since this is such a newsworthy and important topic, and the two of them together do such a fantastic job of explaining why drug pricing is so broken, we actually decided to just pair them together.

And it's pretty illuminating. You're going to hear both CEOs refer to the drug industry and the incumbents as a cartel, maybe a little bit of a mafia, effectively they have unlimited pricing power. It's pretty amazing to hear these two founders explain the intricacies of the industry and where all the corruption and profiteering is happening. So it's going to be a really great show. Two fantastic interviews. Settle in.

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to get a development team you'll love and get $10,000 off when you sign your first contract. That's B-A-I-R-E-S-D-E-V slash twist. Alex Ashmianski is the CEO and founder at Mark Cuban Cost Plus Drug Company and has been for the past four years. Thanks so much for coming on Twist. Hey, no worries. Thanks for having me on. First of all, you are actually a doctor, right? Yep, that's right.

What kind of doctor are you? I am a diagnostic radiologist, sub-specialized in pediatric radiology. Do you still practice? I do. You know, much less frequently than I used to a couple times a month. I practice as an emergency radiologist. doing telehealth. So essentially, you know, hospitals from all over to countries send images to the radiology workstation. I think I have it all blurred out on Zoom so you can't see it,

but those are my radiology computers in the back. And yeah, read CT scans, MRIs from all over the country, late Saturday nights, really the only time available. I mean, I was going to say being a startup CEO and a practicing doctor sounds like kind of a lot. It's a lot. But it's also So kind of it's got that, honestly, it's got that startup DNA. Yeah. And, you know, it's nice to be able to still say I'm a practicing physician. You know, part of it is perhaps just sunk cost fallacy. Like, it takes a lot of time to become a doctor.

And I'm like, I don't want to give that up. Yes. But also, it's nice to actually, you know, get back to the important parts of, of actually taking care of patients and making the decisions of like, who needs to go to the operating room, who can go home. And, you know, keeps you kind of grounded to like be making those life life and death decisions on a very rapid basis, which, you know, it's helpful training for, you know, being, I guess, a business executive of any kind, just training, learning to be

decisive. Yeah. Like in radiology, the bad radiologist are the ones that never make decisions and never, you know, sort of hedge their, you know, reports and don't really say like, oh, this is appendicitis or it's not, oh, it could be appendicitis in the right circumstances. So, you know, it's training yourself to be really able to make decisions on a, on a rapid basis. Let's talk about the sort of other way in which you are maybe slightly less directly

saving lives, but still definitely doing it. Cost plus pharmacy, cost plus drug company has been in the news a lot for literally saving people tons of money on drugs. First of all, if people have not heard of this company, because I'm told that the marketing is strictly word of mouth, or at least Mark Cuban told us that on Twitter. For those who haven't heard of it, what are you doing? And more importantly, how? Oh, sure. So we're aiming to radically reduce the cost that people can get their medications for. And yeah, we're sort of doing it in a number of different ways. So the way I view our company at the moment is it's almost two separate business divisions under sort of almost the same corporate umbrella. So one is our manufacturing division. So there we are a true pharmaceutical manufacturer across the street from me here where I'm

sitting near downtown Dallas, we're building what's called a sterile fill finish facility. So that makes sterile injectable drugs. And there I like to say we will make the drugs that nobody else wants to make, either because the margins are too small or the market size is too small. So good example, pediatric chemotherapy products. Fortunately, pediatric cancers are relatively rare compared to adult cancers. But the consequence of that is the market for pediatric chemo is very small, so no one wants to make it. So believe it or not, there have been studies that rates of morbidity and

mortality from certain pediatric cancers have actually gone up in the United States over to past 10, 20 years because the medicines are just unavailable. And it's just horrible for these parents. Like you can imagine, like, if your doctor tells you like, sorry, we can't get the medicine for your kid in America in 2022, the wealthiest country in the history of human civilization. So, you know, we will be physically making those drugs. And, you know, we will transparency in all things, we'll let the public know exactly what it costs to make them. You know, releasing, you know, aggregated salaries, cogs, equipment costs, utility costs, and just say, hey, it costs us X amount of dollars to make the drugs. X plus 15% is what we're going to charge.

So completely transparent. But the other part of what we're doing and which has caught much more. public attention is what I call sort of our supply chain division. Because we very quickly realized it's not enough just to make the drugs and an affordable price. Because wholesalers are under no obligation to buy the drugs from you if their profits are dependent on a high drug price. Pharmacy chains similar under no obligation. And certainly these entities called pharmacy benefit managers are under no obligation to put

your drugs on insurance company formularies unless you pay them the requisite amount of, you know, rebate dollars. Right. In order to do so. So we did the perfectly rational thing and decided to do all of that. So we are a rich, yeah, this is why it's taken us. So you're like a pharmacy benefit manager, a formulary, an actual drug manufacturer. Yeah. And, and sort of an insurer. Yeah. So when Mark has been going around and saying it's been like, how you say it like, yeah, and a practicing. Don't forget the practicing. Don't forget the practicing. emergency radiology. Don't forget that. Yeah, so Mark has been saying it's it's taken us three or four years to get off the ground and this is why. So, you know, if you go to any business, I'm told

I haven't been to business school, but here on day one, they tell you to try to do one thing and do it really well. Unfortunately, we don't have that luxury. There are so many intermediaries in the pharmaceutical supply chain that if we actually want to get the drugs to the patients for what they really cost, we kind of have to own everything. So we are. registered pharmaceutical wholesaler in all 50 states. We have our, you know, direct-to-consumer mail-order pharmacy, which has caught a lot of public attention, particularly in the last month or two. And then, yeah, we even offer access to our products and our pharmacy as an employee benefit. So, for example, working with technology companies, you know, who have self-insured technology

companies who see that, hey, these are our, we're paying a lot of money for the pharmaceutical benefit for our employees to buy drugs for employees. Wait a second, it's far less expensive on Mark Cuban's website. So basically, we've been working to come over the past few months, not necessarily secretly, just it hasn't caught public attention because it's less interesting, I think, from the messaging standpoint. But yeah, we've been contracting with employers, with insurance companies, and we'll start rolling that out over the next few months that, you know, you can purchase drugs directly

from us for your employees. Yeah. Okay. So at the moment, if you are a consumer and you go on this website, you can order direct. But what you're saying is that in the somewhat near future, you would also be able to do that like through your insurance, enter your insurance information and have that drug potentially be covered by insurance. Yeah, and the important part is when we work with insurance companies, like we do it on our terms, which is everybody pays the same price. Whether you're an insurance company with 10 million lives or you're a single indigent patient on the street, you know, the price on our website is the price. And that's important because essentially the way insurance contracting usually works through these intermediary entities, these pharmacy benefit managers, is you have to start at an artificially inflated cost and then negotiate down. to a lower cost, and the negotiator to PBM gets a cut of the cut of the difference in between, which elevates the overall cost to both the employer at the end of the day and the patient as well. And we basically will not be doing that.

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It's a beautiful product, by the way. Right. We did actually an interview with A.J. Loyakino from Capital R-X. Yeah, and he explained that pharmacy benefit manager kind of monopsony. And the way the sort of spread is taken here and the spread is taken there. And it does sort of explain how you might end up having to be basically a vertically integrated. I don't even know. Like, what is the word for a completely vertically integrated manufacturer, supplier, and distributor?

Sort of the jargon I've been using is we are a parallel supply chain to the one that already exists. But, you know, sort of for an example of how the numbers all wind up working out. So, you know, this is sort of an extreme edge case, but it is a real one. So on our website, we offer a chemotherapy drug called amatinib, which is used to treat a condition chronic myelogynous leukemia. If the list price, the artificially inflated price, is $10,000 for a month's supply, the PBMs are meant to go out and negotiate and they say, hey, we got you a great price. We got, you know, a 90% discount. You know, isn't that amazing? like who where on Earth else can you get a 90% discount?

Yeah. Great deal. On what is presumably a very expensive drug. Wait for it. Okay. Wait for it. Wait for it. And, you know, as our cut, we'll get, you know, a couple thousand dollars.

So what we see, if you're a patient and you go naively, you have a high deductible plan. You go to CVS, Walmart, or, you know, and basically any pharmacy and you show your insurance card, they will what's called adjudicate the price. And patients tell us these are real examples at between $2,3,200 for amatinib, generic amatinib. So that is the actual amount they will be asked to pay in cash at that moment if they have a high deductible plan. Meanwhile, on our website, you can get the exact same drug for $39 for a month supply. Yeah. And not 3,900, 39.

And that's with a margin. And presumably we don't have, we're not a monopsony. We don't have the buying power that they have. So presumably we're getting actually a worse price from the pharmaceutical manufacturer. Right. And someone's capturing that delta between 3200 and 39. And it's actually not the manufacturer. It's just the string of intermediary entities that capture value along the chain.

And, you know, to be fair, usually it's not that crazy. You know, that's sort of an extreme case, but it is a real one. And the same sort of market dynamics just happen over and over and over again. Right. You know, there was the Attorney General of Ohio, a year or two, released the results of an investigation where they found one in three dollars spent by Ohio managed Medicaid. So presumably the people who are getting the best price by law, Medicaid, one out of three dollars spent went to PBMs spread. So essentially one out of every three dollars spent by Medicaid in Ohio went directly to the PBMs. Right.

And, you know, if you look at, you know, I was very, you know, pleased to see this. You know, there was a study by some researchers at Harvard that got published in the Annals of Internal Medicine and then reported on more broadly in the media a few weeks ago that said, hey, if Medicare Part D plans contracted with Mark Cuban's pharmacy with just the first hundred products we launched with in January, you know, they would save on average, you know, 30% going through us as opposed to the conventional channels. like, yeah, that's about right. That's about just on generic products, which are not actually where they capture the most profits. Like, yeah, about 30% of it goes directly to just intermediaries in the supply chain. Right. Well, and you're saying 30%, the actual number, I think, was $3.6 billion. Yeah, yeah.

And that, you know, when you start to talk about taxpayer money in the $3.6 billion of dollars over a pretty short period of time. Yeah, you can either have, you know, universal, like, free. college or PBM markups. Like the raw dollar amounts are staggering. And it's so interesting. I have a million questions about how this came to be, but as long as we're still talking about PBMs, like one of the things I did learn recently in this interview is that the reason that this spread exists and can be effectively infinite is because these intermediate

media areas have basically gotten rid of price transparency. Nobody knows what something costs. And so I have this idea that I just demonstrated, which is like, oh, a chemotherapy drug. drug must cost a lot. Yeah. And it turns out it doesn't and no one knows that. Like how much impact, you know, we'll get back to the impact of the overall business, but how much impact do you think you'll have just by telling people how much drugs should cost

and do cost? Yeah, no. Certainly in a lot of cases, you know, I hope it'll be significant. Kind of, you know, one of my standard business development pitch to pharma companies to get them to work with us because, you know, initially they were skeptical, even the generic guys about like revealing their prices. That's like you. It took us a year.

or two just to convince generic pharma companies to start working with us. And now it's much, much easier because they've seen the value proposition. But in any classic economic theory, in any opaque market, the winners are not the buyers. They're not the sellers. They're the people that broker information in between. Like when you're buying or selling equities from a dark pool at Goldman Sachs, the winners are not the people buying or selling. The winner is Goldman Sachs. And you see that same market dynamic happening, particularly in the generic industry to significant ends, you know, the to cut throat competitive business, monopsony buyers. So, you know, they basically are borderline profitable, if at all. Simultaneously, patients can't afford their medications.

And the intermediary entities, the wholesalers and PBMs are all Fortune 15 companies. Yeah. So clearly there's a disconnect here. I remember talking to the CEO of a major generic company and they were like, you know, I received a piece of hate mail like a deaf threat. And they were like, how can you, you know, I had to pay $100 just in co-payment, you know, for this drug. Like how do you, I needed to live. How do you sleep at night? And he was like, I sold that drug for a dollar.

Like for that same month supply. Like what am I meant to do here? Right. So, yeah, no, just, yeah, hopefully just transparency. Not that it's a panacea, there's certainly more problems in the supply chain, but hopefully is at least a starting point. It's a pretty powerful start. Yeah, exactly.

Tell me the origin story. You founded a pharmaceutical company in 2018, asked Mark Cuban to invest. You know, we're saying his name a lot, but it seems like a lot of this was your idea. Oh, no, but yeah, having Mark on board, it's not just his investment. It's just really the celebrity, which is the magic key. So really, really grateful that he's been willing to, like, put his name on it and stake his reputation on it. Like, that's extraordinarily generous of his part. But yeah, no, actually started. Yeah, were you always planning to be a drug maker and an alternate, what did you say, a parallel

supply chain? Was that always the plan? Yeah. So, you know, I'd been working on this sort of stuff for a while. You know, when I was a resident, you know, doing my training at Hopkins at the time, Johns Hopkins Hospital, you know, I was working with a pulmonologist and we were doing a clinical trial together. I was a radiologist reading the CT scans. And I remember. one weekend he came in incensed because two of his patients had died over the same weekend. They both needed a drug called Bozentin, which was a generic drug, you know, sort of long off patent but still cost, you know, at the time, $10,000 for a month's supply. They were meant to apply to like a patient assistance program set up as a nonprofit by the

pharmaceutical company that made the drug to like they got lost into red tape, fell through cracks, nobody knew this was happening, both died on the same weekend. Oh my God. Yeah, so these are these machinations have very real consequences. And then, you know, if I'm being honest, you think that'd be enough to start me off on this road. But it really was, the straw that broke the camel's back was, do you remember Martin Schrelli, the, the farmer bro? Yeah. How could we forget? Yeah. I was one of the many, you know, people outraged at the social media villain of the moment back then. And, you know, Very naively, with some friends, this is back 2015. Some doctor friends were like, hey, let's just start a pharmaceutical company.

We'll make it a nonprofit. We'll make the drugs. We'll sell them at cost. And yeah, end of story. And yeah, actually did that. We started a 501c3 and went around for the better part of three years, trying to raise financing for that. And did not succeed. Failed spectacularly.

did not raise a single dime beyond what I put in myself. Eventually, actually applied to Y Combinator because they fund non-profits once or twice a batch. And went, interviewed with them. And it was, I remember Sam Altman, Tim Brady. Tim Brady helped a lot. He's the first employee at Yahoo. And I forget who the third person was on the panel now. But in any case, they said, essentially, hey, we like what you're doing.

we'd like to support it, but we do not think you'll be able to raise enough capital to get this off the ground as a non-profit. If you reincorporate as a for-profit public benefit corporation, we'll invest in you like we would in any other company, we'll let you into the batch. And, you know, at that point, after three years of, you know, basically zero success, I was like, you know what, why not? Let's give it a shot. See what happens. And, yeah, to their credit, they were right. I was able to raise, you know what, in pharma dollars is a small seed financing round of a little over a million dollars to get us kicked off. And yeah, a couple months after that, just on a whim noticed Mark Cuban had a public email address. And I, you know, just emailed it, expecting it to go, you know, into the ether.

But no, it turns out he reads all his emails. I have no idea how he has the time. Yeah. Yeah, like, but no, he responded and invested a small amount to start with. and obviously became more and more enthusiastic about the project as years went on. And people don't believe me when I say this, but he's shockingly operationally involved in day-to-day, like affairs of the company. Like, you know, we needed some refrigerators at the pharmacy, and he was, like, tracking the

shipment of the refrigerators and stuff. So, you know, he's just a true operator at heart. Yeah. Well, that is remarkable in exactly the kind of partner you need to build something, you know, pretty not only complex, but in a... an industry that for all of the reasons that you mentioned, the dollars is hard to disrupt. I think in the last interview I did about this, I called it the mafia a lot of times. Basically.

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Just search for Prometheus in the app store and download it. Now, you need to use the secret code, TWIST, to get in because it's gated right now. Really enjoyed using the app. Great job to the team over there. And thanks for supporting this week in startups. Tell me about the drug production part of it. So do the drugs that you're able to produce have to already have a generic? I mean, I assume there's some recipe procurement questions.

Yeah. So the way it generally works is the actual chemicals themselves, like the what are called the AP. or active pharmaceutical ingredient. Not to be confused with the APIs that most of the tech industry works with. It does get confusing in email sometimes. But the ingredients generally we purchase from other companies. What we do is actually the part that's most regulated by the FDA because it's the last sort of spot before the medicine goes into a patient, which is what's called the fill finish or actually filling the bottles with medicine under sterile conditions.

So essentially what we have there, you know, we are creating an automated line, so a robotic fill-finish line. And it's really cool to look at. I can't show the videos because they're proprietary from the company that makes them, but basically robot arms that operate in like what's called an isolator. So a sealed chamber filled with vaporized hydrogen peroxide. And basically they just make sure that, you know, there's zero bacteria cells in that entire chamber while the medicine is getting filled. And there is a component of formulation development. So we do have chemists on staff who develop the formulation. And, you know, we are operating.

One of the things that lets us address drug shortages very quickly is we are operating as, forgive me, I'm going to get into jargony stuff. So stop me if I get too far into the weeds. Something called a 503B compounding pharmacy, which if there's a shortage is permitted to produce the drugs, not necessarily have them go through, you know, have them. go through the standard chemical tests and what are called analytic studies before they get out onto the market, but not necessarily human trials before they get onto the market. So that helps us get products in dire need out very quickly. But we are also, you know, a full what's called

CGMP current good manufacturing practices manufacturer. So for certain products, we also can do what are called bioequivalency trials or small human trials with like generally between five and 10 people. You inject them with the existing drug, you exist them with your drug, and you just make sure that the levels in their bloodstream is the same over time. And that gives you FDA approval to market as what's called an abbreviated new drug approval or basically a generic drug approval at that point. So we'll be doing both. We'll be going for and FDA drug approvals and operating as a 503B compounding pharmacy, you know, as necessary to, you know, try to have the best public. health impact that we can. Right. And then how many, you said you launched with about 100 drugs, how many drugs does that allow you to produce and distribute to carry? Yeah. So all our drugs that are

available at the moment, we're actually just wholesaling them. So we purchased them from other companies at the moment and just pass along basically the acquisition cost that we purchased them at. Got it. And that's the relationship with pharmaceuticals. It's like, it's a marketplace business in that respect. Exactly. Exactly. So the products we actually make probably will be about a dozen at any given point in time. And we should be complete with one, the actual physical construction of our facility, but also what's called the CQV process commissioning qualification validation, which is effectively like the FDA approval process for the facility itself, should be done. We're tracking November at this point. So that's when we'll have our own products available.

that we will sell probably predominantly to the hospital market to start with. Oh, I see. So there will be a B-to-B element of this, too, that will hopefully reduce pricing across the whole ecosystem. Exactly, exactly, yeah. And then talk to me a little bit about some of the, like, hot button drugs. EpiPens come to mind in terms of something that's been really corrupted in terms of price. And, of course, insulin is the hottest of hot button drugs.

Any word on when my mom can get her insulin? insulin there instead of being in the Medicare donut, that would be awesome. Help us out here. Type 1, she can't help it. I don't want to commit to anything on the interview because you never know how things go, but we're actively pursuing it. Yeah. I mean, is it harder?

Like, are there certain things that are harder? I would imagine insulin has some lock up. Yeah. Yeah. And, you know, the manufacturing process of insulin is genuinely harder than for most drugs. It's what's called a biologic, which means you have to genetically engine. cells to make it like you genetically engineer bacteria or yeast. And that's the way all insulin is made. And then you have to explode the cells and filter out everything that's not insulin.

It's this whole difficult process, which is, you know, most drugs are what are called small molecules in the industry, which is basically, you know, at the end of the day, you start with more or less petroleum, do a bunch of chemical reactions, and you have other product and you have pharmaceuticals at the other end. Biologics are much more difficult to produce, so there's less competition is one aspect. of it. But really what we're seeing is behind the scenes, the prices of the insulin are far more affordable. They're representative of what they are in other countries. It's really these same PBM machinations, which are affecting the price of insulin. You know, I'm a diabetic myself,

and when I go to the store and I buy insulin, I'm like, you know, I give my, you know, co-payment of like $100 and I'm like, I know what this costs. Right. It must drive you crazy. Yeah, absolutely, absolutely. So, you know, hopefully, we'll have an impact on that soon. But, you know, doing our best to add as many products as we can. Really, the hardest part is just get convincing other pharmaceutical companies to work with us as strange as that seems. Yeah, tell me more about that. So when you say work with you, you mean allow you to buy wholesale from them? Yep, exactly. And why won't they? Is it just sort of like status quo, fear of the mob thing? Yeah, that's a large part of it is, you know, the system as it stands,

You know, they don't actually, they don't like it. Like, they don't like being beholden to the PBMs. Like, you know, from their perspective, they do all the R&D. They do all the manufacturing, which I can tell you is hard. Like even just the last fill finished part of it is like the chemical engineering is legitimately challenging. They take all the legal liability. Like they're running these huge operations. Like, why does the PBM get 30% of the revenue?

Like, that's crazy. Right. So, you know, they're not pleased with it. but, you know, the devil you know sort of situation. Like, it works, so it's a risk trying anything else. But even more so, there's sort of obscure regulatory issues that they run into where, you know, or you can contractual issues. Like if they're locked into a most favored nation price with another wholesaler, which is artificially high in order for it to be renegotiated down at the level of the PBM. So, you know, my background, in addition, I'm an MD PhD.

My PhD's in mathematics. I promise this is going somewhere. I believe you. Okay. You seem like a very deliberate person. I'm sure you're not on a tangent. I am extraordinarily nerdy. Let me assure you.

And coming out of my PhD, it was like 2007. And I was being recruited for hedge funds to be a quant. So like a quantitative analyst at a hedge fund. And I remember going for the interviews and they make you do math problems and stuff to prove you knew what you were doing. And, you know, they'd show me, you know, these incredibly complicated. financial instruments, collateralized debt obligations, credit default swaps, filled with edo calculus, stochastic calculus. And I just remember looking at them. And I think, you know, I tend to be unusually blunt, like actually saying out loud, oh, so this is a scam. Like, you're starting

with bad debt, putting a layer of indecipherable calculus on top of it, and then calling it good debt. And essentially, in my head, like, the exact same thing is happening with the PBM industry and drug pricing in general. Like, you're starting with drug, you're using as a substrate for financial engineering, drug prices instead of mortgages. But the same end result, you create this sort of incredibly convoluted system of contracting so that no one actually, that very few people actually understand all the mechanics that go into it and use that financial engineering as a way to basically capture rent, capture profits along the supply chain. And it's just sort of-

And they're just profits, to be clear, right? They are not related to some amount of work. They're not related to the drug R&D. That's an argument that we hear a lot. Yeah, and that's the part that's paradoxical about what we're doing. You know, it's sort of this too good to be true pitch, but in this specific circumstance, I think it works, is that, believe it or not, going through us, the pharma companies make more money and more money for R&D potentially, because that part of, we could save money to

to consumer to payers, by taking away that inter, you know, splitting up that intermediary slice. Like the drug companies can actually make a little bit more if that, if the sort of pathologic entities in between are not capturing that, that value. And where are you now in terms of sort of landing those clients? Like, is it, are you seeing slow but steady progress? I would imagine the more people hear about you, the more you might get those calls. Oh, yeah, absolutely. So as you might imagine, you know, there was the, the Harvard study that came out a few weeks ago, and it was not a surprise to us because we'd actually since January when we launched our pharmacy offering, like had outreach from major insurance plans

because they don't like paying more money than they have to. If, you know, a couple of them own the PBMs, so, you know, it's a major profit center for them. Right. So, you know, they have also vertically integrated and they're making you get their prescriptions in the mail and that whole. Yeah. Yeah. Let's assume we're not going to get those. There's a lot. There's a lot. There's a lot. But, so presumably those guys aren't going to be clients of ours, but the other insurance companies came to us and they hired independent consultants to, you know, verify our claims, as you would. And they basically found on their commercial plans, we would say, between 50 and 60 percent on their generic drug spend, which is, you know, very low-hanging fruit. Why not? So actually,

you know, again, this sounds like just a thing you say as puffery, but it's true in our circumstance. Like we've actually been deluged almost by more business than we can handle. So we're trying to like rapidly scale as fast as we can to be able to, you know, bring on all the new clients that are that have, that have interest. But we should have, you know, millions of lives eligible to use us through their insurance at the beginning of the, at the beginning of the new year.

That's incredible. Well, before I let you go, tell me a little more about the scaling. How is, is Mark Cuban the only investor? How do you, how, what is the financing looking like now? Oh, he is by far. are the dominant investor at this point. The initial YC investors are still there. And you know, you imagine, you know, my sales pitch, which is like help the world. It's a very socially minded group of investors as well. So I think everyone is very, very fortunate with the investors we

were able to get, like very much on the same page of like, how do we optimize the social betterment. We take our sort of double bottom line of, you know, we have to be profitable, we have to be sustainable, we have to stay alive. But our very serious second bottom line is like how much of a public health impact do we have? How much do we improve people's lives? Like, everyone's sort of on board, but... But you're still venture-backed planning to stay private. Do you think you'll stay private forever? I don't know why I feel this way, but I sort of want you to. Somehow I'm worried that if you go public, it's all going to get messed up. Yeah, no, I think we have no plans to go public in any point in the indefinite future. You know,

also very fortunate, you know, I think Mark genuinely is not looking at this as a way to make any additional money. He says in interviews like, you know, I think he says something along the lines of like, my next dollar isn't going to affect my life. I'm, you know, he's very, I'm a very fortunate individual. And I think that's totally genuine. Like, and I think, you know, one of the reasons this hasn't been done before is these sort of giant entities just sort of buy you out as soon as you're a competitive threat. And we actually, even before we launched last year, they just, one of them heard about us through the grapevine and actually offered to, to buy us out way before we launched.

Yeah, it was, and then, you know, it was like this, I felt like I had done stirring the conversation because it was their corporate development division. And I was like, oh, it's a biz dev call. You know, okay, whatever. You know, I'll talk to anyone. And it took like 20 minutes into a 30 minute call to understand what they were saying. And I was like, oh, you want to buy us out? No, no.

No, thank you. I'd like to go now. Sorry. Wow. My bad. I didn't understand. I wonder, like, philosophically, just, what that says about how change gets made, right? Because we, as we can see from the fact that this

has been going on for probably the past 30 years in the pharmaceutical industry, regulation is slow to catch up. The FTC, I think, is only just starting to look into PBMs. And, you know, to your point, the economics are such that most startups are going to be in a catch and kill situation. Like, are we to the point with changing big problems where we are going to need an interested billionaire every time? You know, From my general worldview on policy is I'm a radiologist from central Montana and no one cares what I think. But, you know, what we can do is we can help people get their medicine for less in the moment. Like, we can make a change sort of right now. Is it great for the system as a whole

that it requires a white knight, kind of like Mark Cuban, to make these changes? Presumably not. But I don't think we can wait for the system to change. Like, if we can make a difference now, we'll do it. Amazing. Dr. Ashmianski, thanks so much for coming on the So thank you so much for having me. Fun conversation. All right, everybody. When you raise a big round of funding like a series A or greater, you're going to be under a lot of pressure. What is the pressure going to be?

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And they're going to give you $10,000 off your first contract. $10,000 off at byres.com. Okay, that was an excellent interview with Alex. And you heard us mention this kind of pharmacy benefit manager thing and some of these middlemen who sit in between and impact to the pricing. So our next interview is all about that. Here's AJ from Capital RX. All right, I am joined by AJ Loyakano, CEO of Capital RX, a pharmacy benefit manager that manages and negotiates prescription drug benefits on behalf of large organizations. They just raised $106 million series C, led by B Capital. And the mission is to, as I understand it, increase. transparency in the prescription drug process and also improve patient outcomes, which I think we can all

agree sounds great. Thank you for doing this. And welcome to the show, AJ. Thank you so much for having me, Molly. So tell me a little bit about how this works, like sort of high level. How do drugs get paid for? You know, where do pharmacy benefit managers sit? And what is the role there? Yeah. People don't understand any of this. So let's take a step back. Let's kind of compare it to something that we all understand. So let's start at the very beginning. A pharmaceutical manufacturer begins to make a palette of drugs, and they spend an afternoon, and there's, let's just say, a palette sitting on a loading dock. And pharmaceutical manufacturers, these could be brand manufacturers like Pfizer or Merck, or these could be generic manufacturers

like Teva. And what they do is they sell to the next step in the pharmacy supply chain. So they sell to what are known as wholesalers. These are companies that you may or may not know by names of McKesson, Cardinal, and Amerisource Bergen. And they buy the inventory from the manufacturers. And their role is the kind of last mile of logistics. So their supply chain logistics is to provide medication to hospital systems as well as pharmacies. And they sell to, as I state, pharmacies and hospital systems, and they have a unit price. And they sell through the supply chain. And at this point, it makes sense. We could be talking about cans of soda to sneakers at this point, coming from a manufacturer, selling to a retailer, and there's a markup. But this is where everything starts

to go haywire in the United States is the next step in the supply chain is where we have insurance. So you have this in the form of carriers as well as what are known as PBMs, pharmacy benefit managers. And their job is to administrate a benefit on behalf of a payer. A payer could be anything from a municipality to a school system to an employer. It could be the federal government. and they're administrating this pharmacy benefit, and you would think it would follow the same step. There's a price of a drug. There's some sort of reasonable markup that we see, and you get a drug price.

But what happens in this last step is, unfortunately, the way our system has matured over the last 25 years is all the drug prices in the United States magically disappear. So up to this point, everything has been, hey, if I make a pill for a dollar, I'll sell it for a $1.5, and they'll sell it to $1.10. And then you think, oh, so I should get it for $1.15, you know, some slight markup in the supply chain. But all the drug prices disappear. And so this is the problem, is that there are no drug prices because this last step in the supply chain has really been defined but what's called spread pricing. So the administrators that, you know, these are carriers and PBMs, what they did is they said, rather than charge you a fee to administrate your benefit plan, I'll just take a little bit in the middle. And it sounded reasonable,

like, oh, okay. But what happened is they realized that they had a right to steal effectively because there was no limit to what you could charge. How would you ever know? There's no reference. There's no price point for a consumer other than if you could shop around. It's very difficult. There's over 130,000, what we call NDC-11 drug codes, based upon different package size, different strength.

And this is really, really difficult for people to understand relative price. So when you take all the pricing away and you leave some, someone in that last step in the supply chain, I'm administrating a benefit, I can suddenly create any price. And this is where everything goes sideways. And I never understood it because I come from pharmaceutical manufacturing. It's where I started my career off for the first eight years of my career. And then I moved over to the payer side. And I thought everything would behave the same way as I described. You make a drug. There's a markup and you sell down the supply chain and everyone has a price. And I would read these contracts with the carriers and the PV

and I'm like, why are there no drug prices in this agreement? And no one had a good answer for me. And to be honest, I still don't totally understand how they ended up abstracting out pricing and introducing this idea of spread. What did they, like, who would allow that? That's not how buying and selling works. Well, that's a great point. You know, who do you think sits on top of what we call self-insured benefits is really

what we call anyone that is either what we call over a thousand lives is a self-insured entity. So these are large Fortune 500 companies, municipalities, state workers, etc. But also it's fully insured business. This is coming under carriers. And these are small group plans or individual life plans. And so what people kind of got caught up in was the concept of free. and everybody kind of said, I like free, you know, but no one realized what the price was. You know, what was the price of free?

Well, wait, they're telling me it's free, right? It's free. So then just to further clarify, they got caught up in the idea of free because if you are the recipient, aka an insured person, that drug appears to be free or close to free to you? Yes. So what they did is imagine, let's just say, in the old model, an old model, let's just just say before 1995, roughly. Before 1995, benefit administrators like PBMs would kind of say, hey, I'll charge you

25 cents per script, flat fee to administrate your plan. And that's a reasonable amount of money. But then someone had the bright idea, be it marketing or sales, whatever. And they said, what if we went to the employers and the payers and the feds and we said, it's free. There's no more 25 cents per script, but, you know, I'm just going to take a little bit in between. And the country ate up this idea. I mean, the expansion of some of the fastest growing companies in the United States,

if you were to literally go back in time and look from 2000 to 2007, some of the fastest growing companies in America are Express Scripts, which is now part of Cigna. It's Caremark, which is now part of CBS. So these companies exploded Medco, another company, exploded in growth, which was purchased by Express Scripts, which was then in turn purchased by Cigna. In fact, the two you mentioned, we looked this up. McKesson and Amerisorsburg and are 8 and 9 on the Fortune 500 respectively. Oh, all of these companies are top 20. So Cigna, top 20, CVS, top 20, and United Healthcare top 20.

Free is never free. Free is never free. And then never underestimate what people can try. and get away with. So maybe they started out and they said, eh, it's 25 cents. We'll take 35. We'll take 50 cents. We'll take a dollar. And suddenly they realized nothing could stop them. Because no one's looking. Literally not paying attention at all. They're just like, we get it for free at the end. You can't see. And then what they started to do is to structure contracting so no one could see. So the first part of it is retail contracting. So what you do is you say, Mr. or Mrs. Pharmacist, you can never communicate price to the patient at the point of sale. Even if you could sell it at a lower price, I don't want you ever to say anything to my customer. And the retailers sign these agreements because they want access to patients and they said, wow, these carriers are powerful.

Let me sign this. And they lost control of the supply chain early on. I want to say retailers probably lost control of the supply chain in early 2000s. and basically they signed these agreements so a patient could walk in and remember the pharmacist can see, especially if they're the owner of the pharmacist or a store manager and they have some understanding of acquisition cost. They can get a sense of the buy in the sell side, which is I'm typing in the insurance and the insurance company is telling me to charge for a torvastatin $65. And they're probably saying, I'd be willing to do this for $17, but I can't say anything. And so that 25 cents suddenly it grew to $5, to $10, to $20.

And the optimization, because I do want to make this clear, there's nothing technically illegal about what they're doing. You know, what they're doing is they're publicly traded companies and their fiduciary responsibilities to their shareholders and they're trying to maximize value within the model that they've created. And so what's interesting is they suddenly. said, hmm, I did this on retail. What else could I make more money on? And then you look at things like mail order. Be like, what if I made it mandatory mail? So if you have a script that's over 30

day supply, I'm going to say you must go through my mail order. Now, what did they? I've wondered about that. Yeah. What did I do in this magic trick? It sounds like, oh, well, you know, and, you know, think about it. It's under the guise of, I'm going to do what. what's right for you. You know, we want patient adherence to be higher. We want to do this. But what they're doing is they're creating the largest pharmacies in the United States. So what's interesting is the largest pharmacies in America by volume aren't necessarily Walgreens

or Rite Aid. It's United Healthcare and Express Scripts to Cigna because they have such huge male, which includes specialty drugs, high-cost biologics. And so what you're doing is you're forcing you to... to your own pharmacy, which gives you now another way to make money, which is on acquisition cost. Remember, the pharmacy has a markup because they're buying the inventory. But now I can make double spread.

I can make spread on my inventory because I am the pharmacy and I can make spread on my customer. But it doesn't end. You keep going with the game. It just gets worse. There we go. We went ahead and put up United Health Groups overall, you know, like, you know, like, historical stock chart from the 90s, it looks like.

Yes. And you see that right in this period you're talking to early 2000s, all of a sudden, everything starts trending great. Nothing but up. Now, what's interesting, if you were to layer in here on top of this chart, like Merck over the same time frame or, you know, Pfizer. Yeah. And what you're going to see is what grows faster is not necessarily the pharmaceutical

manufacturer. So, as I said, in the history of pharmacy benefits and not to bore people with this, is it's important to remember what's happening is the PBM went from kind of in a not that significant member of a supply chain to the all-encompassing and all-powerful controller of the pharmaceutical supply chain. So you start with retail, you add into your power through mail order, you expand through what is called specialty drugs. These are the highest-cost medication.

And then you look at pharma and you go, well, pharmaceutical manufacturers, brand manufacturers have all the money. I would like their money. Right. And so if you think about the optimization of the traditional PBM model, what's next on the menu is how do I get to pharma's money? And a really interesting thing happened. We call it the birth of what's known as a formulary. And a formulary kind of maybe was born with the right intent, which is I would like to select the appropriate medication. My team has gone through and we have done a survey and an analysis

and collected data from the FDA and other area. And we have basically stated that we have determined precisely the right medication for you. Now, I want to pause for a second and think about how implausible this is. I use this example all the time. My sister and I are very close in age. We're genetically similar, but we have very different medication needs, as well as we respond very differently to medication. What are the odds that everyone in the country should respond to the same exact formula? Right.

Zero. It's zero. Especially considering how few women are even tested with respect to, you know, like you can get into a whole women's health situation and me and your sister will be in a real rage about it. Oh, exactly. And so, you know, I think we would all agree, precision medicine is a much better way to go and we'll eventually steer towards there.

But what I'm trying to ground us in is all the ways that you could take advantage of this system to become a control. So what the PBM industry did is they created a formulary. And it started out like, hey, I have a formulary. And to be on my formulary, you provide me rebate dollars. And so what you're creating is kind of a pay to play economics scenario. because what if someone says, well, I don't really want to pay? Oh, well, then you're not on my formulary. Now, when the PBMs were a bit more fragmented, that didn't mean as much. Someone would be like, all right, well, you've got like 8% market share.

They've got 15% market share. Not that big of a deal. But I always like to point out out of every industry in the United States, the pharmaceutical industry is the greatest gift anyone can. ever receive economically. It's an inelastic demand curve. It does not matter what happens with the stock market or interest rates. Drug utilization is held rock steady for 30 years. No other industry could make this claim. In addition, drug prices for brand and specialty only appear to miraculously go up. And then you have what we call the compounding effect of proliferation of

specialty. The average cost of drugs is going up due to the introduction of high cost. therapies. And so I'm not here to debate what's right or wrong about our patent system or the price of drugs. What I am trying to have everybody understand for a second is when you have the perfect market, you never have to innovate. I mean, think about the advances we've made in things like construction to real estate, even the finance, e-commerce, there's always been ebbs and flows. And you've had the reset button become more efficient, become more competitive. but what if you're in an industry, you never have to be competitive. In fact, it rewards you for being slothful.

And the more focused you are on profit, the better. So you don't innovate, you consolidate. So simultaneously, if we're looking at the history of the PBM industry, what's going on is, well, the PBM industry is eating itself. And you're seeing hyper consolidation. And they're literally from 2000 up until last, month, you know, there have been 30 plus mergers and acquisitions that have created jumbo entities. So you have literally three entities. You have Cigna Express Scripts. You have United,

which owns Optum. You have CVS, which owns the carcass of Caremark, which they took over. And what this is is you have three entities depending upon how you do the math, a utilization or GPO economics controls anywhere from 75 to 90. percent of the purchasing power in the country. So this is important because if we go back to my formulary example, in early 2000s, pharma could kind of push back a little bit and be like, yeah, I don't know if I'm going to pay your fee. Well, now I knock on your door and I say, I control 30% of the patient utilization in the

country. And if you don't pay me to be on my formulary, you're probably going to be fired. Yeah. There's no pushback. Nice little pharma business. here. Well, and this is interesting, is roughly around, by my estimate, 2010, pharma had basically ceded control of the supply chain. That for decades, pharma had basically controlled the U.S. supply chain. And then by 2010, the liberation had happened,

and the PBMs had finally basically taken control. And what this meant is there was nothing to stop them from making more and more egregious asks. And people would often say what comes first, the chicken or the egg. And in this equation, I want everybody to think. People say, well, drug inflation is running rampant. Well, if someone's knocking on your door, PBMs every year, asking for more money in the form of rebates and manufacture incentives, how do I pay for it? So you come to me each year and you say, let's say I'm a manufacturer and you're the PBM Molly. And you knocked on my door every year. It's your job to say, I need 10% more.

Yep. Well, I could take 10% less out of my earnings or I could raise my price 10%. So a lot of arguments are circular in the sense that pharma will oftentimes point a blameful finger at the PBM industry. The PBM industry will point a blameful finger at pharma. But I want everyone to understand the history here because what you have is PBMs that are truly in control of the U.S. supply chain. They're in control of everyone from the manufacturer to the wholesaler to the pharmacies to the hospitals. Make no mistake. They're in charge. The second thing is we have a system that's based upon price opacity and price encumbrance. Price opacity, as I mentioned,

is nobody can see and understand the buy and sell side. The true and buy-sell side of the economics of a prescription. And the other part is this pricing humbrance. You have the ability to change the price at your sole discretion under a traditional PBM model to be anything you'd like. That is extraordinarily powerful, and it equates to very big earnings. And so, you know, I want everyone to understand, this is how we got here. You know what I mean? It shouldn't be a surprise. It took roughly 25, 30 years, and there were different points, but what it left us with is a scenario where literally you can charge anything. So the way I want people to think about this is I often say is imagine the U.S. drug system is a casino and we deal in

probability and odds. And if I'm the casino, if we look at the U.S. drug pricing system, our cash marketplace in the United States is about 6%. These are the people that either aren't covered by insurance or are and they kind of hunt for a better price. But what is a lot of the does that mean? That means 94% of the time, a patient when they go to a pharmacy will accept any price I put in front of them. And if you own the casino as the PBM, those are great odds. And that is so important. I mean, it's funny that you describe it as a casino because to be honest, it sounds a lot, to be fair, I'm rewatching the Sopranos with my son, but it sounds a lot more like a mob shakedown that may be started as an attempt at efficiency, right? Like, we don't want

to ascribe values to what people were doing. Everybody was trying to make more money and things, we've seen things spiral out of control. So I guess let's fast forward to impact and then talk about solutions. What are the, I mean, I think we sort of understand what the impacts are of drug price inflation, but give us the kind of big picture of what the system has led to. Well, I think it's led to a breaking point. I think you're seeing the FTC announce its investigation of the PBM industry, which is the first time in my recollection that they've done this.

And I have to be honest, like, I had never heard of this. I mean, none of this is stuff that I think people know or understand. No. And, you know, it's hiding in plain sight. It's at your local pharmacy and it happens millions of times every day people filling prescriptions. But they don't understand what caused these economics to become untenable. And I think the impact on the consumer is great. So back to the spoiling point, you're seeing state legislation lean in.

You know, the state legislators are saying, wait a second, what's going on with these PBMs? Because the retailers are complaining. They're getting squeezed harder and harder by the PBMs. Hospital systems are complaining. Patients are complaining because you're seeing this price change back to when price is encumbered through spread pricing. price changes every second of every day for every drug. And that's a complete lie. Drug pricing in the United States is incredibly stable. Brand drugs change about twice a year. You can set a clock to it. It's

typically January and July. And generic drugs typically deflate depending upon your purchase schedules, which could be monthly or quarterly depending upon your size and what your routine is. But the point of it is it certainly isn't changing every hour of every day for every drug. that's artificial price encumbrance. And so the impact, again, is patients are complaining, but for the first time, I think oversight groups, be it HHS, CMS, Department of Labor recently is announced they're enforcing the Consolidated Appropriations Act, which is a way to kind of measure profitability and reporting by PBMs as well as brokers and consultants that sell these services, which could be helpful. The FTC is leaning in. So what you're seeing is we hit this boiling point

and everyone's complaining about drugs. And I think finally people are kind of recognizing there's not one person in the supply chain truly responsible for these multiple people. But the outsized kind of role in pharmacy is the PBM. And I think people are starting to understand this. Gotcha. Well, certainly you do. And so it sounds like what you're also describing is possibly a regulatory, but also an awareness environment that creates room for competition. Enter capital or X. Correct. So as I mentioned, I started in pharmaceutical manufacturing. I moved over to the audit and procurement side. So this is reviewing contracts for large self-insured payers. These could be carriers, Fortune 500 companies, even government agencies. And what the one

thing I realized is none of these people were truly getting what they thought they were getting. And how could you? Again, you have a contract with no drug. pricing in it. There are no drug prices. How could I ever kind of figure out what I'm supposed to get? Because it's so complex. We have a very complex classification system of what's the definition of a brand, a generic, a single source, a multi-source, limited supply, DAW handling. And this is done almost to confuse people because everything in the United States has a list price called an NDC-11. And it would be very simple. Just take the NDC-11 and put a price next to it, the same way we priced popsicles to lampshades.

And so what I saw over, I often say I was writing a 13-year thesis on where did the drug pricing go. And I finally got to the point and I said, I'm never going to change the way drugs are priced or patients are serviced by auditing the books or helping with a procurement workflow. Right. So I think what we wanted to be able to do was, why don't we take a step? back and get to the real problem here, which is the person that adminestrates the benefit as all the control, as I just said, the PBM is in charge of the supply chain.

Well, why don't we create a model that we want this to make sense? Let's create a transparent pricing model. Let's create a public ledger pricing. Let's not push around the pharmacist. Let's pass through 100% of the value. but let's do it and be super competitive. And this is where we started to develop the technology at my organization to compete with the big three. So let me pause.

And I know you probably have a host of questions. But I had to get a lot of this out because it's important to ground everybody to just how we got here. Yeah. As you may have seen it go by in our live chat, people were saying, I feel like 99% of Americans could benefit from knowing this information because nobody totally understand. how pricing got this way. It's almost everybody's, you know, you blame big pharma. And it turns out that's a whole ecosystem that is working together and, you know, making trillions. What, how does it work? Like, how are you doing things differently? How are you enabling that transparency? And if you could, give us a real world example of sort of like what that might mean for, you know, my mom and insulin prices.

Sure. So the first thing that we wanted to do was you have to kind of have the discipline. You have to have the discipline to what I call to never take the bad money. The bad money is spread pricing on drugs. Because the moment you make money on a marked up prescription, one, I don't think it's right. Because if you think about it, you can't mark up a medical procedure in the United States. I don't know how the heck we got to marking up drugs. But I always said you have to start with the discipline to never take the bad money. So you can't take spread on rebates.

You can't take spread on mail or specialty. etc. So we decided to just charge a flat administrative fee. So this could be per member per month, flat administrative fee, or it could be a flat per script fee. We let our clients choose. It really doesn't matter. But what we're trying to say is we're performing a very valuable function. When you administrate a plan, you're keeping track of who's eligible, you're setting up the plan design, you're doing the clinical review, the clinical edits, drug utilization, drug to drug interaction. You're reimbursing the network on behalf of the payers. You're billing them. etc. You're doing hundreds of what I would say administrative tasks to maintain a benefit.

The key is to just always remember that's what your job is, not to be the drug czar of marking up drug prices. And so what we wanted to do is to kind of create what we call our clearinghouse model. And this is this concept of a public ledger. Our office is located in New York City. I say all the time I walk by the most famous clearinghouse in the world. which is the New York Stock Exchange. And it lets the buy and sell side freely communicate on pricing. Molly, you would like to buy $100 worth of IBM? I would like to sell you $100 of IBM.

We are communicating freely on price. This does not exist in prescription benefits. And so we wanted to do this. And to do it, we also wanted to never be in a position where we manipulate or set price. So we chose for our pricing benchmark. We use NADAC, National Average Drug Acquisition Cost. You're like, what is this NADAC thing? It comes from the federal government.

The federal government uses it in Medicaid reimbursement in 40 plus states. And we like this because CMS controls it. The federal government, they set it, they update it every week. And what it's doing is I'm saying, I have nothing to do with price. I'm giving a benchmark for our retail pharmacies. So we go out and contract with all the major national network of pharmacies, the independence, the PSAOs. And basically we say, we would like you to either sell the drug at NADAC plus your dispensing fee or if you could do a better job, feel free to do it. Now, this is where

trust comes in. There hasn't been trust in the pharmacy supply chain in 30 years because if I'm a pharmacy and I normally give savings to a traditional PBM, they're going to keep the money. It's never going to make it to the patient or plan or a disproportionate part. And so, pharmacies are very hesitant to offer a better price. So we decided to do something very unique, which is we don't set price. We give you the ability, the pharmacy, better than benchmark, Nadak, if you would like to set a better price, please do. And the patient will always receive it. And the way that we prove that is all of our customers get the same price. Now, that seems like a pretty, you know, that seems normal, right? Shouldn't everyone get the same price? Popsicles and lampshades.

Yeah. Exactly. Well, think about it. You walk into a pharmacy and you go to the OTC counter and you pick up a bottle of Tylenol. Does it matter if you're insured or uninsured? Does it matter if you work for the biggest employer or the smallest? It's the same price, correct? And it will be the same price for months on end until the manufacturer says, I'm going to increase or decrease price based upon supply and demand. Real market forces. That's not how prescriptions work. Right. You know, so you go 50 feet back to the register to the prescription counter and, the price changes every second of every day. It's like spinning a rule at will. Am I today's winner or loser? Which, be fair, is not unlike the stock market, but shouldn't. Shouldn't be that way. No, but at least with the stock market, you can see the buy and sell side.

True. Neither one can see the true price. And even if the pharmacy is willing to communicate a better price, contractually, they can't. Right. You know, they've completely locked. So the difference is you're saying, these are the prices, A, one big innovation. here's how much it costs. B, we will not require you to charge a higher price if a lower price is available.

And then C, the consumer will in fact know what the price is. Agreed. And what's interesting is because we use NADC pricing, there's no massive price swing. So I often say if someone's filling a tour of a statin, let's just say in Washington State or in Florida or in New Hampshire or in Arizona, it's the same price. until the price has changed by CMS, or, to be fair to the retailer, they could say, hey, I've got $4 generics on Walmart or I'm Albertsons. I have $0.00. I'm oxacillin. I have specials on things. That's awesome. Let that value get to the end patient in the plan. And so to do this, we had to reimagine how

claims are processed in patient service. So we had to write our own technology from the ground up. And this is very important because, as I mentioned earlier, when you have the perfect market, there's no need for innovation. And, you know, to be clear, they just, my competitors scaled with people. And they never really invested in technology. Their technology is 20 or 30 years old, depending upon which software platform is. And you'd be like, well, the software that important, I said, yes. Think about any major operational system. I mean, imagine going to someone like Walmart or Amazon and saying you have no software for your supply chain logistics and operations. They would be like, I can't even do my job. There was no investment in workflow management and workflow automation.

Because think about it, the highest cost against drugs are the people and how cheaply you could administrate a plan. And I always say there are two lines in healthcare. There's your top line, which is gross margin. And I will say this very clearly, my company does not purchase drugs cheaper than the largest entities in the pharmacy supply chain. But there's another line that's equal or in greater importance, which is what is your cost? What is your net margin? And so this is your administrative cost. So we built our own technology platform, Judy, Judy short for adjudication, and she is the brains behind our organization because everything runs on Judy. And we had this hypothesis, which is if we could create workflow automation and make our organization 70, 80% more

efficient than my competitors, not only could I close the gap in their pricing advantage, I could beat them. I could offer cheaper prices. And more importantly, I would never be forced to take what I felt was the bad money, the money based upon spread. Well, and this is a really important point because when you first talked about not taking the bad money, my investor brain went, hey, I hear you leaving money on the table. And so it sounds like what you're saying is that you've automated this process enough. You've introduced enough technology that your margins will make up for not taking the bad money. Like you believe that you'll be able to make the same amount of money by also introducing price transparency.

And maybe having, hopefully, it sounds like a downstream positive benefit on the industry. Oh, well, absolutely. And so, you know, I always go to the metrics that matter. So we're a customer-first organization. So some people would say, well, you're leveraging. all this technology, you know, does that create? Let me interject there. Who is the customer? Yeah, the customer that buys our services is an employer group. Typically, 500 employees or more. So in the United States, when you hit 500 employees or more, you become self-insured. That means you're

taking on the risk. I don't need a risk taker or carrier to cover my risk. I can pay for my own bills. And so the employers, they're also municipalities, they're also union groups, hospitals, health systems. So anyone who has a benefit to be administrated, we can provide a solution for it. We can also power the back end for regional carriers and health plans again. So we can be that administrative platform. But the main buyer for you to think about is any large employer in the United States. We're providing this administrative service.

Gotcha. Okay. So how do you hope that, or do you hope that the healthcare landscape will change overall? I'm imagining that this is a little bit like Robin Hood, which came along and offered free, you know, stock trading. And then all of a sudden, everybody had to do that. Like, do you believe that you will have that transformative and impact on the industry? Do you even want to? Or is this your like competitive advantage forever? No, I hope everyone does. I think the industry needs to think this way. And I use Robin Hood quite a bit. If you think about it, once upon a time to make a stock trade in the 90s, I believe the rule is you could keep 10% of the value of the trade. It almost sounds criminal. People used to charge hundreds of dollars for a stock train. And then companies like e-trade and Ameritrade said, I'll do it for 59.95 and 995. And then Robin Hood comes along and says, I'll do it for for zero. And then in my Chase account, they'll do it for zero because you're setting the market for what the true administrative fee should be. And so I do believe exactly as you're saying is you're going to expose what the real price and value is to administrate a plan on behalf of a self-insured entity. And that will settle itself based upon the services and what the market can bear. So I completely agree with your example. I hope everybody, gets here. It's our advantage today, but I believe that others will understand the importance of

this. And I hope many of them use our technology to get there. I would like nothing more than to liberate drug prices on behalf of the U.S. consumer. Yeah, us too. And then talk to me about the sales pipeline. How hard is it for your customers to switch? Yeah. Well, I would say, first of all, Switching is very easy. This is our calling card because we have a modern technology platform. So my competitors take months to set up a new plan and it's a real headache. But if you were to speak to any of my customers, we literally plow through this in hours to set up a new plan because we have a natural language framework, which enables my people to very easily

set up a new plan design and benefit and do the interoperability and the integration, not to bore you with the details, but we connect to a lot of different things, including the carrier. for accumulators and eligibility feeds. But the whole point of it is it's a seamless process that's an eased, very easy to do and to switch. And this helps quite a bit. But I think what you're trying to get to, and part of the question is, how hard is it to convince someone to move to someone like us? And so we've been around now.

You've described like a pretty, you know, well-integrated mob operation. And sometimes those can be a little hard to disrupt without ending up in a barrel. Oh, yeah. Oh, no, completely agree. So, but part of it is I often say there are no shortcuts in health care. So if anyone says, hey, my sister is a bigwig executive at this Fortune 500 company and they're just going to move their business to us. I'm like, I've never seen that because normally someone is going to say, well, wait a second,

how many 200,000 life accounts do you have? And if you're new to the business, your answer is going to be zero and they're going to be like hit the road. So, you know, no one has a tolerance for risk when it comes to benefits. So what I say is there's no shortcuts in healthcare. So we've been at this for four and a half years. And what I often say is I never want to go back. I never want to go back and sell four years ago because it's miserable. Think about it, Molly. You're my customer and I'm trying to convince you. And I say, hey, here's the reason why you should use capital RX. The first question is going to be like, well, how many other customers do you have? I'm going to be like, including,

you? And you're going to be like, oh, that's very cute. And they're like, how long have you been in business for? And you're going to be like, including this month? Right. And you're going to be like, are you trying not to get the sale? But I'm trying to be honest. But my point is, you start by selling 500 life cases to get to 1,000 life cases to 2,000, to 4, and 8, and 16. And I make this point all the time, because I want people to understand there are no shortcuts in healthcare. You build upon your trust score. So if I've been score, you've been score, to serve as 10,000 life cases. Yeah, I might be able to sell a 20,000 life case, but I'm not selling a 200,000 life case any time soon. And this is what we had to build upon. And also, if you think

about it, statistically speaking, as I stated earlier, depending upon your accounting for market control, the big three, you know, Cigna United and CVS control, 80% of the self-insured marketplace. So 80% of the time, I've got to displace a Fortune 20 company. And so that's never easy, but it gets easier each year. And part of it is because our performance and our track record. But it's also, I give a huge amount of thanks to my customers. They're our best sellers. My best brand ambassadors, hands down, are my customers.

I have more sales for my customers talking to other people, be it at conferences, at just get-togethers, people knowing people in industry, HR people are pretty tight. And they'll just say, oh, my goodness, I'm having the best experience with Capital RX, you should speak to them. And I think that goes back to that trust and strength of your brand. And timing, right? Timing matters. You're doing this at this moment when, as you described earlier, this conversation is really increasing. I also want to ask you how, if at all, because there's also been news about drug prices.

is specifically around like Mark Cuban's new company Cost Plus pharmacy. How does this interact with that if at all or how could it? And he's a part of this ecosystem of like, let's upend this. Yeah. So if you think about it, my competitors create walls. They only want to direct drug spend to their channels, especially when it comes to like delivery or home delivery like Mark Cuban Cost Plus. We have the opposite model.

So we're agnostic in our network. So I'll take anyone in our network. Remember, my job is to administrate and find the best price and the best service. So why wouldn't I want Mark's company to give me inventory and price? Right, right. And the answer is yes. You know what I mean? And it's the same, not just Mark, but anyone.

And I want to make this clear. It's at retail. We allow any pharmacy in our network as long as obviously they're in compliance and in good standing with the state. I just want to make the point of that. But I think the other part. Part of it is, I don't care if you have a mail channel. You know, I'm saying, give me a price list and I'll post it.

And if people want to use your services because you're offering a lower price, fantastic. You know, that's the way the market should be. If I'm truly an administrator, what I want to do is help my client and their patients find the lowest price and bridge that and communicate to that to them. So yes, the answer is I applaud anyone like Mark and others that have. mail and delivery services that have figured out ways through partnerships and direct contracting to provide lower drug prices to the U.S. public, I am all for it. Because remember, I don't make any money on fulfillment. This is what makes me very different in our organization from our competitors.

We do not make money on the filling of a prescription or the spread pricing or the acquisition cost or the rebating or anything around that. So it makes it very easy for us to make partnerships and direct people to the appropriate channel. And then last question, do you think, you know, when we look at seemingly intractable problems like this, I'm a climate tech investor, so I, you know, am acutely aware of this, do you think that disruption and competition ultimately are going to have more impact than these sort of slow walk regulatory moves, or do they have to go hand in hand? I've personally never built a business plan or model around federal intervention or oversight.

So I genuinely always believe in innovation and competition driving a market. I do believe it's important for the federal government to lean in and review many of these rules and practices that have kind of emerged over 20 years, not necessarily for myself and competition, but who's the largest payer in the country? It's the federal government. for Medicare, Medicaid, 340B, DOD, VA, take their pick. They buy billions of dollars of drugs. I would like my federal government to, one, get a fair price because they're not.

It's by their own omission, you know, omission. And so if you look at the COB report from February of 2021, it compares net drug prices across things like DOD, VA, Medicare, Medicaid, 340B. And it's not like really tight. Like, oh, well, we have, you know, the best price in the United States. And that's what we've negotiated for all of my billing. It's the exact opposite. There's a delta on net cost of up to 150%.

So I often joke, if the federal government can't get it right, what chance does the average patient? And so I do believe that leaning in on a regulatory standpoint and reviewing things are healthy. but I do believe innovation is the only way and through fair competition. It's the only way the industry is truly going to make a monumental leap in the private sector space. AJ Loyakano is CEO of Capital RX. Thanks for fighting the good fight. Good luck. Thank you so much for having me, Molly. Good luck with the mob. I know I'm watching a lot of Sopranos. I'm from Jersey. It's okay.

We look it out for you. All right, everyone. Thanks for listening to these really, important interviews. I hope it was enlightening. I hope it made you want to become a customer of either of those or maybe call your Congressperson. You know, whatever you want to do from here is up to you. Stay tuned for tomorrow because we have even more awesome show planned. Rachel, producer Rachel, is going to join me to break down the Kardashian versus Instagram saga and what the kids are doing when it comes to social. It's like a special bonus, OK boomer. And we have another episode of everybody's favorite, The Blueprint.

See you back here tomorrow.