Mark Cuban, Mark Cuban Cost Plus Drug Company, on bringing transparency to pharmacy

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Mark Cuban, founder & lead investor of the Mark Cuban Cost Plus Drug Company

Our guest on this episode is Mark Cuban. In addition to a storied business career that includes owning the NBA’s Dallas Mavericks and a role on ABC’s Shark Tank, Mark is the founder and lead investor in the Mark Cuban Cost Plus Drug Company, a generic pharmaceutical distributor that prices medications at cost, plus a 15% administrative markup and any relevant pharmacy and shipping fees. Founded in early 2022, over 1.7M patients have signed up for the service in their first year, and Cost Plus Drugs now offers over 1,000 generic medications for purchase on their website. Mark founded the company with CEO Dr. Alex Oshmyansky, a pediatric radiologist who originally tried to start an organization similar to Cost Plus Drugs as a non-profit, before pivoting and convincing Mark to be his partner.

In this episode, I spoke with Mark about:

• His journey to starting Cost Plus Drugs
• How the company is able to drive down prices so drastically compared to the existing players
• How incumbents, such as traditional pharmacy benefit managers and new entrants, such as the Amazon RxPass, will impact the success of Cost Plus Drugs

Beginning to 10:59: Mark’s entrepreneurial journey, starting the Mark Cuban Cost Plus Drug Company and how Alex Oshmyansky convinced Mark to invest

If you’re saying Pharma Bro can raise the price 7,500%, obviously the market is inefficient, so there must be an opportunity to cut the price as well.

• Shortly after graduating from Indiana University, Mark started MicroSolutions, a computer consulting service, which we sold to CompuServe. He then launched the company that would become Broadcast.com, which he would sell after four years to Yahoo for $5.6B.
• At this point, he purchased the NBA’s Dallas Mavericks and pivoted to investing. It wasn’t until 2017 during congressional debates over repealing the Affordable Care Act that Mark gained an interest in healthcare. After Mark’s conversations with Texas republicans left him concerned that there wasn’t a replacement plan in place in the event of repeal, he started funding studies on other countries’ healthcare systems.
• In 2019, Mark received a cold email from Dr. Alex Oshmyansky, who initially tried to start a company similar to Cost Plus Drugs as a non-profit. After Alex explained the opportunity to reduce the cost of generic drugs, and after seeing the “Pharma Bro” Martin Shkreli raise the price of a generic infectious disease drug over 5000%, Mark decided to partner with Alex to form the company that would become Cost Plus Drugs.

You always have to know what business you’re in. The business we were in is the trust business. In health care, you trust your doctor, hopefully…You don’t trust the hospital, you don’t know why you’re being charged, what you’re charged…you go to the pharmacy, unless you have great insurance you don’t know what you’re paying, and if you’re uninsured or underinsured, you’re terrified when you walk [in].

• It turns out Mark has actually invested in a number of companies whose founders he’s never met. Mark grilled Alex on how to make this business work, why the opportunity existed and how it could scale to serve millions of people. Once Alex convinced Mark that he was the right person for the job, the questions turned to how they could drive costs so low while acquiring customers.

A few key decisions would be the answer:

• The sale price for each drug would transparently show the associates manufacturing costs and fees to the patient at the time of purchase
• Cost Plus Drugs would be a very light-touch solution, with no app, telehealth capabilities or other (expensive) features that patients typically expect
• The company wouldn’t spend anything on marketing, relying on customers (and Mark’s fame) to spread the word about the savings Cost Plus Drugs could deliver

10:55 to 22:35: Why are drug prices so high, and who’s rooting against Cost Plus Drugs?

[PBMs] do everything they can for people to not understand, to distort the whole supply chain, and to distort all the pricing mechanisms.

• There are two key reasons Mark gives for high drug costs. The first is that drug manufacturers price to value, rather than cost. Meaning, they price based on the rate they believe they can charge and the number of customers who will pay that price. This is very different from pricing based on cost (i.e. a cost-plus drug), and can mean that, especially for a drug that will have relatively few buyers (consider a drug for a rare disease), the price can be extremely high.
• The second reason relates to pharmacy benefit managers. PBMs negotiate the price of drugs with manufacturers on behalf of health insurance plans and employers. As a result, they have a significant influence on drug costs. In addition, the PBM market is highly concentrated — three PBMs account for nearly 80% of pharmacy claims. In addition, those PBMs, CVS Caremark, Express Scripts and Optum RX, are owned by CVS (which owns Aetna), Cigna, and UnitedHealthGroup (which owns UnitedHealthCare). The intermingling of PBMs and health insurance companies further muddies the incentives of these organizations.
• PBMs are often pointed to as the source of high pharmaceutical costs for both brand and generic drugs. The argument is that PBMs can actually drive the price of the drug higher due to spread pricing and rebates. Spread pricing refers to the gap in the amount the PBM pays the pharmacy and the amount it charges the insurer. Rebates are paid by the pharmaceutical manufacturer to the PBM in return for including the drug in the PBM’s formulary. Since this rebate is a percentage of the drug’s price, PBMs are incentivized to increase the price of the drug and to include more expensive drugs (i.e. not generic drugs) in their formularies.
• Unsurprisingly, PBMs disagree with this assessment.

If you’re going to work with us, there are no rebates. There’s no other nickel and diming. There’s no other third parties that are involved in the pricing of the medication. We’re going to buy it, we’re going to show our cost, we’re going to mark it up 15% plus…$5 pharmacy fee and $5 shipping…so you get to see all of it.

• These dynamics are generally hidden from public view through contracts that prohibit the revelation of these prices, the size of rebates and spread pricing, etc. This is where Cost Plus Drugs aims to hammer home their value: transparency allows patients, providers, pharmacies, insurers and employers to see the source of a medication’s final cost.

When you run with the elephants there’s the quick and the dead…The biggest challenge has been from brand manufacturers because they have deals with the big PBMs, and they have contracts with them that make it very difficult for us to work with them without all the rebates.

• Despite public perception of drug manufacturers, Mark’s view is that they’re on the wrong end of the deals PBMs are cutting just like patients. As a result, when Cost Plus Drugs can reveal the actual manufacturing cost of a drug, it validates that manufacturers themselves are charging reasonable prices.
• Mark’s point is that, the higher the retail price, the easier it is to tell insurers and employers that PBMs are generating a discount (and earn a percentage of that discount), but after pharmaceutical companies pay the rebates, manufacturers aren’t making the massive profits some may think they are. Explaining this to self-insured employers is the next step: Mark’s analysis for the Dallas Mavericks self-insured plan showed nearly a 90% reduction in drug costs for generic drugs costing at least $30. Similarly, a Vanderbilt University Medical Center study found that Medicare could save $1.29B by buying the nine most popular urological drugs from Cost Plus Drugs.

The greatest trick PBMs ever pulled was convincing people they were saving money.

• At first, Cost Plus Drugs wasn’t large enough for other players in the system, such as PBMs and insurers, to actively stop generic manufacturers from working with them. Now, having grown to 2 million accounts, they can generate enough revenue for partners that the manufacturers can make more by working with Cost Plus Drugs.

22:31 to 29:29: Expanding Cost Plus Drugs: building a factory while maintaining key partners

Even more important than the price is the availability of the medication because we’re able to alleviate…at least some percentage so people are able to get the medication they need.

• Cost Plus Drugs is expanding beyond their pass-through business and has built a factory in Dallas to start manufacturing drugs. The plant is almost entirely driven by robotics, which also lets them change over the factory within four hours.
• The FDA maintains a drug shortage list, typically injectables, and can make it easier for manufacturers to produce those drugs, which in turn makes it easier for a factory that can pivot quickly, such as Cost Plus Drugs, to start producing and distributing. This is especially important given the economic dynamics for other distributors — normally in a market with scarcity, the price would increase, but Cost Plus Drugs meets the need for manufacturing without gauging the price.
• An interesting tidbit: Cost Plus Drugs actually started preparing to produce insulin, but saw that the market was going to start driving prices down without their influence.
• To get to market quickly and keep costs down, Cost Plus Drugs has partnered with Truepill to manage the prescription checks, distribution and provide pharmacist support to patients. Relying so heavily on a partner, as Cost Plus Drugs is with Truepill, can come with the risk of your business being subjected to factors outside of your control, but one nice thing about Mark Cuban being your partner is that he, as he puts it, “can write a check” if he needs to.

29:26 to 33:46: Beating competitors by partnering with independent pharmacy

[Big tech companies] are big enough to get in, but big enough to leave really, really fast as well.

• While the primary competitors to Cost Plus Drugs are PBMs and insurers that control the purchase of generic pharmaceuticals, Amazon’s recently launched RxPass is one of the new disruptors in the space, alongside other direct-to-consumer pharmacy companies such as Ro and Hims & Hers. Competing with the largest tech companies isn’t new for Mark — one distinction he pointed out is that the model relies on ongoing monthly prescription fills, whereas Cost Plus Drugs can often provide the best bang for a patient’s buck by selling 60, 90 or 180-day supplies.
• Cost Plus Drugs has begun partnering with community pharmacies so that members can start picking up medications in-person. These pharmacies are great partners because they’re also trying to survive in an ecosystem dominated by the large, national pharmacies, and they are similarly squeezed by the PBMs. This partnership to pick up medications in-person also distinguishes Cost Plus Drugs from Amazon RxPass for members who are less interested in or comfortable with mail order.
• One of the outstanding questions for Amazon is how they’ll make this investment into pharmaceuticals worth the effort — unlike Cost Plus Drugs, RxPass needs to deliver outsized returns for Amazon while keeping costs low for patients. Investments in PillPack and Amazon Care start to paint the picture of a broader healthcare offering that Mark thinks will be successful, but the bar for success will be driven by financial metrics much more than for Cost Plus Drugs.

33:42 to 39:41: Cost Plus Drug’s structure and goals for expansion

I want to make money on this so I can reinvest in it and go bigger and badder. If I’m going to compete with Amazon, it can’t just be about how much I am subsidizing…our model has got to be better than theirs and we have to have a better relationship and more trust from our customers.

• Cost Plus Drug is a for-profit public benefit corporation, a designation that allows management and the board of directors to pursue profits while considering a broader range of stakeholders when making decisions, rather than just corporate shareholders. Mark and Alex pursued the PBC route to make it clear to stakeholders that patient benefit was a core part of the company’s mission. They also chose this status to account for the constraints of non-profit organizations in a market where they would need to compete with PBMs, and now Amazon.

We’re not like the PBMs, we’re not like others in this industry. We truly want to have an enormous impact on pricing for patients and availability…by putting my name on it, by being a PBC, we think that sends the message…

• Unlike most PBC investors, Mark has resisted letting others put capital into the business because the future exit, generally an IPO or acquisition, is unclear, and because this business isn’t primarily built to deliver outsized returns that other investors would expect. The other key point is that Mark is willing to make the necessary investments without taking outside capital. If that changes, or if he felt like he could make an outsized impact by raising capital, he’d reconsider.

There’s another 300 million people who aren’t customers yet. I have to change that…the mission is to be a primary source for every medication we’re legally allowed to sell.

• The goal right now for Cost Plus Drugs is to increase impact, both by broadening the range of drugs they can offer as well as becoming the primary source of medications for as many people as possible. This will also include brand name drugs — Cost Plus Drugs recently announced that they would start selling J&J diabetes medications Invokana and Invokamet at a steep discount to the cheapest available options.

39:41 to end: Pivoting from tech to healthcare and the hidden costs in healthcare

[Health insurance companies] can’t serve the two masters that they’re trying to serve: full profitability and the interest of patients.

• Mark credits the transparency he’s brought to Cost Plus Drugs as the driver of success for his pivot into healthcare. He wanted to create leverage over the incumbents and, seeing their reliance on obfuscation, identified transparency as the disrupting force. Similarly, he identified that building trust with patients would immediately set Cost Plus Drugs apart.
• This was especially clear when he tried to work with hospital CFOs to understand their costs, given that they routinely claim to be unprofitable, even as the price of healthcare continues to rise.
• Mark also called out the a couple questionable tendencies in our healthcare system. The first is the notion that large hospital systems show off expensive new buildings rather than other aspects of patient care. The Is This a Hospital or a Hotel? quiz from the New York Times does a good job of implicitly calling out the extravagance of these investment decisions.
• The second is the medical loss ratio, in which an insurance plan must spend a certain percentage of premiums on medical care, essentially capping the profit margin for a health plan. As Mark points out, if your profits are capped as a percentage of premiums, increasing premiums increases profit potential. Of course, competitive factors would push back on this, but it does lessen the incentives for lower costs in the healthcare system as a whole.

To see all of the roles the Mark Cuban Cost Plus Drug Company is hiring for, check out their careers site.

We are so appreciative to Mark for joining us on this episode of The Pulse Podcast! Subscribe for our new releases on Twitter, Spotify or Apple podcasts.