Some incredible developments are emerging from CVS Health today, with the most surprising front and center: CVS will drop Lantus as a preferred product in 2017 and instead will pay for Basaglar (insulin glargine).

If you are not already familiar, Basaglar is not a biosimilar drug. No insulin drugs are approved under the Public Health Service Act, thus there is no insulin to serve as a biosimilar reference product. Instead Basaglar was approved through a pathway that is becoming increasingly popular: the Federal Food, Drug, and Cosmetic Act 505(b)(2) approval pathway. Obtaining 505(b)2 approval still requires clinical trials, but manufacturers can leverage supporting data from the innovator product. In this case clinical data for Lantus was used to support Basaglar's approval. The 505(b)2 pathway allows for significant changes in formulation of ingredient while retaining the original chemical entity. The prototypical example would be follow-on "generic" somatropin products which had significantly different injection systems.

The 505(b)2 pathway benefits from two critical factors. First, the manufacturer obtains three years of market exclusivity in which no additional ANDA or 505(b)2 filings will be approved. Second, and perhaps most important point for CVS: 505(b)2 products are able to obtain an "AB" therapeutic equivalence rating in the Orange Book, making them interchangeable with the reference product. If Basaglar receives this AB rating, then pharmacists would be free to substitute Basaglar on prescriptions written for Lantus without the physician's intervention.

The second development is equally important and marks the beginning of a new era in the American pharmaceutical market. Starting in 2017, Neupogen will be replaced by its biosimilar competitor Zarxio as the preferred product. Beyond the obvious shift to low cost biosimilar drugs, this marks a shift in strategy that many analysts previously assumed was impossible. To understand why, you must understand the nature of drug rebate negotiation.

When PBM's negotiate rebates with manufacturers, the negotiation is often affected by other products in the manufacturers offering. It is reasonable to think that Amgen might raise prices on other products in retaliation for CVS placing Neupogen in a higher, less accessible tier. Why is this important? Because it tells you that the manufacturers of Zarxio and Basaglar were able to offer discounts that more than offset the projects increase in price CVS expects from the innovator. Thus, the commonly held belief that biosimilars would only command a 10-20% discount in the US market seems to be patently false.

As PBM's continue to crack down aggressively on manufacturer pricing, it's easy to forget about the bottom line: patient costs. Express Scripts is feeling significant pressure from both Anthem, with whom it is engaged in a multi-billion dollar lawsuit, as well as a coalition of large employers including Coca-Cola, IBM, and American Express, all of whom are pushing for increased transparency on drug price arbitration in their contracts. With quarterly profit growth often topping 20%, many feel as though too much of the savings captured by PBM's ends up lining stockholder pockets while patients march towards ever higher copays. As the conversation around American health care costs continues to develop, drug prices and consumer costs will remain front and center in the mind of many patients.