Rapid Response: How Cost Plus Drugs is revolutionizing pharma, with CEO Alex Oshmyansky

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1:26They're not supposed to. It's grossly anti-competitive, but everyone tells us they do. I saw Mark Cuban had a public Gmail and I was like, I can't hurt. I shot him a line and surprise, surprise, Mark is manic. He's incredible on email. But yeah, he got back in like five minutes and we had a brief dialogue and he invested a small amount of money to start with. Now he's a true operational co-founder. He wants to, you know, what he says is F up the industry.

1:56That's Alex Oshmiansky, CEO of Cost Plus Drugs, which he co-founded with Mark Cuban. Cost Plus Drugs received the 2024 Rapid Response Award at this year's Masters of Scale Summit for quickly and effectively disrupting the pharmaceutical industry. Alex has an amazing backstory from heading to college at age 13 to getting advice from OpenAI founder Sam Altman to cold calling Mark Cuban. But what's most impressive is how he's managed to dramatically cut prescription drug prices, something decades of public policy have failed at. So let's get to it. I'm Bob Safian, and this is Rapid Response.

2:42I'm Bob Safian, and I'm here with Alex Oshmiansky, the co-founder and CEO of Cost Plus Drugs. Alex, thanks for joining us. No, thank you for having me. Cost Plus Drugs sells thousands of drugs at cost plus$15 for shipping, right? Like that's the plus part? So we do our true cost, and that's the big innovation, if you want to call it that, about our company. We reveal what we purchase all the drugs for. We add a 15, 1, 5 % margin for ourselves,$5 fee to pay our pharmacist,$5 shipping and handling, and then that's the total cost of the drug. I'm on a statin. A statin prescription can cost$200 somewhere else.

3:25You guys, it's like five bucks. Like, how do you make that work financially? One of the big things that's unknown about our pharmaceutical distribution chain is there's effectively a cartel of three companies, these so-called pharmacy benefit managers, that the way they do this is very, very complicated. But the bottom line is they buy all the drugs, they mark them up as much as they want, and then they resell them. They accomplish that through effectively being a form of payment processor for insurance companies. But yeah, if you just go around the system, sometimes the price reductions can be radical.

4:00You know, it's estimated at least 30 to 40 percent of all drug spending goes to the pockets of the pharmacy benefit managers. There are drugs we sell on our site for$20,$30 for a month's supply that if you tried to get it through your insurance and you had a high deductible plan, you would be asked to pay$3 ,000 to$4 ,000 out of pocket. Yeah, it's insane. It's criminal. Yeah, and that's not hyperbole. They will say, actually, the list price of this drug is$10 ,000 for a month's supply. So actually, we're getting you an amazing deal at$3 ,000. That's a 70 % discount. How amazing are we? Meanwhile, if you go to the drug manufacturer and just say, can we buy this from you?

4:41Yeah, the troop crisis closer to$20 to$30 for that same month's supply. And yeah, very proud that actually exposing that practice, the Senate actually questioned the CEOs of the big PBMs on it. And now there's an Office of the Inspector General investigation about that particularly egregious like 100 ,000x price increase practice. You and I were talking earlier, you're a physician. you became animated about these cost issues as a physician yourself like how did this sort of pop up to you to be like this is something i'm gonna turn my life towards i think every single physician has had patients injured by not being able to afford their medications family members i'm a radiologist by training but i was working with a pulmonologist on a research project at one point and you know one day he came in and sensed because two of his patients had died over the same weekend.

5:32They both needed a drug called bosentin, which was then generic, long off patent, but still cost$10 ,000 for a month's supply. And you'd think that'd be enough to get me sort of started on this, but kind of distraught it broke the camel's back. Do you remember this character, Martin Shkreli, the pharma bro? Yes. He ended up spending some time behind bars. Yeah. For unrelated securities fraud. But, you know, in retrospect, maybe he did more to lower drug costs than anybody else by starting Mark and me on this track. His raising of prices really is what got you jumped on. Yeah. And it turns out he's a very, very small fish in a much larger pond of people taking advantage of people.

6:13But yeah, that was the sort of triggering event. Yeah. Now, Cost Plus Drugs is officially called Mark Cuban's Cost Plus Drugs. Yeah. You came up with this idea. You didn't know Mark and you just sort of cold call email. Can Can you break down this moment and experience for us? So originally started the company actually as a 501c3 nonprofit. I went out sort of trying to raise funds for it for the better part of three, four years and failed spectacularly. Did not raise a dime beyond what I put in myself. Eventually, I applied to Y Combinator for financing the interview committee. Actually, Sam Altman was on mine at the time.

6:52Sam said, we like what you're doing. We'd like to get behind it. do not think you'll be able to raise enough as a nonprofit. If you reincorporate as a public benefit corporation, so, you know, for-profit company, but with a registered public mission with the state, we'll invest in you like we would in any other company. And after three, four years of no success, I was like, okay, whatever, let's give it a shot. Yeah, I'm a little bit embarrassed now to say I took corporate governance advice from Sam Altman, but it worked out in my case. I was able to raise a small seed round, a little over a million dollars, which, you know, not a lot of pharma dollars, but enough to get kicked up and off the ground.

7:26And yeah, just totally on a whim. A couple of months after that, I saw Mark Cuban had a public Gmail and I was like, eh, can't hurt. And I shot him a line and surprise, surprise, Mark is manic. He's incredible on email. He does respond to everything. Yeah. We shouldn't say that to everyone that's on here. Oh, he doesn't mind. I'm Cuban at Gmail. Like he will, he'll get back to you. He's, I have no idea how he does it because I'm not that good on email. And like, what excuse do I have? But yeah, he got back in like five minutes and we had a brief dialogue and he invested a small amount of money to start with and obviously became much more invested on several different levels.

8:01Yeah, effectively, the company became a very different thing after Mark got really heavily involved. And now he's a true operational co-founder. He's not just kibitzing from the sidelines while he's doing Shark Tank? No, he's taking customer service calls. Seriously, he is a manic workaholic. Like anytime I email him about any issue day or night, six in the morning, 2 a.m., within five to 10 minutes, there's a response. And yeah, he is deeply in the weeds on everything from like website design, coding to our manufacturing plant and operations. He's communicating like every hour about pretty much everything that happens.

8:37He wants to, you know, what he says is F up the industry. So you want to do that too. You're just not willing to use those words. I'm not a billionaire. I can't get away with it. But we get letters, emails every day from people who are like, hey, I was having to skip meals to afford my medicine. I thought I was going to die because I just couldn't get my chemo. I thought I would have to sell my house. Real people who they were being asked to pay$3 ,000 out of pocket for their chemotherapy, for their multiple sclerosis medication. And suddenly we can offer it for$20. Now, you started two years ago, right?

9:08You expanded to begin manufacturing your own drugs. So not just buying from manufacturers. Why did you make that decision? And sort of how hard was that pivot, that change for the company to go into manufacturing? Yeah, actually, the manufacturing was a piece of it from day one, because we always assumed to get the drugs at a low cost, you know, the system's so entrenched, we're going to have to make them ourselves. And actually, the direct-to-consumer mail order piece was kind of an afterthought, believe it or not, because we were like, hey, this is a thing that's relatively easy to do compared to setting up our own manufacturing.

9:43So let's do this first. Yeah, let's just do it on the side. You know, it'll be a public service because there's, you know, these patients that are fairly small communities that need these ultra expensive medicines that we can reduce the cost 99%. Why not? Let's listen. And we figured it'd be fairly limited. We launched it in January of 2022 and it just exploded faster than I think any of us could have predicted. To your point on the statins, actually, one of our top selling drugs at first was generic Rusavastatin. And that kind of blew our mind. it's a very cheap drug. Like, why are we selling so much of this?

10:15And it turned out, yeah, one of the big PPMs was adjudicating it at$200 for a month's supply, a drug that costs literally a penny a tablet. And now we have millions of people who are customers of our direct-to-consumer site and still growing as fast as we can keep pace. Did you ever think like, oh, you know what? Maybe we don't need to do the manufacturing. Like, maybe we can just keep riding what we've got going. We've got product market fit. Like, let's go. We actually have four different business lines. Sort of the grand scheme is that I like to say we use vertical integration for good instead of evil, because anywhere we need to fit into supply chain to fix the problems, we can sort of fit in there.

10:53So we have our manufacturing operation, and there we're very focused on drug shortage products. So products that you can't get anywhere else. So I just came from the International Society of Pediatric Oncology Conference, and they estimate that there's 120 ,000 children who die a year from not being able to get their chemotherapy around the world. And the thing is, the market is so distorted. The price of this drug is generally pretty cheap. It's needed in, relatively speaking, small quantities. So nobody wants to make the drug. So I like to say that our manufacturing makes the drugs that nobody else wants to make.

11:28Some manufacturing operations are like, oh, let's do this because there's a market for this. You're kind of doing it the other way around. Like if there's already a market and there's already a manufacturer, we don't have to worry about that. We worry about the places that are being neglected. Exactly. So we use a robotic technology that uses what are called single-use disposable flow paths, which enable us to pivot from making one product to another very rapidly, in principle, within four hours. And we actually just got a grant from DARPA to take that technology, augment it with AI, miniaturize it, and kind of put it in a pod.

12:03So we can actually rapidly scale our manufacturing abilities around the world and can put one of these automatic sort of manufacturing pods anywhere that there's a drug shortage. And that's sort of our initiative for the next 12 to 18 months. And when you talk about these robots, I don't know, people in their minds could think of, you know, robots from Hollywood movies, right? Like, are these robots you meet? Are they like, how big are they? Are they in their own rooms? They're in a hermetically sealed chamber. So these are robot arms. When you see the videos of car factories, kind of like those.

12:36But they have to operate under conditions of perfect sterility. So they're actually in a sealed chamber that gets periodically sterilized by vaporized hydrogen peroxide. So it's very neat stuff that they make these robots that can operate under these conditions that can mass produce medications at scale. You're a physician. You're not an engineer. But you're now in sort of the robot business, manufacturing business. I mean, it's a lot new to have to master. Yeah, it's a lot of fun. So when I was growing up, I was actually being fast-tracked towards being a high-energy particle physicist. Yeah, so I started college when I was 13 and was meant to be a string theorist, essentially.

13:17Took a hard left turn at the last minute. I remember looking at, with all the wisdom of a 17-year-old, the journal Nature had a cover story about, I think it was a string theory, M-theory-like concept that the universe is a 26 dimensional soccer ball. And I was like, okay, this is going nowhere. I want to do something that's a little bit more substantive. I did wind up doing an MD PhD to PhDs in applied mathematics. And yeah, actually now I've gone far down the like, like everybody else has down the AI rabbit hole. Well, I don't know everybody. It sounds like there's a lot that happens between your ears that may not be able to happen between mine.

13:56How much of the automation and the technologies like AI are about making the cost low enough? That's a component of it. A large part of it is just being able to get the product out the door fast enough because the robots are just faster from an operations perspective. So we do use vendors. We don't own the distribution robots ourselves. We use subcontractors, but they also have robotic pharmacy systems that they use. It's all about then speed. Even if you might have to invest a little more in the robotic equipment to begin with, that's in the service of speed. Exactly. We were struggling, I want to say late 2022, because we were experiencing 20, 30 % month over month growth for a prolonged period of time, which is, you know, they tell you scaling is hard.

14:44It's, yeah, it's a cliche for a reason. Like it really is challenging. And, you know, there was a period where, you know, it was like a week or two delay with prescriptions going out and we were just scrambling to keep pace, which now we're in a much, much better place. And the prescriptions go out in a day and a half on average. The robotics, the automation really helps just operationally keep pace with what has to happen. Let's just pause for a moment. String theory? Not my forte. Of course, neither is sterilization of robots via vaporized hydrogen peroxide. Alex makes remaking the drug industry sound simple and logical, but he's done more than build a better mousetrap.

15:24After the break, we'll dig into how he's re-engineered a marketplace and turned adversaries into allies. Stay with us.

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17:12So if you're scaling, make it simple with Deal. Go to deel.com slash mos and get up to three months free. Before the break, we heard CEO Alex Oshmiansky talk about how and why he launched Cost Plus Drugs. Now he talks about the company's consumer demand flywheel, what people misunderstand about big pharma, and how he balances patience and aggression. Let's jump back in. Getting the word out that you had this new channel that people could get their medications at much cheaper costs, was that something you invested a lot in or sort of happened organically? Zero dollars, zero dollar marketing spend.

17:58And, you know, of course we have Mark and his platform, but honestly what drives our growth is just word of mouth. So we tell all the vendors that come onto our platform, all the pharmaceutical manufacturers, the exact same thing will happen. We'll sell zero of your medication for like a month or so, and then we'll sell out of all of it in a day. Then it'll scale from there. And what we find triggers those events is social media. Like someone in their Facebook group for chronic myelogenous leukemia will realize, hey, I can get$30 imatinib instead of$2 ,000 imatinib through costplusdrugs.com. They'll post and then suddenly it'll spread like wildfire through that specific community.

18:38So we see that pattern happening again and again and again. So really is all just driven by word of mouth. Manufacturers, they have you as a customer. They have the pharmacy benefit managers as a customer also. Do they get pressure to like, oh, don't give it to those guys. Right. Like, do they try to get locked up? Oh, no. I've been told over and over again. You know, one of our initial big challenges was just getting the pharmaceutical companies to work with us because the big cartel basically says, like, don't do business with cost plus drugs or we won't buy your product anymore. They're not supposed to.

19:13It's grossly anti-competitive, but everyone tells us they do. So the first drug we had was actually in 2021, a product called albendazole, which was a anti-parasitic agent sold for like$250 a tablet. We were able to get it for like$5 a tablet, but the company didn't want to be associated with us. They said, we'll sell it to you, but you have to put your own private label on it. That went really well and that it encouraged three other companies to give us a hundred products that we could sell under their own name. They were willing to take the risk. And yeah, that's when the company properly launched in 2022.

19:47What we had to sell to the pharmaceutical companies for the longest time is, you know, the cartel is kind of a paper tiger, like they need you more than you need them. And the irony is like, we're a small company. We don't have the negotiating leverage. We actually pay more for the drugs. The pharmaceutical company - Like per pill, per pill. Yeah. The pharmaceutical companies actually make more money selling through us than they usually do. So one of the questions we get a lot is, well, won't this take away from research and development, actually, if you drive down the drug costs? No. Ironically, in this new model of transparency, without all these mysterious actors obfuscating the true price of the drugs, the pharma companies wind up making more.

20:29You mentioned this earlier. There's government inquiry into drug prices. Kind of seems like that stuff comes and goes. You know, there are things that happen. And has there been any real progress? I don't think that policy change regulation legislation is really going to help. As soon as they implement a policy that's designed to eliminate some bad practice, the PBMs have already moved on. Generally, everything that's on discussion now for PBM reform on Capitol Hill is addressing the big scams that were in place five to seven years ago. So really what we think is the solutions is private sector reform, which is if the big Fortune 500 companies, Fortune 50 companies move away from the big PBMs and go to the smaller competition, like we think the industry will suddenly have to reform of its own accord.

21:22So we have this weird coalition of people we help, which is the most indigent members of society, but also kind of the most powerful. Because who pays for most of the drugs at the end of the day? Large employers. It's just this stuff is so complicated. It's so convoluted that like, you know, why would Mark Zuckerberg have to know about like his employees pharmacy benefits? He has other stuff to worry about. Right. No, that's someone else takes care of that. Yeah. And then you hire a consultant and the consultant gets paid on the back end by the PBMs. Like basically there's this whole corrupted system to ensure that the big PBMs are kind of locked into place.

21:58And if you can break that up from the private sector, that I think is the more meaningful reform. The public narrative about big pharma, sort of like big pharma is bad, you know, is ripping you off. is doing things. And if I'm hearing you right, you're sort of like, it's not big pharma. It's just these PBMs that are in the middle. The big pharma certainly know angels. They're not innocents in all of this, but at least they make the drugs. When I talk to a big pharma CEO, they're like, we do all the R &D. We take all the flack from the public because they know what a pharmaceutical company does.

22:33Their eyes have glazed over by the time you say pharmacy benefit manager. We take all the legal liability. We do all the manufacturing, which I can vouch for is hard. Like, why did these guys get 30 % off the top? Like, that's nuts. There's actually no love lost between pharma and the pharmacy benefit managers. And in some ways, the rap against big pharma is kind of unfair. Like insulin is a great example, actually. When they came up with the recombinant insulins, they were very expensive, but the price did drop pretty substantially. And big pharma was selling insulin for about$20 a vial. But there were people literally dying because they couldn't afford their insulin at the list price of$400 a vial.

23:12And yeah, that was pretty much entirely the fault of the PBMs. Despite, or I should say, while you're running Cost Plus Drugs, you still haven't given up practicing radiology? Is that right? You still do that for a shift every week? Why is that? Maybe it's just sunk cost fallacy. Like, it was a long time to getting to be a doctor. Not giving that up. But yeah, I do find it rewarding. I find it grounds you because, you know, as an emergency radiologist, you're making snap life and death decisions on a rapid pace. And I find it breeds discipline in decision making. As a founder, you want to make decisions.

23:51You want to stick to it. If there are bad consequences, so be it. The same thing applies to medical decision making. You know, there's a quote from Sir William Osler, one of the founders of modern medicine, that they taught me in my surgical internship orientation, which is, the essence of medicine is the assumption of responsibility, which is, you know, you have to take ownership for the patient. Like you have to make the decisions and live with the consequences because most of the time not making a decision at all is worse. So yeah, I find it just breeds discipline that I have to do that within the company as well.

24:23It's like a weekly reminder about like sort of what's most important. Yeah, exactly. Exactly. I read that while you were in residency as a doctor, you attended night school to study law too. Is that right? I did that for one year. Why? I just thought it was neat. I just thought it was interesting. I'm exceptionally nerdy. Does it come in useful at all? Oh, yeah, it's super useful. The first year curriculum was like contracts law and civil procedure, which actually for business is pretty helpful. What's a force majeure clause? All these sort of like legal terms of art that you don't get intimidated by anymore.

24:58I had previously run a startup and gotten kind of fleeced by lawyers. and I was like, I want to at least like know enough to say when like, okay, it's cool. We don't need to get charged any more legal bills. So this is something else I read that until the fourth grade, you were in special needs classes. That's right. It seems a little hard to, hard to believe given, you know, obviously all the things you've achieved since then. I'm from Denver, Colorado originally, but my parents are from the former Soviet Union and I grew up speaking only Russian. So when I went to school, I was put in a second language English class, which was taught in Spanish.