This CEO sells low-cost drugs, and he says Big Pharma might not be the true adversary

For many Americans, pharmaceutical drugs are too expensive—and thanks to a system of complex and tedious bureaucracy, any effort for meaningful reform has been futile. Cost Plus Drugs wants to change that. With the help of co-founder Mark Cuban, CEO Alex Oshmyansky is radically re-engineering the pharma marketplace and dramatically cutting the price for many prescription drugs. Oshmyansky shares why Big Pharma might not be the true adversary, how Y Combinator got his company off the ground, and his hopes for helping to change healthcare for the masses. 

This is an abridged transcript of an interview from Rapid Response, hosted by the former editor-in-chief of Fast Company Bob Safian. From the team behind the Masters of Scale podcast, Rapid Response features candid conversations with today’s top business leaders navigating real-time challenges. Subscribe to Rapid Response wherever you get your podcasts to ensure you never miss an episode.

Cost Plus Drugs sells thousands of drugs at cost, plus $15 for shipping, right? 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% margin for ourselves, a $5 fee to pay our pharmacist, $5 for shipping and handling, and then that’s the total cost of the drug.

I’m on statin. A statin prescription can cost $200 somewhere else. You guys, it’s like $5. 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.

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.

It’s estimated at least 30 to 40% of all drug spending goes to the pockets of the pharmacy benefit managers. There are drugs we sell on our site for $20 or $30 for a month’s supply that if you tried to get through your insurance with a high deductible plan, you would be asked to pay $3,000 to $4,000 out of pocket.

It’s insane. It’s criminal. 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. They say, “How amazing are we?” Meanwhile, if you go to the drug manufacturer and just say, can we buy this from you?

They say, yeah. The true price is closer to $20 to $30 for that same month’s supply. We are very proud of 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.

Now, Cost Plus Drugs is officially called Mark Cuban’s Cost Plus. You came up with this idea. You didn’t know Mark? And you just sort of cold-call emailed?

I originally started the company actually as a 501c3 non-profit. 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. 

Sam 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 a 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.

I am a little bit embarrassed now to say I took corporate governance advice from Sam Altman, but it worked in my case. I was able to raise a small seed round, a little over a million dollars, which is not a lot in pharma dollars, but enough to get kicked up and off the ground.

And yeah, just totally on a whim. A couple of months after that, I saw Mark Cuban had a public Gmail. I was like, wow. I shot him a line, and surprise, surprise, Mark is incredible on email.

He does respond to everything. We shouldn’t say that to everyone that’s listening here.

He doesn’t mind: mcuban@gmail.com. He will get back to you.

I have no idea how he does it because I’m not that good at 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.

Effectively the company became a very different thing after Mark got really heavily involved, and now he’s a true operational co-founder. He is very, very involved.

So he’s, he’s not just kibitzing from the sidelines while he’s doing Shark Tank?

No, he’s taking customer service calls. He’s a manic workaholic. Anytime I email him about any issue day or night, six in the morning, two a.m., within five to ten minutes, there’s a response. And yeah, he is deeply into the weeds on everything from website design and coding to our manufacturing plant and operations.

We’re communicating every hour about pretty much everything that happens.

He wants to, what he says is, F up the industry.

You wanna 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 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.”

The public narrative about Big Pharma is sort of like Big Pharma is bad, is ripping you off, 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.

Big Pharma is certainly no angels, like 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. We take all the legal liability, we do all the manufacturing, which I can vouch for is hard. Like, why do these guys get 30% off the top? That’s nuts.” So 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.

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. And yeah, that was pretty much entirely the fault of the PBMs.

When you see how far Cost Plus Drugs has gone, it’s gone pretty far pretty fast, and where you sort of hope it will land, how far along that journey are you?

Are you 30% along the journey? Are you 3% along the journey?

I think 3% is fair. We’ve still got a long way to go. I remember Sam was just starting OpenAI around the time that I was in Y Combinator. And he had a thing that it’s hard for humans to conceptualize scaling laws, like how quickly if you grow exponentially, it winds up adding up over time, like the human brains just not programmed to be able to understand that.

And yeah, that very much happened with us. And I think we’re still on that exponential trajectory, not just of metrics volume or whatnot, but also of the amount of substantive change we’re making to the system.

CVS Caremark, one of the big three PBMs, put out a cost plus program. And I was like, ah, subtle. They even used our company colors, which I was like, nice.

They definitely feel like they have to respond to us. Hopefully, it does drive more long-term meaningful change. My view is that in classic economic theory, where you have an opaque market, the winners are not the buyers or the sellers—they’re the people that broker information in between.

You see that happening in healthcare like crazy, where the opacity is a feature, it’s not a bug because they’re able to create enormous arbitrage opportunities based on the opacity in the system.

Actors on both sides of that, the pharma companies, the hospitals, the physicians, the providers realize, “Hey, actually, we’ve been told that hiding our prices is good for negotiations. Actually, it’s just the opposite, we’re getting taken advantage of.” And as that sort of mindset and knowledge spreads, hopefully, it’ll bring more meaningful transparency to the status quo.

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