Ten Strategic Questions for 2009

Well, here it is -- my 95^th (and final) post for 2008.

Before I wrap up for the year, I want to give you a brief update on Drug Channels and then highlight key trends (riddles?) for 2009. I hope you find these useful whether you’re a drug channel market player building a strategy, a manufacturer that wants to incorporate trade economics into your channel strategy, or an investor assessing company prospects.

Since this is a longer-than-average posting, you will be rewarded with a bit of multi-denominational holiday humor -- my two favorite holiday songs -- once you get past the yada yada.

AN UPDATE ON DRUG CHANNELS

Since I began tracking site statistics carefully in March 2007, total monthly traffic to Drug Channels has grown by 600% to about 15,000 per month. My readers continue to come from a diverse set of companies throughout the healthcare industry – see question 4 in my blog FAQ for more details. Fortunately, enough people keep hiring me for advice or speaking engagements, so I can pay my mortgage and keep this site free for everyone else.

I’ve also been privileged to hear that many readers have been generous with their time and insights in 2008. For example, the former owner of an independent pharmacy recently chatted with me about his reasons for selling his six-store chain to Walgreens. His feelings on the bittersweet nature of the transaction really help to put the economics of the industry into perspective. (Thanks, BG!)

And in case you haven’t noticed, the number of reader comments has increased dramatically this year. Two recent examples are Counterfeits at Medicine Shoppe Pharmacies?!? (17 comments) and CVS Escalates the Generic Price War (16 comments).

QUESTIONS FOR 2009

Here are some major topics that I expect to be watching in 2009, framed as “strategic questions” with links to my relevant background posts.

1) How deep will the pharmacy shakeout be? The price war started by Wal-Mart is reducing the profitability of generic prescriptions, which are a major source of profits for both retail and mail order pharmacies. At the same time, overall prescription market growth has slowed, which will make the competition for market share even more intense. Look out below!

• CVS Escalates the Generic Price War
• Walgreens’ $4.33 Surrender to Wal-Mart
• Will the economy hurt drug stores?

2) Will CVS Caremark finally prove the strategic value of a PBM-Retail combo? It’s not yet clear how CVS and Caremark will gain a competitive advantage under common corporate ownership. The purchasing gains are well-known, but will initiatives such as Maintenance Choice or Bridge Supply really be enough to sway their PBM market share or boost mail order? If they show traction, then I expect Medco (MHS) and Express Scripts (ESRX) to seek retail partners. If not…

• CVS Escalates the Generic Price War (esp. last section)
• CVS' Channel Power
• The Walgreens-McKesson Specialty Handoff
• What Happened at Walgreens?

3) Will direct-to-payer reimbursement models get more traction? Wal-Mart’s “direct-to-payer” model with Caterpillar introduced a new source of competition into the system. Wal-Mart’s cost-plus reimbursement methodology favors larger, more efficient dispensing operations. Even Walgreens is promising a billion dollars of cost savings and experimenting with more central fill operations.

• New Details on WMT-CAT Pharmacy Deal
• WMT + CAT: Pharmacy's Future?
• Wal-Mart's PBM Game Plan

4) How will the generic price war affect wholesalers? The generic price war is having a secondary effect on wholesalers, which provide generics for about half of the retail market. The largest retail chains and mail order pharmacies bypass wholesalers and buy generics directly from manufacturers. Yet brand manufacturers and customers still prefer to have wholesalers in the supply chain rather than setting up direct relationships, especially given wholesalers’ tendency to perpetually “re-price” (translation: reduce) their margins for the biggest buyers.

• Wholesaler Impact of a Longs Drug Deal
• Rite-Aid: From Worse to Awful

5) What happens when AMP resurfaces? A delay in the implementation of Average Manufacturer Price (AMP) until 10/1/09 was included in the physician payment fix bill over the summer. The pharmacy litigation continues. What will happen when this issue comes up in the FY2010 budget negotiations? Will the AMP hype continue? Does everyone realize that the generic price war is now removing generic margin dollars from drug channels much faster than AMP ever would have?

• AMP Delay Buried in New Medicare Bill
• An AMP Fix for Rural Pharmacies
• 11,105 Pharmacies Gone?!? Just More AMP Hype
• The AMP Saga Goes On and On and On

6) How will Democrats reform Medicare Part D? There is little doubt that the new administration and Congress will focus on changing certain elements of the Part D program – an achievable health care reform compared to some other potential areas. I wonder if branded drug makers are having second thought about the Medicare Part D benefit, especially since the much-maligned “donut hole” also appears to be encouraging greater generic substitution.

• Get Ready for Part D Reform
• Pharmacy Profits & Part D
• Part D and Generics

7) What will wholesalers want from manufacturers? Fee-for-service negotiations between manufacturers and wholesalers are taking place in a very different environment compared to 2004. The financial condition of the big three drug wholesalers has been relatively good, especially as the wholesalers refocus on their core businesses. The remaining regional wholesalers are starting to sell out, further strengthening position of the Big Three. At the same time, the wholesalers' cash flow cycle is reverting back to historical norms, perhaps suggesting lower profitability in 2009. So what’s next?

• Cardinal: The Once and Future Wholesaler
• Big Premium in the McKesson–McQueary McDeal
• McKesson Gets Out of Pharmacy Outsourcing
• WSJ Hypes McKesson Buyout (Again)

8) Will drug importation be resurrected again? HHS Secretary-to-be Daschle has been a long-time fan of drug importation. I believe that importation (a.k.a. legalized diversion) is risky. I doubt that Daschle will be able to certify the safety and effectiveness of imported drugs before they can be imported, but some sort of political compromise is possible.

• Drug Importation: A New Beginning?
• Cardinal Goes to China
• Drug Importation and Global Wholesale

9) Will we ever get national supply chain security standards? I’ve had fun (?) tracking the ups and down of pharmaceutical supply chain regulation this year. The good folks at the California Board of Pharmacy provided me and all Spinal Tap fans great fodder when they debated e-pedigree legislation going to 2011. However, I was disappointed that a more coherent national approach did not get very far. Let's see what the FDA does to meet the March 2010 deadline set by the FDA Act of 2007.

• CA Pedigree: Going to '11?
• Federal Pedigree Sand Trap
• CA E-Pedigree: Going to ... 2015
• CA E-Pedigree: Hasta La Vista, 2011
• The FDA and EC Dive into Supply Chain Security
• My Op-Ed: Securing the Supply Chain

10) Will the future of AWP (and its replacement) be resolved? No.

• The Future of AWP: Ask Again Later
• AWP: Dead Parrot or Just Resting?

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HOLIDAY CHEER

In March, the California Board of Pharmacy went to ’11. In their honor, I present…Christmas with the Devil by Nigel and the gang! (Click for a link to the video -- the song starts at the halfway point after a brief interview with the boys.) There’s someone up the chimney hole, and Satan is his name!

And for those of us celebrating the more minor festival of lights, can I interest you in Hanukkah? (my new favorite holiday song)

Happy New Year!! I’ll be back in 2009!