Post-Armada Reflections on the Specialty Market

I want to share some observations about key specialty market trends following last week’s outstanding Armada Specialty Pharmacy Summit in Las Vegas.

Let me first give a big public thanks to the Irene brothers for putting on a phenomenal meeting. It’s hard to beat the combination of the Wynn Las Vegas, enthusiastic people from all over the industry, and plenty of good ol’ fashioned networking time. Former President George W. Bush’s speech was a highlight—he was funny, down-to-earth, and insightful.

On a personal note, I want to thank the many Drug Channels readers who introduced themselves to me during the Summit. It’s gratifying to know how much people appreciate the blog.

Read on for my musings on the future of limited distribution networks, entrepreneurial pharmacy owners, and how manufacturers can manage the ongoing consolidation in the specialty channel. As always, I welcome your feedback in the comments below, whether you were in Vegas or not.

FIVE MUSINGS FROM VEGAS

Limited networks are under pressure. Manufacturers typically limit the number of specialty pharmacies that are authorized to sell their products. These models are coming under stress as more pharmacies try to participate in the specialty market. In some cases, independent pharmacy owners are acquiring patients who take specialty drugs and rely on Medicare Part D or Medicaid coverage. Any Willing Provider laws require that these pharmacies be permitted into the specialty network of a Part D provider. See Who Pays For Specialty Drugs? (And Why It Matters). At Armada, I heard from many pharmacy owners who are excited about Armada Specialty Pharmacy Network (ASPN) Prescription Transfer Network, a tool that can make a specialty drug’s network appear to be less limited than the manufacturer's strategic intent. Keep an eye on this issue.

Be a winner, not a whiner. I was especially impressed by conversations with entrepreneurial pharmacy owners and regional pharmacy chain executives who are targeting growth with specialty drugs. The pharmacy and pharmaceutical industry of tomorrow will be about expensive specialty drugs for small patient populations and inexpensive generic drugs for large populations. If you are a business owner, you can certainly choose to spend your days trying to pass anti-competitive laws against PBMs or mail order as a way to protect a 1950s-era business model. Or you could figure out how to evolve and adapt. The independent pharmacy owners that I met at Armada are the prospective winners, not the whiners.

Get ready for lots of M&A. The concentration of specialty pharmacies is even greater than the overall pharmacy industry. I estimate that the largest five specialty pharmacies—three of which are owned by the big three PBMs—generate almost 90% of the pharmacy industry’s revenues from specialty drugs. (See Exhibit 3 of The 2010-11 Economic Report on Retail and Specialty Pharmacies.) Even so, there are many smaller pharmacies with a substantial specialty business, with more entering every day. They are either acquisition candidates for the major players or fodder for a private equity-backed industry roll-up. We may see the interesting combination of increasing acquisition activity without increasing concentration.

Manage consolidation in your channel. Manufacturers should focus on working with the probable winners of this consolidation and evolution process by establishing solid relationships with the likely survivors and acquirers. Instead of trying to “pick the winners,” you should take a portfolio approach by ensuring that potential winners are represented among your channel customers. I’ve been thinking about this topic for a long time and actually co-authored a (non-pharma) article in Sloan Management Review way back in 1999. Click here for this blast from the past.

Armada in 2012. Armada is emerging as the de facto industry standard meeting for the specialty pharmacy industry. Attendees came from a diverse mix of companies—biopharmaceutical manufacturers, pharmacies of all types, managed care, service providers, and others. Attendance was reportedly up by 50% to 1,500 people (per Drug Store News.) I expect that there could be 2,000 people next year. I will certainly be one of them. Viva Las Vegas!