But I look at this small news item as another dead canary in the coming war for control of the last mile (last counter?) in the pharmacy supply chain -- and perhaps a harbinger of a future chain pharmacy /PBM merger.
Before you accuse me of starting a market-moving rumor (if only!), let's look at retail pharmacy today:
- Pharmacy continues to grow as a percent of sales at the large chains. (70% of sales CVS and 65% at Walgreens.) This trend will continue because both the prices and utilization of drugs are growing faster than band-aids, lipstick, candy, cigarettes, soda, and all the other CPG stuff in the front of the store. (Come to think of it, you'll be a good candidate for prescription drugs if you spend enough in the front-end of a pharmacy.)
- The big 3 PBMs now process more than half of all retail store prescriptions, effectively turning chain stores into a PBM-managed fulfillment channel. Add in Medicare Part D, and it sure looks like chains are losing control of their destiny.
- The channel is rapidly consolidating. Combined pharmacy sales for Walgreens and CVS were $56 billion in 2005, meaning these two chains accounted for 30% of all non-mail order retail prescriptions last year.
Both CVS and Walgreens are trying to grab market share as quickly as possible. Normally acquisition-shy Walgreens bought venerable regional chain Happy Harry's. CVS is looking for more acquisitions now that it has digested the Sav-On and Osco drugstores.
My take: retail chains want to control access to patients and gain the power to tax anyone who wants access, such as HMOs, PBMs or manufacturers. A more powerful downstream channel can demand that suppliers defray its costs, especially when higher margin content is delivered through lower margin channels. (For example, slotting fees for new products paid by CPG manufacturers in the supermarket industry.)Walgreens continues to signal a willingness to rumble. GM and Walgreens parted ways last year when GM removed Walgreens from the pharmacy network for its 1 million employees and retirees. (Recall that the UAW and GM moved its members into mandatory mail order for chronic meds in 2004.) Walgreens also won't fill prescriptions for state employees in Ohio. In the Midwest Health Plan situation, Walgreens didn't get additional compensation to make up for Medicaid cuts, so they flexed their muscles.
Fear of the channel's power led Merck to buy Medco, but that was a poor fit because the businesses are so fundamentally different. Plus, everyone was skeptical about conflicts of interest when a manufacturer controls the formulary. ("Acquiring the hen house" strategy?)
But a retail/PBM combination seems much more logical to me. I estimate that the drug channel (wholesalers, retailers, PBMs, insurers) accounts for 30 cents of every U.S. retail pharmacy dollar. Managing drug costs will require directing consumers to the most efficient pharmacy channels. PBMs do this by dispensing via mail order, a highly profitable business (see my previous post. And don't forget that Walgreens and CVS have small PBM and mail order businesses, allowing them to learn how to connect these operations to their core.
The combined market cap of Medco, Caremark, and Express Scripts is roughly the same as Walgreens market cap. If PBM P/E ratios return to pre-2005 levels, they will be tempting targets for the retail chains.
Added bonus: Few pharma manufacturers are prepared for this scenario, in part because the Trade Relations department handles pharmacies while a separate Managed Markets/Contracting department deals with PBMs.
P.S. Any investment bankers reading this column should feel free to send me 1% of their fee if they do one of these deals.
No comments:
Post a Comment