Politicians Tackle Supply Chain Security

The Heparin contamination has pushed the security of America’s pharmaceutical supply chain to the forefront of the news. I’m not yet sure how politician’s newfound involvement in the topic will play out.

Yesterday, the House Committee on Energy and Commerce accused the FDA of failing to protect Americans from contaminated Heparin. Rep. John Dingell said: "Our citizens can no longer trust that their food, drugs or medical devices are safe when the FDA says they are." (See Lawmakers Fault FDA on Heparin.)

This Thursday, the House Committee will hold additional hearings on the Food and Drug Administration Globalization Act, a draft bill that proposes new fees and increases FDA resources directed to the safety of food, drugs, devices, and cosmetics. (The FDA Law Blog has a good summary.) Fans of Congressional hearings (hey, who isn’t?) can catch the play-by-play video webcast on this page.

The newfound attention to supply chain safety is also bringing some new players to the game. Last week, New York Senator Chuck Schumer announced plans for seemingly redundant legislation for a “track -and-trace system for prescription drugs to prevent contamination.” (Read his subtle and self-effacing press release.)

Roger Bate of the American Enterprise Institute wrote a good editorial cautioning against the knee-jerk protectionist inclinations of many politicians in China's Drug Dilemma (from The Wall Street Journal Asia.) He argues that Chinese government officials are trying to solve the quality problems, but face an uphill climb:

“China is a vast country with 31 provinces and 333 districts. Harmonizing – not to mention enforcing – drug quality control across them is therefore difficult, especially since there are over 6,000 manufacturers of western drugs and more than 2,000 traditional Chinese drug makers.”

America needs to harmonize its own internal standards for the pharmaceutical supply chain, too. I’ve been told that Thursday’s meeting will also include discussion of H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008, the national standards bill that I endorsed last week. Let’s hope the committee spends time on this useful bill that can help limit counterfeit finished goods from infiltrating the legitimate pharmacy supply chain.

The AMP Saga Goes On and On and On

There are some new developments for Average Manufacturer Price (AMP), although the situation has now devolved into a somewhat arcane legal battle. Unless there is a legislative fix (unlikely), then I expect that CMS will punt this issue to the next administration in 2009.

OUR STORY SO FAR

As a reminder, the Deficit Reduction Act of 2005 required the Center for Medicaid and Medicare Services (CMS) to set the Federal Upper Limit (FUL) on payment for generic drugs at AMP plus 250 percent. The FUL is currently computed using the Average Wholesale Price (AWP) list prices, although some states opt to establish reimbursement limits below FUL at maximum allowable cost (MAC).

The change to AMP was advocated in September 2005 by the Bipartisan Commission on Medicaid Reform and the National Governor’s Association. This change was made in part because pharmacies were earning extraordinary profits from dispensing generic drugs in the Medicaid program.

In 2002, filling a script for a generic less than 5 years old gave a pharmacy $32 in “spread” – the difference between Medicaid reimbursement and acquisition cost. Filling a branded script yielded a comparatively skimpy $14 spread. (Source: Medicaid’s Reimbursements to Pharmacies for Prescription Drugs, a December 2004 CBO report that always generates hate mail from my pharmacist readers.) Private insurers, in the form of Medicare Part D plans, have done a better job at equalizing the dollar margins for brands and generics. (See Pharmacy Profits & Part D.)

CMS issued its Final Rule for implementing the AMP provisions of the DRA in July 2007. NACDS and NCPA, the two leading pharmacy trade associations, filed suit against CMS. To my surprise, they got an injunction that prevented CMS from adopting the AMP-based pharmacy reimbursement formula and publishing AMP data on the Internet. If you believe the over-heated rhetoric, then this legal delay saved up to 12,000 pharmacies from financial ruin.

COMING NOT-SO-SOON

More recently, NACDS and NCPA have opposed CMS’ subsequent clarification of “multiple source drugs” (a.k.a. generics) based on two technical legal objections. Yesterday, the two organizations were granted permission to file an amended complaint that challenges this new multiple source drug rule. The wheels of justice can grind slowly, so I don’t expect a resolution anytime soon.

Legislative action continues via pleas to pass The Fair Medicaid Drug Payment Act of 2007 (S.1951 and H.R. 3700). Neither bill has progressed very far. Senator Baucus, who sponsored S.1951, seems preoccupied with delaying the Medicare physician fee cut for 18 months. Perhaps Congress will feel generous since they voted on Thursday to delay seven new Medicaid regulations.

Just in case, NACDS sent a letter to Congress that asks for joint passage of the AMP bills along with unrelated bills about e-prescribing in Medicare. I presume the unstated motivation is to link the purported savings from e-prescribing to the extra costs of the Medicaid AMP increase.

NOT THE END

So, we are not very close to resolution, which is perhaps a small net benefit to pharmacies. I’ll occasionally check in on our old friend AMP but will primarily turn my attention to other topics until some big news breaks.

Introducing Drug Safety Hub

I want to let you know about www.DrugSafetyHub.com, a new blog about counterfeit drugs to which I am contributing content.

The official description: “The DrugSafetyHub blog aims to foster an open industry exchange on the subject of diverted and counterfeit prescription drugs in the pharmaceutical supply chain and the safety threats they pose to patients and consumers.”

DSH is a “hosted discussion,” which means there are multiple bloggers (8 so far). Check out the list of contributors – a veritable who’s who of pharma industry blogging! I’ll be writing a combination of proprietary material for the blog as well as occasionally cross-posting material from Drug Channels.

The site is sponsored by e-pedigree software vendor Supplyscape, but I have been assured that the content and topics will be free from any editorial meddling. The official blog policy reiterates this message with 9 cluetrain-worthy principles. As always, I'll call it as I see it.

Check it out for yourself and let me know what you think.

National Standards: It’s About Time! !

The movement to make the pharmacy supply chain safer just took a huge step forward with Friday’s introduction of H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008. The bill is co-sponsored by Representatives Steve Buyer (R-IN), Gene Green (D-TX), Jim Matheson (D-UT), and Mike Rogers (R-MI).

I enthusiastically support this bill, which finally offers Federal preemption of the multiple disorganized, uncoordinated, and underfunded state-level mandates. Ultimately, patients will be the biggest beneficiaries of a more secure supply chain.

KEY POINTS

Federal Preemption with Uniform National Standards – “no State or political subdivision of a State may establish or continue in effect any requirement with respect to statements of distribution history, manufacturer packing lists, unique standardized numerical identifiers, or drug identification and tracking systems for prescription drugs that is different from, or in addition to, any requirement under this subsection.’’ Got that, States? The bill also establishes new Federal minimum standards for wholesale licensing.

Phased Implementation – The Bill sensibly requires earlier compliance for “High-Risk Drugs.” The precise timing will depend on when the bill becomes law, but it looks like High-Risk Drugs would not have to serialized until mid-2011. (I touted a risk-based approach last July.) There are many places in the bill where the speed of implementation will be based on sensible factors such as “operational and technical feasibility.”

Support for “Independents” – A truly closed-loop, interoperable track-and-trace system based on serialization will require a massive infrastructure upgrade at the 150,000+ points of pharmacy dispensing in the U.S. The bill permits grants for technology upgrades to a “small pharmacy,” which is defined as “a pharmacy which is not owned (or operated) by a publicly traded company.” Of course, some privately-held pharmacies can be quite large (um, Duane Reade?), so this language will need to be cleaned up.

And the pedigree starts with… The bill also clears up a major area of disagreement between various state and federal definitions of pedigree: Where does pedigree begin? According to H.R. 5839, it begins with the Authorized Distributor of Record (ADR) that purchased directly from the manufacturer, a.k.a. “Direct Purchase Pedigree.”

OBSERVATIONS

H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008 is only a bill, just sitting there on Capitol Hill. Nonetheless, here are a few implications if this bill becomes a law.

Amateur hour will be officially over. Today’s crazy patchwork of pedigree regulations creates uncertainty for everyone involved in the pharmacy supply chain. These decisions need to be made in a structured, logical, and public manner. Supply chain security regulations are too important to be left to the personal whims of a few volunteers at an underfunded state agency. Yes, I’m thinking about you, California State Board of Pharmacy!

Serialization will not be optional. The momentum for serialization is now inescapable, which is one reason that I joined the Advisory Board of Secure Symbology. Track-and-trace at the unit level only becomes possible with serialization, which is complex and must begin with the manufacturer/packager. At a minimum, serialization with pedigree requires: affixing a unique number during the packaging process; capturing and managing petabytes of data; adding pedigree information as the product moves down the supply chain; and then making these data easily (but securely) accessible. It also requires substantial lead time since serialization must happen during the drug packaging process, which can be months (or longer) from the time that the product is dispensed to a patient.

The pharmacy lobby will oppose national standards. I warned in December that pharmacists do not want pedigree. State Boards of Pharmacy – composed mainly of independent pharmacists – don’t want to lose local control (read: influence, power) and want to avoid any additional burdens on pharmacy operations. In fact, before the text of H.R. 5839 was even posted online, Steve Anderson of NACDS leapt into action with this statement asking Congress to “refrain from mandating serialization, e-pedigrees or track and trace requirements, since they are still experimental and will prove extraordinarily costly for pharmacies and other supply chain operators.” Unfortunately, pharmacies must close the loop if we are all to benefit from complete track-and-trace and ensure that pharmacy purchasing is not the weak link in the supply chain. Plus, wouldn't a single national standard lower compliance costs for NACDS members such as CVS Caremark or Walgreens (WAG)?

--

All in all, a very promising start for reducing counterfeits in the legitimate supply chain. Now, we just need to convince consumers to stop buying from shady online pharmacies.

BONUS FUN FACT: Did you know that "PEDIGREE" is a registered trademark of Mars, Inc., the makers of M&Ms? Woof!

Tier 4 Co-Pays and Pharmacy Prices

Monday’s New York Times story about on Tier 4 co-payments (Co-Payments Soar for Drugs With High Prices) generated a lot of attention. The article highlighted the heavy financial burden placed on patients when their insurance plans require 20-30 percent co-payments on very expensive specialty drugs. 86% of Medicare drug plans now have a Tier 4 co-payment level.

The New York Times editorialized that “something has gone terribly wrong when patients have to pay thousands of dollars a month for drugs that they need to maintain their health — and possibly save their lives.” PCMA used the story to advocate for generic biotech products or biogenerics. Brass and Ivory, a “carnival of MS bloggers,” has a good round-up of reactions to the story from patients and others around the web.

Here’s my Drug Channels spin—I don’t see how patients can appropriately manage their piece of the pie under these new programs without adequate access to pricing information. The story also illustrates how the economics of the pharmacy supply chain can have unintended and unseen influences on benefit design and patient behavior. Below, I take a look at Copaxone , a treatment for multiple sclerosis that was highlighted in the Times story. Even an industry expert like me had trouble gathering the right data.

BLOOD, SWEAT, AND TIERS

Here’s the real problem: How should we manage the growing costs of specialty drugs? According to the latest Express Scripts Drug Trend Report:

• Specialty drug spend increased by 14% in 2007, with about 60% of the increase due to increased utilization and only 35% due to price increases.
• Non-specialty spending grew by only 4.4% in 2007.
• Specialty spending is forecast to grow through 2011 at 18-20% per year, which will be 3-4X the rate of non-specialty spending.

Conventional (economics) wisdom holds that shielding consumers from the true costs of their health care decisions will lead them to “over-consume” health care. The theory of consumer-directed health plans is built around this notion. In many situations, the theory works. For instance, seniors under Medicare Part D are highly motivated to keep their total drug costs below the lower end of the doughnut hole. As a result, more seniors are trying to get the biggest bang for their buck by accepting generic substitution, as well as shopping around at pharmacies. (See Part D and Generics.)

Presumably, tier 4 plans could both offset payer’s costs while also encouraging lower utilization use of expensive specialty drugs by patients. However, the situations described in this article are much different because:

• there are no generic alternatives;
• the drugs are essential for care;
• the drugs cost thousands of dollars per month; and
  
• typical cost-sharing ratios put substantial financial burdens on patients.
  

Thus, tier 4 plans could be totally counterproductive and ultimately more costly if they lead to non-adherence to therapy, excess hospitalization, etc.

THE TRACKS OF MY TIERS

Even if we put aside the essential nature of these drugs, there are still two more prosaic challenges that the NYT article ignores completely:

(1) How easily can a consumer manage their co-payment levels?

(2) What price should be used as the basis for the co-pay computation?

Let’s look at Copaxone, which features prominently in the Times’ story of Ms. Robin Steinwand of Maryland. Under Ms. Steinwand’s (now discontinued) pharmacy benefit plan, Kaiser Permanente increased her co-pay from a flat $20 per month to 25% of the drug’s cost (up to a maximum of $325). She hit the $325 maximum in the first month.

In theory, co-pays calculated as a percent of a higher cost drugs should motivate a consumer to shop aggressively for the pharmacy that offers the lowest drug cost and therefore the lowest dollar co-pay.

But is that even possible? Here’s what I found for Ms. Steinwand's hypothetical search:

Maryland’s Prescription Drug Price Finder provides little help. It only lists the comparative list prices for 26 commonly used drugs. Other states, such as New York, typically gather data on the top 150 most prescribed drugs. However, Copaxone generates only $300 million in retail pharmacy sales (#112 nationally in 2007 per Verispan data), so the drug is unlikely to appear on any state price finder sites.

I was also unsuccessful in getting prices from the websites of CVS, Walgreens, or Wal-Mart, so my assistant Angela called some Maryland pharmacies to gather the following range of “list prices”:

• CVS (Silver Springs, MD): “approx. $2,200” but must be special-ordered
• Wal-Mart (Laurel, MD): $2,343.68 but must be ordered from Wal-Mart Specialty Pharmacy in Florida
• Rite-Aid (Silver Springs): $2,390.99
• Walgreens (Potomac, MD): $2,560.99

Knowing a bit about the pharmaceutical industry, I managed to turn up the following publicly available information. I doubt the average consumer would be able to locate and interpret these data.

• Average Wholesale Price (Q4:2007) = $2,096.54 (from Florida’s ACHA site, among other places)
• Average Sales Price (during Q4:2007) = $1,564.47 (from CMS’ drug pricing files)

According to the article, the drug was being dispensed from a retail pharmacy at a “cost” of $1,900, which suggests that Kaiser was reimbursing the pharmacy at around AWP minus 10%. Given typical channel mark-ups, I presume that the pharmacy would not have covered its acquisition cost without the $325 co-payment. (No, I am NOT implying that pharmacy kept the difference between ASP and AWP-10%.)

TIERS FOR FEARS

Even though Kaiser has altered the program described in the article, it’s clear that Tier 4 co-payments may be here to stay. However, Tier 4 co-payments seem like a half-baked idea right now. The wide variations in pharmacy prices for Copaxone make me skeptical that a savvy consumer (or payer) can ever truly figure out how to get the “best deal” on a potentially substantial out-of-pocket co-payment.

In the meantime, “Go broke or die” doesn’t seem like a sensible policy to me.

Big Premium in the McKesson–McQueary McDeal

Apologies for yet another McKesson (MCK) post, but I certainly can’t ignore this week’s news given that I wrote on Tuesday about the company’s active efforts to alter its business mix.

McKesson (MCK) is acquiring McQueary Brothers Drug Company, one the few remaining regional drug wholesalers in the U.S. (See the official announcement.) McKesson is paying a substantial premium for the McQueary’s business, although the deal could be justified given today’s pharmacy industry dynamics. Will the higher price lure the remaining regional wholesalers to sell out, further concentrating the channel for manufacturers and independent pharmacies?

PAYING A PREMIUM

Here’s my math.

McQueary Brothers is one of the few wholesalers that does not report its sales in HDMA’s Factbook. However, the press release states that McQueary serves “more than 400 independents.” Assuming typical purchase levels by an independent pharmacy ($1.5-2M per year), McQueary’s revenues are probably in the range of $600-$800 million. Let’s say $700 million as a round number.

The purchase price was $190 million, implying a price/revenue ratio of about 0.27X. For those of you keeping score at home, this ratio is more than twice the comparable figures of other recent acquisitions, such as D&K by McKesson or Bellco by AmerisourceBergen (ABC). I presume an EBITDA multiple would reflect a similar 2X+ premium.

At first blush, this premium may seem surprising given the limited number of possible buyers (um, 3?) and the potential risk of a distress sale if independents come under further pressure. As I wrote back in March 2007: “Industries do not consolidate forever (even drug wholesaling). I expect that the remaining regional wholesalers will be looking for a reasonable exit strategy, too.”

BUT STILL A GOOD DEAL

However, McKesson’s desire to win this deal at a higher purchase price makes sense once we consider today’s pharmacy realities:

1) Smaller retail pharmacy customers rely on a wholesaler for many more supply chain services than a self-distributing chain. Thus, the threat of disintermediation is low and the gross margins are generally higher for the wholesaler. (More details: Trouble Ahead for Independent Pharmacies.)

2) Smaller buyers – regional chains, independents, supermarkets, etc. – buy their generic drugs via wholesalers, which also boosts a wholesaler’s gross margins. (More details: CVS' Channel Power.)

3) McKesson has been actively trying to deepen its relationships with customers, either through ownership (such as the OTN acquisition) or through a franchise relationship such as the nearly-2,000 pharmacies participating in HealthMart.

As a bonus, McKesson gets a small top-line boost from an (improbably) growing segment and can easily fund the deal given its extremely low levels of debt.

So what’s next? Will the McQueary buyout premium trigger a final feeding frenzy for the remaining regionals? Will manufacturers take action to address the unsettling levels of concentration in wholesale and pharmacy channels?

Any brave souls care to venture a guess?

--

And before you ask, no, that’s not a picture of younger me above. Everyone knows that I don’t wear yellow.

McKesson Gets Out of Pharmacy Outsourcing

McKesson (MCK) is selling its pharmacy outsourcing business to Comprehensive Pharmacy Services (CPS) according to this press release from CPS.

Each of the big 3 wholesalers, which also includes AmerisourceBergen (ABC) and Cardinal Health (CAH), have businesses that operate institutional pharmacies on an outsourced basis. I discussed the controversy around the outsourcing business last month in The Dark Side of Pharmacy Outsourcing. As you may recall from that post, I'm skeptical of the claim that problems at a single hospital indicated systemic flaws in the pharmacy outsourcing business.

You can read more about McKesson’s business at the McKesson Medication Management page. As a guess, Medication Management probably represents less than $1 billion in revenue but has 2 to 3 times better profitability than the core drug distribution business. In the absence of any formal statement from the company, I presume that the risks and controversy did not outweigh these incremental profits.

McKesson has been the most active out of the big 3 in adjusting its health care business portfolio. For example, the company sold its acute care supply business to Owens & Minor last year. Last week, McKesson acquired Rosebud Solutions, a provider of software solutions to track and manage instruments, endoscopes and tissue implants for surgical services. I expect McKesson to continue tweaking its business mix over the coming year.

The Myth of Fading Independents

May 27, 2008: Please see IMS Recounts, but Independents Still Growing for important information about the data in this post.
---------------
Time to test yourself at the college of pharmacy knowledge!

Q: According to IMS, which of the following pharmacy channels had the fastest rate of growth in 2007?
a. Chain Stores
b. Mail Order
c. Supermarket
d. Independent

Contrary to what you may have heard, the answer is … Independents! In fact, independents grew more than 5 times as fast as chains.

Nope, this is not another April Fool’s joke. I was surprised, too, especially given the heated rhetoric around the “debilitating consequences” of Part D, Wal-Mart’s “predatory pricing,” and the “devastating impacts” of AMP.

Looks like your friendly neighborhood blogger will once again have to be the bearer of … good news???

JUST THE FACTS

When IMS released the final 2007 data in March, they noted that the U.S. pharmaceutical market experienced its lowest growth rate since 1961. (See IMS Health Reports U.S. Prescription Sales Grew 3.8 Percent in 2007, to $286.5 Billion.)

However, growth varied by channel. Below is a chart showing the 2007 growth rates for the four major retail pharmacy channels. You can check my math with IMS Health’s 2007 Channel Distribution by U.S. Sales report.

The data come from IMS National Sales Perspectives, which reports sales into each distribution channel tracked by IMS. In other words, the data represent product purchases from wholesalers or manufacturers, not retail pharmacy sales to patients.

As I understand the data, NSP purports to represent sales at invoice pricing, not sales at a list price such as Wholesale Acquisition Cost (WAC). For example, contract pricing, such as a discounts processed via wholesaler chargebacks, should be reflected in the IMS NSP measures of price. However, rebates paid by the manufacturer directly to an insurer or PBM (Pharmacy Benefits Manager) would not be reflected in these data. (A similar principle was embedded in the AMP Final Rule.)

SHAKEOUT TIME

Like it or not, US retailing continues to become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. Consumers are fueling this trend by consolidating their purchases and shopping at fewer, larger stores. Low prices and self-service ("How can you help you?") now dominate.

Consider the massive consolidation occurring at the top end of the pharmacy market. The biggest six dispensers – CVS Caremark (CVS), Walgreens (WAG), Rite-Aid (RAD), Medco (MHS), Express Scripts (ESRX), and Wal-Mart (WMT) – fill more than half of all scripts today.

Retail pharmacy is now undergoing a similar shakeout that will leave us with fewer, but larger, independents. There are half as many independent pharmacies today as there were 15 years ago. Yet by my calculations, the average independent pharmacy today fills 50% more prescriptions than the average independent 15 years ago.

Meanwhile, the aggregate number of pharmacies has barely budged in the past twenty years because new competitive channels – supermarkets, mail, and mass merchants – have filled the gap. As I pointed out last July, consumers of independent pharmacies still have access to many pharmacies within a reasonable driving distance. Yes, I recognize that patients in some rural communities may have an access issue if their local independent closes. If that’s true, then the solution is targeted support for pharmacies in at-risk markets, not blanket protections for all pharmacies in all markets.

And contrary to the claims of doom, Medicare Part D has been neutral to positive for independents. Re-read January’s Pharmacy Profits & Part D, in which I analyze the relationship between pharmacy size and profitability for independents under Part D. The second comment on this Part D post (apparently from a pharmacist) reads: “What the data is basically saying is that the system is going to weed out the pharmacies that are not running efficiently, or not filling a high enough volume of prescriptions.” 'Fraid so.

Put all of these pieces together and you can understand the surprising resilience of the surviving independents in the IMS data.

---

One of my consulting advisory clients recently told me that he values my opinions because I’m a “tough, cynical hard-ass.” Believe it or not, I took his comment as a compliment. My job is to tell people the hard facts – even when the news is good!

Pharmacy Supply Chain: News Update

Whoa! There’s some very intriguing news out this morning on a few key Drug Channels topics.

Here’s a quick run-down:

Wholesalers Merge, Form Big One
The so-called “Big 3” wholesalers – AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK) – stunned Wall Street this morning by announcing a three-way merger that will create The Big One. While the transaction is still subject to regulatory approval, the new firm is scheduled to be called McKameriCardigen. Larry Marsh, Healthcare Distribution & Technology analyst at Lehman Brothers, praised the deal because “my workload just dropped by two-thirds.”

California’s e-pedigree date changed yet again!
The California Board of Pharmacy stunned the pharmaceutical industry again yesterday when they voted to shift the deadline for implementation of e-pedigree laws, this time to November 9, 2010. The Board noted that November 9 is also National Scrapple Day, which they claimed “was appropriate for the task confronting the industry.” When asked why the Board will not settle on a single date, Executive Officer of the Board Virgina Herold reportedly replied: “Where’s the sport in that?”

PCMA Makes New Commitment to Transparency
Responding to recent calls for greater transparency, the Pharmaceutical Care Management Association (PCMA) announced the design of its new corporate headquarters. According to PCMA spokesperson Derek Smalls, the new building will be modeled on Philip Johnson’s famed Glass House. “Every vertical and horizontal surface, from office door to bathroom stall, will be made of clear, pure, diaphanous glass.” Mr. Smalls also noted that the design will aid PCMA’s lobbying efforts in support of Pharmacy Benefit Managers because “we will now be able to throw the first stone.”

----

Oh, by the way… it’s April Fool’s Day.