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!

Big Loophole in New EU Serialization Proposal

The European Commission released its “pharmaceutical package” yesterday. As I mentioned in Monday’s post, a strict ban on repackaging of parallel traded drugs was not included in the final proposal. However, the Third Legislative Proposal, which deals with counterfeit drugs, proposes “security devices” with traceability for pharmaceuticals. Yup, that means serialization (actually, serialisation), but nothing like the Californian vision of serialized e-pedigree that’s due to take effect in only 2,212 days.

The Financial Times emphasized the anti-counterfeit nature of the proposal in European Drugs To Carry Barcodes, but I see some significant concessions to parallel traders in the proposed legislation. The proposal puts some limits on the extent of repackaging but seems to contain a major loophole (described below) that could negate any benefits from serialization.

Three links for your reading pleasure:

• Pharmaceutical Package (main page)
• Press release (with a statement from Vice President Günter Verheugen)
• Text of Third Legislative Proposal

Be forewarned – the proposal is written in the international language of “bureaucratese” and perhaps should be read only by true fans of supply chain security. Here are a few items for your consideration:

A serialized track-and-trace foundation. Product must have “safety features making it possible to ascertain identification, authenticity and traceability of medicinal products.” In other words, the proposal lays the groundwork for a full track-and-trace system, but does not require it.

On-package security will grow. These safety features must allow wholesale distributors and pharmacists to: “(a) verify authenticity by assessing overt, covert, or forensic devices; (b) identify individual packs; (c) verify whether the outer packaging has been tampered with.” Note that point (b) also supports serialization.

Multiple serial numbers? The proposal states that the safety features can not be removed or covered-up. However, there is an exception (loophole?) that allows the repackager to remain compliant even when "replacing the safety feature with a safety feature that is equivalent as regards the possibility to ascertain identification, authenticity and uninterrupted traceability of the medicinal product" Replacing?!?

The last point sure makes it sound like the manufacturer’s original serial number could be covered up by a repackager’s number. Presumably, there would have to be some sort of mapping between the two numbers. In practice, I wonder if replacement could end up negating the benefits of serialization by creating multiple sets of numbers on packages from the same production lot.

Nonetheless, I suspect that most pharmaceutical manufacturers in Europe will take the first step and ramp up serialization efforts in anticipation of this proposal being formally adopted. Keep in mind that all proposals still need to be approved by the member countries.

As always, just my €0.02.

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P.S. Check out the latest Health Wonk Review at the e-CareManagement blog.

Drug Importation: A New Beginning?

Drug importation into the U.S. has been declared dead more times than a narcoleptic Jason Voorhees. As a follow-up to Monday's post about parallel trade in the European Union, I regret to inform you that we may be headed for another sequel.

A couple of months ago, I was relieved to note that both Presidential candidates were backing away from drug importation into the U.S. (See Getting a Clue on Importation.)

Unfortunately, former Senate Majority Leader Tom Daschle, who has been nominated by President-elect Obama to head the Department of Health and Human Services, is a big fan of importation.

Check out Senator Daschle’s 2004 Op-Ed Health-care system picks winners and losers, in which he states:

Second, to lower drug costs, we can pass bipartisan legislation supported by Republicans John McCain and Olympia Snowe and Democrats Byron Dorgan and myself that allows for the safe importation of lower-cost drugs from Canada and other countries.

FYI, he is referring to his co-sponsorship of the 2004 Senate importation bill (S.2328), which didn’t get very far. He was no longer in the Senate by the time the 2007 version (S.242 Pharmaceutical Market Access and Drug Safety Act of 2007) came along, so he could not join then-Senator Obama in supporting this bill.

The conventional wisdom suggests that the contaminated heparin incident, among other things, has pushed drug importation off the radar screen. But I’m not so sure given Sen. Daschle’s many, many public pro-importation comments over the years. And some groups, such as wholesalers, will potentially benefit from legalized importation, as I note in Drug Importation and Global Wholesale.

Stay tuned for Part XIII...

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New Drug Channels readers can read a summary of my views in Importation Illusions (published in Pharmaceutical Manufacturing) or in many previous DC posts.

An Unfortunate Victory for EU Repackagers

Reuters reported on Friday that the EU plans to drop a proposed ban on repackaging of pharmaceuticals. See EU Exec Drops Drug Repackaging Ban Plan for the latest story and EU Drugmakers Demand Repackaging Ban To Stop Fakes for the original June request for a ban by EU drug makers.

In my opinion, dropping the ban is a very bad decision. Repackaging eliminates the benefit of just about every practical anti-counterfeit tracking technology, including the emerging serialization requirements in some EU countries. Apparently, tablets can even be removed from blister packs under EU law. It’s hard to see how this will benefit consumers. “Hey, it’s a bit cheaper, but it might be fake. Good luck!”

The issue relates to our old friend parallel trade. Combining the European Union’s market integration principles with national price controls has created an enormous cross-border gray market, often called parallel trading. Wholesalers in countries such as Spain and Greece sell to importers in higher priced countries such as Germany and the U.K. Drugs may pass through dozens of hands before reaching their destination.

Surprisingly, the average European consumer receives almost no price break from parallel trade, especially in countries with flat-rate patient co-payments such as the U.K. and Germany. Instead, wholesalers, importers and exporters are the big winners from parallel trade because they absorb 80% or more of the price differences between countries. Hence, these are also the groups that oppose the repackaging ban.

Unfortunately, parallel trade also means that products are often repackaged by multiple intermediaries along the supply chain and may pass through dozens of hands before being resold. Legitimate products can easily get mingled with counterfeits, with no feasible way to introduce pedigrees across countries. It’s no surprise that counterfeit cases are growing quickly in Europe. As I pointed out in a June 2008 posting, seizures of counterfeit drugs at the EU border rose 51 percent in 2007 compared with 2006.

Only one thing is certain – litigation over parallel trade will continue. In September, the European Court of Justice gave GlaxoSmithKline a partial victory in its long-running attempt to limit parallel exporting from Greece. See Europe Allows Companies to Limit Drug Sales from the Wall Street Journal.

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FYI, I wrote two background posts on parallel trade in August 2006. Amazingly, all of the links in these posts still work if you are curious:

• London Calling: Fake Drugs Get Real, which provides a high-level overview of the winners and losers from parallel trade
• Curious about European Drug Distribution?, which has background material on the EU market
  

BTW, you'll notice a lack of pictures in my 2006 posts. Hope you'll agree that Drug Channels is much more fun with the accompanying photos. In fact, one client recently confessed that he sometimes reads my blog for the pictures, not the articles. Hmmm, I recall using that excuse in reverse during my youth...

A Quantum of Solace from Cardinal

Now that Cardinal Health (CAH) has finally resolved its long-standing DEA issues, the company has quietly launched a series of intriguing Medication Safety web pages.

I’m impressed by these initial public efforts at education and greater transparency, although it’s obviously a work-in-progress. Cardinal needs to more clearly describe how a more secure supply chain will translate into sales growth among its now highly monitored pharmacy customers. I’d also like to see the initiative evolve into anti-counterfeit education aimed at changing behavior by pharmacy buyers and consumers.

See Cardinal: The Once and Future Wholesaler for my recent update on the company’s pharmaceutical distribution business.

MONITORING SUSPICIOUS ORDERS

Cardinal posted their long-awaited explanation about plans to prevent diversion by its customers at The Cardinal Health Suspicious Order Monitoring Program. According to the site, the system “flags and holds orders that warrant further inspection,” presumably with enough accuracy and effectiveness to avoid catching innocent pharmacies in their net. I hope Cardinal provides details on the system’s effectiveness, especially given the risk of false positives among the customers they are trying to win back.

The new system is reportedly devoted solely to controlled substances and DEA compliance (per Mark Hartman, SVP of supply chain integrity and regulatory operations as cited in Pharmaceutical Commerce). In other words, the company “continues to work” on systems for complying with the December 2006 (!) Assurance of Discontinuance signed with the New York Attorney General. See my post Cardinal's Sins for background on that matter.

BTW, there are links to some good article on diversion prevention under Resources.

FFF GETS AN “A”

Cardinal has also added web pages about counterfeit drugs called What you can do, although I don’t understand the target audience for this material. Are they speaking to consumers, most of whom have never heard of a “drug wholesaler”? Are they communicating to the pharmacies that they will now be monitoring?

IMO, Cardinal should take a look at the approach used by privately-held distributor FFF Enterprises for years.

While I don’t have first-hand knowledge of FFF’s operations (nor do I have a business relationship with FFF), I have been very impressed by their public commitment to educating pharmacy buyers on the benefits of supply chain security. FFF’s website has a set of pages labeled Patient & Product Safety, trumpets a concept called “Guaranteed Channel Integrity,” and recently announced its (trademarked) 8 Critical Steps to Guaranteed Channel Integrity™.

SELL BENEFITS, NOT FEATURES

I have long argued that the risk of counterfeits could be reduced by tackling the demand-side security problem, i.e., making sure that pharmacy buyers and consumers purchase within a secure supply chain. Thus, consumers shouldn’t buy from random online websites, pharmacies should be very cautious about secondary sourcing, there should no be “trading networks” to facilitate transfers between unaffiliated independent pharmacies, etc.

Regulatory and technology solutions are necessary but are not sufficient to close these diversion gateways and stop counterfeits from entering the legitimate pharmacy supply chain. But with regulation on hold and technology in flux, manufacturers and other wholesalers should follow the examples of Cardinal and FFF to emphasize WIIFM (What’s In It For Me) for pharmacy customers and consumers.

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Disclaimer: Any similarities between Daniel Craig and Cardinal Health executives, current or past, is merely coincidental.

Worthwhile Stuff to Read

Hope you all had a nice Thanksgiving holiday. Here are a few interesting articles for your reading pleasure.

As always, I welcome links to interesting stories from Drug Channels readers.

AmerisourceBergen's Scrimp-and-Save Dave (Business Week) – Ever wonder about the glamorous life of a Fortune 28 CEO? Then read this Business Week article about Dave Yost, President and CEO of AmerisourceBergen (ABC). He “answers his own phone, flies economy class, and rarely strays beyond a shortie turkey hoagie with provolone from the local deli near his sterile industrial park headquarters in Valley Forge, PA.” Dave apparently conducted the interview from “a 1970s-era plaid chair … that looks like a yard sale find.” Interesting article, but I wonder if cost-cutting is the same as efficiency.

Pharma Ponders a Track-and-Trace System (RFID Journal) – A review of this year’s NACDS/HDMA RFID Track & Trace Healthcare Summit from an unabashed pro-RFID booster, i.e., the editor of RFID Journal. The following conclusion caught my attention: “At the meeting, I got the feeling many attendees were there to hear the latest regarding which regulation is in the offing, and that they were happy to learn that no regulation is imminent. There was little discussion of the potential business benefits of employing RFID and 2-D bar codes for track and trace.” Yikes!

Knockoff Report – A fascinating blog devoted to collecting stories about counterfeit goods of all types, including: pharmaceuticals, liquor, DVDs, tires, Madonna tickets, condoms (?), and just about anything else you can imagine. Fun but scary reading. Hat tip to Pharmacoma.