Good Stuff to Read

Here are some interesting articles and sites for your reading pleasure. As always, I welcome links to interesting stories from Drug Channels readers.

Rat advert complaints dismissed – Apparently not everyone enjoyed Pfizer's rat ad as much as the Drug Channels readership. 64 people in Britain complained about the rat ad that I describe in Pfizer Tries to Choke Demand for Parallel Imports. The UK's Advertising Standards Authority (ASA) sagely concluded: "we considered the metaphor of regurgitating a rat was likely to justify, for most people, the approach."

CVS Caremark's Smaller Competitors Seek Government Review – Dow Jones did a story on a possible Federal Trade Commission (FTC) review of CVS Caremark, which I wrote about in Could the FTC undo CVS Caremark? However, there is a high hurdle as indicated by the following perspective from the article:

Government action likely would depend primarily on whether the consumer is the one hurt rather than competitors. "The antitrust laws really are not there to protect competitors, and in fact every time a competitor complains it's looked at with suspicion," said Joseph J. Simons, former director of the FTC's competition bureau.

Behind Online Pharma – I just discovered this useful resource for news stories and analysis about online drug sales. According to the site: "We are 14 journalists training at the Toni Stabile Center for Investigative Journalism, which is dedicated to training students in investigative reporting at the Columbia University Graduate School of Journalism." They must be good journalists because they have linked back to your friendly neighborhood blogger.

Kujovic's Drug Channels Continue to Exists – Competition for Fein's Drug Channels?

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I promise not to ask again.

Generic Drug Scandal Hits Wholesalers and Drug Makers in Canada

While the world is focused on swine flu, some well-known wholesalers and manufacturers are being accused of participating in a drug recycling and reimbursement scheme in Canada.

According to Monday's press release from the Ontario Ministry of Health and Long-Term Care:

"The audits found that some pharmacies have been purchasing a greater amount of generic drugs than they require, collect professional allowances on the full amount, and then return what they don't need to the wholesaler. The wholesaler then re-sells the product, triggering a second professional allowance payment. This scheme enables professional allowances to be collected multiple times."

Yikes.

Four wholesalers – AmerisourceBergen Corp. Canada, Kohl and Frisch Ltd., A.O.C. Company Ltd. and Pharmastop – are facing fines totaling $26 million. Generic drug makers Taro Pharmaceuticals Inc., Cobalt Pharmaceuticals Inc., Genpharm Inc., Novopharm Ltd., Ratiopharm Inc., Pharmascience Ltd. and Sandoz Canada Inc. were also fined by the province. (Source)

Keep in mind that generic drugs are significantly more expensive in Canada than the U.S. according to a study by the Fraser Institute (Canada's Drug Price Paradox 2008). A 2004 FDA white paper draws the same conclusion (Generic Drug Prices in the U.S. Are Lower Than Drug Prices in Canada). However, this report from the Canadian Generic Pharmaceutical Association disputes the Fraser results.

I assume more details will be forthcoming.

Drug Channel Profits in 2009’s Fortune 500 list

Spring must be here, because it's time for my annual review of the Fortune 500 list.

The subject of profits comes up frequently in reader comments on the blog. This review will give you some facts and perspective on the profitability of the largest drug wholesalers, chain pharmacies, and pharmacy benefit managers (PBMs). And to keep things spicy, I also compare this group to independent pharmacies and manufacturers.

Sebelius on AMP and Importation

The Senate Finance Committee voted yesterday to approve Kathleen Sebelius as Secretary of Health and Human Services. See Panel Backs Sebelius for Health Post. Some last minute disclosure issues regarding politically sensitive campaign contributions almost derailed her nomination, but the full Senate is likely to confirm her.

So, what's next?

I thought it would be fun (yes, my kind of fun) to look at Governor Sebelius' responses to questions from the Committee on two popular topics here on Drug Channels: Average Manufacturer Price (AMP) and Importation.

You can savor all 137 pages of the political posturing for yourself here: Finance Committee Questions For The Record

AVERAGE MANUFACTURER PRICE

As you may recall, AMP is the reimbursement cap that will supposedly put half of all pharmacies out of business. (No, not really.) Here's the exchange from the Q&A:

Question (from Senator Grassley): The Medicaid statute requires states to reimburse prescription drugs in Medicaid by the average manufacturer price. The regulation implementing the statute was prevented from going into effect by a federal court. While maintaining compliance with the injunction on the regulation as previously issued, do you think CMS should withdraw the regulation and try to more accurately follow the statute?

Answer: I understand that stakeholders have many concerns about this regulation. If confirmed as Secretary, I look forward to working with you to better understand those concerns and explore potential solutions.

Very interesting. As I see it, Governor Sebelius gave a non-answer answer, leaving the door open to implementing AMP.

Balancing the concerns of stakeholders will be difficult. AMP's most important role today is as the basis for computation of brand manufacturer payments under the Medicaid drug rebate program. President Obama's budget proposes increasing the rebate amount from 15.1% to 22.1% of AMP. Since there is only one AMP calculation, this dual role creates conflict between manufacturers and retailers. The Medicaid rebate program suggests that manufacturers want the lowest AMP possible, whereas using AMP as part of a pharmacy reimbursement formula (for generics) means that pharmacies want the highest AMP possible.

The AMP battle is perceived to be even more important to pharmacy now that Average Wholesale Price (AWP) may cease to be. (See Farewell, AWP). AMP – an actual computed transactional price – was scheduled to be published online per the Deficit Reduction Act of 2005. Publication was temporarily suspended until at least September 30, 2009 by the Medicare Improvements for Patients and Providers Act of 2008 (S. 3101) and perhaps longer given the unresolved legal issues. AWP is not dead yet and won't be leaving without a fight.

IMPORTATION

Governor Sebelius is a big fan of importation as I discuss in Obama + Sebelius = Drug Importation. Check out this back and forth from the Q&A:

Question (from Senator Grassley): Will you support an importation program, and if so, how will you assure appropriate implementation that ensures public safety as well as providing access to lower cost prescription drugs?

Answer: There are number of options to lower the cost of drugs. We need to examine all options from expanding the use of generic drugs to providing greater flexibility to negotiate lower-priced drugs when appropriate, to reimportation of drugs from developed nations that have strict safety measures like the United States. That said, the recent incidents involving heparin and other consumer products has highlighted the potential challenges that must be addressed before we import drugs so we can be assured they are safe and effective. The President's FY 2010 budget includes new resources to plan for the safe reimportation of drugs, and I look forward to working with the Congress to implement such policies.

So while she acknowledges the dangers of diversion, I interpret her comment to mean that she will be working to provide the required certification to allow an importation bill to be implemented.

On the other hand, I see that Pharmaceutical Market Access and Drug Safety Act (S.525) has only 27 sponsors. Hmmm.

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Thanks to everyone who has already shared their opinions in the Drug Channels Reader Survey. If you have not done so already, please click here and tell me what you think about this blog. Five lucky respondents will win a free copy of my 2009 Economic Report on Pharmaceutical Wholesalers.

Help me improve Drug Channels

I want to hear from you.

I am conducting a very brief (honest!) Drug Channels reader survey so that I can find out more about what you want to read. There are just a few questions, so it should take you only 5 minutes to complete. Here's the link:

The 2009 Drug Channels Reader Survey

You can answer anonymously. If you provide an email address, I will enter you in a drawing and randomly select 5 people to win a free copy of my 2009 Economic Report on Pharmaceutical Wholesalers. But no matter what, everything is completely confidential.

Won't you please, please help me?

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I'll return to our regularly scheduled programming tomorrow. In the meantime, you can ponder the latest takeover rumor about Walgreens (WAG) acquisition of long-term care pharmacy Omnicare (OCR). See Omnicare shares rise on takeover talk.

The Problem with Pharmacy Prices

I want to mash together two apparently unrelated stories for you so that I can highlight problems for consumers and drug makers from the complex world of pharmacy drug pricing. My unanswered questions are at the bottom -- I'd love to get your thoughts, too.

Story #1: Yesterday's Wall Street Journal reported that many drug makers have raised list prices by 10% to 15% over the past year. See Drug Makers, Hospitals Raise Prices.

Those of us with insurance will probably not feel the full effect of these increases thanks to the bargaining power of our third-party payers. Unfortunately, the mysterious world of pharmacy price-setting will magnify these increases and expose uninsured and underinsured consumers to ever bigger increases in out-of-pocket costs for their drugs.

Story # 2: Price shopping for the best deals at a pharmacy remains difficult, as shown in a new report (link below) about ongoing problems with New York state's prescription drug price comparison site. Judging by this report, uninsured and underinsured consumers need to pay extra close attention when shopping to fill their prescriptions. There are eye-popping variations in pharmacies' U&C prices for the same product in the same area.

NAME MY PRICE

The Prescription Drug Prices in New York State website allows consumers in New York to compare the retail price of the 150 most frequently prescribed drugs at different pharmacies. The price is measured as the "usual and customary" (U&C) price reported to Medicaid by a pharmacy. In theory, this site could help uninsured or underinsured consumers shop around for lower prices.

Not so fast.

The NY PIRG just released an excessively-titled report called The Price is Not Right: The Failure of New York State's Rx Disclosure Law to Offer Consumers Easy Access to Prescription Drug Prices

Here's a small sample of variation in average prices and the min/max range for Lipitor (10 MG tab) around New York state. Even within the same area, pharmacy list prices for a common drug can vary by 200% to 300%.

• Bronx (NYC) = $106.64 (Range: $80.00 to $216.99)

• Central NY = $101.08 (Range: $86.93 to $125.00)

• Finger Lakes = $101.72 (Range: $51.12 to $136.78)

• Western NY = $102.54 (Range: $79.40 to $156.60)

Gluttons for data can enjoy many more pages of price info in the full report.

NOT THE PRICE

What explains these huge disparities? Well, sometimes the data on the New York web site are often incomplete, outdated, or just plain wrong.

For instance, one pharmacy reports selling Ambien for $860,603!! Oddly, 5 of top 20 big pricing errors are Ambien-related. (See page 12) I guess someone is asleep over there.

The NY PIRG study reminds me of another article that I wrote last year called The Price Might Be Right, which looked at a report criticizing the pharmacy price web sites in 10 states (including New York). That study identified four key problems with the state sites:

• Infrequent and incomplete updates of price data
  
• Few reporting pharmacies
  
• Small number of drugs reported
  
• Inconsistent use of modern web search tools
  

Apparently, New York has not fixed these problems in the intervening 14 months.

The latest report also uncovered the fact that few pharmacies support the state's price comparison web site. Only 7 pharmacies in a sample of 55 pharmacies displayed the drug price website address, which is required by New York law. Surprised? No, me either.

HARD QUESTIONS

A few questions that I'm pondering:

• How many uninsured or underinsured consumers overpay at the pharmacy by not shopping around? As I show in Pharmacy Profits and Wal-Mart, independent pharmacies earned 42% gross margins from cash pay scripts – more than twice the margin from third-party scripts. I'm not aware of any studies of consumer shopping behavior related to pharmacy prices.
  
  
• How easy is it for consumers to compare pharmacy prices? According to the report, New York pharmacies are only encouraged (but not required) to provide prescription prices to consumers over the phone.

• How much do drug manufacturers understand about the factors that determine a pharmacy's "usual and customary" price? Effective channel management starts with an understanding of true economics, including the way that the retail pharmacy price from an individual script gets divided between the manufacturer, the wholesaler, the pharmacy, a health plan, and/or the third-party managers who oversee the whole process.

I'm curious to know what Drug Channels readers think about this pharmacy price issue.

My New Report on Drug Wholesalers

I want to let you know about my brand new 2009 Wholesale Distribution Economic Report on Pharmaceutical Wholesalers, which is now available for download from the non-profit NAW Institute for Distribution Excellence.

The report is part of a series that analyzes all major sectors of wholesale distribution in the U.S. economy. However, I added extra material to this particular report especially for Drug Channels readers, including a detailed review of five significant industry trends:

• Slowdown in U.S. Pharmaceutical Spending
  
• Consolidation of the Retail Pharmacy Industry
  
• Increasing pressure on profit margins from generic drugs
  
• The Effect of Manufacturer Consolidation on Fee-for-Service Agreements
  
• Pharmaceutical Supply Chain Regulation and Importation
  

The report is not free, but you are eligible for the "Member of NAW Member Assoc" discount if your company belongs to the Healthcare Distribution Management Association (HDMA) or the Health Industry Distributors Association (HIDA). Most manufacturers, distributors, and supply chain technology companies belong to one of these two organizations. (You do not have to be a member of these organizations to buy the report.)

Please feel free to email me if you have any questions about the report.

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You can read my high-level thoughts on Express Scripts Inc.'s (ESRX) acquisition of WellPoint Inc.'s (WLP) in-house drug-benefits operation in Express Scripts' WellPoint PBM Buy Benefits Both Companies from The Wall Street Journal.

I state: "I think it's a very logical acquisition. I think it's a great deal for Express Scripts and really solidifies their place among the top three PBMs."

As always, just my $0.02.

Could the FTC undo CVS Caremark?

Here's an unusual possibility for you to consider.

The National Community Pharmacist's Association (NCPA) is trying to get the Federal Trade Commission (FTC) to challenge the 2007 merger that formed CVS Caremark.

Apparently, this is not as far-fetched as you might think, judging by comments from the incoming antitrust chief in a March 16 New York Times article:

"Christine A. Varney, President Obama's pick to run the antitrust unit at the Justice Department, said in her nomination hearings last week that she was "absolutely" open to retrospectively studying the effects of approved mergers… History suggests CVS Caremark, the company created by the 2007 merger of a drugstore chain with a pharmacy benefits manager, could be one of the first cases to be re-examined."

Wow. I had no idea that the government gets a do-over.

NCPA has been publicly pushing for an FTC review of CVS Caremark since at least December. Read NCPA's December 23, 2008, letter to Chairman William Kovacic.

The first reason cited in the NCPA's 2008 letter reads: "CVS Caremark has significantly reduced the copay for members when they fill their long-term prescriptions at CVS pharmacies." Gosh, that idea sounds familiar. Where else have I read something like this? Oh, yeah – right here.

Bruce Roberts' blog post from last Friday (NCPA Meeting With FTC on CVS Caremark) suggests that a meeting with the FTC is imminent, writing: "We're in the process of arranging a meeting during the conference with the new FTC Chairman, Jon Leibowitz, to discuss the anticompetitive and anti-patient practices of CVS Caremark."

I have no idea whether the FTC will (or can) take action, but I've learned not to underestimate the lobbying power of pharmacists.

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I'll be off for the rest of the week to break (unleavened) bread with the extended family. If you are similarly inclined, then you'll chuckle at Moses is Departing Egypt: A Facebook Haggadah.

And if you've never heard of Facebook, please turn off your 8-track player and ask the nearest teenager.

CVS Caremark's "Insignificant Impact"

Check out the following (genuine) article in yesterday's Wall Street Journal: CVS Caremark Merger Has Insignificant Impact.

Ouch - harsh title!

The article points out how the theoretical synergies from the CVS Caremark merger have yet to appear, noting: The nearly $27 billion merger, however, hasn't driven a major shift in market share, or stopped growth at rival pharmacy-benefit managers, which are known as PBMs, or prompted similar mergers in the sector.

The article goes on to quote me as follows:

"From what I can tell the jury is still out on whether the retail-PBM combination works strategically" for employers, health plans and consumers, said Pembroke Consulting President Adam Fein. "I think at one level it's been a big win at CVS Caremark behind the scenes." He said that CVS has great leverage in buying generic and branded drugs since it makes almost 20% of the generic purchases in the U.S.

I was especially intrigued by comments from CVS Caremark Chairman and Chief Executive Tom Ryan because he confirms some things that you've read on Drug Channels.

Cost Savings

Mr. Ryan confirmed that the company has overachieved on its planned costs synergies, which should be no surprise to long-time Drug Channels readers.

Check out CVS' Channel Power, a Drug Channels golden oldie from September 2007. I describe a lawsuit that disclosed some of the behind-the-scenes economics of the CVS -Caremark deal and highlighted the negotiating challenges for generic drug makers. Very eye-opening for those who are not familiar with the supply chain's Golden Rule:

"Whoever has the gold makes the rules."

Revenue Synergies TBD

In February's blog post CVS Caremark: No Visible Revenue Synergy, I showed you that CVS Caremark's financial statements did not document any revenue synergies from the PBM/Retail combination. If CVS pharmacies are taking retail pharmacy market share, then it's not yet as a result of corporate co-ownership with a PBM.

So I was particularly interested in these two quotes from Mr. Ryan in yesterday's WSJ article:

• "We're probably halfway through the revenue synergies."

• "But there is no evidence that the PBM business is driving more retail business."

Hmmm.

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Thanks for great feedback on yesterday's post! I either startled or amused enough people to generate a record day for blog traffic. Perhaps I should post more fake news.

Wal-Mart to Buy Walgreens

Wow, I didn't see this one coming!

According to a story that just hit the Dow Jones newswires, Wal-Mart Stores (WMT) will reportedly be buying Walgreens (WAG)!

Folks, this is a major move and will completely reshape the pharmacy industry. I conservatively estimate that the combined buying power of the two companies will exceed even CVS Caremark.

This also puts a new spin on drug wholesaler contracts. Cardinal Health (CAH) supplies Walgreens, while McKesson (MCK) supplies Wal-Mart. Look for another race-to-the-bottom margin slugfest when this contract comes up for re-bid!

From what I understand, Wal-Mart plans to rebrand all Walgreens retail pharmacies as "Wal*Wal" stores.

So far, there's no comment on this name from Pennsylvania-based convenience store operator WaWa. However, one of my lawyer friends works at Disney and told me that Disney may seek to block the deal because of possible consumer confusion with Wall-E.

I'll be following this story closely and will post more as details are released.

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Hey, did anybody else notice what today is? Oh yeah, it's April Fools' Day. Enjoy!