2008 Pharmacy Market Share Data

12/01/10 update: For current information, please download The 2010-11 Economic Report on Retail and Specialty Pharmacies and see Exhibits 2 and 3.

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Before I take my usual summer break from blogging (alas, not also a work vacation), I want to share my estimates of 2008 pharmacy market share by company along with some predictions for 2009.

FYI, I will be attending the NACDS 2009 Pharmacy & Technology Conference from August 9 through 11 in Boston. Please email me (mailto:afein@pembrokeconsulting.com) if you'd like to set up a one-on-one meeting with me in Boston. And if you just bump into me there, please feel free to introduce yourself and tell me what you like (or hate?) about the Drug Channels blog.

OVERALL MARKET TRENDS

The NACDS economics department just released its very useful stats on the overall pharmacy market in 2008. They kindly make these data freely available for download here: 2008 Community Pharmacy Results.

Total 2008 pharmacy sales of prescription drugs were $253.6 billion, up only 1.8% from 2007. However, there was substantial variation among dispensing channel format. Chain pharmacy, mail order, and mass merchants grew in 2008, while supermarkets and independents shrank. See page 5 of the NACDS slides for more details.

MARKET SHARE BY COMPANY

The chart below shows my estimates of market share by company using the NACDS overall market size figure. (Note: NACDS does not provide market share by company, so don't blame them if you disagree.) Click here to download this market share chart as a PDF file that's suitable for framing in your beach house.

PREDICTIONS FOR 2009

The big will get bigger. The top six dispensing pharmacies – CVS Caremark, Walgreens, Medco Health Solutions, Rite-Aid, Walmart, and Express Scripts – accounted for about 60% of U.S. pharmacy dispensing revenues. Like it or not, the more efficient dispensing channels will continue to gain share of the pharmacy market.

Walmart will gain share. Based on recent trends, I expect that Walmart (including Sam's Club) will become the third-largest retail store-based pharmacy in 2009, surpassing Rite-Aid.

Supermarkets will keep losing share. The NACDS figures show supermarket pharmacy sales declining by 5.6% in 2008 following 2007's decline of 2.8%. This shift reflects the ongoing shakeout in the retail food industry and the growth of (you guessed it) Walmart, which now has a more than 20% share of U.S. retail grocery sales. The sales decline also reflects the willingness of these non-pharmacy dependent retailers to jump into the retail generic price war.

Independents will keep losing share, but more slowly. Independent pharmacies face numerous competitive challenges, including a loss of profitability from cash-pay customers. (See Pharmacy Profits and Wal-Mart.) However, the strong survivors will be better positioned than supermarkets and the second-tier mass merchandisers.

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So, dear reader, any thoughts on these data before we head into the summer?

Authorized Generics: Money Saver or Evil Strategy?

Back in the formative youth of the Drug Channels blog (three years ago!), I wrote about Merck's authorized generic (AG) strategy for Zocor (simvastatin) in Winners and Losers in the Zocor Wars. A brand-new FTC report (Authorized Generics: An Interim Report of the Federal Trade Commission) now quantifies the typical short-term savings from authorized generics. .

Back in 2006, Merck had decided to sell Zocor to major managed care companies as an authorized generic, but priced lower than the versions from generic manufacturers with 180-days of exclusivity (Teva and Ranbaxy). As a result, the market price of simvastatin declined more quickly than it might otherwise have.

BTW, my original post will seem oh-so-much-more hilarious after you remind yourself about the ending of the Pixar movie Cars.

Here are the headline numbers from Chairman Leibowitz's Statement on the new FTC report:

Retail prices are on average 4.2 percent lower, relative to the pre-generic brand price, as a result of AG competition during 180-day exclusivity, and wholesale prices are on average 6.5 percent lower than pre-generic entry brand prices as a result of AG competition during 180-day exclusivity.

On the other hand, AG competition substantially reduces the revenue of a single generic company in competition with that AG during 180-day exclusivity. Estimates of the average decline in this situation range from 47 to 51 percent, which could result in a generic's loss of millions in revenue.

The Generic Pharmaceutical Association (GPhA) obviously opposes AGs (per this statement) given the second finding. I am aware of at least two bills (H.R. 573 and S.501) that would prohibit the marketing of authorized generics.

Nonetheless, the key conclusions and questions from my original 2006 post are still valid:

The short-term effect of Merck's move is clearly beneficial because the market price of simvastatin will decline faster, consistent with FDA research showing a correlation between more generic competition and lower prices relative to a brand.

However, the real risk comes from the long-term competitive effect on future ANDA filings. Will generic manufacturers be deterred in the future by the threat (real or implied) that the brand name competitor will reduce the value of the 180-day exclusivity period?

PBMs have been able to deliver substantial value to payers through generic substitution and estimate that each 1 percentage point increase in generic fill rate decreases plan sponsors' pharmacy spend by 1 percent. Gun-shy generic manufacturers will do long-term harm to PBM's ability to keep delivering savings.

So, is a dollar of savings today worth more than the chance that there won't be a dollar tomorrow?

The FTC will apparently address my key questions in a future report. Stay tuned in 2012?

Rite-Aid, Importation, and Obamacare

Here's a hand-picked selection of free-range news stories for your reading pleasure.

PhRMA’s Bold Gamble

Yesterday, President Obama announced a plan under which drug makers will forgo $80 billion in revenues over the next ten years by paying half the cost of prescriptions for patients in the Medicare Part D "doughnut hole." See:

• Drug Makers Trim Prices for Health Overhaul
  
• PhRMA Statement on AARP-White House Press Conference
  
• AARP Thanks President, Senate Leaders for Helping to Close the “Doughnut Hole”
  

As I see it, PhRMA has shrewdly slowed (but not stopped) the momentum behind harsher "reforms" such as Medicare Part D rebates (Get Ready for Part D Reform) or importation fairytales (Surprise! New Importation Bill Introduced). I suspect the reprieve will be short-lived as the pharmaceutical industry will be forced to make more quid pro quo deals with the government.

Wholesalers and the Generic Price War

Pharmaceutical Commerce just published my article on the risks to wholesaler profitability from the generic price war among retail pharmacies. You can read the article for free on the PC site: Drug Wholesalers and the Generic Price War.

My key point:

Cardinal-CVS Deal Almost Done

Last week, Cardinal Health's (CAH) CEO George Barrett strongly hinted that the company's brand drug wholesale supply contract with CVS Caremark (CVS) is almost done. As far as I know, this is the first public statement by any wholesaler about the status of this mega-contract.

As expected, Cardinal will face some "margin erosion" (their words) from the renewal as CVS flexes its buying power. See the "Pricing/Customer Renewals" section of Profit Headwinds for Cardinal Health for background or my 2007 post CVS' Channel Power for an example.

Mr. Barrett heavily qualified his comments, but the message seems pretty clear. Here's what he said:

There is actually a lot that I cannot say. And the reason I cannot say too much is that we are actually not done with this process. CVS has to run this not just with Cardinal but with other players in the mix.

Having said that, we are at very late stages. I have made some assumptions as we look at our early thinking about 2010 about that going forward. And I feel fairly comfortable that those conversations are going in the right direction, and that before long, we will say this deal is done. (emphasis added)

Still no word from McKesson (MCK), which has the mail supply business of Caremark and Pharmacare. Note that these agreements only focus on brand drugs because CVS Caremark buys generics directly from manufacturers, bypassing wholesalers. Again, see CVS' Channel Power.

You can read the full transcript for yourself at "Cardinal Health, Inc. at Goldman Sachs Global Healthcare Conference" on the Investor Relations page of their website. (Sorry, no direct link.)

BTW, I want to publicly thank Cardinal's investor relations team for providing so much useful stuff on their website. None of the other wholesalers provide meeting transcripts and some do not even post presentation slides in PDF format.

And in case you were wondering, neither George Barrett nor Tom Ryan are pictured in the photo above.

Specialty Spending Soars (for now)

The new report from the Federal Trade Commission (FTC) on follow-on biologics (FOBs) is a must-read for anyone interested in the future profitability of drug channels companies (pharmacies, wholesalers, and PBMs). Here's a link to the complete 120 page report:

Emerging Health Care Issues: Follow-On Biologic Drug Competition

The latest spending data for specialty drugs show why momentum for follow-on biologics (FOBs) is building.

These data come from the most recent drug trend reports of the three largest PBMs:

• 2009 Medco Drug Trend Report (Medco Health Solutions)
• 2008 Drug Trend Report (Express Scripts)
  
• 2009 Trends RX (CVS Caremark)

The biggest factor behind the specialty trend growth was price inflation, not utilization. For example, Express Scripts notes that price inflation for specialty drugs was 9.4% – three times the rate for traditional meds.

The new FTC report suggests that FOBs will provide a relatively modest price reduction, noting:

"Only two or three FOB manufacturers are likely to attempt entry for a given pioneer drug product. These FOB entrants are unlikely to introduce their FOB products at price discounts any larger than between 10 and 30 percent of the pioneer products' price."

I think that's too pessimistic. I'll have some comments next week on the economic implications of FOBs for drug channels, especially with regard to potential reimbursement and cost dynamics.

Importation Fanatics Get Snuffed Out

"A fanatic is one who can't change his mind and won't change the subject" – Winston Churchill

Our old friend Senator Byron Dorgan (D-ND) has once again tried to bring drug importation back from the dead. His latest maneuver failed, but the tenacity of importation fanatics remains impressive and scary.

The Senate is currently considering The Family Smoking Prevention and Tobacco Control Act (S.982), which would give the Food and Drug Administration (FDA) authority to regulate tobacco products under the Federal Food, Drug, and Cosmetic Act. The House version (H.R. 1256) passed 298-112, so FDA regulation seems inevitable.

Last week, Senator Dorgan proposed stapling the Pharmaceutical Market Access and Drug Safety Act (S.525) onto the tobacco bill. (See Surprise! New Importation Bill Introduced for background on the bill and its dangers.) Senator John McCain (R-AZ), who co-sponsored S.525 in March, joined the fray as described in Spat between Reid and McCain delays tobacco bill from The Hill. Industry blogs provided both pro (from eDrug Search) and con (from Drugwonks) viewpoints.

Late on Monday, Dorgan dropped his ridiculous attempt to add the drug importation to the tobacco bill, although Senate Majority leader Harry Reid reportedly said that importation will come forward for a Senate vote "very soon." (source)

I find it quite shameful that Senator Dorgan would link drug importation, which has a high probability of reducing public health, to the efforts at regulating a product with a clearly negative impact on human health. But then again, Dorgan has never seemed to have any shame as his consistent inconsistency on beef importation demonstrates.

Three other quick points:

• The only trade association reaction has been from NACDS (text of NACDS letter), which is developing a reputation as first out-of-the-gate in press response these days. Interesting.

• As it happens, I've been working with some companies in the tobacco industry to help them envision how their current distribution system might evolve – with the pharmaceutical industry as a possible model! Yes, I also find this to be one of the more ironic assignments in my consulting career.

• Although you didn't ask, Thank You For Smoking is a hilarious satirical movie (and an even funnier book) about lobbying and political correctness -- two thumbs up from this blogger!

Profit Headwinds for Cardinal Health

Cardinal Health (CAH) has had a tough week.

The roll-out of its shiny new wholesale business was tarnished by some bad news -- earnings will be down sharply in its next fiscal year starting on July 1. See Cardinal Health Sees FY10 Pressures, Then Momentum from Dow Jones for details.

Thursday's stock price was 17% lower than Tuesday's close. Ouch.

The company provided the following useful snapshot of the "headwinds" (their words) for the soon-to-be-independent wholesale distribution business. This chart appears as page 57 in the "Cardinal Health Analyst and Investor Day Presentation" file on the Investor Relations page of their website. (Sorry, no direct link.)

I've discussed some of these issues already on Drug Channels and (in more depth) in my 2009 Wholesale Distribution Economic Report on Pharmaceutical Wholesalers.

Here's some help decoding three items on the slide above along with links to previous blog posts.

"Pricing/Customer Renewals"

The elephant in the room remains the status of the CVS Caremark (CVS) brand drug supply agreement, which reportedly expires at the end of June 2009. CVS Caremark is now the single largest customer of the two largest drug wholesalers -- McKesson services the mail operations of Caremark and Pharmacare while Cardinal Health services CVS' retail operations. (See Wholesaler Impact of a Longs Drug Deal.)

The down arrow reflects the Golden Rule of the supply chain: Whoever has the gold makes the rules. Recall the comments by McKesson's Corporation's (MCK) CFO about "increased pressure on our sell-side margins" and the subsequent loss of two large customers? (See Wholesalers In the News.) Nonetheless, we still have no public statements about the status of the CVS Caremark contract.

"DSA Transition Timing"

Dave Yost of AmerisourceBergen (ABC) broke the news in a January earnings call that Pfizer had signed a fee-for-service deal with wholesalers beginning in January 2010. These agreements can limit a drug wholesaler's gross margin, although there are usually offsetting cash flow advantages. (See Drug Wholesalers and the Credit Crunch.)

Cardinal acknowledged its ongoing use of forward buying as recently as August 2007. (See Investment Buying: Not Dead Yet, although the link to the source article is in fact dead.) I have some future concerns about the increased bargaining leverage from larger post-consolidation drug manufacturers, although this does not appear to be a factor in FY10. (See My Comments on MRK-SCP.)

"Portfolio repositioning"

Cardinal is now trying to restructure its relationships with Medicine Shoppe franchisees, reversing a previously announced strategy of selling this business. Cardinal's drug wholesale business lost a fair amount of market share among independent pharmacies due to the 2007-2008 license suspensions. (See Cardinal: The Once and Future Wholesaler.) At one point, the suspensions had even prevented Cardinal from selling products to its own Medicine Shoppe franchisees. (See Cardinal's Latest DEA Deal.)

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There's plenty more to dissect from Cardinal's admirably compact summary of business challenges. I hope this post gets you thinking about any possible implications for your own business in (or with) the pharmacy supply chain. You know where to find me if you want to chat.

PBM Consolidation Ahead

Looking at some recent news stories, I see more consolidation among Pharmacy Benefit Managers (PBMs). Here are my 5 reasons.