Interpreting IMS’ Shiny Happy New Forecast

IMS Health raised its 2009 U.S. growth forecast last week to a range of +4.5% to +5.5% and its 2010 forecast to a range of +3% to +5%. See IMS Health Forecasts Global Pharmaceutical Market Growth. Recall that IMS was forecasting a 2009 decline of -1% to -2% just 6 months ago, although the upgrade is no surprise given recent sales trends.

I want to clarify precisely what IMS is projecting and speculate on how it relates to the margins and revenues of drugstores, wholesalers, and Pharmacy Benefit Managers (PBMs). I’m also curious to hear what you think about this new, more optimistic outlook.

WHAT IMS PROJECTS

The upgrade should be no surprise to anyone who has been following IMS’ weekly reports, same-store pharmacy sales figures, or the data feeds from their wholesalers. It’s also consistent with my prediction from October 2008 that the recession would not sink the industry.

IMS’ forecast refers to sales as measured by its National Sales Perspectives (NSP) data. NSP reports sales *into* the various distribution channels tracked by IMS. Thus, the data represent product purchases from wholesalers or manufacturers, not retail pharmacy sales to patients.

NSP represents sales at invoice pricing, not sales at a list price such as Wholesale Acquisition Cost (WAC) or Average Wholesale Price (AWP). Contract pricing, such as a discounts processed via a wholesaler chargeback transaction, are apparently reflected in the IMS NSP measures of price and sales. However, rebates paid by the manufacturer—to a health plan, PBM, Part D plan, Medicaid, or others—are not reflected in these data. The press release refers to these discounts as “off-invoice discounts and rebates.”

COMPARING TO VERSUS FROM

The chart below compares growth in retail pharmacy revenues (as reported by the NACDS Industry Profile) to growth in IMS NSP sales into retail distribution channels. Click to enlarge the chart.

As you can see, NSP sales grew faster than retail sales from 2005 through 2007 by an average of 73 basis points, but slower in 2008 by 34 basis points.

What happened? Well, no one knows for sure, but here are few possibilities:

• Any differences between the data series are statistical flukes. Oh well.
  
  
• Retail pharmacies built extra inventory in 2005 to 2007, and worked down those inventories in 2008. IMS cites “pricing flexibility and inventory management actions” for the new higher forecasts, but offers no further explanation.
  
  
• IMS is correcting an earlier underestimation of growth in the mass merchant and mail channels. See Prescriptions and the Economy: A Contrarian View from last October.

Another source of variation arises because NSP data do not reflect channel margins.

I estimate that generic drugs contributed $14 billion more in gross profits to pharmacies and wholesalers in 2008 than did brand drugs.

• Only 12% of pharmacy revenues from brand prescriptions goes to the channel (pharmacies and wholesalers), while the remaining 88% goes to the manufacturer.
  
  
• In contrast, more than half (51%) of the total pharmacy revenues from generic drug prescriptions goes to the channel.

See pages 16 to 20 of the U.S. Pharmacy Industry: 2009 Economic Report and Outlook for details behind these computations.

Anyone else care to share their insights to the new forecasts?

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FYI, journalist Ed Silverman has re-launched Pharmalot, a great source for pharma industry news. Welcome back, Ed!