See you in 2010!

Well, here we are, my 108th and final post for 2009. Thanks to everyone for your readership, comments, friendship, support and/or criticism. I hope you've enjoyed reading Drug Channels this year as much I enjoyed writing it.

Drug Channels will be back on January 4 with my Strategic Questions for 2010 along with our very first sponsor. In the meantime, I have something naughty and something nice to close out 2009.

Naughty and Nice News

Here's my December roundup of noteworthy news from the Drug Channels universe.

Find out who's been naughty and who's been nice at McKesson Corp. (NYSE:MCK). Plus, news about a new FTC commissioner who's not fond of Pharmacy Benefit Managers (PBMs); New York tries to save money with the AWP rollback; and the launch of a new mail-order pharmacy. Ho ho ho!

NCPA Responds to Drug Channels

My little ol’ blog caught the attention of the National Community Pharmacists Association (NCPA).

Yesterday, NCPA posted a response to Shhhh! Owning a Pharmacy is Very Profitable entitled Independent Community Pharmacy Today.

I’m flattered that NCPA has validated Drug Channels as a source of industry information worthy of rebuttal. Muchas gracias.

In keeping with my blogging philosophy (“Everyone is entitled to his own opinion, but not his own facts.”), I want to show you clearly why my computations are not “exaggerated,” as NCPA claims. Please note that NCPA’s response neither disputes my figures nor provides any alternative data. U.S. Census Bureau data on pharmacy margins further supports my conclusions.

I also want to clarify one point about the availability of the Digest’s financial data—although my original critique still holds true.

Finally, I want to remind you that I have no conflicts of interest—although my interest in facts can create conflicts.

Drug Importation: Dead Again

Importation is off the table (again). See Measure to Allow Drug Imports Fails.

The vote was 51-48 in favor (!) of the amendment, but the number fell short of the 60 votes required in the Senate so the amendment was defeated. Click here to see the roll call of votes by Senator.

Shhhh! Owning a Pharmacy is Very Profitable

You may not believe it, but independent pharmacy owners are doing financially quite well, averaging almost $300K in personal income in 2008.

This surprising fact comes from the Executive Summary of the 2009 NCPA Digest Sponsored by Cardinal Health. Click here for the NCPA's public Digest page.

Need further proof that times are good? The NCPA has marked the full financial results as “TOP SECRET.” So much for transparency!

I don’t begrudge the right of business owners to earn a profit. But perhaps pharmacy owners should tone down the woe-is-us rhetoric and stop blaming everyone else—the government, PBMs, drugmakers, third-party insurance, cylons, sunspots, whomever—for (supposedly) “low” profit levels.

CVS Wins a Big One Despite Mudslinging

In the news today: CVS Chosen for $1 Billion Contract to Manage Pharmacy Benefits.

I'm sure the folks in Wooksocket are breathing a sigh of relief ("Whoa.") after November's unexpected contract losses, although this win doesn't "prove" the benefit of a combined PBM-pharmacy chain model. (See CVS Caremark: Pharmacy Gain, PBM Pain.)

Myths and Facts about Drug Prices

The House Energy and Commerce Committee’s Subcommittee on Health held a hearing yesterday titled “Prescription Drug Price Inflation: Are Prices Rising Too Fast?” The hearing was sparked by the AARP’s recent report on prescription drug prices that I wrote about in Drug Prices and Pharmacy Profits.

The testimony revealed a major distortion in the AARP-Schondelmeyer price studies, which increasingly make climate research at the University of East Anglia seem like the pinnacle of accurate and unbiased scientific inquiry.

Importation: Review Your Agreements

Senator Byron Dorgan (D-ND) is trying to staple his infamous importation bill to the 2,000+ pages (and counting!) Senate health care bill and claims that Senate Majority Leader Harry Reid (D-NV) will allow a vote on it (per the Puffington Host).

The odds of commercial drug importation legislation are higher than anytime in recent memory. What would it mean in practice?

• Commercial buyers—drug wholesalers, brick-and-mortar pharmacies, mail-order pharmacies—will be sorely tempted to purchase brand-name drugs from overseas sellers.
  
  
• Pharmaceutical manufacturers will have a hard time structuring commercial agreements to reduce or block importation. Manufacturers will also have little choice about whether to do business with known US importers or non-US exporters.

Anyone getting ready to negotiate a wholesale or pharmacy distribution agreement—buyers and sellers—should be paying attention to the language in the importation amendment.

Genzyme's Troubles Will Help Prescott's Vaxafilth

In this short video clip, Dr. Stephen T. Colbert, D.F.A., discusses how manufacturing problems at Genzyme (NASDAQ:GENZ) will aid the upcoming launch of Prescott Pharmaceuticals' new Vaxafilth product. Isn't it time that filth wallowed in you?

Full disclosure: Prescott is one of my consulting clients. I advised them on the trade strategy for Vaxadrin.

Will Caterpillar trigger a pharmacy price war?

Here’s a follow-up thought to CAT Rolls Out Preferred WAG-WMT Pharmacy Network.

Will Caterpillar (NYSE:CAT) allow Wal-Mart (NYSE:WMT) and Walgreens (NYSE:WAG) to compete on price within the network?

If so, Caterpillar will reap even bigger savings than initially projected at the expense of pharmacy profits at Wal-Mart and Walgreens.

CAT Rolls Out Preferred WAG-WMT Pharmacy Network

Equipment maker Caterpillar (NYSE:CAT) has begun rolling out a pharmacy network made up primarily of Wal-Mart (NYSE:WMT) and Walgreens (NYSE:WAG) pharmacies. Their move is a logical outgrowth of the cost-plus deal that I discussed in CAT + WAG = More Momentum for Cost Plus.

I want to review some newly-public details of their program, which starts in January 2010. Based on my reading of the plan design, this set-up will increase market share for Wal-Mart and Walgreens. Look for copycat deals in 2010 and 2011 if CAT can evolve this network strategy into a beautiful butterfly.

As always, Pembroke Consulting retainer clients can contact me for additional thoughts on this topic. Gerson Lehrman Group customers can make a request via their GLG client representative.

Stuffing Yourself with Noteworthy News

Here are 3 interesting articles to go with your cranberry sauce. No more blogging this week because of the holiday.

Have a Happy Thanksgiving!

A New Opportunity to Reach the Drug Channels Audience

Many people ask me about the readership of Drug Channels. This post shares new details about the companies visiting Drug Channels along with traffic statistics since March 2007.

I am also announcing the availability of two sponsorship opportunities for companies interested in connecting with the Drug Channels community. The number of sponsors will be limited to two companies at any one time and will be allocated on a first-come, first-served basis. I include some high-level details below, but drop me a line to discuss the opportunity.

Regular readers shouldn’t fret—I won’t compromise the content for sponsorship.

Drug Prices and Pharmacy Profits

I’m sure most of you read Sunday’s New York Times article on drug prices: Drug Makers Raise Prices in Face of Health Care Reform.

The NYT story is based on the AARP’s latest analysis of prescription drug list prices: Rx Watchdog Report: Drug Prices Continue to Climb Despite Lack of Growth in General Inflation Rate.

Comparing list prices for a single product category to a computed, non-list price index for a broad basket of goods (CPI-U) is mathematically illogical. After all, the CPI-U for prescription drugs increased at a rate less than half the rate of list prices. But we all know appropriate comparisons don't get you on the front page of the New York Times.

Anyway, let’s assume the AARP computations are mathematically accurate and consider the following Drug Channels-related question:

Have pharmacy profits from brand drug prescriptions gone up, gone down, or stayed the same as average list prices have increased?

The answer may surprise you.

Healthcare Reform Options for AMP

Have you been wondering what’s going on with our old friend Average Manufacturer Price (AMP)?

Never fear, Drug Channels is here!

I recently came across a useful summary from the law firm of Reed Smith in Health Reform Update: Focus on Prescription Drug Price Regulation. See the second page of their briefing for an overview of how AMP would be handled under the House or Senate healthcare bills.

To understand the business implications of AMP, I humbly suggest that you read the sections titled “Risks to the Superior Profitability of Generic Drugs” and “Replacing the Average Wholesale Price Benchmark” in my U.S. Pharmacy Industry: Economic Report and Outlook.

PBMs Go Global for Growth

Express Scripts (NASDAQ: ESRX) is featured in an unusual press release from Chinese company SeaRainbow Holding Corp., Ltd. (SZSE: 000503) announcing Express Script's entry into the fast-growing China market. See Express Scripts, SeaRainbow to Pioneer PBM Business in China.

There will be plenty of growth for Pharmacy Benefit managers (PBMs) in the good ol’ US of A, especially given current health reform proposals and prospects for PBM consolidation. But the global opportunity is even bigger because those markets are much less sophisticated in the management of pharmacy benefits, especially when it comes to generic dispensing rates. Injecting PBMs into the evolution of emerging markets will accelerate convergence with more established markets.

I’m not so sure that manufacturers of brand pharmaceuticals will be cheering the creation of a global PBM industry, although it could be a big positive for generic drug makers.

Gray Market: I'm Not Dead Yet

Secondary market appears to be alive and well. Whether or not patients remain alive and well is a whole different question.

Check out Profiteers peddling flu vaccine from newspapah-of-recahd The Cape Cod Times, which notes:

The seasonal flu vaccine is in short supply, but licensed pharmacists and medical professionals can purchase it on a so-called "gray market" — for as much as eight times the manufacturers' original price.

Unfortunately, the illegitimate secondary market will exist as long as there are willing buyers for products with questionable heritage.

Manufacturers and the Evolving Pharmacy Channel

Pharmaceutical Commerce just published my article on the implications of the evolving retail pharmacy industry for pharmaceutical manufacturers. You can read the article for free on the PC site: The Evolving Retail Pharmacy Channel: Implications for Manufacturers.

The article is based on my U.S. Pharmacy Industry: Economic Report and Outlook.

CVS Caremark: Pharmacy Gain, PBM Pain

CVS Caremark disclosed unexpected problems in its PBM business yesterday, spooking investors and sending its stock down by 20%. See Dow Jones’ coverage: CVS' Pharmacy Benefit Struggles Renew Merger Benefits Debate

Judging by the financials, it sure looks like CVS Caremark has sacrificed its PBM business for the benefit of the retail pharmacy business. They are also having trouble explaining how a PBM customer gains when a brick-and-mortar pharmacy is paired with a benefit management business.

Adding insult to injury, CVS Caremark also disclosed that the Federal Trade Commission (FTC) has opened a formal inquiry into its business. Ouch.

Pembroke Consulting retainer clients and Gerson Lehrman Group customers should feel free to schedule phone calls with me for additional comments beyond what's in this post.

Dilbert on Drug Marketing

As a follow-up to Tuesday's post, management guru Scott Adams shows how promotion by a pharmaceutical manufacturer affects physicians' prescribing decisions.



Of course, this topic may not be funny for much longer given 40,000 recently announced job cuts by Johnson & Johnson, Pfizer, and Astra-Zeneca or the 16,000 cuts planned by Merck.

How Generics Change the Market

I just came across an intriguing new study that examines how generic drug entry affects prescription volume and manufacturer revenues. See TIME RELEASE: The Effect of Patent Expiration on U.S. Drug Prices, Marketing, and Utilization by the Public

The paper poses an interesting question and contains some neat data on post-generic market evolution—brand market share, prices, promotional expenses. I’m a bit underwhelmed by the author’s conclusions. So, I suggest that you enjoy the pretty pictures and perhaps incorporate the conceptual ideas into your forecasting models.

Noteworthy News Stories

Here are some worthwhile articles for your reading pleasure. As always, I welcome story links from Drug Channels readers.

As a special treat, I am including a picture of my Halloween costume at the bottom of the post. Happy Halloween!

Should pharmacies be liable for stupid patients?

Yesterday’s Wall Street Journal had a scary cover story titled Case Spurs Pharmacies' Fears of Lawsuits Over Drug Abuse. (Click here for a free summary if you can't access the article.)

The article describes a lawsuit against a group of pharmacies for dispensing prescription painkillers to a woman who killed someone while driving high on hydrocodone.

Just my $0.02, but I think it’s ludicrous to pin the blame on a pharmacy for the deranged behavior of one consumer. The pharmacy chains are being dragged into this case because they have deep pockets, not because they should be responsible for the tragedies described in this article.

Best Of

There are almost 400 posts on Drug Channels. New readers often ask me for a list of the "best" ones.

Here is my periodically updated selections. Unfortunately, some of my best posts were very timely and/or humorous analyses of news events, which means those posts now sound quite dated and sort of lame.

I am listing the best posts for answering the top questions that people ask me. As far as I know, these posts are still valid although some of the information may have been superseded by new developments.

I wrote the U.S. Pharmacy Industry: Economic Report and Outlook to provide an integrated analysis of these (and other) questions. You should check it out for more details.

Who are the biggest pharmacies?

• 2008 Pharmacy Market Share Data

How much money do pharmacies make?

• Pharmacy Profits and Wal-Mart
  
  
• Two Great New Resources on Pharmacy Economics
  
  
• Drug Channel Profits in 2009's Fortune 500 list
  
  
• Pharmacy Profits & Part D

Who does (and will) pay for prescription drugs in the U.S.?

• Who Will Pay for Prescription Drugs?

What are the economics of mail-order pharmacy?

• A Phony Mail Order Controversy
  
  
• Pharmacists Can't Get No Satisfaction from Mail
  
  
• Reality Check on Mail Economics

What is Wal-Mart's strategy in the pharmacy industry?

• Wal-Mart Explains Its Healthcare Strategy
  
  
• The Impact of Walmart's National Mail Pharmacy
  
  
• Wal-Mart Aims at PBM Mail Profits
  
  
• New details on WMT-CAT Pharmacy Deal
  
  
• Wal-Mart's PBM Game Plan

What's going on with Average Wholesaler Price and First Databank?

• AWP Goes Boom
  
  
• What Happens When AWP Goes Boom?
  
  
• Farewell, AWP
  

What is the controversy about CVS Caremark's Maintenance Choice program?

• The Odd Economics of Maintenance Choice
  
  
• A Glimmer of Synergy at CVS Caremark
  
  
• Debate Over CVS Caremark's Tactics Heats Up

Please let me know if I missed one your favorites.

Adam

Drug Channels Earnings Calendar

In an unusual confluence of the calendar, the big 3 drug wholesalers and big 3 pharmacy benefit managers (PBMs) will all be reporting their latest financial results on 4 of the next 9 days. These financial reports and accompanying conference calls provide invaluable insights into the strategies and economics of companies within U.S. drug channels.

As a service to Drug Channels readers, I'm providing a brief rundown of the upcoming calendar along with links to the earnings conference call webcasts for each company. If you don’t have time to listen to the calls, free transcripts show up on Seeking Alpha within a few days.

Pembroke Consulting retainer clients should feel free to contact me for post-game analysis on any of these reports. Gerson Lehrman Group customers can make a request via their GLG client representative.

Medco Takes on Eli Lilly

Yesterday, Medco Health Solutions (NYSE:MHS) announced its intention to launch a comparative effectiveness study of Bristol-Myers Squibb’s Plavix® versus Eli Lilly’s Effient®. See the press release.

Why, you may ask, would a Pharmacy Benefit Manager (PBM) want to conduct a clinical trial?

Big hint: Effient was approved in July 2009. Plavix will be subject to generic competition in 2011.

Now, can you guess which of the two products will be simultaneously less expensive for payers and more profitable for Medco?

Healthcare Reform: Bullish for PBMs, but Not Pharmacies

"a brand-new market for Medco to serve”

That’s the view on the Senate’s health reform proposal from David Snow, CEO of Medco Health Solutions (NYSE:MHS) as reported yesterday in CEOs Tally Health-Bill Score.

Right now, it looks like healthcare reform will benefit Pharmacy Benefit Managers (PBMs) by expanding coverage. Retail pharmacies would benefit from increased prescription volume but will likely see gross margins drop as the uninsured get the advantage of third-party bargaining power.

Provider Pain in the Healthcare Supply Chain

The State of Healthcare Logistics: Cost and Quality Improvement Opportunities is a worthy new study highlighting successes and challenges for the healthcare supply chain. Download it for free here.

As I summarize below, the findings highlight how providers struggle with missing data standards and stubbornly high inventory costs.

The report got me thinking about the future of the specialty pharmaceuticals distribution channel. I see an emerging opportunity for manufacturers to use their supply chains as a new source of competitive advantage, especially as payers limit provider’s profitability for injection/infusion therapies under traditional buy-and-bill systems.

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.

Scoring the CBO

Must-read editorial in the Wall Street Journal this morning on the flaws in the CBO’s scoring of the Baucus health care bill. Check out The Greatest Show on Earth.

“Behold: a new $829 billion entitlement that will subsidize insurance for tens of millions of people—and reduce deficits by $81 billion at the same time. In the next tent, see the mermaid and a two-headed cow.”

Perhaps this article will distract you from the, um, unexpected WTF news that President Obama won the Nobel Peace Prize. This is not a joke. See the video below.

A Phony Mail Order Controversy

Are consumers satisfied with mail-order pharmacies?

The J.D. Power and Associates 2009 National Pharmacy Study shows high average satisfaction at mail-order pharmacies. Yet the National Community Pharmacists Association (NCPA) issued a press release immediately after the J.D. Power results claiming Patient Survey Finds Widespread Problems With Mail Order Pharmacies.

Drug Topics magazine duly reported on the “controversy” of these supposedly “conflicting results.”

Now, I don't want to get off on a rant here, but it’s inaccurate and intellectually dishonest to compare the NCPA’s aggregation of “just over 400” independent pharmacy customers' viewpoints with J.D. Power’s statistically sound survey of 12,215 pharmacy customers. And I will gladly debate any pharmacy school professor who wants to defend the statistical reliability of NCPA’s methodology.

A Peek at Drug Wholesalers' Economics

If you sell to (or buy from) drug wholesalers, you should consider buying the new 2009-2010 HDMA Factbook, just released by the research arm of the drug wholesaler’s trade association.

This report is valuable for anyone who negotiates with or analyzes drug wholesalers, although you’ll need to be careful when interpreting the reported statistics. I note a few highlights about drug wholesalers' profitability below and suggest two creative uses of the data.

Unfortunately, I must qualify my purchase recommendation because HDMA has decided not to make the report available as an electronic PDF document. Huh?

CVS' Losses in 2010 Part D Enrollment

Last week, the Centers for Medicare & Medicaid Services (CMS) released information about Medicare Part D stand-alone prescription drug plans (PDPs) available in 2010. Click here to view the raw CMS plan data.

The surprising news comes from CVS Caremark's (NYSE:CVS) loss of 30 to 35% of its Low income Subsidy (LIS) Part D members. This drop will reduce earnings per share for the company. See CVS Caremark Statement Regarding Results of 2010 Medicare Part D Bidding Process.

Here’s a quick look at what happened last week. I’ll save my speculations on the status of CVS Caremark’s PBM business for another day.

CVS Gets Ahead of Walgreens...with Chia Obama!

CVS Caremark (NYSE:CVS) has made a bold strategic move that puts it head and shoulders above rival Walgreen (NYSE:WAG) in the all-important Presidential Decorative Planter Category (PDPC).

Yes, you guessed right. CVS stores will soon begin stocking the Obama Chia.

This is not a joke. See the video below.

Walgreen's Future Profit Potential

Walgreen (NYSE:WAG) posted better than expected sales and announced major progress in its cost-cutting efforts, leading its stock to pop about 10% on Tuesday. Here’s the official release: Walgreen Co. Reports Fourth Quarter 2009 Earnings of 44 Cents Per Diluted Share

Walgreen’s strategic moves are in sync with two important industry trends that I analyze in my (hint, hint) new U.S. Pharmacy Industry: 2009 Economic Report and Outlook:

• The growing advantage of low-cost prescription fulfillment
• The expansion of channel-neutral dispensing models

Both factors—dispensing efficiency and integrated models–also position Walgreen's for more cost-plus deals a la Caterpillar/Walgreens/Wal-Mart.

Download My New Pharmacy Industry Report

I am pleased to announce the release of my new downloadable report U.S. Pharmacy Industry: 2009 Economic Report and Outlook. Here’s the Dow Jones story: Report: US Pharmacy Revenues To Surpass $350 Billion By 2015.

I’m really proud of the report and think you’ll find it to be a valuable planning tool. I want to tell you a bit about the content and give blog readers a sneak peek at the seven major trends.

I also want to offer something special for you, my blog readers. I will randomly select 5 of first 25 Corporate License purchasers for a confidential 60 minute conference call with me to review the report with your team.

AWP Goes Boom

Tomorrow’s the day that First DataBank’s Average Wholesale Price (AWP) goes boom. See What Happens When AWP Goes Boom for background.

My view is that there's not going to be much of a difference after Sept. 26. As I see it, the net impact on total U.S. drug spending will be relatively small and certainly far below the initial multibillion-dollar predictions from a few years ago.

The Medicaid issue is more complex, but not fatal. So far, New Jersey has already announced a reimbursement change that will partly neutralize the impact. (See this NACDS press release.)

And as for the future of AWP? I'm still skeptical that this benchmark will survive too much longer.

Wal-Mart Explains Its Healthcare Strategy

The latest issue of Health Affairs has a fascinating insider’s view on how Wal-Mart views healthcare services (including pharmacy dispensing). Read it here: Removing Costs From The Health Care Supply Chain: Lessons From Mass Retail

The article's subtitle says it all: “Many standard health care products and services should be ‘commoditized’—and priced accordingly.”

Translation: Pharmacies should be ready to compete on price, not just customer satisfaction.

It’s important to understand Wal-Mart's message although I doubt many pharmacy owners (and even some PBM executives) will agree with it.

PBM Consolidation Ahead (redux)

In early June, I laid out the five reasons why I expect PBM Consolidation Ahead.

The prospects for more consolidation seem even higher now, especially in light of recent news about CVS Caremark (CVS) and Medco Health Solutions (MHS). I also think that health care reform will end up being a net positive for the PBM industry, increasing the need for more scale.

I estimate that the big three PBMs – CVS Caremark (Pharmacy Services), Express Scripts, and Medco Health Solutions – will process about 45% of all prescriptions filled in a retail drug store in 2009. I would not be surprised if that figure hits 60% by 2014.

Pharmacists Can't Get No Satisfaction from Mail

Hot on the heels of Walmart’s mail pharmacy announcement, the National Association of Community Pharmacists (NCPA) issued a statement highlighting the purported dangers of using any type of mail pharmacy: Despite Wal-Mart's Assertion, New Mail Order Program Will Not Benefit Patients.

But at the risk of further annoying the irate independent pharmacists who post comments on this blog, I regret to inform you (and NCPA) that the facts do not show mail pharmacy to be an inconvenient, patient-killing scam.

Baucus Bill: Weighted AMP+75%

Senate Finance Committee Chairman Max Baucus officially released the text of a massive health care reform bill. Read the full text of the Baucus plan – 223 pages of wonky goodness.

The “Changes to Medicaid Payment for Prescription Drugs” (page 55) sets the Federal Upper Limit (FUL) to the weighted Average Manufacturer Price (WAMP?) x 175%, i.e., WAMP+75%.

Quick reaction: While 175% is less than 250%, I expect WAMP to be greater than AMP, especially since the proposal excludes mail order pharmacies. Seems like a victory for the pharmacy groups that lobbied for an increase, although I predict they will still ask for more.

The Impact of Walmart's National Mail Pharmacy

Walmart just went national with its mail pharmacy program, an outcome that I had predicted in May when the company launched its initial trial in Michigan. Details here: Walmart Expands Access to Affordable Prescriptions Nationwide. Walmart is offering 300 generic prescriptions for $10 each and more than 3,000 other brand and generic prescriptions with free mail delivery.

This announcement expands the retail pharmacy price war over generic drugs, puts further pressure on pharmacy margins from cash-pay customers, and sets the stage for more cost-plus deals. More intriguingly, it portends an emerging strategic convergence between Walmart and CVS Caremark. Yes, you read that correctly.

Pharmacies Sued for Making Money on Generic Drugs

Here’s an unusual case that I haven't seen reported anywhere else.

Two small health plans in Minnesota are suing pharmacies for making higher profits on generic drugs than on brand name drugs. Perhaps the attorneys went to the Lake Wobegon School for Pharmacy Management. (“All the pharmacists are strong, all the technicians are good-looking, and all the profits are above average.”)

While I have no idea whether the legal claims have any merit, the case again highlights the risks to the superior profitability of generic drugs for pharmacies and Pharmacy Benefit Managers (PBMs).

Two Great New Resources on Pharmacy Economics

Last August was not just a time for rioting about health care reform in a town hall meeting. It was also the month in which two great new resources on pharmacy economics were released.

Sure, the release of these reports was perhaps not comparable to the excitement surrounding Wednesday's release of The Beatles: Rock Band. Nevertheless, this self-confessed pharmacy economics geek (but in a good way!) suggests you check out both reports.

What Happens When AWP Goes Boom?

Enough about Obamacare -- let's talk about something closer to home.

In just 12 days, the Great 4% AWP Rollback begins. From what I hear, many pharmacies, PBMs, and health plans are adopting (or are negotiating) contractual “equivalency formulas” that will maintain constant dollar reimbursements to pharmacies. So I'll offer you a few thoughts on the post-September 26 situation.

Medicaid is another story and will likely mean real cuts. Unfortunately, this episode shows that it’s never too late to exaggerate the impact of a reimbursement cut.

THE LONG GOODBYE

I'm sure almost everyone is familiar with the circumstances here, but if not, read Farewell, AWP.

Briefly, the settlement of the New England Carpenters Health Benefits Fund, et al., v. First DataBank, Inc. and McKesson Corporation case requires First DataBank (FDB) to reduce the AWP mark-up from 1.25 to 1.20 times the Wholesale Acquisition Cost (WAC) for approximately 1,400 NDCs identified in the litigation.

Although the settlement doesn't require it, FDB plans to set the mark-up at 1.20 for all drugs independent of the litigation on September 26, 2009. This roll back of the WAC-to-AWP spread translates mathematically into a 4% reduction in their AWP.

FDB also intends to stop publishing AWP data no later than two years following the date that the rollback adjustments are implemented, i.e., no later than September 26, 2011. First DataBank has stated that it will continue to publish non-AWP drug pricing information, including WAC, Direct Price, and suggested wholesale price. Visit http://www.firstdatabank.com/Support/awp-communications.aspx for more details.

Since payers still widely use AWP as a drug reimbursement benchmark for pharmacies, the settlement affects the economics of providers that were not directly involved in the lawsuit or settlement. Many pharmacy groups have been strenuously objecting to the settlement. In June 2009, NACDS and FMI filed another legal brief challenging the settlements that reduce AWPs. However, the United States Court of Appeals for the First Circuit upheld the settlement, paving the way for the 4% rollback will occur on September 26.

BTW, there’s still some dispute about how much pharmacies have benefited from the initial mark-up change back in 2002. Judge Saris was withering in her March decision, writing that “[T]hese pharmacies … were unjustly enriched when drug prices were fraudulently inflated during the scheme, yet they have not been asked to disgorge their profits.” (See Farewell, AWP.) Many pharmacists disagree with this statement, although I have not seen any hard evidence one way or the other.

WHAT MIGHT HAPPEN AFTER SEPTEMBER 26?

Here are a few thoughts on the near-term outcomes.

• The market will adapt and pharmacies will be OK. Despite any alleged “enrichment,” many participants in the private market seem to be recomputing so that there will be a limited impact on pharmacies. This should not be news to anyone. Don’t believe me? Then take the wayback machine to my October 2006 post Additional Comments on the AWP settlement, when CVS (among others) seemed confident of its ability to renegotiate. At the time, the plaintiff’s expert argued that market participants would *not* be able to renegotiate, although that view now seems incorrect.


• AWP is not dead yet. AWP continues to be the most widely used benchmark for brand drug reimbursement. I presume that other publishers will step in to fill the gap left by First DataBank and Medi-Span. Thomson Reuters, which publishes the Redbook, already uses a 1.20 WAC-to-AWP mark-up in their AWP Policy. A source there told me that Thomson Reuters has no plans to change the methodology or stop publishing AWP.


• We’ll always have WAC. Some public payers have already begun to shift to the alternative list price benchmark of WAC, such as the Department of Defense (Big WAC Attack). Nine state Medicaid programs already incorporate WAC into the ingredient cost reimbursement formula. Of course, WAC doesn’t necessarily represent the price paid by any entity within the distribution system either, so shifting to WAC just kicks the can down the road.


• We still need a credible alternative. Personally, I think that dissatisfaction with list-price benchmarks will ultimately lead to reimbursement models based on actual transactional pricing data, such as the Caterpillar-Walgreens agreement. However, there is not yet a viable published “average price” available for payers to use in computations. Stay tuned for more on this topic.

WOULD YOU BELIEVE …. ?

Now we come at last to Medicaid, which consistently provides the most generous reimbursements to retail pharmacies for generic drugs. See this February 2009 OIG report or Pharmacy Profits and Wal-Mart for some evidence. (Hey, I don't make this stuff up.)

The government doesn’t move quite as fast as the private sector, so there’s little time to adjust the various state Medicaid prescription reimbursement methods. Also, states aren’t particularly motivated to act quickly given the potential budget savings.

How much is at risk? Well, I guess that depends on how close we get to the deadline.

• At the August NACDS meeting, NACDS Senior Vice President and General Counsel Don L. Bell II estimated a $68 million reduction per year from Medicaid. (See page 3 of his presentation.)


• In a letter this week to CMS head honcho Kathleen Sebelius, NCPA and NACDS cite a “conservatively-estimated loss of more than $350 million each year.” (See page 2 of their letter.)

Gosh, one month makes a big difference, doesn’t it? Good thing that it's only taxpayer's (our) money, right?

Regardless of whether CMS reacts, I hope that the OIG looks into whether pharmacies gained from the initial 2002 increase or would have lost (or did lose) from the 2009 rollback. Facts never hurt anyone.

CAT + WAG = More Momentum for Cost Plus

What is Caterpillar smokin’? It must be strong because the company is trying hard to transform the economic reality of the pharmacy industry.

Two weeks ago, Walgreens announced a direct-to-payer agreement with Caterpillar that would use a cost-plus pricing model for prescriptions filled at Walgreens’ pharmacies starting in January 2010. See Walgreen to Provide Prescription Drugs for Caterpillar Workers.

This deal provides further momentum for cost-plus pharmacy reimbursement. Maybe the industry is falling down the rabbit hole into a fantasy world…or maybe the future is arriving sooner than expected. Here’s my take on what direct-to-payer, cost-plus deals could mean for drug channels along with some cautionary words on the longer-term impact.

Drug Channels XR: New and Improved!

Welcome back! Drug Channels is now back in session.

As you can see, I spent time over the summer fixin' up the joint. In the spirit of the pharmaceutical industry, let's call it Drug Channels XR – a new formulation that will keep you away from those pesky copycats.

Here's a quick rundown on some new features, coming attractions, and an explanation of why I won't be twittering (or tweeting) anytime soon.

A QUICK TOUR

I have redesigned and updated the entire Drug Channels site. All of the content is still here, but you should find it much easier to access and share everything. Notable new features:

1. Two Sidebars = Twice the fun!

2. Social media: The button at the bottom of each post will allow you to easily email any article or post it to your favorite social networking site (Twitter, Facebook, LinkedIn, et al). I hope you find my posts worthy of sharing.

3. LinkedIn? Yup, I've jumped on the bandwagon and have an account at http://www.linkedin.com/in/adamjfein. I accept almost all invitations, so please feel free to connect with me.

4. Print this Post: When online just isn't good enough, you can now efficiently deforest the planet (but now with better formatting).

5. Improved search: DC now has an integrated Google blog search engine, which is much faster and more comprehensive than the old search feature.

I've tested the site with multiple browsers and operating systems, but please let me know if you encounter any problems using the new site.

COMING ATTRACTIONS

Despite what you might believe about my glamorous life as a surfer, I was actually working all summer. I'll hit a few developments from summer 2009 in upcoming posts. You may find this summary list to be a helpful guide:

• Inglourious Basterds (An update on the rational, reasonable health care reform debate)

• The Hurt Locker (Defusing the AWP time bomb)

• Star Trek (Walgreens boldly goes into a cost-plus deal)
  

• Transformers 2: Revenge of the Fallen (Pharmacies push anti-PBM legislation)

• District 9 (Relocating that pesky AMP problem)

• The Hangover (Huh? How did I get here? Walmart is doing what?!?)

• Julie & Julia (Cooking up some online counterfeit drug fun)

The number one most requested item from my April reader survey (91% of respondents) was "A downloadable report written by Dr. Fein on future trends for the retail pharmacy industry." As you wish! Stay tuned for the official announcement in a few weeks.

WHAT, NO TWITTER?

So far, I have resisted the siren chirp of this new platform, especially when I learned that MC Hammer has 1.4 million followers. (Really.) I'm not opposed to it, I'm just too darn busy to be interrupting you (and me) all the time. (Insert "MC Hammer must have time on his hands" joke here.)

Nevertheless, you can follow me http://www.twitter.com/adamjfein, although I have not tweeted yet. Maybe I never will. (UPDATE: You can now follow the blog at http://www.twitter.com/DrugChannels.)

In the meantime, please enjoy this very revealing interview of Twitter co-founder Biz Stone by pundit Stephen Colbert. A familiar business strategy for pharma?

Stone: "It's the messaging service we didn't know we needed until we had it."

Colbert: "That sounds like the answer to a problem that we didn't have until I invented the answer."

FYI, I monitor the twitterverse using a clever little application called TweetDeck. Caveat tweetor.

Blogcation! See you at NACDS?

Well, it is that time of year again. I am taking my usual two-month break from blogging, a.k.a, a blogcation. Yes, I'm sorry to report that your subscription fees only covers 10 months of Drug Channels.

Drug Channels is now read by almost 5,000 people each month (and gets almost 12,000 unique visits monthly). Obviously, I only know only a small fraction of you. If you haven't done so, please send me a message if you'd like to chat on the phone or even meet in person at the NACDS meeting in August. (I'll be working during most of July and August despite the blog's summer hiatus.) I'd be pleased to discuss how I help people understand this evolving industry and develop strategies to deal with it. Plus, meeting me in person at NACDS may convince you that I am not just a computer generated avatar.

My summer reading list from 2008 is still worthwhile if you are looking for something wonky to bring to the beach. See Summer Reading. If those books are not enticing enough, you can always revisit some of the most popular and controversial Drug Channels posts from 2009 (in chronological order):

• Who Will Pay for Prescription Drugs?
  
  
• Drug Channel Profits in 2009's Fortune 500 list
  
  
• Is Walgreens planning a direct-to-payer deal?
  
  
• Wal-Mart Aims at PBM Mail Profits
  
  
• Reality Check on Mail Economics
  
  
• The Odd Economics of Maintenance Choice
  
  
• Profit Headwinds for Cardinal Health
  
  
• PBM Consolidation Ahead
  
  
• 2008 Pharmacy Market Share Data

I'll be back to blogging after Labor Day. Have a great summer!

Adam

Frequently Asked Questions (FAQs)

THE QUESTIONS

1. What are “Drug Channels”?
2. What topics do you cover on Drug Channels?
3. Why do you write this blog?
4. Who reads Drug Channels?
5. Who are your clients?
6. Do you discuss confidential or non-public information on Drug Channels?
7. I’m an investor. How can I schedule a call with you?
8. Do you invest or own stock in the public companies that you mention?
9. Aren’t you just a shill for…?
10. Can you suggest some good books about the pharmaceutical industry?

THE ANSWERS

1. What are “Drug Channels”?

This blog is about marketing channels for pharmaceuticals (aka drugs). Marketing channels are the routes to market used to sell every product and service that consumers and business buyers purchase everywhere in the world. A channel is a set of interdependent organizations involved in the process of making a product or service available for sale. (Source: Marketing Channels.)

The companies and organizations in the channel successfully ensure that prescription drugs manufactured in truck-load quantities ultimately end up being delivered and dispensed in an appropriate quantity – say, a bottle with 30 pills – to an individual patient. There are three primary channel flows within the U.S. pharmacy distribution and reimbursement system:

• Product movement, which covers bulk distribution from pharmaceutical manufacturers to the drug wholesalers that supply pharmacies. A pharmacy marks the final step when a prescription is dispensed to a patient.
  
  
• Financial flows, which transfer money from third-party payers to Pharmacy Benefit Managers (PBMS), who in turn reimburse pharmacies. Funds flow to manufacturers via pharmacies, which purchase drugs from wholesalers.
  
  
• Contractual relationships, which govern the relationships between payers and PBMs; PBMs and pharmacies; pharmacies and wholesalers; wholesalers and manufacturers; and manufacturers and PBMs.

Hence, Drug Channels.

2. What topics do you cover on Drug Channels?

Every year, Americans fill nearly four billion prescriptions. The companies that facilitate the supply, dispensing and payment of our drugs – pharmacies, insurance companies, pharmacy benefit managers (PBMs), supermarkets, mass merchandisers, and drug wholesalers – absorb more than one-quarter of the $250 billion spent in the U.S. on outpatient prescription drugs.

Drug Channels provides an accessible behind-the-scenes look at this highly dynamic part of our health care system. I also examine the ways in which these companies affect – and are affected by – brand and generic pharmaceutical manufacturers.

Given the regulatory and financial role of the government, I also spend a considerable amount of time looking at regulations and legislation that deal with issues such as pharmacy reimbursement, pedigree, Part D, etc. You can see a list of topics on the left hand side of the page.

You should also check out my occasionally updated Best Of list.

3. Why do you write this blog?

The traditional drugstore has evolved into a complex network of multi-billion-dollar public corporations that manage the distribution, dispensing, and payment of our prescriptions. The strategies and decisions of the companies in the pharmacy industry affect us all: which drugs our insurance plans cover; where we will fill our prescriptions; how much we will pay out of our own pockets; and our likelihood of choosing a generic drug.

I make Drug Channels freely available as part of my mission to educate, inform, and challenge people about this system. I feel fortunate to have been similarly educated in many private emails and conversations that were sparked by the blog.

The discipline of writing a blog also forces me to stay current with new developments, which helps keep me energized and engaged. I have fun thinking about ways to use Spinal Tap or Monty Python references!

Of course, the blog has turned out to be an unexpectedly valuable tool to build my practice. Existing clients read the blog and contact me for “the inside scoop” and specific application to their business. I have also “expanded the envelope” by writing about a wide range of topics, allowing me to generate new conversations with existing clients and add new types of clients.

So, as long as a few readers hire me for consulting work or speaking engagements, then I can afford to pay my mortgage and keep this site free for everyone else.

4. Who reads Drug Channels?

Drug Channels is written for anyone who wants to understand how the pharmaceutical industry works. Based on domain names from web traffic logs, the blog is widely read by people at companies throughout the healthcare industry, including (but not limited to):

• Manufacturers
• Drug wholesalers
• Pharmacies (all types)
• Investors
• Insurers
• PBMs
• Providers
• Payors
• Government agencies
• Law firms

Click here to see a list of domain names that visited Drug Channels. As you can see, it's a Who's Who of the industry. You can view summary traffic stats at the bottom of the right hand sidebar.

5. Who are your clients?

Pembroke Consulting's clients are senior executives seeking to make better strategic and tactical decisions for their companies. My clients are executives at manufacturers of pharmaceuticals, biopharmaceuticals, or medical devices. I also work with trade associations, technology companies, law firms, institutional investors (via Gerson Lehrman Group), private equity firms, and other participants in the healthcare value chain.

Check out my corporate site for more info.

Was that a shameless plug?

Yes.

6. Do you discuss confidential or non-public information on Drug Channels?

No. The analyses on this website are based on information and data that is in the public domain. I NEVER (a) disclose material, nonpublic information about a public company; (b) disclose information that I have a duty to keep confidential (e.g., by agreement, fiduciary duty, etc.); or (c) disclose information that I obtained from any person who expects me to keep it confidential.

Whenever possible, I provide links to the original source material so that you read it for yourself and make up your own mind.

7. I’m an investor. How can I schedule a call with you?

I currently consult with institutional investors via an exclusive relationship with Gerson Lehrman Group (GLG), where I am a Leader in their Health Care Network. If you are a GLG client, then you can contact your representative to schedule a consultation or make a web request at my GLG home page.

8. Do you invest or own stock in the public companies that you mention?

No. I do not invest or own stock in any individual public companies. I only own stock through general mutual funds. Please note that Pembroke Consulting, Inc. does not make investment recommendations, on this website or otherwise.

9. Aren’t you just a shill for [Big Pharma / PBMs / Insurers / Knights Templar / Hollow Earth theorists / Birthers /blah blah blah]?

Nope. My philosophy in writing this blog can be summed up with a quote from the late Senator Patrick Moniyhan: “Everyone is entitled to his own opinion, but not his own facts.” In my own way, I want to bring facts and balance to subjects that don't get sufficient or accurate coverage from traditional media outlets.

I am opposed to unsupported accusations, overwrought hyperbole, or just plain misrepresentation. One of my consulting advisory clients 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 (on the blog and elsewhere) is to tell people the hard facts and help them figure out what it means.

10. Can you suggest some good books about the pharmaceutical industry?

Sure. Check out this post from July 2008.