Pharmacy and PBM Trends for 2011

Hard to believe, but this is my 140th post of 2010. Thanks to everyone who read, commented, or forwarded the articles on Drug Channels. I hope you’ve had a fun and educational year. There's a special holiday video from my good friend MC Ad-Elf at the bottom of today's post.

To wrap up the year, here are four big trends that we'll be talking more about in MMXI:

• Market Growth and the Shift to Specialty
• Boom-to-Bust for Generic Drugs
• Cost-Plus Pharmacy Reimbursement
• Preferred Pharmacy Networks

Below is an overview of each trend along with a summary of the drug trend forecasts provided by CVS Caremark (NYSE:CVS), Express Scripts (NASDAQ:ESRX), and Medco Health Solutions (NYSE:MHS). If you're curious to know more, I devote the final third of the 2010-11 Economic Report on Retail and Specialty Pharmacies to analyzing these trends.

FYI, the introductory discount on my new pharmacy report ends tomorrow. It’s the perfect stocking stuffer for all the executives on your Christmas list!

Drug Channels News Roundup: December 2010

Here's my final 2010 round-up of noteworthy news stories from the Drug Channels universe. In this edition:

• The Battle for Specialty: Express Scripts goes after buy-and-bill specialty drugs
• Direct to pharmacy, mate: Pfizer plans to bypass Australian wholesalers
• Pharmacy Price War Update: More pharmacies join UnitedHealthcare’s preferred Part D network
• Thumbs up! Reviews of my new pharmacy report from the blogosphere

Hope you've been nice, not naughty, in 2010!

Are You Saving from Wholesaler Efficiencies?

The Center for Healthcare Supply Chain Research, the research arm of the Healthcare Distribution Management Association (HDMA), recently released its 2010-2011 HDMA Factbook.

IMHO, the Factbook is an invaluable guide to the economics of the pharmaceutical wholesale industry. The report will be particularly useful if you sell to or buy from pharmaceutical wholesalers because it reveals a lot about wholesaler economics—perhaps more than the participating wholesalers may realize.

As I highlight below, you could credibly use the data in the new Factbook as a rebuttal whenever a wholesaler complains that “their costs have gone up.” You may also question the basis-point economics of your fee-for-service agreement.

The report’s price is lower this year, but I can only give it a qualified recommendation because HDMA stubbornly refuses to make the report available in a convenient downloadable format. More on this subject below, too.

How to Stop Medicaid from Overpaying for Drugs

A fascinating new study from the Lewin Group estimates how much Medicaid overpays for prescription drugs. You can download this lengthily-titled report for free here: Potential Federal and State-by-State Savings if Medicaid Pharmacy Programs were Optimally Managed.

Lewin estimates that Medicaid spending would drop by 14.8% ($2.5 billion) in 2011 if fee-for-service Medicaid prescriptions were “optimally managed,” which means at levels comparable to private plans. A ten-year extrapolation estimates more than $30 billion in savings.

Shocking? Not really. I’ve long been critical of the overly political nature of pharmacy reimbursement under Medicaid. Just look at the windfall to South Carolina pharmacies versus their neighbors (in A Victory for Pharmacy Profits in South Carolina) or the excessive payments to pharmacies under the old Federal Upper Limits (in Won’t get FULed again). Lewin found that higher payments to pharmacies are not even associated with higher generic dispensing rates.

The data seem clear to me. But as always, I encourage you to read the study for yourself and make up your own mind.

The 2010-11 Economic Report on Retail and Specialty Pharmacies

I am pleased to announce the availability of The 2010-11 Economic Report on Retail and Specialty Pharmacies, my brand-new report on the U.S. pharmacy industry. We are offering 10% off the regular price if you order before December 21, 2010.

I worked hard to make this report a comprehensive resource with the latest facts and data about all aspects of the U.S. pharmacy distribution and reimbursement system—product movement, financial flows, and contractual relationships. The report also does a deep dive on 4 key trends that will affect the market structure and economics of the retail and specialty pharmacy industries:

• Market Growth and the Shift to Specialty
• Boom-to-Bust for Generic Drugs
• Cost-Plus Pharmacy Reimbursement
• Preferred Pharmacy Networks

There's a lot of new material since my last update in September 2009. And as always, I’ve packed enough into the report to make it valuable to both newbies and grizzled veterans. You can get all the details here:

• Download a free Overview of the Report
  
  
• View the Table of Contents
  
  
• View the List of Exhibits

I hope you enjoy reading it as much as I enjoyed writing it!

Join Me at the PBMI Drug Benefit Conference (sponsor)

I want to let the Drug Channels audience know about PBMI's 16th Annual Drug Benefit Conference to be held at the Arizona Biltmore Hotel in Phoenix, AZ, on February 16-18, 2011.

I will be delivering the keynote address on The Future of the Pharmacy Industry. My talk will outline the dramatic changes impacting the pharmacy industry and discuss how payers should prepare for dramatic shifts in the current business model. Check out the complete event details below.

BTW, I featured the most recent PBMI's most recent 2010-11 Prescription Drug Benefit Cost and Plan Design Survey in October's Pharmacy Reimbursement Drops Again…or Does It?

Hope to see you there!

If Donald Trump Becomes U.S. President...

...then I will hold Stewart Rahr personally responsible.

Why?

Stewart Rahr, who recently got a $1.3 billion check from Cardinal for Kinray, has created the website ShouldTrumpRun.com. The site states: "We need to convince Donald Trump to run for President in 2012 and end all of the old rhetoric occurring in Washington."

The footer on every page of the website states: "This site paid for by: Michael Cohen, Stewart Rahr and Bradley Gerstman & David Schwartz of Gotham Government Relations." See below for the email that Mr. Rahr reportedly sent to his personal email list.

Hmm, Trump vs. Palin in 2012?

2010 Market Share of Top Retail and Specialty Pharmacies

NOTE: For fresher data, see 2011 Market Share of Top Pharmacies.


On December 7, I’ll be releasing a new report called The 2010-11 Economic Report on Retail and Specialty Pharmacies. I want to give you a sneak peek at my list of top pharmacies in 2010—a piece of data that generates many email requests.

The exhibit below, one of 40 in my new report, shows my estimates for market share of prescription revenue by company for calendar year 2010. I estimate that the top six dispensing retail and specialty pharmacies—CVS Caremark, Walgreens, Medco Health Solutions, Rite-Aid, Walmart, and Express Scripts—will account for 62.2% of U.S. pharmacy dispensing revenues in 2010. These data reflect the industry-level trends highlighted in New Data on Pharmacy Industry Market Share.

Don’t get too frightened by the data. Almost one-third of revenues still come from retail and specialty pharmacies beyond the 11 companies in the table. Total revenues from this more numerous group are a still-substantial $85.5 billion.

Cardinal Gets to China First

This morning, Cardinal Health (NYSE:CAH) continued its growth-by-acquisition strategy by entering the Chinese distribution market. See Cardinal Health Acquires Leading Pharmaceutical Distributor in China. Click here to view Cardinal's slide deck describing the deal.

The era of global wholesale is dawning. The acquisition represents the first major distribution investment outside of North America by one of the Big Three U.S. wholesalers. I've long pointed to China as a logical growth platform for U.S. wholesalers as in my January 2007 post 3 Ways for Drug Wholesalers to Grow. See below for my initial thoughts on this deal and what it means.

The 2010-11 Economic Report on Pharmaceutical Wholesalers has details on Cardinal's economics and strategy. As always, Pembroke Consulting and Gerson Lehrman Group clients can schedule phone calls with me for additional insights.

Giving Thanks for the Cherpumple and the TSA

Perhaps you’ll get to spend some time off with your family this week. And perhaps one of them will serve you the latest contribution to America's Type II diabetes epidemic—the cherpumple!

What is the cherpumple, you may ask? Well, dear reader, it’s nothing more than a three-layer cake with an entire pie baked into each layer—a cherry pie baked inside a white cake, a pumpkin pie baked inside a yellow cake and an apple pie baked inside a spice cake. Just stack the layers and seal them with cream-cheese frosting.

Yup, it's the turducken of desserts. To my amazement, the cherpumple was recently featured in a Wall Street Journal cover story along with its inventor, Charles Phoenix. Genius or loony? Watch the video below and decide.

As for the TSA? Watch the second video and decide. 'nuff said.

Drug Channels News Roundup: November 2010

Time to get ready for Thanksgiving with these noteworthy news stories from the Drug Channels universe. In this edition:

• Say what?!? Kinray sells to Cardinal Health
  
• The Perils of Discount Generics: Big Brother can’t watch!
• Pedigree Referee: Will wholesalers control your pedigree strategy?
• Waiting for Pigs to Fly: A plea for rational debate about health care policy
• Dirty Deeds: The Onion examines GSK’s manufacturing problems

Enjoy!

New Study Finds Small AMP Impact, But Trouble in Six States

Regular readers know the unofficial motto of Drug Channels: "Everyone is entitled to their own opinion, but not their own facts."

Last Thursday, I posited that the forthcoming Average Manufacturer Price (AMP)-based Federal Upper Limits (FULs) for Medicaid reimbursement of multisource (generic) drugs would have only a moderate impact on the pharmacy industry’s profits. See What’s Happening with AMP and Pharmacy Profits.

I'm now pleased to bring you the results of a new study that confirms my opinions with actual facts. Ricky Goldwasser and her colleagues at Morgan Stanley conducted a valuable and original analysis computing how the new AMP-based FULs will affect pharmacy profits. Their methodology is much more rigorous and quantitative than my more informal explanation, but the conclusion is the same: "New AMP based reimbursement for generic drugs will have only limited impact on supply chain participants."

The Morgan Stanley research also makes an important contribution by showing that the impact of the new AMP-based FULs will vary based on geography. As the chart below shows, AMP-based FULs will be a non-event in most states, but pharmacies will face a painful adjustment in six key states that still rely on inflated FULs. Pharmacies in California and Connecticut will be hit the hardest.

When the facts change, I change my mind. What will the pharmacy industry's lobbyists do?

Finished Product Supply Chain Summit (sponsor)

I am pleased to welcome back CBI as a Drug Channels sponsor for the upcoming Life Science Finished Product Supply Chain Summit. The event will be held January 20-21, 2011, in Lake Buena Vista, FL. CBI is offering an exclusive discount for Drug Channels of $400 off the registration fee, Just use promo code AMC996 when you sign up. Thanks, CBI!

This promises to be another worthwhile event with appeal to many Drug Channels readers. The conference speakers include executives from both pharmaceutical manufacturers and wholesalers. Topics include pedigree, brand protection, cargo theft, anti-counterfeiting, and other related topics. These subjects are especially timely given the news that Bristol-Myers Squibb suffered a major in-transit cargo theft last Thursday.

As always, CBI provides a valuable forum for networking and sharing of best practices, so I encourage you to check out this event.

What’s Happening with AMP and Pharmacy Profits!!

The Center for Medicare & Medicaid Services (CMS) just took another baby step toward implementing new Federal Upper Limits (FULs) for pharmacy reimbursement of multi-source (generic) drugs in the Medicaid program. Yesterday, CMS filed a Final Rule implementing its previously proposed withdrawal of now-obsolete provisions related to Average Manufacturer Price (AMP). Click here to read this Final Rule.

It’s really quite extraordinary that CMS takes 39 pages to say almost nothing. CMS dodged most of the key unresolved questions about AMP except to note that a formal rule-making process will occur at an unspecified future date. Gee, thanks.

Meanwhile, the battle over AMP/FUL will continue. The pharmacy industry has spewed so much nonsense out there about AMP that you're right to be confused about the ultimate impact of the new FULs on the industry’s profits from Medicaid prescriptions. But as I explain below, the new FULs will have only a moderate impact on the pharmacy industry’s profits because states have moved faster than CMS. Who woulda thunk it?

Healthcare Reform and Drug Prices

The Congressional Budget Office (CBO) just released a new analysis of the impact of the Patient Protection and Affordable Care Act (PPACA) on pharmaceutical pricing. Click here to download this dense but thought-provoking analysis.

The memo does two things well. One, the CBO succinctly explains key provisions of the law that could affect drug prices. Two, the CBO describes how the PPACA could influence manufacturers' pricing strategies and the net prices paid by pharmacies or payers.

The memo reminds me of a favorite quote attributed to Laurence J. Peter: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.” Many of the conclusions are highly speculative, but it’s impossible to challenge the quantitative forecasts because the CBO does not describe any methodology.

So, ask me in 10 years (or in the year 3000?) whether the CBO’s predictions came true. I’ll be able to explain the answer no matter what happens.

Specialty Pharmaceuticals: A Forum for Payers (sponsor)

I am pleased to welcome back CBI as a Drug Channels sponsor for its very interesting conference 8th Annual Specialty Pharmaceuticals, Biotech Therapies and Injectables - A Forum for Payers. The event will be held January 26-27, 2011, in Las Vegas. Register by Nov 19, 2010 and save $300.

This conference focuses on one of the most dynamic aspects of the Drug Channels universe. Just think about some of the big announcements in just the past two weeks: UnitedHealthcare's cost-plus model for physician-administered cancer drugs and McKesson acquisition of U.S. Oncology.

The agenda includes payers and specialty pharmacies, so I expect very lively conversations and lots of learning.

Is Track-and-Trace a priority for the FDA?

The U.S. Food and Drug Administration (FDA) recently released its draft Strategic Priorities for 2011-2015. I recommend that you read the document for a useful glimpse into the FDA’s perspectives and the breadth of its responsibilities. You can also submit a public comment at www.regulations.gov.

But there’s a notable omission from these priorities. I searched and searched through the document, but was unable to find any mention of perennial supply-chain security topics such as pedigree, track-and-trace, RFID, or serialization.

True, there is a section called "Strengthen the Safety and Integrity of the Global Supply Chain", but it deals primarily with globalization and imports.

Some Drug Channels readers may be attending the Healthcare Distribution Management Association’s (HDMA) Track-and-Trace Technology Seminar next week. If so, please ask Ilisa Bernstein, who has been on the forefront of the FDA’s efforts on supply chain security over the years, about this unexpected omission.

Medco's Generics Outlook: Party On, Dudes!

Medco Health Solutions (NYSE:MHS) stock jumped 10% yesterday on an upbeat forecast for generics and better-than-expected earnings yesterday. See Medco's Net Rises 11% from The Wall Street Journal.

Looks like Medco’s Excellent Adventure will just keep getting better. Medco raised its forecast of generic introductions through 2015. CEO David Snow referred to 2012 as the "monster" and noted that 2018 is projected to be the third biggest year in the decade. As the chart below shows, $28.3 billion of brand-name drugs sales will be lost to generic introduction in 2012. Whoa.

This news will either makes you ecstatic or depressed, depending on what type of company you work for. PBMs, pharmacies, and (to a lesser extent) drug wholesalers will benefit from this tidal wave. Brand-name manufacturers...not so much.

McKesson Snags US Oncology

This morning, McKesson (NYSE:MCK) announced the acquisition of U.S. Oncology. See McKesson to Purchase US Oncology in a Transaction Valued at $2.16 Billion.

This deal is a big win for McKesson. The company now solidifies its position as the #2 specialty products distributor. McKesson also picks up the services and Group Purchasing Organization (GPOs) businesses of US Oncology.

On the other hand, Cardinal Health (NYSE:CAH) now has an even bigger challenge in rebuilding its specialty business and diversifying away from its two mega-customers, CVS Caremark (NYSE:CVS) and Walgreen (NYSE:WAG). See Double Trouble for Cardinal Health. Time to go shopping?

Manufacturers of specialty oncology products should be paying close attention. Two drug wholesalers—McKesson and AmerisourceBergen (NYSE:ABC)—are simultaneously the largest distributors of specialty drugs as well as the owners of the largest community oncology Group Purchasing Organizations (GPOs). Today's acquisition signals even tighter vertical integration between oncology care and the distribution channel. Combined distributor-GPO entities gain leverage as the channel to the physician gets narrower, requiring a more strategic view of the customer and improved account management.

Government Programs Summit (sponsor)

I am pleased to welcome back IIR as a Drug Channels sponsor for its Government Programs Summit. The event will be held March 7-9, 2011, in Baltimore. IIR is offering Drug Channels readers a 25% discount off the standard registration rate with VIP code XP1651DRUGCH—up to $700 in savings. Thanks, IIR!

As the GP Summit website correctly notes, government program pricing methodologies, calculations, and enforcement actions have changed significantly since the Patient Protection and Affordable Care Act (PPACA) was passed in March 2010. Just consider the complexities and controversy surrounding the new definition of Average Manufacturer Price (AMP)! (See Secret AMP Letter Emerges; FUL Delay Likely.) Even before the Act's passage, the Center for Medicare and Medicaid Services (CMS) was projecting that government funds will be almost half of outpatient retail prescription spending by 2019. See CMS' New Drug Spending Projections for my analysis of the most recent forecast.

Read more from IIR below.

For Sale by Walgreens: One Small PBM, Slightly Used

Bloomberg Business Week scored a major scoop this week by being the first to report publicly that Walgreens is looking to sell its pharmacy benefit management (PBM) business. See Walgreen Said to Seek Sale of Pharmacy-Benefits Manager.

Observations:

• PBM Consolidation Ahead. We once again see the powerful consolidation trend in the PBM industry. Scale matters, especially in these last few years of major generic launches. There are more than 60 PBMs competing in the market—the top 3 process about 60% of total adjusted prescriptions.
  
  
• Streamlining = focus. Rather than forcing a false synergy, Walgreens is wisely focusing on its roster of non-retail dispensing and provider channels. Walgreens has a wide-ranging set of businesses within its Health Initiatives unit, but has struggled to assemble them into a coherent future vision.
  
  
• Bypass Strategy Redux? Divestiture frees Walgreens to more radically disrupt the traditional PBM business model with a cross-channel offering to employers, payers, and health plans. Reread Walgreen’s PBM Bypass Strategy for more speculations on this strategy.

NCPA's New CEO and the Pharmacy Industry's Future

On Sunday, the National Community Pharmacists Association (NCPA) announced the appointment of Kathleen Jaeger as Executive Vice President and CEO. Read the announcement. Ms. Jaeger was most recently President and CEO of the Generic Pharmaceutical Association (GPhA).

I’m impressed by this selection. NCPA has chosen an experienced association director and Washington insider. I expect her to upgrade NCPA into a more professional organization, assuming that the old guard doesn’t block her from making the necessary changes.

Ms. Jaeger’s appointment illustrates how the balance of power is shifting in U.S. drug channels.

Why Doctors Like Placebos

I chuckled at the cartoon below from The Wall Street Journal. Go Phillies!

UnitedHealthcare: Cost-Plus for Cancer Drugs

UnitedHealthcare Employer & Individual, a UnitedHealth Group (NYSE:UNH) company, announced a new pilot program that will reimburse physicians on a cost-plus basis for chemotherapy drugs. Here’s the official press release: New Cancer Care Payment Model by UnitedHealthcare Employer & Individual to Focus on Best Treatment Practices and Better Health Outcomes.

This pilot program shows a prominent payer experimenting with pharmaceutical reimbursement in the non-retail drug channel. While not as novel as the media coverage would have you believe, it's another signal of change for payers, physicians, manufacturers, and wholesalers. Some observations:

• The cost-plus revolution is accelerating. This announcement should be no surprise if you’ve been following recent developments in retail drug reimbursement. My comments in Industry Impacts of Cost-Plus Reimbursement apply equally well to the physician model. Payers are unbundling drug price and professional fees because existing reimbursement models can provide inappropriately high profits on drugs and create inappropriate financial incentives. UnitedHealth claims that drug mark-ups account for 65% of an oncologist's income. Their vice president of oncology referred to physicians as "drug dealers” (huh?) in yesterday’s Wall Street Journal. Hmmm, time for some media training?
  
• A computed average price benchmark has many uses. Despite media hype, this model is not really new for office-administered drugs because it relies on a familiar benchmark. The press release states that “chemotherapy drugs will be reimbursed at the manufacturer’s cost.” UnitedHealthcare confirmed to me that “cost” will be Average Sales Price (ASP), which is the basis for reimbursement for Medicare Part B drugs and already used by many commercial payers. ASP data are freely available on a public Center for Medicaid and Medicare Services (CMS) webpage: http://www.cms.gov/McrPartBDrugAvgSalesPrice/. More on ASP below.
  
• Will this model affect generic substitution and drug wholesalers? The two-quarter data lag baked into the Part B ASP model allows very high physician profits early in the generic life cycle, thereby creating powerful incentives for rapid generic substitution. (See Generic Drug Profits: Too High or Appropriate Incentive?) Could UnitedHealthcare’s plan inadvertently reduce substitution speed for soon-to-launch generic oncology drugs such as Gemzar and Taxotere? AmerisourceBergen (NYSE:ABC) and McKesson (MYSE:MCK) get a huge financial benefit from generic oncology drugs, so any reduction in substitution rates due to new payment models will be negative for the drug wholesalers, too.

Pharmacy Reimbursement Drops Again…or Does It?

The Pharmacy Benefit Management Institute (PBMI) just released its 2010-11 Prescription Drug Benefit Cost and Plan Design Survey, an informative and useful report that you can download for free. A hearty Drug Channels “Thank You” to Takeda Pharmaceuticals North America for sponsoring the research.

The latest survey shows that retail pharmacy payment tightened significantly in 2010, reinforcing the fact that efficient, low-cost dispensing is crucial to a retail pharmacy’s economic survival.

But here’s the unexpected conclusion from my number-crunching of the latest PBMI data: Retail pharmacy profits from brand-name prescriptions have remained remarkably stable over the past 10 years. The apparently steep drop in third-party reimbursements to retail pharmacies primarily reflects mathematical adjustments to underlying pharmaceutical price inflation.

I expect channel participants will strongly disagree, so read on and make up your own mind.

Meet me at the NCPA Convention

I will be attending the Annual NCPA Convention and Trade Exposition next week right in here in my hometown of Philadelphia. Yes, that's me and the iconic LOVE statue, which is one block from my office.

Send me an email if you’d like to arrange a one-on-one meeting during NCPA. If you run into me at the convention, please introduce yourself and let me know what you think of Drug Channels.

Double Trouble for Cardinal Health

Tuesday’s post about CVS Caremark (NYSE:CVS) reminded me about Cardinal Health (NYSE:CAH), one of CVS' biggest suppliers.

So, let's take a look at Cardinal's recently released annual 10-K filing for the fiscal year ending June 30, 2010. (You can download it from this page.)

Alas, the data show a company that's increasingly at the mercy of its two dominant customers. CVS Caremark’s retail pharmacy business and Walgreens (NYSE:WAG) are now half of Cardinal’s drug distribution business. Even more troubling, it looks like Cardinal lost substantial market share when we exclude its two mega-customers and account for inflation.

CEO George Barrett has been focusing Cardinal on regaining market share and reputation since he joined in early 2008. From what I hear, Cardinal is making slow progress, but it’s a long road back and competition from McKesson (NYSE:MCK) and AmerisourceBergen (NYSE:ABS) is intense. When sliced and diced in the right way, data from the 10-K reveal that the turnaround hasn’t happened yet.

CVS Caremark: More Happy Talk, But Hard Work Remains

CVS Caremark (NYSE:CVS) held its 2010 Analyst Day last Friday. The happy talk is nicely encapsulated by the headline of The Wall Street Journal’s coverage: CVS Caremark Says Drug-Benefit Business Strong.

My $0.02: CVS Caremark’s management told a good story, but the underlying message remains the same: Keep waiting because the pot of gold is (still) just around the corner.

Friday’s meeting provided another list of intriguing ideas for how a mega-pharmacy chain and a top Pharmacy Benefit Managers (PBM) can live together without driving each other crazy. Many of these programs—Pharmacy Advisor, Maintenance Choice, Genetic Benefit Management, etc.—sound quite intriguing in theory but are not likely to translate into an insurmountable competitive advantage. Thus, I still expect CVS to spin off Caremark (per When will CVS and Caremark split up?), but probably not until 2012.

The Analyst Day slide deck is 170 pages and the transcript runs to 58 single-spaced pages, so I just focus on a few key points about the PBM business below. As always, Pembroke Consulting and Gerson Lehrman Group clients can schedule phone calls with me for additional insights beyond what I discuss in this post.

NCPA's Odd Reaction to the Walmart-Humana Part D Plan

I want to offer some unsolicited—and perhaps unwelcome—advice to the National Community Pharmacist’s Association (NCPA), which represents owners of independent pharmacies.

In Walmart-Humana: An Inevitable Surprise for Pharmacies and PBMs, I explain the economics and strategy behind the Humana Walmart Preferred Rx Plan. However, I neglect to discuss NCPA’s press release reaction: Walmart Medicare Drug Plan a Prescription for Poor Pharmacy Care.

Just my $0.02, but I think NCPA is serving its members poorly with its complaints and threats instead of an upbeat, positive message to consumers, manufacturers, and the media about independent pharmacies. What do you think?

Trade and Channel Strategies (sponsor)

Here's a conference on a subject near and dear to my heart—CBI’s 6th Annual Bio/Pharma Trade and Channel Strategies, which just signed up as a Drug Channels sponsor. In fact, I like this conference so much that I’ll be delivering the keynote address on December 6 entitled “Building a Strategy for Tomorrow’s Drug Channels.” Click here to see the whole agenda.

In my opinion, CBI’s Trade and Channel Strategies conference is a great forum for networking and sharing best practices in trade and channel management. The conference will be held in Philadelphia on December 6 and 7. I'll be staying around for the duration of the conference because I always learn a lot, too.

I also have a long-time affiliation with this particular conference. I delivered the keynote address at the first conference in 2005 along with some guy named Christopher Christie. He went on to be the Governor of New Jersey while I, um, started this blog. Anyway...

CBI is offering a special discount to Drug Channels readers. Just mention promo code JBS268 when registering and you’ll get $300 off of the standard registration fee. Thanks, CBI!

Walmart-Humana: An Inevitable Surprise for Pharmacies and PBMs

On Friday, Walmart (NYSE:WMT) and Humana (NYSE:HUM) announced the “Humana Walmart Preferred Rx Plan,” a new Medicare Part D prescription drug plan (PDP) with lower consumer co-payments for prescriptions filled at Walmart pharmacies. Click here to read the official press release or get full details in Humana’s 2011 Summary of Benefits document for its Prescription Drug Plans.

Well, well, well. Looks like Walmart’s appetite for the pharmacy industry has reignited after a long hibernation. The company is once again challenging the conventional wisdom about profitability and market share with a lower cost, consumer-driven plan design. Once you understand this “incentivized preferred network design” (my words), then you’ll grasp its disruptive potential for retail and mail-order pharmacies.

• The $14.80 monthly premium makes it the low-cost PDP in every U.S. state (per Kaiser’s October 2010 Fact Sheet).
• The discount retail prescription pricing will influence pharmacy choice while simultaneously undermining the economic model of the Big Three PBMs—CVS Caremark (NYSE:CVS), Express Scripts (NASDAQ:ESRX), and Medco Health Solutions (NYSE:MHS).

The announcement is also an “Inevitable Surprise”—the predictable outgrowth of Walmart’s observable actions and statements about the pharmacy and PBM industries. Exhibit A: Wal-Mart's PBM Game Plan from January 2008. (Alternative hypothesis: Nobody expects Walmart!)

Read on for more details. I include many links to older Drug Channels posts on Walmart’s strategy as background for the many new readers in 2010.

Drug Channels News Roundup: September 2010

Autumn is in the air! Time for a rundown of noteworthy news stories from the Drug Channels universe in September.

Here are three stories worthy of your attention:

• Cost-Plus Plus: Oregon proposes Average Acquisition Cost (AAC) for pharmacies starting in January 2011.
  
  
• Ain't What's Preferred: The editors of a pharmacy journal opine on the best replacement for Average Wholesale Price (AWP).
  
  
• Thank you, Sir. May I have another? Express Scripts (NASDAQ:ESRX) gets ready to acquire again.
  
  
• Unbranding. CVS (NYSE:CVS) launches an innovative private label product.
  

Plus, I announce the winners from the Drug Channels Reader survey!

Independent Pharmacy Cooperative Sues McKesson

Independent Pharmacy Cooperative, a large group purchasing organization (GPO) for independent pharmacies, recently filed a lawsuit against McKesson (NYSE:MCK), its prime vendor wholesaler. According to this Courthouse News Service article, IPC “claims McKesson Corp. is striking side deals to steal its members, and using a punitive, $100 million early termination penalty to keep the group tied to McKesson.”

IPC member pharmacies collectively make up one of McKesson’s largest customers. This Wall Street Journal article attributed last Thursday's drop in McKesson’s stock price in part to “investors worried about the potential loss of business from a key customer that sued the pharmaceutical supplier for breach of contract.” However, McKesson's stock price bounced back by Friday.

I have no opinion on the merits of the case because the facts are not known. However, I want to share my general perspective on pharmacy buying groups because some readers may not be aware of their role in the supply chain for independent pharmacies. The excerpt below comes from The 2010-11 Economic Report on Pharmaceutical Wholesalers.

Meet with Me at PCMA's Annual Meeting

I will be attending the PCMA Annual Meeting on October 4 through 6. Send me an email if you’d like to arrange a one-on-one meeting in California. If you happen to run into me at the meeting, please introduce yourself. I'm always interested in chatting with Drug Channels readers.

On a more personal note, I must take a moment of your time for a wee bit of bragging.

My gorgeous wife of 19 years is now appearing in an ad campaign for Philadelphia's Reading Terminal Market. Check out her photo below from a bus stop at 16th and Walnut Street in Center City. Congratulations, honey!

Bonus: I can legitimately say that I am married to a model.

Specialty Pharma Commercial Excellence (sponsor)

I am pleased to welcome eyeforpharma’s Specialty Pharma Commercial Excellence conference as a Drug Channels sponsor. The conference will be held in Boston on November 15 and 16. Read more in the official description below or download the brochure. There is a discount if you register before October 1.

This event should be particularly interesting to Drug Channels readers. Specialty pharmaceuticals account for about 15% of total pharmacy industry revenues today but will be closer to 30% by 2015. Unlike traditional oral drugs, a specialty drug can be covered under a medical benefit, a pharmacy benefit, or both. (See Specialty Drugs: The Medical vs. Pharmacy Benefit Muddle for data on this marketplace confusion.) The diversity of payment and channel options increases the importance of a successful commercial strategy for manufacturers.

I will be attending (but not presenting) the conference, so perhaps I will see you there!

Industry Impacts of Cost-Plus Reimbursement

I want to share some of my speculations about the pharmacy industry’s evolution if cost-plus pharmacy reimbursement becomes common.

As I see it, a cost-plus model gives a payer more control over pharmacy distribution and dispensing expenses. But this model could reduce incentives for generic substitution by limiting the profitability of generic prescriptions for retail and mail-order pharmacies. Payers would get new insights to the economics of Pharmacy Benefit Managers (PBMs). And as I describe below, widespread adoption of cost-plus ingredient cost reimbursement will likely lead to further pharmacy industry consolidation.

I also encourage you to check out the insightful reader comments below Monday’s CMS Approves Alabama’s Cost-Plus Plan. My article prompted a response from the always-gracious Kelli Littlejohn, Director of Pharmacy at the Alabama Medicaid Agency. I am reproducing her comments in this post below.

As always, I look forward more good debate and discussion from the Drug Channels community!

BREAKING NEWS: CMS Approves Alabama’s Cost-Plus Plan

The Alabama Medicaid Agency just announced that the Centers for Medicare and Medicaid Services (CMS) has approved a new pharmacy reimbursement program using Actual Acquisition Cost (AAC) instead of published benchmark or Maximum Allowable Cost (MAC) lists. Read the official announcement on the AAC Program Implementation page. The changes will be effective for outpatient pharmacy claims on September 22, 2010.

Fans of transparency will be pleased to know that Alabama will now publish pharmacy acquisition costs for both brand-name and generic drugs (by product name and package size) on this free public website: Alabama AAC List.

My $0.02: The post-Average Wholesale Price (AWP) future just became a little clearer. While alternative list price benchmarks, such as Wholesale Acquisition Cost (WAC), are becoming more common, I expect computed transactional benchmarks to become the norm for pharmaceutical reimbursement. The Alabama Medicaid Agency now officially becomes the leading innovator of alternative benchmarks.

I describe Alabama’s proposal and its potential market impact in Alabama: More Momentum for Cost-Plus. Key questions:

• Will other states follow Alabama's lead? (I hear at least one state is very close.)
• Will private payers adopt Alabama's methodology and/or use the public AAC data?
• What will happen to pharmacy and wholesaler profits?
  

Post your best guesses in the comments below. You can comment anonymously, if you want.

Forces of Change for Drug Wholesalers

Stock prices of the Big 3 drug wholesalers—AmerisourceBergen (NYSE:ABC), Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK)—all jumped yesterday on analyst upgrades. Combined market capitalization rose about $1.6 billion. See Big 3 US Pharmaceutical Distributors Post Sharp Gains or this stock price chart. Tom Gallucci of Lazard Capital Markets referred to drug distributors as "The kind of group to own in this environment."

While I never comment on stock valuations, I do believe that the biggest wholesalers are positioning themselves as indispensable intermediaries in the supply chain and staking out a powerful position in high-growth channels for specialty drugs. Like it or not, manufacturers and pharmacies will be negotiating with wholesalers for some time.

To understand what keeps drug wholesaler CEOs up at night, check out my article Forces of Change for Pharmaceutical Wholesalers from the latest Pharmaceutical Commerce. Forewarned is forearmed when developing your next fee-for-service contract.

Big Growth in Four-Tier Drug Benefits

The Employer Health Benefits 2010 Annual Survey, a new report by the Kaiser Family Foundation and the Health Research and Educational Trust, made the news with the finding that employers are passing more health-insurance costs onto employees in 2010. See Employers Sharply Raise Workers' Share of Health Costs.

Buried in the report is an important pharmacy benefit trend—the growth of plan designs with four or more tiers. One out of eight employers now have high-tier plans, almost double the pre-economic meltdown proportion from 2008.

Why should you care? Because four-tier plans can pose enormous financial burdens on patients who pay co-insurance—a percentage of drug costs—rather than a fixed dollar co-payment. I wrote about these patient challenges way back in 2008 in Tier 4 Co-Pays and Pharmacy Prices.

Pharmaceutical manufacturers also need to make sure that certain products don’t end up on a fourth tier because it can dramatically reduce or eliminate access for patients. In the lexicon of a pharmaceutical manufacturer, four-tier plans pose a significant challenge to the payer marketing function, something I am seeing first-hand in my consulting work with drug companies.

The Counterfeit Counterfeit Drug Count

Have you ever wondered about the statement that "10% of all drugs worldwide are counterfeit"?

The 10% figure has been cited by the World Health Organization (WHO), which has become the de facto source for the statistic. Just about every technology vendor involved in pharmaceutical supply chain security still touts the 10% figure as often as possible.

Alas, it turns out that the 10% figure has no factual basis in reality. Carl Bialik, the Wall Street Journal's Numbers Guy, published a fantastic piece of journalism this weekend entitled Counterfeit Drug Count Is Tough to Swallow. You should also read Dubious Origins for Drugs, and Stats About Them from The Number Guy's blog for some additional background.

The lesson? Always check the references. And don't believe everything you hear from technology vendors.

Help Me Improve Drug Channels

I want to hear from you.

I am conducting a very brief Drug Channels reader survey to learn more about what you like and dislike about the blog. There are just a few questions, so it should only take you about 5 minutes to complete. Here's the link:

The 2010 Drug Channels Reader Survey.

There is also a spot to add a testimonial, which I hope you will feel inspired to do.

You can answer anonymously. But if you provide an email address, I'll enter you in a drawing to win a free corporate license of my 2010-11 Economic Report on Pharmaceutical Wholesalers. No matter what, everything is completely confidential.

Walgreens and Omnicare Play Switcheroo

You may have missed a small but quite intriguing pre-Labor day deal between Walgreens (NYSE:WAG) and Omnicare (NYSE:OCR) in which the two companies swapped some non-core businesses with each other. See Omnicare, Inc. and Walgreen Co. to Exchange Home Infusion and Long-Term Care Pharmacy Businesses.

Walgreens also picked up 18 ApothecaryRx pharmacies in five states last week, continuing its acquisitive retail growth strategy. See Walgreens Reaches Definitive Agreement with Graymark Healthcare to Acquire Assets of 18 ApothecaryRx Pharmacies in Five States.

These deals emphasize the consolidation trend that has been moving through the drug channels universe for the past few years. Both companies are exiting non-core businesses that were neither well-loved nor well-understood by the respective management teams. Just my $0.02, but Walgreens made the better deal because it adds another puzzle piece to its growing non-retail business. Omnicare merely bulks up in a core industry that it knows all too well.

Surprise! Independents Not Vanishing

Time to test yourself at Adam’s College of Pharmacy Industry Knowledge!

Q: According to the new 2010-11 NACDS Chain Pharmacy Industry Profile, which of the following pharmacy formats had the biggest growth in number of locations in 2009?

• Chain Drug Stores
• Independent Drug Stores
• Supermarkets
• Mass Merchants

Believe it or not, the answer is … Independent Drug Stores! In fact, independents added 474 locations (+2.3%) in 2009, almost three times as many as chains (+177 locations, +0.8%). Even more astounding, the newly-revised NACDS data now show the number of independents increasing by 1% over the past seven years instead of declining by 10%.

The bad news? Both total revenues and number of prescriptions continue to decline at independents (as shown in New Data on Pharmacy Industry Market Share). Thus, the average independent survivor is smaller and less productive than we all previously thought.

Read on for the wonky details. And no more complaints that your friendly neighborhood blogger never provides good news about independent pharmacies!

Viagra Sales Rep: The Movie

I hope you get a chance to relax over the Labor Day weekend. Perhaps you'll even see a movie.

Unfortunately, you'll have to wait until November 24 to see Love and Other Drugs, a romantic comedy starring Jake Gyllenhaal and Anne Hathaway. Why should Drug Channels readers care? Because the movie is based on Hard Sell: The Evolution of a Viagra Salesman, a non-fiction book penned by former Pfizer sales rep James Reidy.

Check out the trailer below for what seems like a sorta sympathetic look at the pharmaceutical industry. Click here if you can't see the video.

Why is Stolen Shire Product Being Returned for Credit?

Add Shire Pharmaceuticals to the list of companies that should be wondering about the integrity of its pharmacy and wholesale channels.

In October 2008, a shipment of Carbatrol and Adderall XR was stolen en route from Shire’s manufacturing facility to its own distribution center. Two weeks ago, Shire notified its trade accounts that "Carbatrol from the stolen lots has started to appear in our expired returns and more stolen product may still be on the market."

Pharmaceutical cargo thefts are on the rise, but every stolen drug needs a buyer for the fenced goods.

So, who's buying?

Drug Channels News Roundup: August 2010

Here's a rundown of noteworthy news stories from the Drug Channels universe in August.

In this edition, we look at the latest bogus study of drug prices from AARP, get an update on CVS Caremark’s (NYSE:CVS) PBM selling season, hear more about NACDS' secret AMP letter, and learn how McKesson (NYSE:MCK) avoids taxes using an Irish subsidiary. Blimey!

Speaking of the secret AMP letter, please say hello if you see me in the audience this Sunday morning at the NACDS meeting in San Diego during Medicaid Expansion and Changes to Pharmacy Reimbursement. Then join me for a brunch of eggs, spam, bacon, spam, spam, and AMP!

Drug Benefit News & Me

I am pleased to announce that I have joined the Editorial Board of Drug Benefit News (DBN), one of my must-read publications about the pharmacy, managed care, and pharmacy benefit industries.

If you enjoy Drug Channels, then you should subscribe to DBN. Just so you know, there's nothing in it for me in making this suggestion.

BTW, you will understand a lot more about me and the Drug Channels blog when I tell you that three of my favorite publications are:

• The Economist
• Drug Benefit News
• Entertainment Weekly

Yes, really.

PBMs, Not Physicians, Stepping Up for Genomics

Check out Docs Falling Behind In Race To Help Patients With Genetics, a physician's thought-provoking perspective on the beneficial role of Pharmacy Benefit Managers (PBMs) in accelerating pharmacogenomics—using a patient’s genetic information to optimize drug therapy.

While I can't speak as a medical professional, I'm not surprised to hear this viewpoint from a leading physician. PBMs have powerful incentives to invest in personalized medicine tools that will improve clinical outcomes and manage utilization for their clients. As I see it, successful implementation of these services will be one way for PBMs to maintain spreads within the PBM economic model.

You can complement this article with Genomics: What Lies Within for a good discussion of the DNA sequencing market from The Economist.

Medicaid Drug Rebate Program Summit (sponsor)

I want to give you a quick reminder that IIR's 15th Annual Medicaid Drug Rebate Program (MDRP) Summit is coming up in a few weeks.

IIR is offering a special 25% discount for Drug Channels readers, which will save about $700. Just mention VIP code XP1558DRUGCH when registering.

I have also learned that CDR Krista Pedley, the new Director of the Office of Pharmacy Affairs (OPA) of the Health Resources and Services Administration, will be at the event. Her appointment was announced on July 14.

You can meet CDR Pedley at 1:35pm on Thursday September 16th, Track B, at the session "Changing PHS Regulations, 340B Entity Expansion and Enforcement" with a presentation by Devin K. Williams, Program Management Officer, US Public Health Service, Office of Pharmacy Affairs (OPA).

The MDRP promises to be a valuable and timely event. Check out the agenda for full details.

Is Medco Overreaching with United BioSource?

Medco Health Solutions (NYSE:MHS) continued its expansion into fee-based clinical services with the acquisition of United BioSource Corporation (UBC). Press Release

The high-level logic of the deal seems logical given Pharmacy Benefit Manager (PBM) industry dynamics and Medco's pharmacogenomic investments.

However, I'm a little puzzled by the strategic fit because United’s customers are manufacturers. PBMs have grown by aligning with the interests of plans sponsors (employers and health plans) rather than with brand-name or generic drug manufacturers.

Is an innovative PBM succumbing to business model creep and management hubris?

Rite-Aid Postpones Judgment Day (Again)

Rite-Aid (NYSE:RAD) has a new plan to postpone its ultimate day of reckoning just a wee bit longer—more junk bonds! See Rite Aid Announces Offering of Senior Secured Notes and Proposed Refinancing of Its Revolving Credit Facility

The new junk bond offering will further reduce the risk that Rite-Aid will vanish in a puff of smoke. McKesson (NYSE:MCK), which sells about $13 billion in drugs to Rite-Aid, will also be relieved.

Wow, this company has more lives than a cat with an afterlife.

Of course, restructuring an excessive debt burden is not the same as saying the future looks rosy. Recent same-store sales trends don’t dispel Rite-Aid’s nickname as “the turnaround that never turns around.” The NYSE is once again threatening to delist Rite-Aid if its stock stays below the price of a Sausage McMuffin.

FWIW, below is a quick primer on their debt load and the new offering.