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