Why ABC Grabbed Caremark’s Reimbursement Hub

AmerisourceBergen (NYSE:ABC) continued its specialty acquisition splurge with the acquisition of Theracom, CVS Caremark’s (NYSE:CVS) specialty services (reimbursement hub) business. See AmerisourceBergen to Acquire TheraCom, LLC.

The deal marks ABC’s third specialty services acquisition in four weeks, playing to CEO Steve Collis’ strengths in the market. The deal doesn’t solve the core revenue problems facing ABC, but is a logical add-on to its small, but profitable, consulting business.

Is the sale a precursor to a CVS Caremark break-up? I don’t think so. As I explain below, the transaction reflects (1) the relative strategic value of hubs to each party, and (2) the inherent tension between specialty services for manufacturers vs. those for payers.

WHAT THE HUB IS A HUB?

Companies like Theracom and Lash Group are an infrequently-discussed part of the specialty pharmaceutical ecosystem. They are often called reimbursement hubs, although the term does not fully describe what they do.

Note to creative readers: This industry could use a catchy, descriptive name that can be abbreviated with a TLA. (TLA = Three Letter Acronym)

These integrated service providers, which are hired and funded by biopharmaceutical manufacturers, perform a range of activities for payers, patients, and providers related to reimbursement and patient access support services. They coordinate with a physician's office to provide a single point of contact and referral, reducing the patient administrative management burden on a physician's office. They also help with the collection and organization of de-identified patient data.

At a macro level, these service providers absorb activities and functions that could be—and sometimes are—performed by a specialty pharmacy. In doing so, they can help broaden a manufacturer’s limited network by reducing barriers to entry.

THE COMBINING CHANNEL

Interestingly, the biggest hubs are owned by other supply participants, many of which also own a specialty pharmacy. Here are some of the largest market participants.

There’s no public data on market share, but I estimate ABC’s Lash Group is the largest hub provider. Lash (and now Theracom) are part of the newly-formed AmerisourceBergen Consulting Services (ABCS), which accounts for a tiny sliver of ABC’s corporate revenues but has EBIT margins of 10-12%. Download the 2011-12 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors for a deep dive into ABC’s specialty business, including my estimates of each business unit’s underlying profitability.

ABC remains a leader in the consolidation of specialty drug channels and specialty service providers. But other customers, channels, and payers are also consolidating under common corporate ownership. Centric Health Resources was recently purchased by F. Dohmen, which also owns the Restat PBM and DDN pharmaceutical logistics and outsourcing business. And of course, a merger of Express Scripts (NASDAQ:ESRX) and Medco Health Solutions (NYSE:MHS) would bring together Healthbridge and Proherent.

WHY IS CAREMARK SELLING?

As far as I know, CVS Caremark has said very little about Theracom or its rationale for divestiture.

Put simply, Theracom is not as strategic to CVS Caremark as ABCS is to ABC. ABC has been positioning itself as a service provider to pharmaceutical manufacturers, whereas a PBM works on behalf of plan sponsors and third-party payers. I often wonder how much payers really understand about a reimbursement hub’s role and its allegiance to a manufacturer.

Perhaps you’ll agree with an alternate theory suggested by a Drug Channels reader: Caremark is getting rid of a superfluous business to attract a potential buyer and/or prepare for a spin-off. It doesn’t seem right to me, but none of us really know.

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P.S. To readers who will be welcoming 5772 tonight: L'Shana Tovah!