Drug Channels News Roundup: October 2012

It’s time for my Halloween roundup of spooky Drug Channels news. Here are today’s terrifying stories:

• Dawn of the DEA: The never-ending battle against wholesalers
• No Fangs: Pharmacy lawsuit against preferred Part D networks is dismissed
• Stake through the Heart: People trust the Internet more than pharmacists
• Frankenbill: New potential legislation on distribution security

Plus, a funny video trick-or-treating lesson … for pharmaceutical sales reps!

McKesson Buys PSS: Channel Consolidation Carries On

Yesterday, McKesson (NYSE: MCK) announced plans to acquire PSS World Medical (NASDAQ: PSSI), paying a 34% premium over Wednesday’s closing stock price. Read the press release.

This acquisition is another solid deal for McKesson. The combined companies will have about 28-30% of the ambulatory (non-acute care) medical-surgical distribution business. Cardinal Health will be distant second, with less than 10% of this business. As with US Oncology, the acquisition once again allows McKesson to snatch another likely target from Cardinal. At a more than-12X multiple of EBITDA, the deal is pricey. [NOTE: EBITDA multiple corrected from earlier version.]

For manufacturers, distributor consolidation once again blurs competitive boundaries between business partners. Companies with both pharmaceutical and vaccine portfolios will feel the most pressure. Read on for a quick look at the med-surg market and the transaction.

Book Review: The Business of Healthcare Innovation

The Business of Healthcare Innovation, a new book edited by my friend Lawton Burns of the Wharton School, is a highly-recommended examination of four major business sectors developing innovative healthcare products—pharmaceuticals, biotechnology, medical devices, and information technology.

The second edition brings the analyses (mostly) up-to-date, so it’s a worthwhile and cost-effective purchase, even if you already own the 2005 edition. The chapter on mergers and acquisition is particularly useful. Experienced executives will appreciate the book’s focus on the big picture ideas, while everyone else will benefit from the broad strategic perspectives on each sector.

Read on for my review.

Pharmacy Ownership: Getting Less Profitable

Time for my always-controversial annual look at independent pharmacy owners’ true economics, courtesy of the just-released 2012 NCPA Digest, Sponsored by Cardinal Health. Here's the press release: NCPA Digest Finds Independent Community Pharmacists Cut Costs Through Generic Drugs; Boosting Patient Adherence.

The news is not as good as previous years. Here are five observations from the new report:

• Overall pharmacy profit margins remain stable.
• An independent pharmacy’s profits per prescription are decreasing. In 2011, gross profit dollars per prescription were $12.40, vs. 2010's $13.43.
• The average pharmacist owning a single pharmacy earned about $234,000 in 2011—8% less than 2009.
• The average pharmacist owning multiple pharmacies earned about $982,000, down 12% vs. 2010.
• Despite the sad economic news, the total number of independent pharmacies increased in 2011.

As always, I welcome your comments on this peek at pharmacy economics. To keep things civil, I include a few helpful ground rules below.

How Hospitals Inflate Specialty Drug Prices

Many people blame pharmaceutical manufacturers for high specialty drug prices. Yet channel intermediaries also add to drug prices, via mark-ups that account for the costs, profits, and value of the channel's services. But sometimes these mark-ups are eye-poppingly outrageous, as appears to be the case for North Carolina hospitals.

According to N.C. nonprofit hospitals make big money on cancer drug markups, hospitals are routinely marking up specialty drugs far above Average Sales Price (ASP). For example, the table reproduced below shows that Duke University Hospital received nearly $23,000 for Avastin, versus an ASP of about $6,000. And as reported in Prices soar as hospitals dominate cancer market, hospitals are buying independent oncology practices and then able to charge more “for the same chemotherapy in the same office,” due to differences in payment methods.

For payers, these examples highlight the appeal of channel management strategies such as white bagging and medical benefit management. For manufacturers, the stories illustrate what happens to drug prices as providers consolidate and traditional classes of trade blur.

Read on and be outraged.

For 2013, Preferred Pharmacy Networks Propagate in Part D

Yesterday, Medicare Part D kicked off its open enrollment period. Between now and December 7, America’s seniors will have the opportunity to keep their existing plan or switch to a new one. In 2010, Medicare Part D paid for about 20% of all retail prescription drugs.

In 2013, preferred networks will make a big splash in Part D. Listed below are the 16 prescription drug plans (PDPs) with preferred pharmacy networks, including five new 2013 plans. In this post, I look at these plans and provide some observations on the plans, the participants, and the economics.

We’ll have to wait until 2013 to know how successful these plans will be, but I stand by my earlier prediction that at least 40% of beneficiaries will be in a PDP with a preferred network. I’ll check back with these plans once CMS publishes the 2013 enrollment data.

NADAC/NARP data are back!

The mystery deepens.

In contrast to my comments in this morning's post, CMS just republished the NADAC and NARP data on its Survey of Retail Prices web page.

Here are direct links to the data files:

• Draft NARP File [ZIP]

• Draft NADAC File [ZIP]

• NADAC Data Field Definitions [PDF]

I have not checked whether the data have changed since my download over the weekend.

Enjoy! You may want to download quickly, just in case they disappear again.

CMS Pulls NADAC/NARP Data; Plus, Pharmacy Economics 101

Yesterday's article (Transparency is Here! CMS Exposes Pharmacy Prescription Profit Margins) was one of the most viewed articles in Drug Channels's 6 year history. Thank you, faithful readers!

Alas, pharmacy data nerds got a rude surprise when they looked for the data, because CMS PULLED THE NADAC AND NARP DATA FROM THEIR WEB SITE! CMS also removed the June and July FUL/AMP data, along with the 3-month rolling averages. (UPDATE: Data are back online. See this post.)

I have no idea what what happened. A quick injunction? Big Bird blowback? Government goof-up? I'll let you know when (if?) the data reappear.

In the meantime, many pharmacy owners wrote to me with a similar lament: "My average cost of dispensing is about $10 per prescription. If my gross profit is less than $10, then I lose money." While this sounds logical, it is actually not true. Below, I explain why.

Transparency is Here! CMS Exposes Pharmacy Prescription Profit Margins

Pharmacy economics nerds: Your day has arrived!

Late Friday evening, the Center for Medicare and Medicaid Services (CMS) released its first batch of detailed data on pharmacy acquisition costs and pharmacy revenues (by payer type). These data allow anyone to compute average per-prescription pharmacy profit margins for more than 3,000 drugs at the 11-digit National Drug Code (NDC) level.

Wow.

To illustrate how easy it is, below I compute the per-prescription profit margins for three brand-name and three generic prescriptions. I also discuss profit patterns for the 3,230 drugs with both acquisition cost and revenue data.

The era of transparency has arrived. Expect violent and strenuous protests about these data from the pharmacy industry. Download the data now, before the inevitable injunction.

VA•DoD•PHS—Federal Pricing and Contracts Forum

Today, I welcome CBI’s 4th Annual VA • DoD • PHS — Federal Pricing and Contracts for Bio/Pharmaceutical Companies Forum as a Drug Channels sponsor. The event is being held at the Radisson Plaza-Warwick Hotel in Philadelphia, PA on November 28 and 29, 2012.

The top-notch speaking faculty includes government perspectives from the Department of Veterans Affairs (VA), Department of Defense (DoD), U.S. Public Health Service (PHS) and 340B Prime Vendor Program, and industry perspectives from Amneal, Boehringer Ingelheim, Cornerstone Therapeutics, Horizon Pharma, Johnson and Johnson, Lilly, Pfizer, and Teva. Read more in the official description below or visit the event website.

CBI is offering a special $300 discount to Drug Channels readers. Just register with promo code VADDC3. Thanks, CBI!

McKesson/Rite Aid: The Early Bid Catches the Contract

On Wednesday, Rite Aid (NYSE: RAD) unexpectedly announced an early renewal of its supply agreement with McKesson (NYSE: MCK). The agreement, which wasn’t due to expire until April 2013, will now run until March 31, 2016. See Rite Aid’s 8-K filing.

Investors must have been relieved, because McKesson's stock price jumped 3% yesterday. 2012 has already seen multiple large contract renewals with terms of three years or more. Examples include Cardinal’s agreements with Kmart and Kroger or AmerisourceBergen’s discount deal with Express Scripts. Given uncertainty about the supply intentions of large chains, I expect we’ll continue to see wholesalers offering incentives for early contract renewal.

Below, I quantify the McKesson/Rite Aid relationship and explain a bit about the deal’s economics, which are probably not as unfavorable to McKesson as you might expect.

Walgreen's September Sales Leave Us Shaken, Not Stirred

Yesterday, Walgreen reported its first monthly sales since rejoining the Express Scripts network on September 16. See Walgreens September Sales Decrease 7.8 Percent.

While the sky is not falling yet, the early data are not very promising. Same store pharmacy revenues were down by 16% compared to analysts’ expectations of an 11% drop. Shares were down 1.6% during a positive day for the market.

The next few months should look better, but Walgreen faces significant challenges in regaining lost customers. Below, I look at the detailed results, recent comments from Walgreen’s management, and offer some thoughts on Alliance Boots.

The 13 Fastest-Growing, Private Specialty Pharmacies

Time to check in with the recently-released Inc. 5000 list of fastest-growing private companies. The 2012 list nicely highlights the boom in specialty drug dispensing.

There are 13 companies on the 2012 list, compared to only 10 on the 2011 list. The pharmacies and their key stats are listed below. With revenues of $772 million, Diplomat Pharmacy again topped the list. The other 12 pharmacies had total revenues of $1.1 billion.

Given the eye-popping growth, I suspect that many of these companies will not remain independent for much longer.

MEDAlternatives: A Drug Alternatives Search Tool

I am pleased to welcome MEDAlternatives, a new product from Elsevier/Gold Standard, as a Drug Channels sponsor.

MEDAlternatives is an integrated database of medication alternatives and their costs, designed to help consumers learn about available alternate therapies. The system helps consumers understand their medication options, using only evidence-based alternatives that have comparable or better efficacy and safety compared to current prescriptions. Check out the fact sheet.

Many Drug Channels readers will also be interested in MEDAlternatives free, downloadable cost savings spreadsheet. It allows plan sponsors to plug-in data on member lives, average number of prescriptions, average costs, and estimated conversion rates to estimate savings.