Drug Channels

A New Opportunity to Reach the Drug Channels Audience

2009-11-20T02:00:00.005-05:00

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.

Who Reads Drug Channels?

Based on domain names from our web traffic logs, the blog is widely read by people at companies throughout the healthcare industry, including:

Pharmaceutical manufacturers (especially in supply chain, trade relations, and commercial operations functions)
Pharmacy benefit managers
Pharmaceutical wholesalers
Pharmacies (all types)
Health care providers
Government agencies
Large employers
Law firms
Institutional Investors

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.

Don’t worry—I can’t see the names of any individual readers, just the organization name assigned to your computer network.

How many people read Drug Channels?

Here is a chart of monthly page loads (views) and unique visitors of Drug Channels since I first started collecting data (March 2007). Click the chart to enlarge it.

As you can see, traffic has grown tenfold over the past few years. During the past two months, Drug Channels have averaged more than 22,000 page views and almost 14,000 unique visits. Although I generally post only 2 or 3 times per week, Drug Channels traffic is comparable to some leading trade publications.

Note that the big dips in the chart correspond to my July and August blogcations, although page view remained above 10,000 because traffic continued to come to the blog from search engines.

I am now making real-time traffic statistics for Drug Channels available. You can view these stats anytime by clicking on the Statcounter logo at the bottom of the right hand sidebar. These summary stats do NOT include domain names.

Sponsorship Opportunities

I am offering a maximum of two sponsorship slots. Sponsorship offers a unique opportunity to reach an engaged audience of professionals from around the industry.

Here’s my current idea, although I’m open to any other suggestions. Drug Channels sponsors will get:

Premier placement of a banner ad at the top of a Drug Channels sidebar, i.e., above the fold. This ad can link anywhere—your company’s main home page, a special campaign, whatever. The ad will appear with every post and will not be blockable by a browser add-in.
A “Sponsor Welcome” blog post
The ability to request a specific blog topic
Permission to reproduce blog posts (with full citation and URL) during the sponsorship period

Naturally, I will retain editorial control to maintain the integrity of the content.

Email me to discuss this opportunity or if you have any questions.

Drug Prices and Pharmacy Profits

2009-11-18T02:00:00.019-05:00

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.

PHARMACY MARGIN MATH

Pharmacies earn the majority of their gross profits on a prescription from “spread pricing”—the difference between (a) the “ingredient cost” reimbursement a pharmacy gets from a third-party payer or consumer minus (b) the pharmacy’s net acquisition cost for purchasing the product. Pharmacies also collect a fixed per prescription payment, a.k.a., a dispensing fee. See pages 16-20 of my pharmacy report for more details.

Most private and government third-party payers use the Average Wholesale Price (AWP) benchmark to estimate a pharmacy’s ingredient costs for a drug and compute a reimbursement amount. For instance, private employers in 2009 used an average discount of 16.4% from AWP, i.e., “AWP minus 16.4%,” as the ingredient cost reimbursement. AWP has a mathematical relationship to Wholesale Acquisition Cost (WAC), the list price used in the AARP study.

THE SURPRISING RESULT

The AARP study shows the average WAC (and hence AWP) for a brand prescription increasing. So what happened to pharmacy profits as the reimbursement benchmark rose?

To find out, I translated the AARP computations into a crude monthly per-script AWP estimate. I’m keeping things simple by ignoring the AWP rollback issue.

The table below shows my computations for the average gross profit and gross margin per brand prescription. These are averages, so YMMV. Click the chart to enlarge it.

Two observations:

Pharmacies now receive a smaller percentage of a bigger number. The average AWP discount has increased. PMBI’s 2009-2010 Prescription Drug Benefit Cost and Plan Design Report, which survey employers (not PBMs) on benefit plan design, shows the average discount off AWP increasing from -14.1% in 2002 to -16.4% in 2009. Despite bigger AWP discounts, average pharmacy reimbursement per script has increased from $91 in 2002 to $144 in 2009—an annual average growth rate of 6.7%.
Gross profits per brand prescription have grown very slowly. A retail pharmacy’s acquisition cost for a brand-name drug can be reasonably approximated using AWP/WAC benchmarks due to the pricing structure for single-source brand-name drugs. hus, average gross profits per brand drug prescription have increased very slightly and average gross margins per brand prescription have declined. Note that these computations are sensitive to the particular assumptions for column [E].

THOUGHTS TO PONDER

Efficient, low-cost dispensing fulfillment is crucial to a pharmacy’s economic survival. You may be surprised to see average gross profits per prescription remaining fairly consistent over the 2002 to 2009 period. However, it does reconfirm my belief in the challenges facing a retail dispensing model. Wal-Mart agrees, as I note in Wal-Mart Explains Its Healthcare Strategy. These pressures are one reason the average daily number of prescriptions per pharmacy has been increasing steadily across all dispensing formats. See exhibit 8 of the pharmacy report.
Profits from generic drug prescriptions have saved the day for pharmacies. The retail generic dispensing rate has gone from about 40% in 2002 to about 70% in 2009. Generic prescriptions yield higher profits per prescription for pharmacies than brand-name prescriptions. This superior profitability is being threatened as healthcare payers implement new payment benchmarks and pharmacies engage in a generic prescription price war.

EXTRA CYNICAL FUN FACT

The AARP report was co-authored by Stephen W. Schondelmeyer, a professor at the University of Minnesota. He is quoted in the New York Times article as saying: “When we have major legislation anticipated, we see a run-up in price increases.”

My web searching finds that tuition at the University of Minnesota increased by 7.3% this year (source) and by 7.5% last year (source).

Golly, those increases are quite a bit higher than the CPI-U, too.

I look forward to learning what major legislation is causing a run-up in tuition increases by the University of Minnesota.

Healthcare Reform Options for AMP

2009-11-17T02:03:00.000-05:00

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.

Here’s an excerpt highlighting two significant issues—the applicability of Federal Upper Limits (FULs) and publication of AMP data (however AMP is defined):

Both bills would also amend the provisions relating to FULs. The Senate bill strikes the mandate that CMS establish a FUL when there are two or more equivalent products, and instead authorizes FULs set at 175 percent of the weighted average of the AMPs for equivalent multiple source drug products available on a nationwide basis. Under the House bill, the FUL would be set at 130 percent of the weighted average of the AMPs. These provisions would also necessitate that manufacturers report to CMS the total number of units associated with AMP calculations.

On the other hand, the bills appear to reflect a moderate retreat from the AMP transparency contemplated by the DRA, in that they would amend the law to provide for public disclosure of the weighted average AMP for multiple source products, rather than individual manufacturers’ AMPs.

It's hard to predict precisely how everything will turn out, but AMP-based reimbursement will surely be here sooner if health care legislation passes.

In case you are wondering, the picture above is an accurate depiction of AMP’s chemical structure.

PBMs Go Global for Growth

2009-11-13T00:01:00.017-05:00

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.

GLOBAL INVESTMENTS

According to the SeaRainbow press release:

Under the agreement, both sides plan to respectively invest at best USD 12 million to set up a 50-50 joint venture in Hong Kong. The new company will pioneer the PBM business, which has not yet been practical in Mainland China.

In detail, the agreement was inked between a Hong Kong-based wholly-owned subsidiary under SeaRainbow and ESI Singapore II Pte Ltd., a wholly-owned subsidiary under Express Scripts. ESI Singapore was registered in Singapore. ESI Singapore will have an option to raise its stake in the venture to 51% six months after the signing of the agreement, and buy an additional 20% stake from the Chinese partner two years after the establishment of the venture.

The Express Scripts news is just one more data point that the PBM business model is going global. Recall that Medco Health Solutions (NYSE: MHS) is investing in Europe, most recently via a joint venture with Irish drug distributor United Drug. (source)

GLOBAL OPPORTUNITY

IMS projects that emerging economies will grow much faster than the mature economies of the U.S. and Europe, so pharmaceutical manufacturers are looking to these new markets for growth. Pfizer CEO Jeffrey Kindler recently said: “Right now I think we're the number one company in China and the overall opportunity is enormous.” See Drugmakers place big bets on emerging markets.

Global PBMs could put a crimp in those plans. We all know that PBMs help to accelerate generic substitution, a key reason that spending on outpatient drugs is now growing more slowly in the U.S. than other health care services.

So you will not be surprised to learn the U.S. generic dispensing rate is far above other countries. Here’s some interesting market share data about generics from How to Increase Patient Access to Generic Medicines in European Healthcare Systems, a June 2009 report published by the European Generic Medicines Association.

You go, Latvia!

You can read the whole EGMA report if you’re curious about the details, but the headline conclusion: “The main reason for such discrepancies in relation to market shares is the varying effectiveness of differing healthcare policies in enhancing generic medicines penetration.”

Translation: Incentives for generic substitution are much lower in Europe.

The Chinese market isn’t comparable to Europe since legitimate drugs share the market with unauthorized copies and outright fakes. Nonetheless, the establishment of the first Chinese PBM should help the market to mature. Greater global penetration should also be good for generic drug manufacturers.

Extra credit: Wikipedia has an astonishingly detailed article on the Pharmaceutical Industry in China. Who writes these things?

P.S. If you've read this far, then paraskevidekatriaphobia didn't prevent you from enjoying Drug Channels today!

Gray Market: I'm Not Dead Yet

2009-11-12T08:49:00.008-05:00

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.

History has shown us that wild west secondary trading markets create a wide open gateway for counterfeit drugs to enter the legitimate drug distribution system. Read Dangerous Doses: A True Story of Cops, Counterfeiters, and the Contamination of America's Drug Supply, an expose of drug diversion by essentially unregulated drug wholesalers in Florida. The book will show you why Florida passed a pedigree law.

Even Cardinal Health (NYSE:CAH) was forced to promise good ol’ Eliot Spitzer that the company would back away from secondary markets. See Cardinal's Sins.

Inventory Management Agreements (IMAs) and Fee-for-Service agreements dramatically reduced secondary market activity in the U.S. wholesale channel. This has limited product leakage into the grey market and closed a significant entry point for counterfeit drugs.

But we still need to be vigilant because even legitimate pharmacists will be tempted to purchase in the secondary market. A 2004 study found that two-thirds of hospital pharmacy directors use secondary wholesalers as a resource to obtain needed supplies during a product shortage. (Source) If there are willing sellers of dubious H1N1 vaccine, I’m sure there are buyers out there.

Pedigree is one possible solution, although we have no national standards as I point out in my 2008 op-ed Securing America’s Pharmaceutical Supply Chain. I haven’t written a lot about pedigree since the California law was pushed off to 2015, dashing the hopes of many tech companies. See CA E-Pedigree: Hasta La Vista, 2011 and Federal Pedigree Sand Trap for background on the general topic.

BTW, the CCT article references a lawsuit by RxUSA regarding pedigree. As reported in Pharmaceutical Commerce, RxUSA’s lawsuit against wholesaler and manufacturers was thrown out in late September. But as far as I know, the FDA is still enjoined from implementing the pedigree requirements of the 1987 (!) Prescription Drug Marketing Act as I discussed way back in No PDMA for You! in December 2006.

Bonus tip: In addition to potentially-counterfeit flu vaccine, you can also find some wicked good licka stohars down theyah on the Cape.

Manufacturers and the Evolving Pharmacy Channel

2009-11-10T00:01:00.010-05:00

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.

My key point:

The corner drugstore has evolved into consolidated, multibillion-dollar public corporations that manage the distribution, dispensing, and payment of prescriptions. These organizations will be able to use their emerging influence to extract financial support from pharmaceutical manufacturers as pharmacy margins erode. Manufacturers should be prepared with an integrated approach to engage effectively with these participants and maintain competitive position.

Please feel free to post comments on the article—pro or con—here on the blog.

I'm helping a number of clients with these issues, so drop me a line if you'd like to schedule a confidential discussion on this topic.

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As a Philadelphia resident, I'm ashamed to admit that the Yankees World Series victory may be a positive leading economic indicator per Yankees World Series Victories Boost Economic Growth. You may recall the unfortunate accuracy of last year's World Series prediction in Phillies win!! Economy doomed?.

Only 146 shopping days until Opening Day 2010!

CVS Caremark: Pharmacy Gain, PBM Pain

2009-11-06T00:36:00.011-05:00

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.

Here are the primary sources for your reading pleasure:

THE BENEFIT TO RETAIL

Despite the bad news about the PBM business, the retail pharmacy segment posted another quarter of above-market growth. CVS pharmacies’ same store sales grew by 8.0%. Maintenance Choice accounted for 250 basis points of this increase, demonstrating how the program is helping to grow the company’s retail pharmacy market share. See my recent pharmacy report for more on Maintenance Choice and its impact on the market.

The positive synergy for the pharmacy business is apparent from the growing share of CVS' retail prescription revenues coming from CVS Caremark’s PBM businesses. In two previous posts (here and here), I describe how to use the accounting construct called intersegment eliminations to measure this effect. The chart below shows how important the PBM business has become to the brick-and-mortar pharmacies.

The PBM share at CVS stores was fairly flat in the two years after the Caremark acquisition (2007 and 2008). Since 2008:Q4, we’ve seen PBM business at CVS pharmacies increase by 520 basis points to 21.4% of prescription revenues. In other words, more of CVS’ pharmacy revenues is coming from its own PBM businesses. CEO Tom Ryan even validated this fact on the earnings call, stating:

“PBM is helping the retail business. The retail business is taking share from other players in the business.”

Left unsaid is the risk that further losses in the PBM business could reverse this beneficial effect.

Two technical notes for those who care about such details:

To provide a clearer picture of the retail business, I compute the figure differently than CFO Dave Rickard because I use prescription revenues from CVS pharmacies as the denominator.
The intersegment figures from the most recent two quarters are artificially inflated because RxAmerica contracts were moved from "net" to "gross" accounting in Q2:2009. The dotted line in the chart above shows my estimate of an apples-to-apples comparison. The retail revenue synergy is still increasing but a bit less impressively.

THE COST TO BENEFIT MANAGEMENT

How does patient care improve when a PBM owns a brick-and-mortar pharmacy chain? What are the hard-dollar cost-savings from Maintenance Choice for the payer? And how exactly does a payer benefit when CVS increases its pharmacy market share?

These are reasonable questions—and ones that CVS Caremark is apparently having a hard time answering to the satisfaction of payers. Listen to CEO Ryan from yesterday’s conference call:

“I think it’s fairly common knowledge that our message early on was not clear, to be honest. It was not simple for managers, benefit managers to understand. It focused a little too much on the retail side of the business as opposed to a coordinated effort…”

The company expects to lose PBM contracts worth $4.5B in revenue—more than twice the $2B figure disclosed in its last earnings call. CVS Caremark also lost $1.7B of Medicare Part D business as I highlighted in CVS' Losses in 2010 Part D Enrollment.

These contract losses are occurring despite what I perceive to be a profitability sacrifice baked into the combined offering. The company contends that its prescription profits increase when consumers move from a mail-order to a brick-and-mortar pharmacy. But the underlying economics don’t make sense (at least to me) as I explained last May in The Odd Economics of Maintenance Choice.

In other words, it looks like the company is effectively reducing its own profitability, yet not reaping the benefits of increased PBM market share.

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CVS Caremark management faced very tough questions from investors and analysts on yesterday’s call. The combination has now moved from a “show me how you’ll make it work” situation to a “show me why you shouldn’t just spin off the PBM” story. It will be interesting to see how the FTC approaches this confusing situation.

Dilbert on Drug Marketing

2009-11-05T02:01:00.005-05:00

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

2009-11-03T02:01:00.004-05:00

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.

The authors use monthly data for 2000–2004 from IMS Health on virtually all prescription drugs sold in the United States. A few fun facts from the paper about the generic market in 2000 to 2004:

Generics’ market share increases sharply and suddenly after year 12. Thank you, Hatch-Waxman!
For a patent-protected drug, the average price increases about 44 percent (about 3.5 percent per year) from year 0 to year 12.
Between year 12 and year 17, the average price declines by 61 percent. Advertising expenditures drop by roughly the same amount.

Here’s my favorite chart:

I believe that substitution speed has increased since 2004 a la the Fosamax example that I highlighted in Medco Takes on Eli Lilly. Anyone know of a study that looks at a large sample of recent generic launches?

Here’s my summary of the author’s main theoretical question:

Promotion by a manufacturer increases total prescriptions for a drug.
Following the launch of the generic version(s), competition reduces the prices of both the innovator drug and the generic.
Promotion by the manufacturer of the brand declines after generic entry because there is less incentive to promote as the price drops.
At the same time, a decline in price should stimulate demand per Economics 101. Thus, the net effect of generic competition on demand is (theoretically) indeterminate.

And the answer?

“The two hypothesized effects of increased competition from generics—increased utilization due to falling prices, and decreased utilization due to reduced marketing—appear approximately to offset each other.”

Thanks for checking, guys!

Noteworthy News Stories

2009-10-30T00:01:00.019-04:00

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!

Face-Off: Pharmaceutical Distributors
A financial blogger ranks the stock market prospects of the Big 3 drug wholesalers--AmerisourceBergen(ABC), Cardinal Health (CAH), and McKesson (MCK). Can you guess who comes out on top?

CVS Caremark Drug-Benefit Pitches Missed The Mark For Some
The premise of this Dow Jones article from early September: "CVS Caremark Corp.'s (CVS) effort to sell potential clients on the advantages of using a pharmacy benefits manager linked to a retail drug-store chain apparently missed the mark in several cases this year." Listen for a selling season update on next Thursday's earnings conference call.

Health Wonk Review: Killer viruses and the undead public option
This latest collection of wonkery from around the web comes with a healthy serving of groan-worthy Halloween puns. Spooky!

Phillies Hope To End 364-Day World Series Drought
"The last time the Philadelphia Phillies brought a World Series title back to the City of Brotherly Love, the nation's financial sector was in complete ruin, the cost of a gallon of milk was only $2.74, fans watched the Fall Classic while huddled around their slightly-less-streamlined high-definition television sets, and Philadelphia slugger Ryan Howard was just 28 years old." 'nuff said!

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This Halloween, I’ll be dressing up as an RFID tag from the Springfield Nuclear Power Plant!

An RFID tag is especially appropriate because this blog is sometimes hard to read.

DOH!

Should pharmacies be liable for stupid patients?

2009-10-29T00:01:00.008-04:00

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.

THE REPORTED FACTS

The personal tragedies described in this story are a heartbreaking reminder that prescription drug abuse is a serious problem.

Briefly, a woman who abused prescription painkillers went for a drive and swerved off the road, killing one man and seriously injuring another. Alas, the driver was unhurt. There were prescription bottles and 167 loose pills of hydrocodone, Soma and other drugs in her car. A blood test detected hydrocodone after the accident. The driver pleaded guilty to two counts of reckless driving and served nine months in jail. Yes, only nine months.

Here’s where things get complicated.

According to the article, Nevada’s Prescription Controlled Substance Abuse Prevention Task Force sent a letter to 14 pharmacies in the Las Vegas area one year prior to the accident warning that the woman could be abusing drugs after she purchased 4,500 painkillers in one year.

The victims’ families duly filed a lawsuit against seven pharmacy-chain owners—including Wal-Mart, Walgreen, CVS Caremark and Rite Aid—and one independent drugstore.

PIN THE BLAME ON THE PHARMACY?

According to the WSJ reporter, “The case, Sanchez vs. Wal-Mart Stores et al, asks whether drugstores must use information at their disposal to protect the public from potentially dangerous customers.”

Let me put it another way: Can the seller be held liable if the buyer does something incredibly stupid after leaving the store? Why not sue the car dealer that sold her the car? Or the gas station where she filled up before the accident? If this case goes against pharmacies, there could be a never-ending stream of brand-new “liabilities” and "responsibilities" for pharmacies.

Plus, I don’t see how any single pharmacy or pharmacist would have been able to deny filling her prescription since the woman was using multiple pharmacies to get her pills. Dispensing controlled substances doesn't fall into the category of a “commoditized activity” per my article about Wal-Mart last month.

More questions: Where was law enforcement? Why didn't they intervene once the form letter from the Nevada Board was mailed? The protagonist in this drama served only nine months! Didn't she know that she was abusing the prescriptions meds, or has she been absolved of all responsbility?

Am I’m missing something in this story? I’m curious to know what my pharmacist readers think about this case.

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A Friendly Reminder

Special introductory pricing for the U.S. Pharmacy Industry: Economic Report and Outlook ends on Saturday. Be sure to download the report this week before the price goes up.

Best Of

2009-10-28T00:01:00.002-04:00

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?

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?

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

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

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

Please let me know if I missed one your favorites.

Adam

Drug Channels Earnings Calendar

2009-10-27T00:01:00.005-04:00

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.

McKesson (NYSE:MCK)
Tuesday, October 27, 2009
Earnings Conference Call at 5:00 p.m. ET

Express Scripts (NASDAQ:ESRX)
Thursday, October 29, 2009
Earnings Conference Call at 10:00 a.m. ET

AmerisourceBergen (NYSE:ABC)
Tuesday, November 3, 2009
Earnings Conference Call at 11:00 a.m. ET

Medco Health Solutions (NYSE:MHS)
Tuesday, November 3, 2009
Earnings Conference Call at 8:30 a.m. ET

Cardinal Health (NYSE:CAH)
Thursday, November 5, 2009
Earnings Conference Call at 8:30 a.m. ET

CVS Caremark (NYSE:CVS)
Thursday, November 5, 2009
Earnings Conference Call at 8:30 a.m. ET

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BONUS: Should we hope that the Phillies lose?

Last year, I pointed out the dangers to the U.S. economy if the Phillies win the World Series. Check out Phillies win!! Economy doomed? from October 2008.

Alas, my warning has proven to be depressingly prescient because the U.S. has lost 5.4 million jobs since the 2008 series ended.

I hate to think that I need to become a Yankees fan now…

Medco Takes on Eli Lilly

2009-10-21T00:01:00.009-04:00

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?

SAVING MONEY, MAKING MONEY

Dr. Robert Epstein, Medco's chief medical officer, pulls no punches in yesterday’s press release:

“Plavix is going generic in 2011 and if found to be equally effective as Effient for patients who have a normally functioning version of the CYP2C19 gene, the study provides the evidence that would allow these patients to opt for a lower cost treatment.”

Translation: "Medco wants to profit by helping its customers—payers of prescription drug plans—save money. So sorry about your R&D investments, Eli Lilly."

It’s no secret that generic substitution is the most reliable and consistent way for a payer to reduce expenditures in a prescription drug plan.

The average brand-name prescription was $137.90 in 2008, while the average generic prescription was $35.22. (source) At these average prices, a brand-to-generic substitution would save $102.68 per prescription, a cost reduction of 75%.

Generic prescriptions are also more profitable for the channel—pharmacies, wholesalers, and PBMs—than brand-name drug prescriptions. (See my new report for details.) The superior profitability of generic drugs for the channel creates powerful incentives for accelerated generic substitution and also aligns the PBM’s interests with payers.

DIVERGING INTERESTS

Medco’s announcement highlights how the economic and business interests of companies within the pharmacy supply chain are diverging away from brand-drug pharmaceutical manufacturers. It's also a pretty compelling counter-example to the idea that PBMs have an incentive to dispense more expensive brand name drugs over cost-saving generics.

The chart below should provide a pre-Halloween scare for pharmaceutical manufacturers. It appears on page 22 of the 2009 Medco Drug Trend Report. Click the chart to enlarge it.

In the first 30 days after generic versions of Merck’s Fosamax® (alendronate sodium) were launched in early 2008, the brand-name product lost 94% of its market share at mail and 84% of its market share at retail.

Ouch. That’s gotta hurt.

You youngsters may not believe it, but I’m old enough to remember when “end-of-lifecycle planning” was a legitimate consulting project for brand drugs with generic competition. A 1998 CBO study backs up my recollection of yesteryear. The average market share of 21 generic drugs launched from 1991 to 1993 was only 44% after one year (per the CBO in 1998).

Ah, yes, the good old days…for pharmaceutical manufacturers.

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It's all fun and games until someone starts a fire.

My hometown Phillies are on the verge of another trip to the World Series tonight. As a Philadelphia resident, I was happy to see this story: Cops brace for possible repeat of unlawful Phillies phever.

Go Phillies!

Healthcare Reform: Bullish for PBMs, but Not Pharmacies

2009-10-20T00:01:00.012-04:00

"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.

The Bullish Case for PBMs

If you believe the CBO’s October 7 analysis of the America’s Healthy Future Act of 2009, then the total non-elderly insured population will grow by 50 million people by 2019. The number of uninsured will drop by 29 million people while the number covered by Medicaid/CHIP will grow by 14 million.

Here’s the breakdown of coverage that I derived from page 14 of CBO’s letter to Senator Baucus. (Click the chart to enlarge it.)

The net effect will be an overall increase in the number of people covered by prescription drug insurance. I assume that most plans sold through health insurance “exchanges” will include some type of drug coverage. (Click here for a helpful overview of the insurance exchange concept from the Kaiser Family Foundation.)

Pharmacy Benefit Managers (PBMs) are the likely administrators of these plans, regardless of coverage guidelines or the government’s involvement. This brand-new market won't appear until 2014, which is when the CBO expects the number of uninsured to start dropping significantly.

The Less-Bullish Case for Retail Pharmacies

Prescription drug insurance is a double-edged estoque for retail pharmacies.

The good news for pharmacies is that overall prescription utilization would grow, benefiting brick-and-mortar pharmacies. This is exactly what happened in 2006 when the Medicare Part D benefit was introduced.

At the same time, greater insurance coverage would also depress pharmacy margins. As I show in Exhibit 13 of my new pharmacy report, pharmacies earn much higher margins from uninsured and underinsured individuals, a.k.a. “cash customers.” In contrast, the pooled negotiating power of third-party payers limits the profitability of pharmacy prescriptions for consumers with third-party insurance.

You may not appreciate that this margin decline also occurred when Part D started. Here’s a quote from CVS Caremark’s 2007 10-K filing:

“The Medicare Drug Benefit became effective on January 1, 2006. Since its inception the program has resulted in increased utilization and decreased pharmacy gross margin rates as higher margin business (such as cash and state Medicaid customers) migrated to the new Medicare Part D coverage.”

There are other aspects of the proposal that will benefit pharmacies. Everything could change as the proposal gets turned into law. So, my comments only represent the first stage in the coming bullfight.

Provider Pain in the Healthcare Supply Chain

2009-10-16T00:01:00.004-04:00

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.

As you read the report, ask yourself: How could my company’s go-to-market strategy give me an edge with providers?

ABOUT THE RESEARCH

Two professors from the University of Arkansas’ Center for Innovation in Healthcare Logistics conducted an online survey of healthcare supply chain professionals. Oddly, the survey was conducted 11 months ago although the results were just released this week.

I’m going to focus my comments on the perspectives of 1,063 respondents working at healthcare providers. The other categories (manufacturer, distributor, GPO) each had less than 100 responses. I wrote to the study’s authors to get more details about the composition of the providers group—acute-care hospital, physician’s office, clinic, and so on. I’ll update the post if I find out more.

Unfortunately, there is no indication of how the findings vary based on product type, such as pharmaceutical versus med-surg products.

PROVIDERS ARE NOT READY FOR THE FUTURE

The lack of data standards jumps out as a major pain point—and opportunity—throughout the survey. For example:

Providers cite “Lack of Data Standards” as the biggest barrier they face in collaborating with supply chain partners (page 11).
Most providers are *not* moving toward adoption of data standards such as GS1 (page 15). A majority (51%) didn’t even know the answer to this question!
A majority of providers have not improved product traceability during the past 12 years (page 12).

What’s holding back adoption of data standards? No surprises here. The most frequently cited reasons by providers were “Lack of Resources” and “Information Technology.”

Hard to see how bright ideas like serialized track-and-trace will ever get enough traction within provider organizations given these results.

TRACK-AND-BILL?

The traditional buy-and-bill model for outpatient injectable/infusible medications is under pressure as payers limit the profitability of specialty drugs for providers. See my discussion of provider cost-plus reimbursement methodologies in the U.S. Pharmacy Industry: 2009 Economic Report and Outlook.

This development will level the playing field as reimbursement profitability becomes less relevant as a decision factor.

That’s why I think that the supply chain could be a major area of future opportunity.

This opportunity becomes even more intriguing when you consider that one-fifth of the average provider’s operating expenses were devoted to inventory management and order management. (See page 25 of the study.)

Think about this post as an idea-starter. If you are (or will be) a manufacturer or distributor of specialty products, gather the sales, marketing, trade, and brand teams to review the results of the survey and brainstorm on possible applications. What kind of competitive advantage is available by removing supply chain pains for providers?

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Check out the best of health care blogging in the new Health Wonk Review being hosted at InsureBlog.

Interpreting IMS’ Shiny Happy New Forecast

2009-10-13T00:00:00.013-04:00

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.

WHAT IMS PROJECTS

The upgrade should be no surprise to anyone who has been following IMS’ weekly reports, same-store pharmacy sales figures, or the data feeds from their wholesalers. It’s also consistent with my prediction from October 2008 that the recession would not sink the industry.

IMS’ forecast refers to sales as measured by its National Sales Perspectives (NSP) data. NSP reports sales *into* the various distribution channels tracked by IMS. Thus, the data represent product purchases from wholesalers or manufacturers, not retail pharmacy sales to patients.

NSP represents sales at invoice pricing, not sales at a list price such as Wholesale Acquisition Cost (WAC) or Average Wholesale Price (AWP). Contract pricing, such as a discounts processed via a wholesaler chargeback transaction, are apparently reflected in the IMS NSP measures of price and sales. However, rebates paid by the manufacturer—to a health plan, PBM, Part D plan, Medicaid, or others—are not reflected in these data. The press release refers to these discounts as “off-invoice discounts and rebates.”

COMPARING TO VERSUS FROM

The chart below compares growth in retail pharmacy revenues (as reported by the NACDS Industry Profile) to growth in IMS NSP sales into retail distribution channels. Click to enlarge the chart.

As you can see, NSP sales grew faster than retail sales from 2005 through 2007 by an average of 73 basis points, but slower in 2008 by 34 basis points.

What happened? Well, no one knows for sure, but here are few possibilities:

Any differences between the data series are statistical flukes. Oh well.
Retail pharmacies built extra inventory in 2005 to 2007, and worked down those inventories in 2008. IMS cites “pricing flexibility and inventory management actions” for the new higher forecasts, but offers no further explanation.
IMS is correcting an earlier underestimation of growth in the mass merchant and mail channels. See Prescriptions and the Economy: A Contrarian View from last October.

Another source of variation arises because NSP data do not reflect channel margins.

I estimate that generic drugs contributed $14 billion more in gross profits to pharmacies and wholesalers in 2008 than did brand drugs.

Only 12% of pharmacy revenues from brand prescriptions goes to the channel (pharmacies and wholesalers), while the remaining 88% goes to the manufacturer.
In contrast, more than half (51%) of the total pharmacy revenues from generic drug prescriptions goes to the channel.

See pages 16 to 20 of the U.S. Pharmacy Industry: 2009 Economic Report and Outlook for details behind these computations.

Anyone else care to share their insights to the new forecasts?

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FYI, journalist Ed Silverman has re-launched Pharmalot, a great source for pharma industry news. Welcome back, Ed!

Scoring the CBO

2009-10-09T08:33:00.007-04:00

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.

Poll: Happy, Healthy Obamas Out Of Touch With Miserable Americans

'nuff said.

A Phony Mail Order Controversy

2009-10-08T00:01:00.011-04:00

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.

GETTING SOME SATISFACTION

Here are the average pharmacy satisfaction rankings rankings (out of 1,000 points) by pharmacy format from the J.D. Power survey. Click the chart to enlarge it. Note that brick-and-mortar pharmacies were evaluated using different, store-related factors than mail-order pharmacies. (See paragraph 6 of the J.D. Power press release for details.)

Two interesting findings:

The mail-order pharmacies of the big 3 pharmacy benefit managers (PBMs)—CVS Caremark (CVS), Express Scripts (ESRX), and Medco Health Solutions (MHS)—all ranked slightly below the mail-order average.
Two franchise chains of independent pharmacies—Health Mart (McKesson) and Medicine Shoppe (Cardinal Health)—ranked above the chain segment average.

The J.D. Power results are consistent with the relatively high mail satisfaction findings from the 2008 Boehringer Ingelheim Pharmacy Satisfaction Digest (conducted by WilsonRx) that I discuss in Pharmacists Can't Get No Satisfaction from Mail.

…OR NOT?

Gosh, how did the combined efforts of J.D. Power and WilsonRx fail to detect the supposed "widespread problems" with mail order?

A quick look at the respective methodologies makes the answer crystal clear. Click the table to enlarge it.
The NCPA survey suffers from what statisticians call “bias”—the tendency for a survey’s findings to be unrepresentative of the whole population. Sources of bias include:

Non-response bias: Only consumers who shop at independent pharmacies were sampled.
Invalid sample size: “Just over 400” surveys collected from more than 23,000 NCPA member pharmacies
Non-sampling error: Did the pharmacy owners encourage only disgruntled consumers to fill out the survey? Who decided which surveys got returned for analysis?

I could go on, but you get the idea.

Look, I understand that some pharmacists don’t like mail-order because it hurts their business. But it’s insulting to the discipline of statistics to place NCPA’s survey side-by-side with the other two surveys.

Before you accuse me of bias, keep in mind that I am ranting about statistics, not about mail-order pharmacies. If you are still confused, please read Chapter 4 of What is a Survey?, a straightforward, non-technical booklet designed to improve survey literacy.

Of course, that's just my opinion. I could be wrong.

A Peek at Drug Wholesalers' Economics

2009-10-07T00:01:00.016-04:00

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?

A PEEK AT THE REPORT

HDMA’s Factbook is based on data from 18 reporting companies. I notice that at least one large wholesaler—Kinray—did not provide sales data.

The Factbook presents a confusing array of figures—weighted averages, averages, medians, and middle ranges. The weighted average is most meaningful because it summarizes the business of the big 3 wholesalers—AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK).

The weighted average profitability figures in the HDMA Factbook correspond roughly to the SEC filings of the big 3:

Gross profit margin = 2.70%
Operating profit to net sales = 1.54%
Return on Investment = 19.2%

Other statistics use the distribution center (DC) as the unit of analysis. Presumably, the DC-level data strip out the effect of ancillary businesses such as packaging or automation. There are 130 DCs in this year’s sample.

However, two of the three big wholesalers have national DCs that supply other, smaller DCs within their network. The report doesn’t address this complexity, making the interpretation of the DC averages a bit murky.

A PEEK BEHIND THE REPORT

Over the years, I have found the Factbook to be quite useful for deriving or confirming intriguing statistics that do not appear in SEC filings.

For instance, did you know that vendor payment terms, a.k.a. prompt-pay discounts, from drug manufacturers still represent about half of drug wholesaler’s gross profits in 2008? (I computed this figure based on Table 22.) Fee-for-service payments, which get so much attention, represent less than half of the balance.

The report could also help you figure out various wholesaler revenue and profit streams. For example, I used data from the HDMA Factbook to quantify how much more wholesalers earned from generic drugs versus brand-name drugs. See Exhibit 12 of the U.S. Pharmacy Industry: 2009 Economic Report and Outlook for my answer.

TWO CAVEATS

The report does not provide much substantive analysis to help you interpret the data. That's one reason that I included these topics in my 2009 Economic Report on Pharmaceutical Wholesalers.

Another shortcoming is HDMA’s decision to make the report available as a hard-copy spiral-bound book but not as an electronic PDF file. I find it much more difficult and less convenient to locate material in a hard-copy book versus searching an electronic file, the format of reports such as the NACDS Industry Profile or the NCPA Digest.

I asked HDMA about this decision. Karen Ribler, Executive VP and COO of the HDMA’s Center for Healthcare Supply Chain Research, told me:

“HDMA has a long tradition of offering this book to the healthcare industry as a hardcopy reference tool. What we do offer is a CD that allows users to download pertinent data for marketing, benchmarking or planning. They can then put Factbook data straight into their powerpoints.”

The Factbook is available for sale from the Center for Healthcare Supply Chain Research. The non-member price is $225.00 (book only) or $325.00 (book plus data CD). I did not evaluate the more expensive version with the data CD.

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I’m mindful of the FTC’s new guidelines for bloggers, so you should know that HDMA provided me with a complimentary copy of the report (value=$225.00).

CVS' Losses in 2010 Part D Enrollment

2009-10-06T00:01:00.012-04:00

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.

NEXT YEAR’S PART D BENEFIT

The best analysis of the new 2010 Part D plan landscape (planscape?) is Medicare Part D Spotlight: Part D Plan Availability in 2010 and Key Changes Since 2006 from the Kaiser Family Foundation.

The Kaiser report contains a useful snapshot of the Part D benefit, including these interesting factoids:

There will be 1,510 PDPs offered nationwide in 2010, down almost 20% from the 2007 peak of 1,875 plans.
The average monthly PDP premium in 2010 will increase 11% versus 2009, although premiums will vary widely both within and across regions.
80% of Part D plans will offer no coverage in the “donut hole” gap.

2010: A PART D ODYSSEY

CVS’ loss comes from its “benchmark” plans, which are PDPs available for no monthly premium to Low income Subsidy (LIS) enrollees.

According to the Kaiser analysis, more than 3 million people—four of every ten LIS beneficiaries—are enrolled in benchmark PDPs that will no longer qualify as benchmark plans in 2010. These enrollees must switch plans, pay extra premiums, or be reassigned by CMS.

Here’s the data over time per Kaiser. (Click the chart to enlarge it.)

As the chart indicates, the CVS Caremark plans—Silverscript and Accendo—will only be qualified to receive automatically-assigned LIS members in 15 regions in 2010, a sharp drop from 2009.

As a result, investors will have to pin their hopes for a positive earnings surprise at CVS Caremark on the Obama Chia.

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

2009-10-02T00:00:00.010-04:00

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 pulled the Obama Chia from its stores back in April. Fortunately, CVS will fill the gaping hole in our nation’s soul and do a test run at CVS stores in Chicago, Tampa and San Francisco.

Check out the ad:

This is not a political endorsement or a comment on health care reform. If Chia Obama is not your cup of sod, you can always purchase Chia George Washington or Chia Abraham Lincoln instead

And if you don’t like a Chia POTUS, then you can always purchase my new report. (Sorry, I couldn’t resist.)

P.S. Special thanks to Tina P. at Boehringer Ingelheim for letting me know about this very important story.

Walgreen's Future Profit Potential

2009-10-01T00:01:00.023-04:00

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.

LOW-COST

Last week, I highlighted Wal-Mart’s view that dispensing services for many maintenance products should be priced as a commodity. See Wal-Mart Explains Its Healthcare Strategy.

Cost leadership is a key strategy for winning in a commodity market. Walgreen is positioning itself to succeed as a low-cost prescription fulfillment provider while also differentiating itself as a one-stop solutions provider. Walgreens Rewiring for Growth program is taking significant costs out of the business without any apparent loss of service.

I’m also keeping a close eye on Walgreen’s POWER initiative, which attempts a best-of-both worlds dispensing strategy. POWER combines the central-fill efficiencies of mail-order pharmacies with in-person consultation from pharmacists in a retail setting. POWER is one factor behind the impressive inventory reductions reported.

I also see that Walgreen grew same-store prescription sales by 4.5% in the quarter ending August 31. It’s well-known that larger, more active pharmacies have lower average costs of dispensing. (See Exhibit 21 in you know where.) Pharmacies with lower costs of dispensing will be better able to operate with lower levels of reimbursement than higher cost pharmacies.

CHANNEL NEUTRAL

Walgreens also announced a new effort to shift 90-day maintenance scripts from mail-order into a retail store format, a trend being encouraged by both CVS Caremark and Wal-Mart. This is not really new because Walgreen’s Advantage90 program launched in 2003. But the renewed emphasis connects to the low-cost story and an emerging challenge facing Pharmacy Benefit Managers (PBMs).

See Walgreens Launches National Initiative for 90-Day Prescriptions at Community Pharmacies, which states:

“As part of this program, Walgreens pharmacists will work with patients, physicians, insurers, employers and managed care organizations to implement a comprehensive 90-day at retail prescription program for maintenance medications including, where appropriate, the conversion of traditional 30-day chronic care prescriptions into 90-day prescriptions.”

Big Picture: Convergence within the pharmacy business is creating channel-neutral dispensing models.

As I note in The Impact of Walmart's National Mail Pharmacy, Walmart and CVS Caremark (with Maintenance Choice) are now both pursuing strategies that eliminate the traditional out-of-pocket cost difference for consumers and payers between mail and store-based pharmacy. On the conference call, Walgreen’s highlighted its reluctantly launched Prescription Savings Club as another factor driving the shift to retail.

This dynamic will affect PBMs, which rely heavily on mail-order profits to fund other activities. I forecast that growth in mail-order prescriptions will lag some other channels because of increased competition from retail store-based pharmacies. See Exhibit 15 in...wait for it... my new report.

RANDOM COMMENTS

I heard some very intriguing hints about the future WAG-CAT network structure on the earnings call. If you purchased the U.S. Pharmacy Industry: 2009 Economic Report and Outlook, compare Walgreen’s CFO Wade D. Miquelon’s responses on the call to pages 42-44 in my new report.
Walgreen’s projected a “worst case” impact of $80 to $90 million from the AWP rollback. Similar to my comments in AWP Goes Boom, the biggest impact will be from state Medicaid programs, not the commercial market.
You may have noticed a few subtle hints regarding my new report. If you haven't yet broken down and purchased it, check out the Table of Contents to get a better sense of what's inside. Sales so far have been really strong, so you should at least know that your competitors and many industry analysts/strategists are already reading it.

Download My New Pharmacy Industry Report

2009-09-30T00:01:00.009-04:00

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.

ABOUT THE NEW REPORT

I wrote this report for pharmacists, business people, drug manufacturers, employers, benefit managers, healthcare policy analysts, investors—anyone who wants to understand and benefit from the forces reshaping the increasingly competitive U.S. pharmacy industry.

Translation: this report will appeal to regular reader of Drug Channels.

The report gives you the Big Picture on the industry's major trends. I worked hard to write an integrated, self-contained document with lots of new stuff that's never been on the blog. I also filled it with data and information, including 22 detailed exhibits to help you understand the pharmacy industry's real economics and 63 endnotes with live weblinks to the original source materials. Yes, you can really get wild-and-crazy with this report!

Unlike the blog, the report is joke-free—no goofy puns or silly pop-culture references. Some of you may view this omission as an improvement.

FREEMIUM

As you see on the report’s informational page, I am hopping on the latest internet trend: Freemium.

So, you get Drug Channels for free, but this special report incurs a premium charge. I’ve seen other reports on the pharmacy industry selling for $1,000 and up, but this reports sells for much less.

There are two versions: Single-User and Corporate. Please respect the license terms and purchase the one that's right for you.

I am offering the lower-priced Single User License for individuals—pharmacy owners, industry analysts, lone wolves—who only want it for themselves.
You must purchase the Corporate License if you want to share the report with your co-workers. This version is appropriate if you want to share report among multiple employees within a single organization.

2015 FORECAST

A highlight of the report is my forecast of the industry in 2015 and market share by channel. Total prescription revenues of U.S. pharmacies and drugstores will reach more than $350 billion by 2015, an increase of almost $100 billion from 2008. I project that larger retailers—chain drugstores and merchants with pharmacies—will grow faster than other channels (including mail-order) and capture 56.5% of the market.

My report analyzes seven major trends that will affect the economics and structure of the pharmacy and drugstore industry in the coming years:

Strong Underlying Growth Potential
The Coming Generic Boom
Risks to the Superior Profitability of Generic Drugs
Replacing the Average Wholesale Price Benchmark
Cost-Plus Pharmacy Reimbursement
Preferred and Restricted Pharmacy Networks
Government as the Dominant Payer for Outpatient Drugs

I welcome comments, criticisms, questions and kudos from anyone who buys the U.S. Pharmacy Industry: 2009 Economic Report and Outlook. Email me any questions about the content if you’re not yet sure the report is right for you.

AWP Goes Boom

2009-09-25T00:01:00.007-04:00

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.

THE IMAGINARY WINDFALL

A few people have emailed me claiming that the rollback will be a windfall for Pharmacy Benefit Managers (PBMs). This makes no sense.

Since everyone has known about the change for at least 3 years, many plan/PBM contracts already have economic neutrality language. Health plans and employers are not so naïve or unsophisticated that they would allow their PBMs to reap the benefit of the rollback without sharing the savings.

The pharmacies are also likely to emerge mostly unscathed. The chain pharmacies have been talking publicly for a few years about negotiating language related to benchmark shifts. The Pharmacy Services Administration Organizations (PSAOs) already have—or should have—negotiated similar language with PBMs on behalf of independents. More than 80% of independent pharmacies rely on PSAOs to negotiate their third-party contracts and manage claims payment.

Here’s a representative comment from the recent Dow Jones story Drug-Benefit Cos Said Adjusted For Price Rollback:

Thomas Moriarty, general counsel for Medco Health Solutions Inc. (MHS), said, "A number of years ago we began to address this potential matter in our client contracts with the goal of it being essentially economically neutral" for the company and its clients. What Medco charges customers and pays retailers is adjusted along with the benchmark, he explained. "This is an arithmetic change that is going on." (emphasis added)

Healthtrans, a “privately held healthcare management solutions company,” even went so far as to issue this press release yesterday announcing their adoption of Wholesale Acquisition Cost (WAC).

THE MEDICAID CHALLENGE

My comments in What Happens When AWP Goes Boom still hold true regarding Medicaid. States aren’t particularly motivated to act quickly given the potential cost savings from a rollback.

The NACDS announced that New Jersey will restructure their brand reimbursement to AWP minus 15%, which translates to a 1.2% increase in the amount paid. NOTE: Please see clarification from David Schwed below.

But let's keep things in perspective. Medicaid’s total federal, state, and local spending on outpatient prescription drugs was estimated at $20.7 billion in 2008—about 8% of national pharmacy revenues. Pharmacies with significant Medicaid business will feel the effect, but the overall impact will not be a meltdown of the pharmacy market, especially in states using WAC.

Ka-Boom!