Thursday, June 01, 2006

Specialty spending keeps soaring

Medco's latest Drug Trends report points us toward the future of drug channels.

A few highlights that caught my attention:
  • Specialty drugs accounted for 9.7% of total pharmacy spending in 2005, up from 8.5% in 2004.
  • Specialty drug spending grew by 16.9% in 2005, significantly faster than the 5.4% average trend for drug spending as a whole.
  • The rapid growth in specialty drug spending is primarily due to a large increase in utilization. However, unit costs for specialty drugs increased by 6.6% during 2005 vs. a 2.7% increase for prescription drugs as a whole.
Three therapeutic classes contributed more than 80% of the specialty increase:
  1. Rheumatoid Arthritis (46.0%)
  2. Cancer (19.2%)
  3. Multiple Sclerosis (16.9%)
Crucial differences between conventional oral solids drugs and new biopharmaceuticals created the specialty pharmacy/distribution channel. Major differences for specialty, especiallylargeg molecule drugs:
  • Cost (higher)
  • Patient population (smaller)
  • Handling (more complex)
  • Reimbursement (trickier)
  • Treatment location (much more diverse)
As I argued over two and half years ago, the big 3 wholesalers were so busy pursuing scale economies through consolidation that they ignored the opportunity to take a leadership position in the fast growing, higher margin business of bringing biopharmaceuticals to market. (See the transcript of my Lehman Brothers-sponsored conference call from January 2004, page 11.)

Today, McKesson is spending heavily to catch up, while Cardinal seems to be moving away from specialty. AmerisourceBergen has been best positioned because of the ION/Oncology Supply relationship and recently reported that specialty distribution is at an $8.5 billion run rate, equal to almost 17% of ABC's non-bulk drug distribution revenues.

I'll comment on what this means for the oncology channel tomorrow.

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