Monday, July 02, 2007

Walgreens expands in specialty

Walgreen (WAG) just announced the acquisition of Option Care Inc. (OPTN), a specialty pharmacy and infusion services company with $660 million in revenues. Walgreen will pay a 27% premium, making the deal worth about $850 million. See Option Care Deal Furthers Walgreen Health-Care Ambitions.

This move vaults Walgreens ahead in specialty pharmacy. The major players today are PBMs that have acquired their own specialty pharmacy operations in the past few years: Medco, Express Scripts, and Caremark. All three major wholesalers – AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK) –also own specialty pharmacies, but these are relatively small.

The fact that this acquisition comes so soon after the CVS/Caremark deal is not a coincidence. I began 2007 by predicting more consolidation within the U.S. pharmacy supply chain – the network of companies that facilitate dispensing and payment of pharmaceuticals.

Specialty pharmaceuticals are the biggest driver of drug spending right now. There is a lot of money to be made managing the benefits for payors, but that’s only possible by also dispensing these drugs. Thus, Walgreens can continue to grow their small in-house PBM, which is not even ranked in the top 25 based on lives covered. I also think that today's acquisition reduces the likelihood that Walgreens will emulate CVS and acquire a PBM.

Specialty drugs tend to be single-source products with no generic equivalent. They treat complex diseases – such as rheumatoid arthritis, cancer or multiple sclerosis – and can cost more than $200,000 per year. Consider:

  • Medco’s total spending on specialty drugs grew by 16.9% in 2006 and that spending on specialty drugs accounted for 25% of the total growth in drug spending. See Medco’s 2007 Drug Trend Report.
  • Express Scripts’ per member per year (PMPY) spending on specialty drugs grew by 20.9% in 2006. See Express Scripts’ Drug Trend Report.
(Note that these figures are not directly comparable because Medco reports total spend while Express Scripts reports PMPY.)

Plus, there is also evidence that health plans are having trouble getting their arms around specialty as the number of therapies increases. (See Some Health Plans Are Not Tracking PMPM Specialty Pharmacy Costs.)

Bottom line: this looks like a good strategic move for Walgreens.

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