Wednesday, October 27, 2010

For Sale by Walgreens: One Small PBM, Slightly Used

Bloomberg Business Week scored a major scoop this week by being the first to report publicly that Walgreens is looking to sell its pharmacy benefit management (PBM) business. See Walgreen Said to Seek Sale of Pharmacy-Benefits Manager.

Observations:
  • PBM Consolidation Ahead. We once again see the powerful consolidation trend in the PBM industry. Scale matters, especially in these last few years of major generic launches. There are more than 60 PBMs competing in the market—the top 3 process about 60% of total adjusted prescriptions.

  • Streamlining = focus. Rather than forcing a false synergy, Walgreens is wisely focusing on its roster of non-retail dispensing and provider channels. Walgreens has a wide-ranging set of businesses within its Health Initiatives unit, but has struggled to assemble them into a coherent future vision.

  • Bypass Strategy Redux? Divestiture frees Walgreens to more radically disrupt the traditional PBM business model with a cross-channel offering to employers, payers, and health plans. Reread Walgreen’s PBM Bypass Strategy for more speculations on this strategy.
Recall the reorganization of Walgreens Health Initiatives announced in March. The long-term care pharmacy was the first to go last month in a transaction that also bulked up its home care/infusion business. See Walgreens and Omnicare Play Switcheroo. Divesting another ill-fitting puzzle piece makes sense because there is limited synergy for a PBM-retail combination.

Yes, I’m looking at you, CVS Caremark. See CVS Caremark: More Happy Talk, But Hard Work Remains.

Walgreens PBM also lacks scale, so the only real options were divestiture or a mega-acquisition. My estimates, which were cited in the Bloomberg article, suggest that Walgreens PBM will process about 108 million (adjusted) prescriptions in 2010. Although this means Walgreens is the ninth largest PBM, it also implies a market share of only 2.6% of total adjusted scripts.

The new catchphrase for Drug Channels participants? Get big, get focused, or get out.

3 comments:

  1. What kind of scale are you talking about?

    Surely Walgreens' retail operation gives it plenty of scale in purchasing, so what is it lacking?

    [I predict an Airplane quote in the near future]

    ReplyDelete
  2. Where are you getting your Rx assumptions? That seems to be higher than what other sources, including WAG IR, has reported.

    ReplyDelete
  3. Q1: Walgreens has purchasing scale for a mail-order operation, but has limited scale for negotiating rebates with manufacturers. Claims processing is a fixed cost business, so their platform would have higher average costs to process a claim, making them less competitive. And stop calling me Shirley.

    Q2: As far as I know, WAG IR has said nothing about the size of its PBM business. I estimated WAG by starting with AIS data and adjusting for some shortcomings in those data based on publicly reported data from other PBMs. Note that I am reporting PBM adjusted scripts, i.e., retail scripts + mail scripts*3.

    Adam

    ReplyDelete

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