Going beyond the financials, I heard some very intriguing statements on the call regarding three timely topics:
- Walgreen sold its PBM in part because of “the inherent conflict of owning a PBM.”
- The 90-day at retail program is gaining traction, but will likely have a slightly negative profit impact.
- AMP doesn’t appear to be freaking anyone out, although management claims it’s “too early to speculate on the eventual timing and impact.”
As always, I encourage you to review the original source materials yourself:
- Walgreen Co. Reports 17.6 Percent Increase in Diluted Earnings Per Share to 80 Cents forthe Second Quarter of Fiscal 2011 (press release)
- 2nd Quarter 2011 Highlights & Operating Review (presentation slides)—Lots of good operating data here!
- Transcript (from Seeking Alpha)
As you know, Walgreens recently sold its PBM business to Catalyst RX (NASDAQ:CHSI). See SOLD! Thoughts on the Catalyst-Walgreen Deal.
Here is CEO Gregory Wasson on the strategic rationale behind the deal:
“First, we are divesting non-core assets, so we can further increase our focus and discipline on the execution of our core strategies. The transaction accelerates our strategy of leveraging the best community store network in America by providing an expanding pharmacy and health and wellness solutions to all of our patients and payers.Conflict, eh? Whoever could he be referring to? Oh snap!
Second, the sale accelerates our B2B strategy of taking pharmacy and health and wellness solutions to our customers, employers and government agencies, either directly or with our PBM and health plan partners, without the inherent conflict of owning a PBM.
And third, we retained and look to grow our Specialty Pharmacy and Mail Service businesses as they are an integral part of our full-service pharmacy offerings."(emphasis added)
The comment about “either directly or with our PBM and health plan partners” is intriguing because it suggests that Walgreen has not given up entirely on direct-to-payer deals that bypass the PBM.
90-Day Prescriptions at Retail
There is a fascinating back-and-forth with Lisa Gill of JP Morgan Chase regarding the profitability of filling 90-day prescriptions at a Walgreens retail pharmacy instead of a mail-order pharmacy. You may want to review my comments in January’s Walgreens Joins the Attack on PBM Mail Profits.
Here’s my interpretation of this section of the Q&A:
- Walgreen has to sacrifice profitability by accepting mail reimbursement rates.
- However, Walgreen is able to get a slight premium above mail rates because of (1) consumer convenience, and (2) improved adherence.
- Walgreen has a lower average cost of dispensing for one 90-day fill versus three 30-day fills, although there is an as-yet-unquantified loss of front-end revenue.
Lisa Gill - JP Morgan Chase & Co: So Kermit, are you giving better pricing now? I mean, so if you look, generally speaking, the discounts given at mail order versus retail are generally substantially better and from a consumer perspective, they are usually paying two co-pays versus three. Do you have any managed care plans or PBMs [Pharmacy Benefit Manager] today that are willing to give similar pricing to mail to try to entice the person to do 90 days, or it's just the convenience factor of only having to pick up a prescription four times a year instead of 12 times a year?Average Manufacturer Price (AMP)
Wade Miquelon: I would say that pricing is different by customer depending on what they give, what the terms and conditions are, so it varies. So answering that in one answer is difficult to do. But in general, we can provide a very good value proposition that's also good for our margin, good for the payer and good for the patient in a way which makes a 30-90 a win-win-win for everyone.
Gregory Wasson: Lisa, Greg. I want to pile on here a little bit. So I think you can look at a 90-day supply of prescriptions and the convenience that we bring by someone being able to come into our retail pharmacy within the community. Same way you can look at the front-end goods and the value that our convenience brings. People will pay for convenience. They pay for convenience for our front-end products, even though there may be competitive items. And they also pay for the convenience, whether it's an additional co-pay or half a co-pay for it to be able to walk in and see their pharmacist face-to-face. So our convenience, just like it does on the front-end, supports the pharmacy and a differential co-pay, if that's what it requires.
Kermit Crawford: And Lisa, the only thing I would add is that this is about lowering the overall total cost. And what we've seen with the 90-day retail plan is an increase generic utilization and an increase in the adherence. So, both of those things lower the overall total costs for the payer. Those are about lowering our overall total costs.
The comments regarding AMP were fairly vague. Mr. Wasson noted the uncertainty as far as the timing and impact, but also said: “[A]s states wrestle with budget difficulties and the need to reduce overall spending, we do expect pressure to continue on Medicaid reimbursement.”
Personally, I think that the new AMP-based Federal Upper Limits (FULs) will have only a moderate impact on the pharmacy industry’s profits because states have moved faster than CMS. See What’s Happening with AMP and Pharmacy Profits!! and New Study Finds Small AMP Impact, But Trouble in Six States. The broader Medicaid issue is certainly uncertain.
Anything else notable that you heard?