Friday, November 16, 2012

Kroger Makes a Big Specialty Pharmacy Play

In reviewing the 13 Fastest-Growing, Private Specialty Pharmacies, I predicted: “Given the eye-popping growth, I suspect that many of these companies will not remain independent for much longer.”

Well, it didn't take long. Yesterday, supermarket chain Kroger (NYSE: KR) announced a merger with Axium Pharmacy, the third-largest company on my list. Read the press release.

In 2011, we estimate that Kroger was the seventh largest U.S. pharmacy, with prescription revenues equal to about $7.0 billion. (See 2011 Market Share of Top Pharmacies.) While Axium’s 2011 revenues were only $155 million, this deal places Kroger firmly ahead of many retail rivals struggling to take advantage of the coming specialty dispensing boom.

SPECIALTY DISPENSING

In 2011, about $47 billion of specialty drugs were dispensed by retail, mail, and specialty pharmacies. Specialty medications now represent about 17% of the U.S. pharmacy industry’s total revenues, vs. only 9% in 2006.

Pharmacy market share for specialty dispensing is highly concentrated. Accounting for 2012 business combinations, three companies—Express Scripts, CVS Caremark, and Walgreens—generated about two-thirds of 2011 revenues from pharmacy-dispensed specialty drugs. See 2011 Pharmacy Market Share for Specialty Drugs.

However, the projected growth of the specialty market continues to draw smaller pharmacies into this part of the industry. For the 13 specialty pharmacies on the Inc. 500 list, average 2011 revenues were $141.1 million and average 3-year revenue growth rate was 166%.

SPECIALTY AT NON-DRUGSTORE RETAILERS

Mass merchants and supermarkets have been slow to jump on the specialty bandwagon. Some non-drugstore retailers are tip-toeing into the market by outsourcing fulfillment and patient management to larger independent specialty pharmacy providers.

Very few have moved aggressively into specialty. A notable exception is grocer Schnucks, which has opened specialty-focused pharmacies within Schnucks stores and as stand-alone facilities within medical clinics and hospitals. See the list at Schnucks Specialty Pharmacy Division.

A key hurdle for retail pharmacies has been gaining access to manufacturer and payer networks. The manufacturer of a specialty drug limits the number of pharmacies eligible to dispense its specialty product. Manufacturers strategically choose pharmacies with the distinctive capabilities required to efficiently and effectively serve patients, providers, and payers. See To Limit Counterfeits, Build a Solid Channel Strategy.

I’ll be interested to see if Kroger uses the Axium deal to engage manufacturers in a broader specialty conversation. In the meantime, expect many more deals to come.


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