Thursday, May 04, 2017

Five Industry Trends for U.S. Drug Wholesalers in 2017 (rerun)

This week, I’m rerunning some popular posts while I attend Asembia’s 2017 Specialty Pharmacy Summit. Click here to see the original post and comments from December 2016. FYI: I updated a few links with our more current market data.



Modern Distribution Management recently published my article 2016 MDM Market Leaders | Top Pharmaceuticals Distributors. It is an excerpt from the 2016-17 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

Below, I republish the section highlighting five significant industry trends affecting the U.S. drug wholesaling industry. I think Drug Channels readers will enjoy this summary as we look toward an eventful 2017.


INDUSTRY TRENDS FOR WHOLESALERS

Here are five significant industry trends that will substantially impact the drug wholesaling industry in the coming years.

1. U.S. pharmaceutical spending – and drug prices – are still growing.

Outpatient prescription drug spending is projected to grow along with overall national healthcare expenditures. (See Latest CMS Forecast Shows Big Drug Spending Growth Through 2025.) Wholesalers will benefit from this additional spending. We project that in 2016, for the first time, the Big Three wholesalers’ combined drug distribution revenues will exceed $400 billion.

Brand-name drugs remain the key driver of wholesalers’ revenue growth. Wholesalers’ revenues are most closely tied to increases in gross drug spending, so wholesalers will also gain from the expected list price increases of brand-name drugs. See Drug Prices, Manufacturer Rebates, and the Risk to Channel Economics.

A change in historical brand list price inflation will be negative for wholesalers’ profits. See EpiPen, Channel Economics, and the Great PBM Rebate Debate and What McKesson’s Profit Warning Means for Manufacturers and Pharmacies.

The pharmaceutical industry’s revenues will continue to shift from traditional brand-name drugs to specialty drugs. (See Our Exclusive 2021 Outlook for Specialty Pharmacy Prescription Revenues.) As we discuss below, wholesalers are being challenged by this shift.

From 2013 to 2015, wholesalers profited from unexpected and somewhat unprecedented generic price inflation. Wholesalers could typically pass price increases directly to their pharmacy customers. Generic inflation began easing in 2015, due partly to the FDA having cleared much of the backlog for new generic drug applications. (See The FDA Is Finally Ending Generic Inflation—and Hurting Wholesaler Profits.) Generic deflation reduced wholesalers’ gross profits from generic drugs in 2016. (See AmerisourceBergen Charts the Profit Headwinds Facing Drug Wholesalers.)

2. The consolidation of pharmacy and provider markets shows no sign of slowing

Mergers and acquisitions among pharmacies and payers are pressuring wholesaler margins, especially as the acquiring companies consolidate buying power. The top tier of dispensing pharmacies – CVS Health, Walgreens Boots Alliance, Express Scripts, Walmart, Rite Aid, and UnitedHealth Group – account for the majority of U.S. prescription dispensing revenues. (See The Top 15 Pharmacies of 2016.) Such pending deals as the Walgreens-Rite Aid acquisition and the Walgreens-Prime Therapeutics combination will create even more concentration.

For provider-administered drugs, wholesalers have been facing hospital acquisitions of physician practices and care that is shifting to hospital outpatient departments. (See The Decline and Fall of Physician Buy-and-Bill For Specialty Drugs.) Proposed changes to the buy-and-bill model could accelerate these consolidation and practice acquisition trends. (See Why CMS’s Crazy Plan to Remake Medicare Part B Won’t Work.) For now, that particular CMS plan will surely not be implemented under the new administration.

3. Payers and manufacturers are narrowing drug channels, pressuring wholesalers’ profitability

Narrow pharmacy networks – either preferred or limited models – are now a widely accepted element of pharmacy benefit design. Such networks dominate Medicare Part D prescription drug plans and are a crucial element of payers’ specialty drug management strategies. (See Preferred Pharmacy Networks Are Back in 85% of the 2017 Medicare Part D Plans.)

These payer and PBM network strategies are further concentrating dispensing revenues with the biggest specialty pharmacies. Wholesalers therefore face new challenges in capturing the value and profits from the specialty drug market, particularly for patient-administered, pharmacy-dispensed specialty drugs.

Many manufacturers limit and manage the specialty pharmacies eligible to dispense expensive specialty medications. For pharmacy-dispensed medications, the expansion of these limited specialty networks is reducing the value of – and, in some cases, is displacing – the wholesale distribution channel. (See How Specialty Pharmacy Is Penetrating Buy-and-Bill Oncology Channels.)

To manage costs and improve patient management, pharmacy benefit managers (PBMs) and health plans often further limit the number of specialty pharmacies selected by the manufacturer. These payer and PBM network strategies are shifting specialty dispensing into the largest, payer-owned specialty pharmacies, which offer the smallest margins for wholesalers. (See The Top 10 Specialty Pharmacies of 2016.) Due to specialty growth, for example, CVS Health accounted for about one-quarter of McKesson’s 2016 North American drug distribution revenues. (See How CVS Health Got McKesson Under Its Thumb.)

Wholesalers’ largest – and least profitable – retail chain customers are also benefitting from the trend toward narrow network models. (See Walgreens’ TRICARE Win: Tracking WBA’s Aggressive Preferred Network Deal Strategy.)

4. Large pharmacies have entered into multifaceted partnerships with wholesalers

Larger pharmacies now have a new level of top-to-top partnering that is securing wholesalers’ role in the distribution system. This sometimes underappreciated benefit of consolidation is creating a channel supply alignment among the largest wholesalers, largest PBMs and largest retail chains. Wholesalers have become virtually impossible to displace for broadly distributed traditional drugs.

Wholesalers and retailers have also become strategically aligned via such generic purchasing consortia as Walgreens Boots Alliance Development (Walgreens and AmerisourceBergen), Red Oak Sourcing (CVS Health and Cardinal Health), and McKesson’s purchasing arrangement with Walmart. (See Why Walmart Is Finally Joining McKesson for Generic Purchasing.) New vertical ownership relationships are also developing:
5. Biosimilars are unlikely to provide superior profits to wholesalers.

Biosimilars – biological drugs that are highly similar to an FDA-approved biological product – seem poised to deliver only minimal benefits to wholesalers.

We expect patient-administered, pharmacy-dispensed biosimilars to be marketed as brand alternatives rather than as interchangeable generics. Competition between a biologic drug and biosimilar is therefore likely to resemble brand-to-brand competition rather than brand-to-generic competition. (See Seven Takeaways from the New 2017 CVS Health and Express Scripts Formulary Exclusion Lists.) Without interchangeability, wholesalers will not receive the superior profits that they earn from newly-launched generic drugs.

Growth in provider-administered biosimilars will be more positive for wholesalers and specialty distributors than will growth in biosimilars covered under a patient’s pharmacy benefit. Wholesalers should have a greater opportunity to influence biosimilar adoption for provider-administered medical benefit drugs than they do for patient-administered pharmacy benefit drugs. However, wholesalers are also unlikely to experience the same profit benefits from biosimilars that they gain from the brand-to-generic conversions for products paid in the buy-and-bill system. (See Sections 6.2.4. and 6.3.4. of our new report.)

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Many of these issues are headwinds for the wholesalers, which is one reason that the stocks of the largest public wholesalers are valued at a significant discount to the overall stock market average. Drug wholesaling is a much more complex business than ever before. Let's see how (whether?) the companies' executives manage these forces of change.

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