Thursday, November 30, 2017

Why CVS Health and Express Scripts Sold—and McKesson Bought—a Specialty Hub Business

ICYMI: In early November, McKesson paid CVS Health $735 million for the RxCrossroads patient services hub business. A few weeks later, Express Scripts sold its United BioSource Corporation (UBC) hub business to a private equity firm.

These intriguing transactions make sense for all of these key drug channel players. CVS Health and Express Scripts divest businesses that could be perceived to conflict with their pharmacy benefit manager (PBM) business. McKesson deepens its investment in non-wholesaling manufacturer services for specialty products.

Below, I review the market landscape for hub service providers and explain the business issues that motivated the two PBMs to sell and McKesson to buy. I also ponder a crucial question: Did the PBMs get out at the right time?

HUB 101

Specialty hubs are service providers that biopharmaceutical manufacturers hire and fund. They coordinate and standardize patient reimbursement and care regardless of a patient’s specialty pharmacy. Hubs can also coordinate with a physician's office to provide a single point of contact and referral, reducing a physician office’s administrative management burden. They collect and organize patient data, which must be de-identified per the Health Insurance Portability and Accountability Act (HIPAA) of 1996.

Some manufacturers provide in-house hub services for their own products. Many external hub services providers are owned by other supply chain participants. Some of these participants also own a specialty pharmacy. The table below is an updated version of Exhibit 51 from our 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. We’ll have an updated list when we release the 2018 edition in late February.

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We estimate that AmerisourceBergen’s Lash Group is the largest hub provider for pharmaceutical manufacturers. RxCrossroads is also a significant player, with more than 1,300 employees.

By way of background:
WHY THE PBMS SOLD

Hubs work for—and are paid by—pharmaceutical manufacturers. A hub business can therefore be an awkward fit with a PBM, which negotiates with manufacturers. In 2011, CVS divested its Theracom business to AmerisourceBergen (ABC), which operates the Lash Group. Here’s what I wrote at the time:
“ABC has been positioning itself as a service provider to pharmaceutical manufacturers, whereas a PBM works on behalf of plan sponsors and third-party payers. I often wonder how much payers really understand about a reimbursement hub’s role and its allegiance to a manufacturer.“
This potential conflict appeared in 2015. Back then, many investors were worried about the unsavory disclosures regarding Valeant and Philidor RX. Questions swirled about the role and functions of legitimate specialty pharmacies and hub service providers. Take a trip down bad memory lane with Valeant, Philidor RX, and the Uninformed Attack on Specialty Pharmacy.

Consequently, CVS felt compelled to defend the RxCrossroads business during its December 2015 analyst day. Here are the Dr. Seussian slides that it shared with investors:

[Click to Enlarge]

At that time, CVS further disclosed that RxCrossroads contributed less than $0.01 to the company’s earnings per share. That figure implies that RxCrossroads’ net income was less than $11 million in 2015.

Express Scripts has also been criticized over its ownership of UBC, especially for its work for Mallinckrodt’s Acthar Gel. Bloomberg recounts the background in Express Scripts Sells Unit With Ties to a $35,000-a-Vial Drug.

WHY MCKESSON BOUGHT

Like its peer AmerisouceBergen, McKesson is now a significant participant in all aspects of the specialty drug distribution and services market. For details, see Section 9.4.2. of our 2017–18 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

After the acquisition, RxCrossroads will become part of the “manufacturer solutions” business line within McKesson Specialty Health. This business line includes reimbursement hub services, specialty pharmacy, patient assistance programs, third-party logistics, and other services for the commercialization of specialty pharmaceuticals.

Shawn Seamans, senior vice president of Manufacturer Solutions at McKesson Specialty Health told me that such solutions “are a key part of McKesson’s go-forward strategy in the U.S.” He added:
“We have a focused strategy of providing services and support to pharma manufacturers to help them commercialize their products.”
The RxCrossroads business fits nicely into this portfolio. McKesson already operates one of the largest 15 specialty pharmacies in the country.

Note that two of McKesson’s most well-known manufacturer-oriented services businesses are not part of McKesson Specialty Health. Instead, the following two businesses are part of the McKesson Rx Technology Solutions (MRTS) operating segment:
  • RelayHealth provides a clinical and financial connectivity solution to pharmacies, manufacturers, and payers. This business was formerly part of McKesson’s Technology Solutions reporting unit.
  • CoverMyMeds, which McKesson acquired in 2017, provides electronic prior authorization solutions.
McKesson expects RxCrossroads to add approximately 20 cents to its earnings by the third year following the close of the transaction. That figure implies that RxCrossroads net income will be at least $35 to $40 million by 2022.

WILL HUBS STILL BE CENTRAL?

I believe that specialty hubs can add value to the patient journey.

But the specialty market is changing. PBMs, pharmacies, wholesalers, health plans, and providers are battling for control of the specialty market and the patient journey. Manufacturers’ specialty networks are becoming larger and more inclusive. Channel control continues to migrate from manufacturers to PBMs and payers.

Consequently, providing centralized hub services for a tightly-limited network could become less important as more channel participants provide hub-like services. Will the hub business continue to expand as the specialty market evolves?

CORRECTION: The table above has been updated to reflect the correct name for Cardinal Health's hub.

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