Drug Channels delivers timely analysis and provocative opinions from Adam J. Fein, Ph.D., the country's foremost expert on pharmaceutical economics and the drug distribution system. Drug Channels reaches an engaged, loyal and growing audience of nearly 100,000 subscribers and followers. Learn more...

Friday, February 27, 2009

Hello, I'm a Generic!

Teva Pharmaceutical has just launched a new set of "humorous" ads to convince consumers that generics are just as good as brands. See if you can figure out what other famous ad campaign that Teva is (ahem) copying.

OK, I get the point but the ad is kinda lame. Compared to the original apple-vs-PC ads, it looks like . . . a poor imitation. That's probably not the point Teva is trying to make.

Hat tip to Mr. Medsaver.

Thursday, February 26, 2009

Who Will Pay for Prescription Drugs?

In Tuesday’s State of the Union address, President Obama said that we must “address the crushing cost of health care.” (Full text) Coincidentally (?), the boffins at CMS released their newest national health care spending projections through 2018 on Tuesday morning.

The latest forecasts now show public funds taking over prescription drug spending in 2010 – at least 7 years earlier than last year's forecast. If you believe these just-released CMS projections, then the government will have a very strong hand in managing retail drug spending and shaping the future of drug channels.

Savor the numbers for yourself here:

In Who Pays for Prescription Drugs?, I point out that public funds paid for 36 percent of total retail drug spending in 2007. The majority of these public funds came from CMS programs: Medicare, Medicaid, and State Children’s Health Insurance Program (SCHIP). The private health insurance share peaked in 2001 at 50 percent. Since then, public funds have been crowding out both public and out-of-pocket payments.

Here is an updated chart that shows how the payment source for prescription drugs (share of dollars) has changed during my lifetime along with the new 2017 forecast. I include the intermediate years to give you a better sense of the changing private insurance story.

Note that CMS projects that public funds will pay a greater share of outpatient retail prescription spending than private insurance starting in 2010. This is a major change from last year’s forecast, which showed private insurance with a greater share than public funds through 2017. According to my number crunching, the difference comes from CMS’ substantial under-forecast of the 2007 Medicare spending:

  • 2007 forecast (from Jan 2008): $43.0 billion
  • 2007 actual (from Jan 2009): $47.0 billion


Looking ahead, CMS expects the growth rate in prescription drug spending to remain below 5 percent through 2010 and then climb to 6.6 percent by 2013 as “use increases in response to projected improving economic conditions and to the effect of new indications of currently approved drugs.” CMS then projects that growth in drug spending will accelerate after 2013 as the generic dispensing rate levels off and specialty drugs spending grows.

While useful benchmarks, you should probably be somewhat skeptical given CMS’ track record. As physicist Niels Bohr, once said: “Prediction is very difficult, especially if it's about the future.”

Sunday, February 22, 2009

CVS Caremark: No Visible Revenue Synergy

Can two different businesses share a company without driving each other crazy?

Or as I asked in my Ten Strategic Questions for 2009: “Will CVS Caremark finally prove the strategic value of a Pharmacy Benefit Manager/Retail Pharmacy combo?”

So far, the answer appears to be “not yet.”

I won’t do a deep dive into the company's finances or strategy on the blog (sorry, clients only), but CVS Caremark posted impressive financials in its 2008:Q4 earnings last Thursday. Same store sales at CVS retail pharmacies increased 4.5% in 2008 (4.8% in pharmacy and 3.6% in the front-end). The Longs deal gave an extra boost to fourth quarter revenue. Last week's top-line results shouldn’t be a surprise if you read last Tuesday’s post Pharmacy Avoids Retail Sales Plunge. See:

However, CVS Caremark’s PBM businesses are not becoming a larger share of prescriptions filled at CVS retail pharmacies. Put another way, the flagship Maintenance Choice program may be appealing to payers and consumers, but there is not yet a quantitatively visible shift in CVS' retail activity. If CVS pharmacies are taking retail pharmacy market share, then it’s not yet as a result of corporate co-ownership with a PBM.

Looking forward, I suspect that CVS Caremark will try to take a stronger hand to generate greater “synergies” for its combination business model. CEO Tom Ryan alluded to "people experimenting with limited networks" on Thursday's earnings call. Wal-Mart has already thrown down the gauntlet for the preferred pharmacy network in its deal with Caterpillar. (See WMT + CAT: Pharmacy's Future?.) However, we still have little evidence that consumers or payers will accept limited networks on a wide-scale.

The Numbers

Here are the numbers behind my observations about PBM revenue synergies at retail pharmacies

Since 2005, CVS has reported an income statement item in its SEC filings called “Intersegment eliminations,” which is currently defined as follows:

“Intersegment eliminations relate to intersegment revenues and accounts receivables that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered products. When this occurs, both segments record the revenue on a standalone basis.”

Thus, these eliminations are a proxy for measuring the revenues to CVS retail pharmacy when it fills a script for beneficiaries of a CVS-owned PBM plan. As I understand the accounting, a PBM usually recognizes revenues for these prescriptions because the PBM considers itself to be a principal in the transaction. The relevant PBMs are Pharmacare, Caremark (starting in 2007), and now RxAmerica (starting with Q4:2008).

The chart below shows quarterly intersegment eliminations as a percent of retail pharmacy prescription revenue during the last three years. Thus, the chart shows an estimate how much of CVS' retail prescription revenues come from CVS Caremark’s 3 PBM businesses.

As expected, the numbers jump sharply after the Caremark acquisition. But it’s notable that the share has not consistently increased since the acquisition. If the in-store share starts to rise, then it will be (partial) evidence that maintenance choice is getting traction. (One small twist: RxAmerica contracts will be moving from "net" to "gross" in Q2:2009, which will boost intersegment eliminations.)

In the meantime, I suspect some readers will view this disconnect in a positive light because it means that beneficiaries still have the freedom to choose their pharmacy regardless of co-ownership with a PBM.

So, which one is the neat freak and which one is the slob?

Tuesday, February 17, 2009

Pharmacy Avoids Retail Sales Plunge

Beep, Beep! Here’s a reason to be cheerful about the pharmacy industry’s prospects for 2009.

Total retail sales plunged off a cliff by 5.1% in the fourth quarter last year -- the biggest drop in a generation.

Guess what?

Pharmacy sales defied this overall retail trend and actually grew by 4.1% in Q4:2008 compared to Q4:2007 – despite the consumer meltdown, the slowing prescription market, $4 generics, etc.

The chart below compares year-over-year changes in quarterly retail sales at Pharmacies and Drug Stores (NAICS 44611) to Total Retail Sales (NAICS 44) using data collected by
the Bureau of the Census. My calculation of “Total Retail Sales” excludes (a) motor vehicle and parts dealers and (b) Pharmacies and drug stores.As you can see, there was no statistical relationship between pharmacy sales and overall retail sales over the past six years. The measured correlation was negative (-13%) for this 24 quarter period. Note that this nine-point performance gap is entirely consistent with the historical evidence that I show in Will the economy hurt drug stores?

Gosh, pretty soon we’ll all have to start taking

Want another implication of the fact that pharmacy is an “uncorrelated" retail sector? Even a poorly managed pharmacy has a better chance of surviving the recession that the average well-run retail store.

BONUS fun fact: Paul Julian provided the Road Runner's "Beep Beep" sound. (source)


A few technical comments for my uber-geek readers:
  • The monthly retail sales data come from the Census Bureau’s Monthly Retail Trade and Food Services series. These government-collected data provide the most complete picture of revenues at all drug stores, not just the big public companies.
  • I aggregated monthly data (without seasonal adjustment) to calendar quarters.
  • The government's pharmacy retail sales data exclude non-pharmacy dependent retail formats, such as supermarkets or mass merchants, and also combine prescription and front-end sales.
The statistical correlation relates the *change* in sales at pharmacies to the *change* in retail sales. Why? If you correlate the actual dollar value of sales, then the correlation is artificially inflated because there is a common time trend a.k.a. a unit root. In other words, retail sales of all kinds tend to grow over time, so correlations of dollar sales levels often just show the correlation of the time trend. Taking the first difference (change in sales) removes the time trend and exposes the true relationship.

Friday, February 13, 2009

FDA Approves Despondex :-(

"Despondex: the first-ever prescription depressant for the annoyingly cheerful."

Just a little something from the ONN to get your weekend off to a good start. Happy Friday the 13th!

Here is the link in case the video does not show up in your browser:

(Warning: Video contains profanity. No viewers under 17 permitted unless accompanied by a parent, legal guardian, or FDA inspector.)

Thursday, February 12, 2009

The Unknown Pharmacist's View on Margins

Last month in Pharmacy Profits and Wal-Mart, I pointed out that Medicaid remains the most profitable third-party payer for independent pharmacies. The data came from the National Community Pharmacists Association (NCPA), which is the trade association and lobbying group for independent pharmacies.

I posed this question to the self-styled Pharmacy God (PG), an anonymous blogger who works in a retail pharmacy. Be forewarned: his posts range from fascinating behind-the-counter insights to mundane profanity. Nevertheless, he is one of the better pharmacist-bloggers and I like to read his blog Thoughts from the Pharmacy God.

PG gave me a detailed answer to my question about pharmacy margins, so I thought I’d share it with you. Note that his pharmacy fills a much lower share of Medicaid scrips than a typical independent.

Any other viewpoints? Note that the recent stimulus compromise takes out the option to let states extend Medicaid to the unemployed.

Thanks again, PG!

(Yup, it’s been an all-guest-post week. Don’t worry – I’ll be back with new stuff next week.)


“My pharmacy doesn’t fill a lot of pure Medicaid prescriptions (less than 1 percent), so I can't really comment on the profits on them. My state has switched a lot of its chronic Medicaid families over to the managed care companies, but even with those factored in I still bill less than 4% of my scripts to these plans. I remember a few years ago that Medicaid reimbursed well, but things may have changed since then.

On the Medicare Part D side, the reimbursements are all over the place. One PBM will pay 3% higher on Medicare D scripts, the next will be 3% lower. At my pharmacy, I'm lucky to pull a 16% gross profit.

Here's the catch... the base dollar amount that the profit is coming from has dropped. I don't know if it's the Walmart effect or if there is a backroom deal between the government and manufacturers, but the actual dollars profit per rx has dropped.

Three years ago it was normal to see a generic's cost to be $25. Add your 18% profit and you would make $4.50 on the script. Now I'm seeing generic costs on a lot of the fast moving medications below $5. That means that I'm going to make a buck (hopefully) on the script.

This past, Monday I ran a report just to check on my reimbursement amounts. For the purpose of my report, I assumed that my actual cost to dispense each medication would be $8.00. When I looked at the report, I saw that the total reimbursement for 28.4% of the generic medications didn't even break the $8.00 mark. And when I look at brand name reimbursements, it's not uncommon to see reimbursements that are $4-10 over the actual cost of the medications.”

Tuesday, February 10, 2009

Dear FDA: Eight is (Not) Enough

As you may know, the Food and Drug Administration Amendments Act of 2007 requires the FDA to establish technology standards for the pharmaceutical supply chain by 2010. The FDA requested comments and information earlier this year – see the links in The FDA and EC Dive into Supply Chain Security.

The U.S. Food and Drug Administration recently provided guidance on the use of Standardized Numerical Identifiers (SNIs) for prescription drug packages. The guidance document can be accessed here:

One of my clients – an executive in the corporate supply chain organization at a big pharma company – pointed out a possible limitation about the FDA’s proposed eight-digit serial number. Perhaps inspired by your friendly neighborhood Drug Channels blogger, his comments were inspired by the inestimable Dick van Patten. His reference is admittedly much classier than my proposed title “Length Matters.

Since he wants to remain anonymous, I’ll let you read his thoughts directly. Feel free to post any comments below.

“The serialized National Drug Code (sNDC) is comprised of the 10-digit NDC code followed by an 8-digit serial number. One issue not mentioned previously is the length of this serial number.

  • An 8-digit number provides for 99,999,999 serial numbers, or to round-up, 100 million numbers. This is probably not an issue for most NDC codes but what about high volume SKUs? Wouldn't vaccines need greater capacity? High-volume generics?
  • Any single SKU that has sales of more than 10 million units per year will have less than 10 years' worth of numbers. Perhaps peak sales cannot be sustained for that period but why push it?
  • Any additional serialization features that manufacturers would like to pursue, such as step-increments to the numbers or other algorithms to make it more robust, will be virtually impossible with only 8-digits available to utilize.
Fortunately, the SNI can be incorporated into a serialized Global Trade Identification Number (sGTIN), which allows for serial numbers of up to 20 digits in length. This is the approach that our serialization program will take in order to maintain consistency with the GS1 Global Standards organization. While the FDA’s proposal for a new number construct is puzzling, at least progress is being made. It does not negatively impact those of us who are embracing GS1 standards.

Sorry Dick Van Patten – Eight is NOT Enough!”

Thursday, February 05, 2009

Yikes! 30K Fake Drugs Dispensed in UK

This week, the BBC reported (in Thousands 'have taken fake drugs') that more than 30,000 packs of counterfeit drugs were dispensed by retail pharmacies in Britain in 2007. Even worse than swallowing a rat that you bought online!

Apparently, the Medicines Health Products Regulatory Authority (MHRA) issued four emergency drugs recall notices in June 2007. Almost half of a batch of 70,000 fake drugs are still unaccounted for.

You won’t be surprised to learn that the fakes were parallel imports. A former industry investigator is quoted as saying: "All three medicines would have pretended to be medicines that were destined for other European markets..."

I often criticize parallel trade in the EU because it is (by definition) diversion, i.e., the sale of a drug outside of the distribution channels for which it was originally intended. Although many (most?) parallel trade products may be legit, it’s logical to me that any type of diversion will open up gateways for counterfeits.

So, "Where are the bodies?" That is, where is the unpleasant evidence that counterfeit drugs entered a supply chain?

As the BBC dryly notes in How fake drugs got into the NHS: "The fate of his potential British victims may never be known because no-one knows who took the drugs, and because of that, no-one knows whether anyone died as a result or what effect it has had on people’s treatment."


Bye bye, Tom Daschle! Gosh, I was kinda looking forward to complaining about your support of drug importation, especially with a re-launch of the Friday the 13th franchise on the way.

Was he treated fairly for accepting money from the industry that he would be regulating? As one average American opined: "It's still not as bad as the $400,000 that Interior Secretary Ken Salazar has received from the geyser and hot springs lobby." (source)


Check out the all-new Health Wonk Review for the best in health care blogging from around the web.

Monday, February 02, 2009

Pharmacy and the Stimulus Bill

Should you worry about the fact that economic crisis is being used as a way to nationalize health care?

I think that’s a yes!

Last week, the U.S. House of Representative passed H.R.1 American Recovery and Reinvestment Act of 2009, the $819 billion so-called “stimulus” bill. As Peggy Noonan opined in Saturday’s Wall Street Journal, it’s “a big, messy, largely off-point and philosophically chaotic piece of legislation.”

There’s some good news for the pharmacy industry buried in Section 3003 (“Temporary Optional Medicaid Coverage For The Unemployed”) of this pork-laden monstrosity.

Most notably, Medicaid is now available to Americans (and their families) who lost their jobs anytime since July 2008 and anyone who will lose their jobs by January 2011. States are prevented from imposing income limits on beneficiaries in most cases. I guess that the states won’t mind because the Federal government will reimburse states for the more than 1 millions new enrollees.

I don’t know whether this unexpected Medicaid expansion will survive into the final version of the stimulus bill. But if it does, it will help further insulate pharmacies and the pharmaceutical industry from the downturn. Medicaid margins are relatively robust compared to private insurance. (See Pharmacy Profits and Wal-Mart.) Plus, the uninsured have much more trouble paying for drugs. If losing their jobs also meant losing insurance (and they can’t or didn’t use COBRA), then Medicaid provides a cushion.

On the plus side, we have free Doritos in the office today.