PBM Consolidation Ahead (redux)

In early June, I laid out the five reasons why I expect PBM Consolidation Ahead.

The prospects for more consolidation seem even higher now, especially in light of recent news about CVS Caremark (CVS) and Medco Health Solutions (MHS). I also think that health care reform will end up being a net positive for the PBM industry, increasing the need for more scale.

I estimate that the big three PBMs – CVS Caremark (Pharmacy Services), Express Scripts, and Medco Health Solutions – will process about 45% of all prescriptions filled in a retail drug store in 2009. I would not be surprised if that figure hits 60% by 2014.

SIX FACTORS TO WATCH

In June, I laid out five factors that favor consolidation within the PBM sector:

1. The FTC’s decision not to challenge the Express Scripts' (ESRX) acquisition of Wellpoint's (WLP) Next Rx in-house PBM business.
   
   
2. The perceived financial value of in-house PBMs (in light of the valuation assigned to Next Rx)
   
   
3. The value and role of PBMs in the system – Pharmacy owners tend to scoff at the economic logic behind PBMs and/or accuse me of unrelenting bias. Alas, neither perspective is accurate. The Wall Street Journal recently predicted that Drug Managers Should Keep Their Health, referring to PBMs as “the arteries of the prescription-drug network.” (PBM-haters, feel free to insert your own joke about “bloodsuckers.”)
   
   
4. Lack of concentration – Still true.
   
   
5. Need for generic scale – By 2015, more than $90 billion of current branded product revenues will be lost to generic competition. PBMs need clout with generic drug makers, especially given the prospects for reduced per-script profitability on generic prescriptions.

As a sixth factor, I'll add in the still-uncertain nature of health care reform.

The various proposals and bills all suggest an increase in the number of people covered by prescription drug insurance. These plans are not going to administer themselves, regardless of coverage guidelines or the government’s involvement. Even the Medicaid drug benefit is administered by the states within the requirements set by the Federal government (via the Centers for Medicare and Medicaid Services).

Yes, I know that there are so-called transparency provisions in at least one version of the reform passed by the House. (See Battle Erupts Over Disclosure on Drug Prices.) However, I don’t believe that these measures will make it into the final version of any reform bill (or have much teeth if they do make it there).

THE NEWS

Given the six factors above, I suppose the following stories may not appear shocking.

At a recent Thomas Weisel Partners Healthcare Conference, CVS Caremark Corp. (CVS) Chief Financial Officer David Rickard predicted further consolidation. As reported in More Consolidation For Pharmacy Mgmt Cos Inevitable - CVS CFO, he said:

As major PBMs keep gaining share, "what won't happen is some of those in the non-top three will become, you know, competitively unfit, and so there will be a further consolidation within the industry."

(The meaning of this verbatim quote may have been lost in translation, but he does suggest further consolidation ahead.)

In addition, Reuters reported that Medco is seen as the lead bidder for Aetna’s PBM in the aptly-named article Medco seen as lead bidder for Aetna's PBM: sources.

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So, what do you think about the likelihood and impact of PBM consolidation?