Thursday, August 19, 2010

Is Medco Overreaching with United BioSource?

Medco Health Solutions (NYSE:MHS) continued its expansion into fee-based clinical services with the acquisition of United BioSource Corporation (UBC). Press Release

The high-level logic of the deal seems logical given Pharmacy Benefit Manager (PBM) industry dynamics and Medco's pharmacogenomic investments.

However, I'm a little puzzled by the strategic fit because United’s customers are manufacturers. PBMs have grown by aligning with the interests of plans sponsors (employers and health plans) rather than with brand-name or generic drug manufacturers.

Is an innovative PBM succumbing to business model creep and management hubris?

PBMs are racing to reinvent their business models given a post-2014 slowdown in generic launches and ongoing pressure on generic margins. In a world awash with low-cost generics, the quality of care—adherence, compliance, appropriate utilization—becomes much more important than the unit price per pill. The Big Three PBMs are each investing in personalized medicine tools to improve clinical outcomes and manage utilization as I discuss in Medco's Pharmacogenomic Future.

UBC makes sense by adding another clinical, fee-based-service business to Medco's operations. It also bolsters Medco’s claim to pharmacogenomics leadership given UBC's ability to run global validation trials. This fits Medco’s aggressive push into Europe. See Medco Expands in Europe.

At the same time, I note the following intriguing phrase in the press release:
"Upon closing the transaction, UBC would become a wholly-owned subsidiary of Medco that will be run independently from Medco's core business to ensure compliance with contractual requirements and client expectations." (emphasis added)
It's been awhile since I was in b-school, but "run independently" does not sound like "synergy." Keep an eye on this transaction.

P.S. Check out the latest Health Wonk Review at Managed Care Matters.


  1. Could Medco and the other PBM be using their gazillions of dollars to invest in other businesses in preparation for their exposure to their non-transparent activities of now and the past???

    Things that make you go...hmmmm.....

  2. No, transparency is not the issue. There are big cross-sell opportunities for Medco with payers. Medco can now run CER trials better than anyone so this capability will be a big advantage in Europe. Dr. Fein is skeptical but I predict big success from the acquisition.

  3. The PBM business model has always had two faces; one to their plan sponsors that says: "let us help you reduce the cost increases you've been experiencing with prescription drugs," and one to manufacturers that says: "let us help you sell more of your expensive drugs." They have been achieving the first commitment through greater utilization of generic drugs on which they earn extremely high profits. They are rewarded in the second arena with rebates. Now that the frontier of opportunity for generic conversion is shrinking, they have no choice but to find another way to float on a rising tide.