Medco Health Solutions (NYSE:MHS) stock jumped 10% yesterday on an upbeat forecast for generics and better-than-expected earnings yesterday. See Medco's Net Rises 11% from The Wall Street Journal.Looks like Medco’s Excellent Adventure will just keep getting better. Medco raised its forecast of generic introductions through 2015. CEO David Snow referred to 2012 as the "monster" and noted that 2018 is projected to be the third biggest year in the decade. As the chart below shows, $28.3 billion of brand-name drugs sales will be lost to generic introduction in 2012. Whoa.
This news will either makes you ecstatic or depressed, depending on what type of company you work for. PBMs, pharmacies, and (to a lesser extent) drug wholesalers will benefit from this tidal wave. Brand-name manufacturers...not so much.
More generics growth on the way. Medco’s overall generic dispensing rate (GDR), which blends retail network and mail-order prescriptions, hit 71.6% in the quarter. While Medco did not provide a GDR forecast, I estimate that the industry's GDR will pass 80% in mid-2012. Here is the updated generic forecast from Medco’s Q3 2010 Earnings Presentation.
On the earnings conference call, CEO David Snow highlighted the 2012 boom while also touting growth through 2020:
"All of the other years for the remainder of this decade delivered solid and continuous incremental growth to earnings per share each and every year...This is before taking into account the increased likelihood for a new wave of biosimilar introductions that we believe will, over time, become another meaningful contributor to our earnings growth."More sophisticated payers? IMO, the superior profits from generic drugs are catching the attention of payers, so there is a countervailing force against per-script profit growth. Medco CEO David Snow dismissed this concern on the earnings call by noting that plan sponsors have "very clear reasons to keep our interest aligned with driving that uptake." True enough, as generic substitution is one of the most reliable and consistent ways for a payer to reduce expenditures for a prescription-drug plan. But note the comments of Per Lofberg of CVS Caremark (NYSE:CVS), who recently mentioned “more sophisticated” payers asking to “participate” in the savings from generic drugs. See CVS Caremark: More Happy Talk, But Hard Work Remains. Hmmm.
Challenge for Brand-Name Manufacturers. The generic boom will create channel challenges for brand-name drug manufacturers. As I note in NCPA's New CEO and the Pharmacy Industry's Future, generic drugs turn pharmaceutical channel economics upside down. The costs of distributing and dispensing a traditional (non-specialty) generic drug far exceed the actual cost of the medicine, which is the opposite of brand-name drugs. As a result, the economic interests of companies within the U.S drug channel—pharmacies, wholesalers, and PBMs—will continue to diverge from brand-name drug manufacturers. "Be excellent to each other" will not be a sufficient account management strategy.
Stay tuned for Medco's Analyst day on November 19.
P.S. Apparently, Jim Cramer of Mad Money is a Drug Channels fan. He tweeted my article about Walgreen's PBM last night. Booyah! (You may need a Twitter account to view the link.)