Interpreting Caremark’s Big Win over Medco

Big news in the PBM world on Friday: CVS Caremark (NYSE:CVS) took the $3 billion Federal Employee Program (FEP) mail/specialty business away from Medco Health Solutions (NYSE:MHS) and will manage the entire contract starting in January 2012. Here’s the official press release: CVS Caremark Awarded Integrated 3-Year Blue Cross and Blue Shield Federal Employee Program (FEP) Contract.

This major win for Caremark—and surprising loss for Medco—reinforces my view that Per Lofberg is leading a successful rejuvenation of Caremark’s PBM business. However, there is limited evidence that the integrated PBM-Retail model was the deciding factor, beyond purchasing synergies that allow CVS Caremark to compete more aggressively on price.

Apparently, Medco lost the FEP contract for "financial" reasons. While bad news for Medco, it is consistent with my view that marketplace competition is better than government oversight in protecting the interests of plan sponsors.

Here’s my quick take on what this deal means for CVS Caremark, Medco, and the two drug wholesalers supplying each company. As always, Pembroke Consulting and Gerson Lehrman Group clients can schedule phone calls with me for additional insights beyond what I discuss in this public post.

Is Caremark really better at managing drug trend?

The big three Pharmacy Benefit Managers (PBMs)—CVS Caremark (NYSE:CVS), Express Scripts (NASDAQ:ESRX), and Medco Health Solutions (NYSE:MHS)—have all now published their annual drug trend reports for 2010. I reviewed two of them in Insights from the 2011 Medco Drug Trend Report and Insights from the new Express Scripts Drug Trend Report.

The numbers appear to show a clear advantage for CVS Caremark in managing drug trend—the change in prescription drug expenditures of plan sponsors. The gap is biggest for specialty drugs, which is the fastest growing part of spending.

However, a deeper look shows that the trend figures are effectively non-comparable. The uncomfortable reality is that we can’t tell which PBM is actually the best at managing trend for plan sponsors.

Read on for the data and wonky explanation.

Cancer Care and the Future of PBMs

In addition to TRON: Legacy, Medco Health Solution’s (NYSE:MHS) big theme in its 2011 Drug Trend report is “Cancer Care 2020.” Medco illustrates a plausible and compelling roadmap for how PBMs will be reinventing their business model.

Here’s a summary of the non-Medco-specific story, as I see it.

• The old world of brand-name formulary access and rebate negotiations is rapidly fading as generics come to dominate traditional drugs. In a world of low-cost generics, the quality of care—adherence, compliance, appropriate utilization—becomes much more important than the unit price per pill.

• Generic introductions will slow sharply after 2015, putting enormous pressure on PBM profits. The mail-pricing-at-retail trend adds further risk to the PBM profit model.

• Until biosimilars appear and the formulary game restarts, PBMs will use the cash river from the near-term generic wave to develop new services for plan sponsors. These clinical and health care services will (theoretically) improve patient outcomes and lower a plan sponsor’s total health care costs.
  

• Cancer care is the area of specialty drug spending with the greatest patient care component and the biggest share of spending under a medical benefit.

Hop on your light cycle as your favorite sentient isomorphic algorithm walks through the details below.

Insights from the 2011 Medco Drug Trend Report

The 2011 Drug Trend Report from Medco Health Solutions (NYSE:MHS) was released last week. Judging by the cover, somebody is a big fan of TRON: Legacy!

I strongly recommend you download this must-read (and free) resource. (Tip: If you want to download the report to your computer, go to www.drugtrendreport.com, click “Launch Report,” and look for the PDF icon on the menu floating at the top of the screen.) For a comparison with another PBM, see Insights from the new Express Scripts Drug Trend Report.

For Medco's book of business, traditional drug trend was a mild 1.1%, while specialty drug trend jumped 17.4%. Medco does a nice job explaining the data behind these figures. Medco's report also provides all sorts of interesting details, such as Average Wholesale Price (AWP) increases for major brand-name drugs in individual therapeutic areas.

Tune in tomorrow when I look at Medco’s strategy and what it tells us about the future of PBMs. On Thursday, I dig into the differences in reported drug trend among the big 3 PBMs.

Pharma Sales Reps: The Sitcom!

Following in the illustrious footsteps of the movie Love and Other Drugs, ABC will be launching a new sitcom next year about pharmaceutical sales reps called Work It.

No, this is not a joke. But there's a twist to this self-described "high-concept comedy":

With unemployment an ongoing issue and women now outnumbering men in the workforce, the new comedy series "Work It" follows two alpha males who realize the only way to beat the current "mancession" and land a job in pharmaceutical sales is to pass themselves off as women.

Um, yeah, that sounds like a realistic depiction of life at a pharmaceutical company. Or perhaps some of my clients are hiding a secret...

Check out the video clip below. I'm making the bold prediction that this show will neither win an Emmy award nor be featured on the PhRMA web site.

Drug Channel Profits in the 2011 Fortune 500

It's time for my annual review of the latest Fortune 500 list. This annual review gives you perspective on the relative profitability of the largest drug wholesalers, chain pharmacies, pharmacy benefit managers (PBMs), and manufacturers. I also compare this group to independent pharmacies.

Key observations:

• The biggest drug channel companies are much bigger (in revenues) than pharmaceutical manufacturers—but this is a misleading comparison. It also leads to a "pennies in profit" fallacy, when in fact drug channels companies are quite profitable.
  
  
• Median profitability of drug channels companies was up slightly in 2010. Profitability of the channel companies is about half of the profitability of pharmaceutical manufacturers when using a more appropriate metric such as Return on Assets.
  
  
• The profitability of a typical independent pharmacy is well above the median profitability of the nine largest drug channels companies, including PBMs.
  
  
• Investors once again earned higher returns from the drug channels group in 2010 as well as over the past 10 years.

Please post any questions or reactions as comments. The technical notes are at the bottom.

Post-Armada Reflections on the Specialty Market

I want to share some observations about key specialty market trends following last week’s outstanding Armada Specialty Pharmacy Summit in Las Vegas.

Let me first give a big public thanks to the Irene brothers for putting on a phenomenal meeting. It’s hard to beat the combination of the Wynn Las Vegas, enthusiastic people from all over the industry, and plenty of good ol’ fashioned networking time. Former President George W. Bush’s speech was a highlight—he was funny, down-to-earth, and insightful.

On a personal note, I want to thank the many Drug Channels readers who introduced themselves to me during the Summit. It’s gratifying to know how much people appreciate the blog.

Read on for my musings on the future of limited distribution networks, entrepreneurial pharmacy owners, and how manufacturers can manage the ongoing consolidation in the specialty channel. As always, I welcome your feedback in the comments below, whether you were in Vegas or not.

News Update: Omitted Item

Thanks in part to yesterday's web hosting snafu, the editorial staff at Drug Channels (that would be me) inadvertently omitted an important story from the Drug Channels News Update: May 2011. Here it is:

Obi-Wan Kenobi Is Dead, Vader Says
(Source: The Galactic Empire Times)

I apologize for this oversight.

Drug Channels News Roundup: May 2011

Here are four articles worth reading, hand-picked by your friendly neighborhood blogger.

• What’s going on with Lipitor? An excellent overview of the generic Lipitor controversy.

• What about ACOs? Thought-provoking ideas on what accountable care organizations could mean for managed care contracting

• What’s up, Doc? RFID used to track physicians, but not drugs.

• WTF? Mississippi allows pharmacists to oversee PBMs

Plus, a hilarious correction from The New York Times.

CVS CEO: Papa Don’t Preach, I’m Keeping My PBM

On last week’s earning call, Larry Merlo, President and CEO of CVS Caremark (NYSE:CVS), offered a stinging rebuke to the company’s critics. He stated that “there are no plans to split up the company” and bashed “certain well-funded special interest groups” that are making “false, unfounded and misleading accusations regarding CVS Caremark to the media and to government officials.”

Folks, if you read only one earnings call transcript this year, then make it this one. Key excerpts after the jump.

Just don’t forget that Mr. Merlo comes from pharmacy retail business, which increasingly depends on the PBM relationship. See my latest calculations in the chart below showing that 27% of CVS Caremark’ retail prescription revenues now come from CVS Caremark’s PBM business.

I’ll take him at his word regarding the break-up. If the PBM business turns around in 2012, then the pressure to split will ease. If not…

Pembroke Consulting or Gerson Lehrman Group clients should feel free to schedule phone calls with me for additional comments beyond what I discuss in this post.

Join me at the iMANY Summit

I want to let the Drug Channels audience know about iMANY's Annual Summit on May 23-26, 2011, at the wonderful Fontainebleau Miami Beach. Check out complete event details on the iMANY site and read on for a special offer from iMANY.

I will be delivering a keynote address on “The Future of the Pharmaceutical Industry.” I'll help you understand the big picture trends in the life sciences industry and what they mean for new business partnerships, commercial models, and distribution systems. The other keynote speaker is Donna Shalala, former Secretary of the U.S Department of Health and Human Services.

I am also pleased to announce a special offer for readers from growth-oriented pharmaceutical, biotech and generic drug manufacturers that do not currently work with iMANY.

During their Summit event, iMANY is conducting a track exclusively for smaller to medium sized companies called "New Dynamics for Growth Companies." If you want to attend this session, iMANY will cover your registration fee and provide your company with an on-site “Compliance Readiness” Assessment.” Availability is limited. Click here to contact iMANY for details of this special invitation. Thanks, iMANY!

See You at the Armada Summit Next Week

FYI, I'll be at 2011 Armada Specialty Pharmacy Summit next week on May 11 and 12 at the wonderful Wynn hotel in Las Vegas.

There should many good sessions and great networking. I'm especially curious to hear what former President George W. Bush has to say about Osama Bin Laden.

I won' t be speaking at the event, but drop me a line if you’d like to arrange a one-on-one meeting. Otherwise, please say hi if you run into me at the meeting—just not while I am losing my childrens' college fund in the casino.

And since it's Friday, I have included the Dr. Stephen Colbert's latest Cheating Death video below. It includes a special report on litigation in the pharmaceutical industry and a (very NSFW) cure for restless leg syndrome. Don't watch if you're easily offended!

Drugstore Margins Jump in New Gov’t Data

It's time to open a Corona, squeeze a lime into it, and party with new drugstore margin data from the U.S. Census Bureau's latest Annual Retail Trade Survey!

Two interesting factoids:

• The drugstore industry’s average gross margin has been remarkably stable over the past 17 years, averaging 25.7%.

• To my surprise, gross margins grew by 250 basis points to 27.5% in 2009 to reach the highest level in the past 17 years.

The Census Bureau is silent on why margins grew in 2009. My guess? The national retail generic dispensing rate grew, boosting average gross margins.

Although a bit tardy, these data provide the most complete and impartial picture of profits at all store-based retail drugstores, not just the larger public companies. Read on for details and festive charts.

What's Behind Teva's Cephalon Deal

The other big news yesterday is that Teva Pharmaceuticals (NASDAQ:TEVA) will be acquiring Cephalon (NASDAQ:CEPH) after outbidding Valeant Pharmaceuticals (NYSE:VRX)‎. Here’s the official press release: Teva to Acquire Cephalon in $6.8 Billion Transaction

This is a great, albeit expensive, strategic move by Teva. Management clearly recognizes the business model problem looming ahead for the generic drug business. The deal boosts Teva's brand business while maintaining a broadly diversified revenue base, positioning Teva as the "anti-Pfizer."

The pharma industry of tomorrow will be about expensive drugs for small patient populations and cheap drugs for large populations. I wonder how many manufacturers will be ready.

Medicaid Drug Rebate Program (sponsor)

I want to let you know about IIR's 16th Annual Medicaid Drug Rebate Program (MDRP) Summit, a returning Drug Channels sponsor.

The event will be held September 14-16 in Chicago. The 2011 agenda looks awesome, so I expect this year's event to be extremely popular.

IIR is offering a special 25% discount to Drug Channels readers—that’s up to $800 in savings off the standard rate. All you have to do is register with your VIP code: XP1658DRUG. Thanks, IIR!

FYI, the 2010 MDRP Summit actually sold out, so you should register as soon as possible.

Plus, IIR is offering you a chance to win an iPad 2 if you can guess the keynote speaker. (No, it's not me.)

Full details from IIR below.