Thursday, February 02, 2012

VA Contract Odds Improving for McKesson

As I discussed in last week’s Big Trouble in the VA Contract: Who will win?, McKesson (NYSE:MCK) has been facing questions about “improper buying” under its Department of Veterans Affairs pharmaceutical prime vendor (PPV) contract.

Yesterday’s House Committee on Veterans’ Affairs hearing seems to exonerate McKesson. The VA took responsibility for the open market, non-contracted purchases and complimented McKesson on its performance. Good news for McKesson, bad news for taxpayers. Here’s the Washington Post’s summary: VA: Buying medications outside of contracts was just an effort to help veterans.

Below are some highlights from the testimony along with my updated but still-unscientific guess at which wholesaler will win the contract. BTW, there was also an interesting discussion about drug shortages and how McKesson manages supply and handles allocations.

Three people submitted written testimony, although many other people from the VA participated in the hearing:
The hearing was almost 2.5 hours long. Click here to watch the webcast to hear the full Q&A.

Here's Mr. Gould accepting blame on behalf of the VA:

The current contract also enables VA to order, through the PPV distributor, supplies that are not identified on any Federal contract in order to avoid a disruption where a needed drug cannot be obtained for a Vetaran. This is referred to as the ‘open market clause’...The failure to properly use and oversee the administration of the open market clause of this contract represents a breakdown in our system of management and accountability.
His testimony walks through a McKesson ordering screen and how the process broke down. The House committee issued a subpoena to the VA (but not McKesson) requesting all documents and communications related to this matter.

Rep. Jeff Miller, Chairman of the House Committee on Veterans’ Affairs, was very critical of the VA:

What VA has been doing is not mere bureaucratic failure; it is illegal with serious potential ramifications for America’s veterans. We will get to the bottom of this and who knew of VA’s illegal buying and did nothing about it, either through a complete contracting overhaul or simply new leadership that can enforce existing law.(source)
The written testimony doesn’t capture the extended discussions of the drug shortage problem. Ms. Longwell discusses how McKesson handles drug shortages starting at 2:09 into the hearing. Her description is consistent with the storyline that I describe in What’s Behind the Drug Shortage Epidemic.


The VA certainly sounds happy with McKesson, which has been providing a 99.9% fulfillment rate along with its “negative distribution fee,” a.k.a. cost-minus pricing.

So, I see an increasing likelihood that McKesson will retain the contract as the sole prime vendor. I also think that the likelihood of a multi-wholesaler award is greater than the odds for either Cardinal Health (NYSE:CAH)or AmerisourceBergen (NYSE:ABC). The contract award could be delayed even further beyond March given the increased scrutiny and the subpoena.

My current guess about outcomes:
  • McKesson: 55%
  • Cardinal Health: 10%
  • AmerisourceBergen: 10%
  • Multiple prime vendors (no sole-source): 25%
To be fair, I also thought that Michael Vick had a good chance to take the Eagles to the Super Bowl this year, so who knows?

1 comment:

  1. Always interesting to see what you think albeit sometimes entertaining!