Last week’s surprising Rite Aid/EnvisionRx deal illustrates the convergence of benefit management with dispensing channels.
Based on new disclosures during CVS Health’s most recent quarterly earning call last week, Specialty Connect—the company's latest convergence offering—appears to be getting more traction. Below, I highlight how Specialty Connect alters the business economics of CVS Health’s pharmacy business.
Like Maintenance Choice, Specialty Connect challenges competing pharmacies and pharmacy benefit managers (PBMs), which can’t easily imitate this offering. Expect payers to continue adopting it—but also expect competitors to find 38 special reasons to complain.
CAUGHT UP IN YOU
In 2014, CVS Health launched the Specialty Connect service, which lets patients taking specialty drugs choose between in-store pickup at a retail location or mail delivery from CVS Health’s Caremark specialty pharmacy. It’s like the company’s Maintenance Choice program, which lets consumers choose their pharmacy channel (mail or retail) for certain traditional therapies.
For both programs, the choice of dispensing outlet is limited CVS Health outlets, which infuriates other pharmacies.
HOLD ON LOOSELY
Specialty Connect has some varied and intriguing effects on CVS Health’s business economics.
It overcomes specialty-at-retail problems. In addition to basic product dispensing, specialty pharmacies provide other complex services beyond those typically needed for a traditional drug. That's one reason why community retail pharmacies play a relatively small role in dispensing many specialty drugs. Given disparate pharmacy capabilities, manufacturers and payers limit and manage the pharmacies eligible to dispense expensive specialty medications.
Specialty Connect overcomes this usual specialty-at-retail limitation by providing back-end clinical services and care management, regardless of dispensing channel. Diplomat Pharmacy offers a similar strategy to non-affiliated pharmacies via its Retail Specialty Network (RSN) program, but lacks the PBM integration.
It lowers CVS retail pharmacy revenues. Average specialty costs are more than $3,000 per prescription. Under Specialty Connect, about 50% of patients are choosing to get these specialty prescriptions from the Caremark specialty pharmacy, which reduces retail pharmacy revenues.
In 2014’s fourth quarter, CVS pharmacy same-store sales grew by 5.5% over the figures for same quarter in 2013. On the call, CVS revealed that Specialty Connect reduced revenues by 190 basis points. In other words, same store sales growth would have been 7.4% without Specialty Connect.
It increases CVS retail pharmacy gross margins. For a retail pharmacy, a generic prescription’s gross margin percentage is typically about 10 times as large as a brand-name drug’s gross margin. (See Chapter 7 in our new 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies.) Since specialty drugs are primarily brand-name products, the retail generic dispensing rate will grow and retail gross margins will increase.
Gross profit dollars will decline in CVS Health's retail pharmacy segment, because they will be transferred to CVS Health’s PBM reporting segment. But the overall corporate effect should be small.
It improves patient adherence. Numerous peer-reviewed studies have found that specialty pharmacies can deliver higher adherence rates and better patient health outcomes. In a recent conference presentation, CVS stated that Specialty Connect led to a 7 percentage-point increase in medication possession ratios. I'd like to see additional data, but the result seems credible.
It differentiates the PBM business. Caremark had an impressive quarter, reporting $7 billion in net new PBM business. While this gain can’t be attributed solely to Specialty Connect, the program does helps CVS Health differentiate it from PBM peers. Competing PBMs cannot readily match the Specialty Connect program, because a separately owned PBM and retail pharmacy would battle over the per-prescription profit.
The new Rite Aid/EnvisionRx combination can theoretically overcome this obstacle, too.
STONE COLD BELIEVER
The specialty boom is reshaping the pharmacy industry’s market structure, as evidenced by the prominence of PBM-owned pharmacies with substantial specialty operations. See 2014's Top Pharmacies: Specialty Shifts Industry Leadership.
We estimate that CVS Health’s retail, mail, and specialty pharmacies accounted for 26% of pharmacy dispensing revenues from specialty pharmaceuticals. See Exhibit 40 of our 2014-15 report.
I predict that Specialty Connect will allow CVS Health to keep on rockin’ into the night.