Wednesday, September 05, 2018

How 2017’s Fastest-Growing, Private Specialty Pharmacies Highlight an Industry Slowdown

Time for our annual review of the Inc. 5000 list, the magazine’s annual ranking of the fastest-growing private companies in the United States. The list offers a valuable snapshot of the dynamic specialty pharmacy industry. This marks our sixth annual review of the list.

We have identified nine specialty pharmacies on the 2018 list, which is based upon revenue growth from 2014 to 2017. Annual revenues range from $61.3 million to $1.4 billion. The companies on the list are larger but growing more slowly than those in our previous analyses.

The pharmacies and key stats are listed below. For the eight companies returning from last year’s list, median revenues in 2017 grew by 14%. This marks the second year of slower growth.

This year’s list showcases the maturation of the specialty pharmacy industry. The go-go growth years are fading. It’s becoming harder to enter the industry and more challenging to scale a business. OptumRx is rumored to be acquiring Avella Specialty Pharmacy, the largest company on the list. Everyone has to grow up someday.

LEARNING TO CRAWL 

The 2018 Inc. 5000 list ranks companies based upon percentage revenue growth from 2014 through 2017.
  • To be ranked, companies must be based in the United States and be privately held, for profit, and independent—not subsidiaries or divisions of other companies—as of December 31, 2017. Companies must also have had revenues of no less than $100,000 in 2014 and no less than $2,000,000 in 2017.
  • Some companies have grown by acquisition. The Inc. growth figures do not necessarily reflect organic growth.
Here is our analysis of last year’s list: 2016’s Fastest-Growing, Private Specialty Pharmacies (From the Inc. 5000)

BABY STEPS

Based upon the magazine’s company descriptions, we have identified nine firms whose primary business is the dispensing of specialty pharmaceuticals. That figure marks the fewest specialty pharmacies on the Inc. list since we began counting, in 2012.

[Click to Enlarge]

The chart above updates Exhibit 47 (on page 71) of our 2018 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

For our list of the largest specialty pharmacies, see The Top 15 Specialty Pharmacies of 2017: PBMs and Payers Still Dominate. Pharmacies owned by pharmacy benefit managers (PBMs) captured most of the market share. The top four specialty pharmacies are all owned or co-owned by a PBM. They accounted for about two-thirds of prescription revenues from pharmacy-dispensed specialty drugs. Only two companies from that list—Avella Specialty Pharmacy and PANTHERx Specialty Pharmacy—made it onto the 2017 Inc. list.

LIFE LESSONS

Here are my takeaways from the new list:

1) Revenue growth remains high for some companies.

Although the Inc. list is a self-selected sample, the revenue growth rates remain impressive. Average (median) 2017 revenue for these nine businesses was $336 million ($201 million), and the average three-year revenue growth rate was 812% (160%). All of these companies are attractive acquisition candidates for financial and strategic buyers.

Eight of the nine companies appeared on last year’s list. The returnees’ average year-over-year revenue growth rate for 2016 was 26% (median=14%).

PANTHERx grew the most quickly. Its 2017 revenues were $454.3 million, up $214.2 million from the 2016 figure and up $411.9 million from the 2015 figure.

2) The Inc. list reflects the overall specialty market slowdown.

Total prescription dispensing revenues from specialty drugs at retail, mail, long-term care, and specialty pharmacies reached $138 billion in 2017. (See Chapter 3 of our 2018 pharmacy/PBM report.) We estimate that independent pharmacies—such as the companies in the Inc. list—accounted for about 10% of total U.S. specialty dispensing revenues in 2017.

Though pharmacy revenues from specialty drugs grew by nearly 9%, this growth rate was a historical low. Factors behind this slowdown include much lower spending for drugs that treat hepatitis C, the launch of generic specialty drugs, slower growth in list prices for some specialty drugs, and the launch of specialty products with list prices below those of competitive products.

This industry slowdown is reflected in the Inc. figures. Consider Avella Specialty Pharmacy and Curant Health—the only two specialty pharmacies that have appeared on the Inc. list every year since 2012. The chart below compares their annual revenue growth rates with the overall industry growth rate. As you can see, their sales performance closely tracks the industry’s slowdown.

[Click to Enlarge]


3) Six pharmacies from last year have dropped off the Inc. list due to acquisitions and/or slower growth.

Here’s a summary of the six companies on last year’s list that don’t appear on this year’s:
  • Two pharmacies were acquired by public companies and were no longer independent, private businesses:
    • Diplomat Pharmacy acquired Focus Rx (2016 revenues = $50.3 million)
    • CVS Health acquired Apothecary by Design (2016 revenues = $206 million)
  • Infusion Express received a significant growth capital investment from Health Velocity Capital and McKesson Ventures. Such investment does not disqualify a company from appearing on the list, though private equity investors generally prefer not to reveal information about their investments.
  • Three companies from last year’s list—BioCure Rx, OptiMed Specialty Pharmacy, and OptionOne Pharmacy—either did not apply this year or did not grow quickly enough to qualify for inclusion.
One company on this year's list—SMP Pharmacy Solutions—received a major growth capital investment from private equity firm Galen Partners. I presume SMP will drop off the 2019 list. The industry slowdown shown above means that there will be fewer specialty pharmacies eligible for next year’s Inc. 5000 list.

THE REAL WORLD

The nine specialty pharmacies on the 2018 Inc. 5000 illustrate the industry’s slowing growth and mounting competitive pressures. Smaller specialty pharmacies often struggle to access specialty medications within payer and PBM networks. They are accepting lower reimbursements to participate in payers' networks and paying per-prescription direct and indirect remuneration (DIR) fees.

For more on the outlook, see my article The State of Specialty Pharmacy 2018. In the meantime, expect to see fewer specialty pharmacies on the 2019 Inc. 5000 list. O, sweet youth, how soon it fades!

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