Tuesday, July 09, 2019

The Big Three Generic Drug Mega-Buyers Drove Double-Digit Deflation in 2018. Stability ahead? (rerun)

This week, I’m rerunning some popular posts. Click here to see the original post and comments from January 2019—complete with now-dated Bird Box references!

Oral generic drugs keep getting cheaper. The Food & Drug Administration (FDA) has intensified the generic industry’s competitive pressures with record drug approvals. The FDA’s actions, combined with the negotiating leverage of the large generic purchasing organizations, led to 2018’s persistent double-digit deflation in manufacturers’ selling prices for oral generic drugs.

Below, we update our analysis of these generic drug mega-buyers.

We estimate that for 2018, the three largest buyers  accounted for more than 90% of total U.S. generic drug purchases from manufacturers. In 2019, acquisitions and contract switches will shift market share among these groups, but not diminish their impact. It's no surprise that manufacturers lose their minds when seeing these monster firms.

There are now fewer therapeutic areas with excess inflation, so future price reductions will be smaller. What’s more, some generic manufacturers have signaled their intention to exit highly competitive generic drug categories in which prices have dropped. Look for oral generic prices to stabilize—and possibly rise—over the next 12 to 18 months. Perhaps the blindfolds will come off?

P.S. Portions of this post have been adapted from our forthcoming 2019 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. We'll be taking this updated and expanded edition out of our bird box on March 5!

SCARY MONSTERS

Here is our summary of the generic power buyers for 2018. Note that no organization reports its generic volume, so the figures in this exhibit represent our estimates. (The birds in our box can detect these scary mega buyers.)

[Click to Enlarge]

Here are profiles of these entities and recent news that will shift market shares in 2019:

1) Red Oak Sourcing

We estimate that in 2018, Red Oak remained the largest buyer of generic drugs.

The company was formed in 2013 as a 50/50 joint venture between CVS Health and Cardinal Health. It began operating in mid-2014 as Red Oak Sourcing, LLC. The joint venture does not require extensive business integration or acquisition expenses, nor does it fundamentally change each company’s current supply chain and distribution operations.

Red Oak benefits from its owners’ growth:
  • CVS Health’s 2015 acquisitions shifted the generic purchasing volume of Target and Omnicare to Red Oak. In 2016, Cardinal Health began a multiyear agreement with OptumRx to supply generic and brand pharmaceuticals to OptumRx's mail and specialty pharmacies, including the Catamaran business.
  • Over the past two years, CVS has also acquired three regional drugstore chains and numerous specialty pharmacies.
  • Red Oak will benefit in 2019 from OptumRx’s acquisition activity, which should increase Cardinal’s revenues. In 2018, OptumRx acquired Avella Specialty Pharmacy, the largest private, independent specialty pharmacy, and Genoa Healthcare, the largest pharmacy services company for behavioral health and addiction treatment communities. These gains offset volume losses (discussed below) from Prime Therapeutics, Fred’s, and Cigna.

2) Walgreens Boots Alliance with AmerisourceBergen

Walgreens Boots Alliance Development (WBAD), a Swiss joint venture, is the second-largest buyer of generics drugs. It is poised to become larger than Red Oak, given recent acquisitions and alliances.

WBAD was formed in 2012, after the first stage of the merger between Walgreens and Alliance Boots. Walgreens’ supply agreement with AmerisourceBergen (ABC) allows the wholesaler to source generic drugs and other products through WBAD. ABC therefore shares in (and contributes to) the purchasing scale of WBAD. AmerisourceBergen’s pharmacy customers, such as the ones that participate in the wholesaler’s PRxO generics program, also benefit from the reduced acquisition costs if ABC shares the savings with them.

WBAD continues to expand its share of generic purchases, due largely to the addition of volume from recent acquisitions and business shifts:
  • In 2017, Walgreens Boots Alliance and Prime Therapeutics completed the formation of AllianceRx Walgreens Prime, a company that combines their respective central-fill mail and specialty pharmacies.
  • In 2018, Walgreens announced three significant transactions. It acquired 1,932 stores from Rite Aid, the pharmacy patient prescription files of 179 Fred’s Super Dollar pharmacies, and the non-dialysis-related prescription files of DaVita’s pharmacy.

3) Econdisc Contracting Solutions / Innovative Product Alignment

In 2010, Express Scripts, which operates the third-largest U.S. pharmacy by revenue, formed Econdisc Contracting Solutions. (UPDATE: Click here for 2018 figures.) This group purchasing organization for generics includes Express Scripts, two major supermarket chains (Kroger and Supervalu), and other smaller chains.

In 2017, Express Scripts agreed to partner with WBAD to purchase generic drugs. Express Scripts is participating via Innovative Product Alignment (IPA), a newly created subsidiary that will gain some price transparency into—and be able to audit—WBAD. Express Scripts will not shut down Econdisc, and AmerisourceBergen will reportedly not gain additional volume from the arrangement. Econdisc is therefore a separate entity in the chart above. We estimate that the full impact of this arrangement will be felt in the 2019 contracting cycle.

Cigna’s recently completed acquisition of Express Scripts will provide further leverage for the WBAD/Econdisc partnership. In Cigna-Express Scripts: Vertical Integration and PBMs’ Medical-Pharmacy Future, I summarize Cigna’s complex relationship with UnitedHealth’s OptumRx business. Yesterday, Cigna announced that by 2020, the business will transition from OptumRx to Express Scripts. See Cigna’s 8-K filing .

In 2018, Walgreens and Express Scripts formed ValoremRx Specialty Solutions, a separate group purchasing organization focused on the procurement of specialty brand drugs. ValoremRx does not focus on generic drugs, so we have not incorporated its activities into the chart above. We estimate that ValoremRx has had minimal market impact.

4) McKesson OneStop + ClarusOne (Walmart)

Unlike its wholesaler peers, McKesson has channeled its customers’ generic purchasing volume into OneStop Generics, its own generic program. This program has added leverage and scale to McKesson’s negotiations with generic manufacturers. OneStop, however, has suffered due to a loss of volume from Rite Aid and the shift of Ahold’s business to Cardinal Health.

McKesson also has global generic purchasing scale through its acquisition of Celesio AG, one of the largest pan-European wholesalers. In 2015, McKesson established McKesson Global Procurement & Sourcing Limited, a London-based subsidiary focused on manufacturer negotiations.

In 2016, Walmart and McKesson formed ClarusOne Sourcing Services LLP to source generic pharmaceuticals for their respective U.S. operations. McKesson is Walmart’s longtime brand-name drug supplier. ClarusOne is fully operational and has been negotiating with manufacturers.

Everyone Else

Other significant buyers are not broken out in the chart above. These include:
  • OptiSource, a partnership of smaller drug wholesalers
  • Rx Sourcing Strategies, a buying group launched in 2016 with founding members Anda Distribution, Delhaize America, and Smith Drug Company
  • Buyers of generic drugs that don’t participate in consortia, such as Kaiser Permanente and Morris & Dickson
The purchasing scale associated with the large consortia have shifted large pharmacies’ generic purchasing from direct sales to wholesalers. Generic volume purchased via wholesalers is included in the market share figures above.

GOING DOWNRIVER

The consortia have contributed to a massive and sustained period of generic price deflation. The chart below shows price changes for a sales-weighted index of mature oral and injectable generic drugs. The data come from the independent research firm Nephron Research. IMHO, Nephron provides Wall Street’s most robust methodology for tracking generic market drug prices from manufacturers to purchasers.

As the blue line shows, deflation in oral solid generic pills, where consortia have the greatest impact, was -10% to -15% throughout 2017 and 2018. By contrast, prices for injectable drugs rose in the low single digits during 2018.

[Click to Enlarge]

The FDA has aided deflation by creating more competition. The government’s 2018 fiscal year set a record year for generic drug approvals. In 2018, the FDA approved 781 generic drug applications, compared with 763 approvals in 2017, 651 in 2016, and 492 in 2015. We expect that the 2018 figures will include more approvals than those of 2017. See the chart in my October tweet.

That said, generic manufacturers seem to be reacting to these trends. Some generic manufacturers have signaled their intention to exit highly competitive generic drug categories in which prices have dropped. For instance, RBC Capital Markets found that the number of abbreviated new drug applications (ANDAs) that have been withdrawn spiked in 2018, from 21 withdrawals per month in 2017 to 71 withdrawals per month in the first half of 2018. These withdrawals may indicate that manufacturers are reevaluating the profitability of entering highly competitive categories.

Perhaps generic manufacturers are learning to win the bird box challenge?

P.S. My $0.02: Bird Box (the movie) was just OK. Some of the memes, however, are hilarious.

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