Tuesday, March 24, 2020

Coronavirus Industry Impact: Patients, Pharmacies, and Wholesalers (Part 1)

I hope you are staying healthy and are managing to navigate your work-at-home mandates.

Last week, I tapped the collective insights of the Drug Channels’ audience. Nearly 700 readers shared their perspectives and projections for how the coronavirus pandemic could ultimately affect behavior, policy, and industry structure. Thank you to everyone who took the time to respond.

I will share the results over three articles this week:
  • Today, in Part 1, I will review the responses relating to patient behavior, pharmacies, and wholesalers. 
  • In Part 2 (tomorrow), I’ll focus on expectations for pharmaceutical manufacturers and third-party payment. 
  • In Part 3 (Thursday), I’ll examine how the coronavirus may affect the public perception of the industry’s participants.
P.S. A special shout out to the respondent who hoped that the coronavirus would not impact the quality of Drug Channels memes. Never fear, dear readers: Drug Channels will remain the internet’s top destination for pharmaceutical-related humor!

RESPONDENTS

We received 677 responses. The chart below profiles the survey’s participants according to the type of organization for which they work. As you can see, we received responses from across the healthcare industry.

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Where appropriate, I provide context for the responses by highlighting relevant material from our 2020 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. I also include representative comments from respondents. Some comments have been edited lightly for clarity.

PATIENT BEHAVIOR

We asked our readers to respond to the following question:
“Please consider the long-term, enduring impact of the coronavirus on the drug channel, then evaluate the likelihood of the outcomes listed below. When we look back on 2020, will the coronavirus have left a lasting mark on the drug channel by:”
The chart below summarizes responses to our questions about how patient behavior could change.

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1) Patients are likely to increase their use of mail pharmacies instead of retail pharmacies.

Almost one-third of survey respondents believe that a long-term increase in mail pharmacy is very likely. An additional 46% consider that outcome at least somewhat likely.

Such a change would reverse the recent trends before the coronavirus outbreak. From 2013 to 2019, total 30-day equivalent prescriptions filled at retail community pharmacies increased by 19%, while equivalent prescriptions dispensed by mail pharmacies declined by -13%. (See Exhibit 30 of our new 2020 report.) Note that mail pharmacies have captured more than half of the total industry’s prescription revenue growth, driven by the dispensing of higher-priced specialty medications.

Drugs Channels Institute estimates in 2019, about one in five prescriptions dispensed by a community retail pharmacy was for a 90-day supply. (See Exhibit 27 of our new 2020 report.) This 90-day retail penetration rate had removed one of mail pharmacies’ competitive advantages.

However, the responses indicate that across the industry, there is an expectation that the coronavirus will trigger longer-term behavioral changes.

Consumers today typically choose mail pharmacies primarily for insurance-related reasons. Some PBMs and plan sponsors are therefore trying to accelerate a possible shift. Some notable comments:
“We are overriding 'refill too soon' edits to allow for up to 90 day drug supplies at retail, for most drugs. We're also encouraging people to move to the mail pharmacy, where they can.”

“If mail pharmacy penetration cannot increase as a result of this, it really has no chance.”
2) The expected growth of mail pharmacies will coincide with a boom in telehealth and remote counseling.

Many in the industry anticipate a boom in telehealth that would support mail pharmacy. A simultaneous shift to telehealth and mail pharmacy dispensing would benefit the venture-backed startups that I profile in Section 12.5.2. of our new 2020 report. It may also accelerate specialty pharmacies’ use of digital engagement tools.

Here are some representative comments:
“I suspect [COVID-19] will further drive consumer use of mail or internet pharmacy and discourage in-person dispensing and pharmacy visits. Much will depend though whether a vaccine can be rapidly developed and available in pharmacies. Maybe a quick availability will restore some of the value of local pharmacies.”

“We will have a healthy debate on the balance between speed, safety, and efficacy of new products. Telehealth will have a chance to prove itself. Consumers will be more willing to try mail order pharmacy options.”

“I would expect a significant uptick and permanent benefit to telehealth which will become a bigger and more permanent fixture in health care delivery.”

“This has the potential to spark a wave of technology and HUB/SP call centers will shift to more digital friendly engagement.”

“Covid-19 will act as an accelerator of existing trends towards consumerism, e-commerce, and final mile pharmacy. Anticipatory or direct to patient supply chains where drug inventories are moved forward in the supply chain closer to the consumer, ordered online, prescribed by tele-health and same day delivery.”
Here are two good overviews of how the coronavirus is leading to surges in demand for telehealth:
Many U.S. consumers are already willing to consider using an Amazon pharmacy, so perhaps the coronavirus will also accelerate Amazon’s efforts. As one respondent noted:
“If Amazon Pharmacy and Pillpack can hold supply and make it easy for customers, now is a break out moment for them. Who really wants to enter and stand in a retail pharmacy about now?”
Amazon is the second-largest retailer in the United States, after Walmart. It would be logical for Amazon to keep seeking market share within the $446 billion pharmacy industry.

3) Patients are expected to increase their use of retail clinics.

Two-thirds of survey respondents think it is likely that consumers will increase their use of clinics located in retail locations.

Like the growth in mail pharmacies, growth in the use of retail clinics would reverse recent trends. The in-store clinic business at retail pharmacy locations has stagnated. The total number of retail clinics in 2019 declined significantly, from 1,942 clinics at the start of 2019 to 1,757 clinics at the start of 2020. (See Exhibit 18 of our new 2020 report.) Most of the decline was due to Walgreens’ decision to shut down its in-house retail clinics.

The traditional retail clinic model has been fading in favor of locations with broader healthcare services, including CVS Health’s HealthHUB format and the Walmart Health centers in Georgia.

In recent weeks, many drugstore chains are providing space for COVID-19 testing. Check out the activities of the two largest chains:
One respondent from a pharmacy expressed this optimistic sentiment:
“I would hope that for retail independent pharmacies this is a wake-up call to allow them to do more point of care testing, telepharmacy and other provider status type things to help the medical community.”
CHANNEL IMPACT

The chart below summarizes responses related to wholesaler inventories and retail pharmacy profits.

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4) Pharmaceutical wholesalers are expected to maintain higher inventory levels in the future.

Two-thirds of our survey’s respondents expect that wholesalers will increase their inventory levels of prescription drugs. Such a change would negatively impact wholesalers’ profitability, at least until gross margins could adjust.

Wholesalers need to hold enough inventory to maintain customer service levels. However, inventory uses cash and is recorded as an asset on their balance sheet. Product inventory accounts for 40% to 50% of current assets for the largest public wholesalers. (Chapter 5 of our 2019–20 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors explains wholesalers’ balance sheet and cash flow economics.)

In recent years, wholesalers’ average inventory levels have remained relatively stable, at about one month. This overall average disguises variations between different products and businesses. For instance, inventory levels for brand-name drugs are typically about two to three weeks. Wholesalers hold even lower levels of inventory for products that sell quickly and can be readily replenished.

The comments regarding wholesalers were generally negative and focused on their inventory practices:
“Wholesalers did not anticipate this and are unable to provide supply as needed.”

“Just in time supplies from the wholesalers continues to strangle the hospital system. Many shortages have nothing to do with manufacturers rather lean inventory methods.”

“I'm finding some of the ‘JIT subscribing’ wholesalers were caught with their pants down.”

“Wholesalers and warehousing chains will likely want to carry higher inventory levels and this may help improve cash flow for the generic manufacturers as wholesalers may have to start paying more often instead of so much cash being withheld by immediate charge-back deductions and long payment terms.”

“From a wholesaler perspective, this may force them to carry more inventory on Branded and Specialty products because they often turn their inventories over 30x annually which means they generally carry 10 days of inventory to take advantage of the payment terms. Given the potential impact on logistics and manufacturing, this may expose the wholesalers' low inventory levels of these critical products.”
5) The coronavirus is unlikely to improve the profit prospects for retail pharmacies.

Retail pharmacies have experienced slowing growth, lower profits, and mounting competitive pressures. The retail pharmacy industry has entered a shakeout process that will ultimately reduce the number of U.S. pharmacy locations. Our new 2020 report analyzes the multiple economic challenges behind these conclusions. However, our respondents believe that it is unlikely that the coronavirus situation will alter this negative prescription profit trajectory.

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I’ll be back tomorrow with Part 2.

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