News Update: August 2007

I’m going to take a break from blogging until after Labor Day. In the meantime, here are a few stories that you may have missed this month. Don't worry -- I’ll be back in September!

1) Pharmacy fights back
The Average Manufacturer Price (AMP) war has now moved to Congress, where multiple bills benefiting retail pharmacy have been introduced. Here are the major bills and their key provisions, which I’ll discuss further in upcoming posts:

• S.1951: Fair Medicaid Drug Payment Act of 2007 – This bill changes the AMP formula and redefines retail class of trade, among other things.


• S.1954: Pharmacy Access Improvement Act of 2007 – Many items are stuffed into this bill, including prompt payment requirements for drug plans and limits on Part D co-branding.


• H.R. 3140: Saving Our Community Pharmacies Act of 2007 – This bill would replace AMP with a survey-based metric called “Retail Acquisition Cost.”

BTW, you will not be surprised to find that emails from pharmacists about Heretical Questions about the AMP War have been generally negative. Oh well. I still maintain that an ounce of data is worth a pound of opinions.

2) Drug Imports: Coming Soon?
In early August, I speculated that drug importation may be inevitable within the next few years. The lawyers over at Hyman, Phelps & McNamara provide a useful legal analysis of HR 3161, the Agriculture bill that included controversial drug importation language. Check out House Passes FDA Appropriations Bill With Drug Importation Provision, which concludes that “…the House and Senate are headed for a showdown over the issue as a part of FDA appropriations legislation.”

3) Cracking the Top 100
Drug Channels is now #69 on the Healthcare 100 list of top blogs on health and medicine. (There are actually 390 blogs on the list, so it's a good page to bookmark.) Thanks for helping to make Drug Channels such a success!

I also want to give a special shout-out to Al Godley of Edge Dynamics, who was named to the PharmaVOICE 100 list of industry influencers. Congratulations on this well-deserved recognition, Al!

4) Phun Phact about Philly
Your friendly neighborhood pharmacy supply chain blogger is proud to live in the second "bloggiest" city in the US. Who knew?

Diversion from Canada via China

Bloomberg has a great story today in which Johnson & Johnson talks publicly about how they disrupted a counterfeit diabetes test supplier. See China Counterfeit Diabetes Tests Tracked by J&J. Unfortunately, the story once again shows the dangerous connection between diversion and counterfeiting.

The article makes for a gripping read. Following customer complaints, detectives followed the bogus products to 700 pharmacies where the products were sold, then to eight U.S. wholesalers, and then to two importers, one in the U.S. and another in Canada.

Here’s the rub: the defendant wholesalers apparently believed the counterfeit strips were lower-priced gray market products diverted from normal distribution channels.

So, we (re)learn the lesson that diversion is the primary way for counterfeit products to enter legitimate channels. That’s why allowing importation will open up new gateways for counterfeits. I just wish that Senator’s Dorgan and Snowe would try to understand the dangers!

Unfortunately, there’s still a fatal flaw in J&J’s distribution channel. One LifeScan executive is quoted as saying: “We recommend customers obtain their diabetes testing supplies from reputable sources to reduce their risk of receiving counterfeit product in the future.”

Sounds sensible, but a “recommendation” is much too weak. Why doesn’t LifeScan require all pharmacy customers to purchase only from authorized distributors and then require authorized distributors to only buy directly from the manufacturer? That's the situation for prescription drugs, where Inventory Management Agreements (IMAs) and Fee-for-Service agreements have limited product leakage into the grey market and closed a significant entry point for counterfeiters.

And I pointed out yesterday, there is still no way for the ultimate consumer/patient of these diabetic tests to know whether their pharmacy or its wholesaler got the product from a legitimate source. Very few people are willing to discuss this truly scary part of product security.

Hat tip to Pharmalot for highlighting this story.

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P.S. Given the quality problems of Chinese goods, many people seem eager to throw out overseas sourcing for political reasons. Not me. I am simply arguing against diversion, not against Chinese sourcing. See The Risks of Chinese Sourcing on my Distribution Trends blog for more details.

Lessons from Nigeria

Did you ever pick up a prescription and wonder if your pharmacy received a valid pedigree, imported drugs from outside the country, or dispensed an outright counterfeit to you? You and I have no way to know if our pharmacy is behaving ethically, even in a world of self-authenticating e-pedigree.

Well, just be glad you don’t live in Nigeria. Dora Akunyili, the head of Nigeria’s National Agency for Food, Drug Administration and Control (NAFDAC), estimated that 41% (!) of drugs in her country were fake or sub-standard in 2001. Today, the national average is down to a still-troubling 15%. (See Officials boost fight against counterfeit drugs for more background.)

In response, Pfizer (PFE) has just launched an intriguing pharmacy-level anti-counterfeiting initiative in Nigeria. As described in Pfizer Launches Friendly Pharmacy Initiative, the program provides disease awareness materials, training, and testing materials to pharmacists. But most interesting to me is the fact that the Pfizer-Friendly designation will signal the availability of genuine Pfizer products.

Pfizer’s Marketing Director made the connection to counterfeits directly, saying: “We want to have strong allies who will say no to clones, no to parallel imports, no to fakes or counterfeits. We want to create strong and effective disease awareness amongst our colleagues in Pharmacy practice and the patients down the streets in a language they understand.”

Naturally, any potential problems with counterfeit drugs in the U.S. pale in comparison with the Nigerian situation. Yet the Nigerian program makes me wonder:

How could drug makers partner with dispensing pharmacies in the U.S. to help consumers identify and validate legitimate pharmacies that practice “safe sourcing?”

What do you think? Which elements, if any, of the Nigerian program can be adapted to the U.S.?

Investment Buying: Not Dead Yet

Many inventory management agreements and fee-for-service agreements between manufacturers and wholesalers will be renegotiated over the next 24 months. So it’s interesting to note that investment buying remains an important source of drug wholesaler profits. (Click here for a little musical accompaniment to today's post.)

Peter Loftus from Dow Jones wrote a must-read article Wholesalers' Speculative Buying Still Unsettles Drug Sales to follow-up on the Pfizer (PFE) and Wyeth (WYE) inventory issues described in Harry Potter and the Wholesaler Inventory.

Here’s a key quote from the article:

Cardinal Health still practices what it calls "investment buying" with certain manufacturers, said spokeswoman Tara Schumacher. The company doesn't comment on specific customers or products. Also, it has "hybrid" relationships with some drug makers, engaging in speculative buying for some products and fee-for-service on others. "From the beginning, we knew we wouldn't have a 100% shift," Schumacher said. "That was never the intent. We wanted to ensure we were negotiating fair prices for each customer. We're comfortable with the economics of some of the contracts not being fee-based."

Translation: Investment buying is still around, just less prevalent and less visible. In some cases, investment buying appears to have shifted away from wholesalers to other points in the pharmacy supply chain.

I must give credit to Cardinal Health (CAH) for discussing this “open secret.” The adoption of inventory management and fee-for-service agreements has dramatically reduced (but not eliminated) drug wholesalers’ dependence on investment buying and price inflation. I estimate that inventory profits (investment buying + passive gains) are now less than one-third of wholesaler gross margins from large branded manufacturers.

If you don’t believe Cardinal, check out AmerisourceBergen’s (ABC) July 26 earnings announcement, in which they noted that “…operating income benefited from an above market sales increase in our proprietary generic drug program which offset in part the impact of fewer drug price increases in the June quarter.” (emphasis added)

The Wall Street Journal's Health Blog is more pejorative about these activities, writing Drug Wholesalers Back at Betting Window. That’s not really fair. Investment buying is nothing more than a means by which manufacturers can compensate wholesalers for the legitimate costs of distributing drugs. Unfortunately, there can be excesses in this system (summarized in the third paragraph of my 2005 article).

At least two senior wholesaler executives hate when I write about this topic. But facts don't cease to exist because they are ignored.

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P.S. Check out the new Health Wonk Review, edited by Julie Ferguson at Workers' Comp Insider.

John Edwards and ... Pedigree?

It's official! E-pedigree has now become a campaign issue as we enter the final 15 (!) months before the 2008 Presidential election.

Presidential candidate John Edwards just issued his Smarter Trade That Puts Workers First, which includes the following unexpected statement:

Big drug companies have lobbied and litigated to prevent enforcement of the drug safety law passed in 1988. As president, John Edwards will require the pharmaceutical industry to quickly implement non-forgeable electronic "track-and-trace pedigrees" to ensure that drugs stay safe at every step in the supply chain, from factory to store. He will also start enforcing laws requiring sellers to prove that their drugs came from an authorized distributor and close the loophole that allows big drug wholesalers to ignore pedigree requirements.

(Note to John’s speechwriter: For the record, it is actually smaller wholesalers, not "big drug companies," that have litigated to prevent enforcement of the PDMA. See It's Official: PDMA is Back On Hold for some background.)

Notably, Edwards implies that he wants Federal pre-emption over state pedigree laws to close loopholes for "big drug wholesalers." This is deeply ironic, given the lobbying activities now underway. Politics does indeed make strange bedfellows.

Drug imports are not here...yet

House OKs prescription drug imports, said the headline in a widely syndicated AP story on Friday. Pharmalot led with a similar headline.

These headlines are not really accurate. Nevertheless, drug importation fans continue to fight on, making me fear that this legislation is inevitable.

HR 3161, a massive agriculture bill, was passed on Friday by a vote of only 237-18. Math wizards will note that the total is far less than 435 district total because Republicans essentially boycotted the vote.

Here is the primary drug importation text buried inside the bill:

“SEC. 726. None of the funds appropriated or otherwise made available by this Act for the Food and Drug Administration may be used under section 801 of the Federal Food, Drug, and Cosmetic Act to prevent an individual not in the business of importing a prescription drug within the meaning of section 801(g) of such Act, wholesalers, or pharmacists from importing a prescription drug which complies with sections 501, 502, and 505.”

Obviously, this text is much less intrusive than the primary House importation bill (HR 380), the inaptly named Pharmaceutical Market Access and Drug Safety Act of 2007. H.R. 380, which now has 102 co-sponsors, includes detailed requirements about pedigree and track-and-trace systems. H.R. 380 and its Senate cousin S.242 impose many commercial restrictions on drug makers.

S.242 was undone by an amendment requiring the administration to certify the safety and effectiveness of imported drugs before they can be imported. In contrast, the House voted 283-146 to reject Rep. Jack Kingston's amendment to remove section 726 from the H.R. 3161 bill.

As Senator Vitter’s diversion obsession shows, the fans of importation draw inspiration from Spartan King Leonides: No retreat, no surrender. (Yes, I finally saw 300 this weekend.) So why do I still run into executives who claim not to be preparing for the eventual passage of an importation bill?

The ASP Future is Here

I've stated before that Average Manufacturer Price (AMP) will become a new benchmark for pharmacy reimbursement.

Both AMP skeptics and die-hard AWP fans should consider a must-read article called The Arrival of Average Sales Price from Biotechnology Healthcare. It describes how private health plans are now using Medicare’s average sales price (ASP) data to reimburse oncologists and other specialists for office-administered drugs.

I predict that CMS’ publication of AMP data will have a similar effect on retail pharmacy channels. List minus pricing models for pharmacy reimbursement based on AWP or WAC will not be sustainable once there is confidence in the published AMP data, which I predict will occur no later than mid-2008. Expect the retail pharmacy revolution to be in full swing by 2009.

ASP Adoption

The Arrival of Average Sales Price describes how many health plans have already adopted ASP models for oncology reimbursement. A survey of 102 plans found:

• List Minus: 52% of plans (68% of covered lives) used AWP

• Cost Plus: 36% of plans (30% of covered lives) used ASP

Half of the plans using ASP are paying at Medicare’s ASP+6% rate, while the rest paid at ASP markups ranging from 9% to 18%. The larger plans have been most successful at getting providers to accept because they can leverage their market share power.

Physicians are making predictable changes in their practices –collecting co-payments, looking for bigger rebates from manufacturers, getting out of the injection/infusion business, etc.

Ironically, Judge Saris chastised third-party payers for not adopting cost-plus reimbursement models once Medicare devised the ASP model for Part B. (See my Comments on the AWP Decision from June.)

Looks like she was right about the outcome, but wrong about the timing.

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FYI, CMS issued an updated AMP timeline. The regulation now takes effect on October 1, 2007.

News Update: July 2007

Here are some interesting or curious articles about the pharmacy supply chain that didn’t merit their own post in July.

1) E-Pedigree Goes Mainstream
The venerable Pharmaceutical Executive ventured into the supply chain with Pharma Ramps Up for E-Pedigree, an overview of the California e-pedigree situation. The article is generally accurate, although the ratio of actual pharma executives (3) to technology vendors (7) was a bit low. Surprisingly, there are no comments from the pharmacists who will supposedly install systems to read serialized RFID/bar-codes and willingly transmit the information for free to everyone else.

2) Fun with Forrester
My June news update led to an interesting debate with Forrester research analyst Carlton Doty regarding my negative review of his online drug buying study. Make up your own mind by reading our back-and-forth exchange in the comments section below the June post.

3) Why do they put nails in coffins?
Whistleblower Peter Rost allows an anonymous pharma sales rep to post a deeply cynical look at Average Sales Price (ASP) reimbursement for oncology drugs. Caveat lector!

4) UK Distribution Update
Sanofi-Aventis became the latest manufacturer to trim its UK distribution network. In related news, it looks like the Alliance Boots buyout has hits some snags, with banks holding back on the debt sale until the market improves (See Alliance Boots Debt Sale Postponed).

5) Wonky
The new Health Wonk Review, a compendium of health policy blog postings, is worth reading. Plus, they picked up one of my Average Manufacturer Price (AMP) analyses.

6) Chicken Soup for a Pharmacist’s Soul?
You MUST read Welcome to the World of Retail Pharmacy, a poem about life in a community pharmacy. After all, how many poets would dare to rhyme words such as “Rx” or “pseudoephedrine”?

Diversions

Last October, U.S. Customs caved to Congressional pressure and stopped seizing prescriptions sent from Canada. Now, Sen. David Vitter (R-LA) is proposing a one-year extension to this program. (See Extension sought on importing medicine.)

Sen. Vitter should read the news coming out of Canada before extending this unsafe plan. He should also recognize the pesky fact that imports from Canada are dropping rapidly thanks to Part D.

Unfortunately, I fear that Sen. Vitter wants to legalize drug diversion so that we'll forget about his own illegal diversions.

Heretical Questions about the AMP War

As I mentioned on Monday, Reps. Nancy Boyda (D-KS) and Jo Ann Emerson (R-MO) introduced H.R. 3140 to “fix” the purported problems with Average Manufacturers Price (AMP) methodology in CMS’ Final Rule. There are 29 co-sponsors to the bill.

According to Drug Store News, NACDS and NCPA expect “… a loss of local pharmacy services and access for low-income patients in many rural and inner-city areas as pharmacies either drop out of the Medicaid program or close their doors after operating at a loss.”

The late Senator Patrick Moniyhan once quipped: “Everyone is entitled to his own opinion, but not his own facts.” In that spirit, I submit three heretical questions.

1) Is this really Pharmacy’s Last Stand?

Medicaid is projected to spend $27.1 billion on outpatient prescription drugs in 2008, equal to 11% of total US spending of $247.6 billion. (See page 14 of the National Health Expenditure Projections, which were made without considering AMP.) CMS’ projects total Federal and State savings from AMP of $1.3 billion, which would reduce national spending by 0.5%. That's right -- half of one percent.

Keep in mind that Medicaid spending dropped by $14 billion (-36%) in 2006 when dual eligibles moved to Part D. I certainly recognize that generics are much more profitable for pharmacies, but might I humbly suggest that rhetoric about reckless disregard for patient welfare is a bit overheated?

2) Is access really at risk?

NCPA posted this graphic cartoon to illustrate the harmful effects of AMP. To check the accuracy of this cartoon, I reviewed a little-noticed study published by the PCMA last month called Consumer Access to Pharmacies In the United States, 2007.

The study found that consumers of independent pharmacies have access to many pharmacies within a reasonable driving distance. Three key findings:

• In urban areas – where 61% of independent pharmacies are located – consumers patronizing independents have access to 30 competing pharmacies within two miles of their current pharmacy.


• In suburban areas, independent pharmacy consumers have access to 7 competing pharmacies located within 5 miles of their current pharmacy.


• In rural areas, independent pharmacy consumers typically have access to 14 competing pharmacies located with 15 miles of their current pharmacy.

This fact-based study used the pharmacy network adequacy standards established by Medicare. Unless I’m missing something, access seems pretty solid for quite a while.

3) Do we have too many community pharmacies?

Seeing the numbers above, I wonder if the U.S. retail pharmacy industry simply has too much capacity.

One of my favorite productivity stats is the Average Weekly Prescriptions Per Pharmacy, shown for the major store-based retail pharmacy channels. As you can see, the typical independent fills far fewer scripts per week than CVS, Walgreen (WAG), and Wal-Mart (WMT).

For some further perspective, consider Caremark’s mail operations in 2006. They operated seven mail order facilities and dispensed 60 million (90-day) prescriptions. That translates into 500,000 30-day prescriptions per facility per week – roughly equivalent to a single independent pharmacy’s dispensing for 15 years!

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Look, I’m a realist. There are hundreds of community pharmacies in every congressional district. This story may have a quite predictable and politically motivated ending regardless of the economic facts.

Prove it, you say? Well, Ohio just became the latest state to pass a budget with an increase in the dispensing fee. At least the total increase must be less than the total savings from the Medicaid FUL change. (You can view the bill's text online, but must search for “dispensing fee” to find the relevant sections.)

Hmmm, I guess this explains why economists rarely get elected to public office...

Canadian Dreamin'

Health Canada vows to crack down on fake pills, as the unfortunate case of Marcia Ann Bergeron continues to raise awareness about counterfeit drugs.

What, no statement from my good friend Senator Byron Dorgan? As you may recall, he attached The Legalized Diversion and Support of Drug Counterfeiting Act of 2007 to the drug safety bill earlier this year. Luckily, his move was narrowly defeated two months ago.

Importation from Canada is diversion, plain and simple. Drug diversion is the primary way that counterfeit drugs get into legitimate pharmacies. Thus, importation will open up new gateways for counterfeits, even though it won’t even save much money.

I hope that our pro-importation politicians are paying attention.

Many so-called Canadian pharmacies are not actually in Canada and many drugs sold online are counterfeit. Yet people still buy drugs online from unscrupulous sellers. Where do you think Al Gore III got his Vicodin?

If young Al’s 100 mph Prius drag race isn’t scary enough, then read The Philadelphia Inquirer’s fascinating 8-part series about a father-son duo that imported bulk drugs from India and then fulfilled huge orders for online pharmacies. I summarized their scheme last November in Of Spammers and Senators, noting that we can never be sure where "Canadian" pharmacies are getting their supplies.

So I was especially disappointed to read that four people died after taking counterfeit Norvasc dispensed from a local Canadian pharmacy. According to the article cited above: “The pharmacist was acquitted this spring, though, after a judge concluded there was no evidence that he sold the drugs knowing they were counterfeit. The druggist said he had bought them from a traveling salesman.” Say what?!?

Do our politicians understand these risks? Doubtful, although at least Senator Dorgan can finally be true to himself when blocking Canadian imports now.

ADDENDUM (7/26/07)

Sigh. Another day, another batch of counterfeits discovered. Chinese police seized more than a tonne of fake drugs for impotence, bird flu and malaria, including at least 18,000 fake Viagra tablets, according to this Reuters story.

Lobbying for Pharmacy Profits (cont.)

As you may recall, Lobbying for Pharmacy Profits was one of my top four trends for the pharmacy supply and payment system in 2007.

Looks like the AMP Final Rule will keep this trend going. On Tuesday, Reps. Nancy Boyda (D-Kan.) and Jo Ann Emerson (R-Mo.) will introduce The Patient Access to Medicaid Generic Prescription Drugs Act of 2007. They will also participate in a conference call with the National Community Pharmacists Association (NCPA), which appears to be doing a good job of refocusing Average Manufacturer Price (AMP) into a debate over “access” versus the relative profits of generics.

Here are the details in case you want to tune in:

WHEN: Tuesday, July 24, 2007, at 2:00 p.m. EST
(UPDATE: Time changed to 11:00 PM per new press release.)

CALL-IN #: 800-944-8766 (Conference Code: 39108)

You can also read the full press release from NCPA. Drug Topics has a summary of the proposed legislation, which will focus on generic dispensing targets. I'll weigh in after I read the bill.