Cardinal Apologizes; NCPA Organizes

More fall-out from the ongoing saga of the DEA’s supply-chain-focused anti-diversion strategy. Meanwhile, I’m getting ready for a trip to HDMA’s meeting in Orlando to hear from the CA Board of Pharmacy and the DEA.

CARDINAL APOLOGIZES

Cardinal Health (CAH) has recently started publicizing An Open Letter to Our Customers from Chairman and CEO Kerry Clark. It appeared on the inside cover of Drug Topics magazine, among other places.

The letter acknowledges an “unintentional” lack of due process that I described in my February interview with Washington pharmacist Richard Molitor. Here’s a key passage:

“In our zeal to do the right thing in addressing the diversion issue, we unintentionally put an undue burden on some of our legitimate and long-standing customers. This is disappointing to all of us, and we apologize to those customers who have been affected.”

George Barrett described the challenges facing Cardinal in refreshingly candid statements last month, which was an important first step. Mr. Clark’s letter is another step on the road to recovery.

Cardinal is still struggling to balance their enforcement responsibilities with the legitimate needs of pharmacies and patients. While Cardinal desperately needs to resolve its DEA issues, I think that the company still has an opportunity to recover from its missteps and regain some lost market share.

NCPA ORGANIZES

The NCPA, which represents independent pharmacies, is also concerned about the DEA’s efforts to make wholesalers responsible for stopping diversion by pharmacies. So, the group is “gathering information that Congress can use to exercise its oversight authority and get involved” according to this item on the NCPA web site.

NCPA is encouraging pharmacies that have had difficulties ordering C-IIs and C-IIIs through a wholesaler to e-mail the NCPA government affairs department. If you are skeptical, just keep in mind that the NCPA has demonstrated an impressive ability to gather affidavits from independent pharmacies, such as the 22 statements compiled for the First DataBank case. Stay tuned for more on this issue.

SEE YOU IN ORLANDO?

I will be at the HDMA’s Distribution Management Conference & Technology Expo in Orlando on Monday and Tuesday. Highlights of Monday’s program include presentations by:

• Virginia Herold, Executive Director, California Board of Pharmacy
• Mark Caverly, Chief Liaison and Policy Section, Office of Diversion Control, DEA

Hmmm, I wonder if I’ll be able to come with any good questions for those two?

I know that some Drug Channels readers will be there, too. Please take the opportunity to critique and/or praise me live and in person. Goofy won't be the only one in Orlando who will be fishing for compliments!

CA E-Pedigree Timeline in Flux

I hope you are still paying attention to the California pedigree situation.

Yes, we all know that the CA Board of Pharmacy extended the e-pedigree implementation deadline to January 1, 2011. But SB1307, which was introduced by CA State Senator Ridley-Thomas in February, proposes the following new e-pedigree implementation timelines:

• Wholesalers: January 1, 2011
• Pharmacies: January 1, 2012
• Manufacturers: January 1, 2011 to January 1, 2013

The manufacturers have a phased in serialization schedule under SB1307 because “the process of implementing serialized electronic pedigree for all prescription drugs in the entire chain of distribution is a complicated technological and logistical undertaking for manufacturers, wholesalers, pharmacies, and other supply chain participants. The Legislature seeks to ensure continued availability of prescription drugs in California while drug manufacturers implement these requirements.” (according to page 10 of the bill’s text.)

Here is the proposed schedule by which a manufacturer must (1) designate the particular drugs that will be serialized, and (2) actually comply with the serialized electronic pedigree requirements:

• Designated by January 1, 2010; Compliance by January 1, 2011: 20 percent of drugs
• Designated by January 1, 2011; Compliance by January 1, 2012: 30 percent of drugs (Total = 50 percent)
• Designated by January 1, 2012; Compliance by January 1, 2013: 50 percent of drugs (Total = 100 percent)

I’m encouraged that California will be incorporating more realistic timelines for serialization, especially given the unknown prospects for national standards. However, it's harder than ever to predict the precise future deadlines.

Where's Doc Brown when you need him?

READER OF THE WEEK

The Texas Startup Blog recently interviewed Jon Cameron, founder and President of Pop Technology. According to the article: “When Jon isn’t inventing cool gadgets for the retail industry he can be found reading Drug Channels…”

Gosh, your friendly neighborhood blogger is now someone’s hobby!

Thanks for the shout-out, Jon.

COMMENTS, WE GOT COMMENTS

There are many interesting comments on yesterday's analysis of the latest AMP study. Read them below the original post. Perhaps you'll even add you own $0.02?

11,105 Pharmacies Gone?!? Just More AMP Hype

A new report prepared by PriceWaterhouseCoopers (PWC) claims that 11,105 pharmacies will close due to the Average Manufacturer Price (AMP) provisions in the Deficit Reduction Act of 2005 (DRA).

• Press release from the National Association of Chain Drug Stores (NACDS) and the Food Marketing Institute (FMI)
• Impact of the Deficit Reduction Act of 2005 on Pharmacies by State (Full Report)

However, as I explain below, this report is fundamentally flawed in a way that will be immediately apparent to anyone familiar with pharmacy economics. In my opinion, the “findings” are not a reliable or accurate prediction of the actual outcome of AMP on the pharmacy industry. No one in the channel – manufacturers, PBMs, wholesalers, pharmacies, and payors – should use this report to plan business strategy.

QUICK OVERVIEW

The centerpiece of the report is a state-by-state estimate of the number of pharmacies that will close if AMP is used to compute the FUL. (See The AMP Saga Goes On and On and On for background.) There are many questionable methodological aspects behind these estimates, but the most significant assumption in PWC’s model derives from the variation in the 2001 average pharmacy net profit.

The average Net Profit reported in 2001 was 3.5% (as reported in the 2002 NCPA-Pharmacia Digest.) However, according to the self-reported data from the report: 13% of independent pharmacies had a net loss in 2001; 28% had a net profit of less than 2% in 2001; 33% had a net profit between 2% and 5% in 2002; and 26% had a net profit of 5% or more.

PWC’s model assumes that AMP would cause all pharmacies with negative net profits, i.e., a net loss, to close and also cause some percentage of pharmacies with “low” net profits to close.

BTW, Dr. Schondelmeyer’s November 2007 report from the AMP lawsuit used a similar approach to come up with the “loss of 10,000-12,000 pharmacies” guesstimate that has been cited up until now.

PHARMACY ECONOMICS 101

Understanding the flaw in the report’s method requires a quick review of a retail pharmacy’s income statement:

• Gross Profit = Revenues minus Cost of Goods Sold (COGS)
• Net Profit = Gross Profit minus Operating Expenses
• Operating Expenses = Owner compensation + Payroll Expenses (excluding owner’s comp) + Other Expenses (rent, utilities, etc.)
• Owner's Discretionary Profit Before Tax = Net Profit + Owner Compensation
  

Key insight: A reduction in reimbursement has no direct effect on a pharmacy’s Net Profit.

A reduction in reimbursement, such as the use of AMP for FUL computations, lowers Gross Profit by reducing Revenues (assuming no change in COGS, among other things). However, the impact on net profit depends on whether a pharmacy can alter its operating expenses in response to a decline in Gross Profit.

If a pharmacy’s costs are entirely fixed regardless of changes in reimbursement, then a reduction in reimbursement translates directly into a loss of net profit. However, the impact on net profit would be less significant if a pharmacy can adjust its expenses in response to a change in reimbursement levels.

OPERATING LOSS OR TAX STRATEGY?

A private business may report an “net loss” for many reasons that do not relate to the true financial health of the business. For example, there could be tax minimization benefits for a business owner from reporting a low or negative net profit while generating high personal income for the owner.

Thus, the “average” pharmacy could have reported an “net loss” if the average pharmacy owner had chosen to pay himself or herself a larger bonus of instead reporting a positive net profit on the NCPA survey. In other words, a decline in Gross Profit could be offset by a reduction in profits to the owner without causing the business to shut down.

I’m no accountant, but a “global market leader for tax services” such as PWC should have considered these financial issues in their computations. If you understand these matters, then you too will question the core assumption that 13% of pharmacies with a “negative net profit” will automatically close.

So here’s another way to think through the math.

• PWC estimates that average pharmacy net profits drop by $23,300 due to DRA.
• The most recent data reported (2003) put Owner's Discretionary Profit Before Tax at 8.1% of revenues.
• Using the most recent average revenue data of $3.6 million per independent pharmacy implies that Owner's Discretionary Profits were about $293,000.

Unfortunately for owners of independent pharmacies, the most obvious way to stay in business would be to reduce average pharmacy owner compensation by $23,300 to about $270,000 per year.

Personally painful? Yes. So the real (and still unanswered) question becomes: At what point will an independent pharmacy owner decide that the Owner's Discretionary Profit is too low and shut down or sell the business?

BOTTOM LINE

Look, I understand what’s going on. Pharmacists want to be compensated appropriately for the value that they contribute to U.S. health care. I fully support pharmacists’ First Amendment rights to advocate on behalf of their own interests. See In Defense of Lobbyists from Friday’s Wall Street Journal for a spirited POV on this subject.

I’m just bothered that pharmacists are making the case using misleading analyses rather than explaining their true value to the health care system or confronting the cross-subsidies of the pharmacy economic model. I’m disturbed to think that this report might be used by outside parties to predict the actual impact of DRA. I also suspect that many independent pharmacists may begin to believe (falsely) that AMP is the single biggest threat to their collective survival.

Just to be clear, I have no stake in the outcome of the AMP battle. I’m not being paid to write this blog nor do I get paid for advocating any particular position regarding AMP. I don't have a grudge against retail pharmacists - honest!

But I do believe strongly in the value of independent expert analyses. Unfortunately, the latest AMP report appears to be political theater designed to influence policy makers rather than a genuine attempt to quantify the impact of AMP. Too bad.

Good Grief! More Trouble for Cardinal

You may find it hard to believe, but a fifth Cardinal Health (CAH) location is now under investigation for allegedly failing to report “suspicious orders” of controlled substances from its Findlay, OH, warehouse. Yet another fine mess for “Iron Man” George Barrett to cleanup.

According to this article in The Columbus Dispatch, the Ohio State Board of Pharmacy is investigating Cardinal’s Findlay, OH, warehouse for allegedly failing to report suspicious drug orders shipped to Caringwell Pharmacy. Per my most recent post, you will not be shocked to know that Caringwell sold more than 600,000 doses to Internet buyers in 49 states. The Ohio Board revoked the pharmacy's license last October.

Cardinal Health has requested a hearing before the pharmacy board, so I presume nothing will happen until then. Penalties could range from a fine (most likely, IMHO) to revocation of its wholesale license (improbable but possible).

Cardinal Health has been dealing with the fallout from controlled substance license suspensions in Washington, Florida, and New Jersey as well as limits on shipments to independent pharmacies from Stafford, Texas. Cardinal seems to have bungled the customer service aspects of these problems (as noted in Cardinal's Customer Problems Deepen). As far as I know, the suspensions are still in place at all four locations. The alleged incidents at Findlay occurred prior to (or at the same time as) the company's DEA issues.

Ironically, pharmaceutical supply chain geeks (ahem) will recall that Findlay was the site used for Cardinal’s first major RFID pilot back in 2006. AAUGH!

Well Done, NABP!

Last week, the National Association of Boards of Pharmacy (NABP) named 79 online pharmacies that are not safe for patients. Rather than a general “watch out” message, the NABP actually listed the web addresses for these rogue sources.

Kudos to for naming names! I hope the NABP has a good firewall to repel the disgruntled spammers.

According to NABP, a site got on the bad guy list for one of the following three illegal activities:

• Does not require a valid prescription (71 sites)
• Foreign or non-FDA-approved drugs (35 sites)
• A physical address outside of the US (36 sites)

NABP has accredited 15 legitimate online pharmacies though the Verified Internet Pharmacy Practice Sites™ (VIPPS^®) program. In contrast, the 79 non-recommended sites are non-accredited through the Fake Online Outlets League™ (FOOL^®) program. (NABP doesn’t seem to allow direct links. Go to NABP and click “Internet Pharmacies” to find the list.)

NOPE, NOT SCARE TACTICS

In this recent Drug Safety Hub post, Allen Coukell, Director of Policy and Strategic Communications for the Pew Charitable Trust-funded Prescription Project, implied that the dangers of counterfeiting were scare tactics. He asked: “If you were an uninsured patient unable to afford medication in the US, would you rather get your prescription filled in a Canadian pharmacy or go without?”

If those are the only choices, you should go without. Primum non nocere. (“First, do no harm.”)

I find it incredible that a health professional such as Mr. Coukell would encourage personal importation via an online pharmacy given the risks.

Judging by his biography, Allen appears to be a Canadian pharmacist by training. So he should know that many so-called Canadian pharmacies are not actually in Canada. In fact, twenty-two of the sites on the NABP list have “Canada” in the company name.

Let’s face it -- People often buy online from unscrupulous sellers to get access to drugs they shouldn’t be getting anyway. Just visit the pain pill addicts at www.drugbuyers.com. They’ll tell you how to buy anything online, no questions asked.

Organized criminals, drug traffickers and terrorists could (and probably do) exploit gaps in our drug distribution system. I wish it were only fear-mongering and scare tactics, but unfortunately the risks are real.

P.S. Happy 100th birthday, Ian Fleming!

IMS Recounts, but Independents Still Growing

In April, I wrote The Myth of Fading Independents to highlight the surprising growth by independent pharmacies shown in IMS Health’s (RX) 2007 channel distribution data. However, IMS recently confirmed to me that 2007’s growth in purchases by independent pharmacies was overstated. My recalculation shows that independents still grew last year, but much more slowly than originally reported.

WHAT HAPPENED?

IMS’ National Sales Perspectives (NSP) reports sales *into* each distribution channel tracked by IMS. In other words, the data represent product purchases from wholesalers or manufacturers, not retail pharmacy sales to patients. (See the original post and comments for further details.)

In a comment on my original post, I hinted that a data reclassification may have artificially boosted the 2007 figures and made the historical comparison misleading. Well, it turns out that IMS shifted sales to Cardinal Health (CAH)’s Medicine Shoppe pharmacy franchises from “chains” to “independents” in January 2007.

To be fair, IMS claims to have issued a product information bulletin (PIB) to its customers at the time of the switch.

However, IMS neglected to restate the historical data reported publicly on its website, which meant that growth by independents was overstated and growth by chains was understated. To further confuse the reported numbers, IMS apparently did not make a comparable adjustment in the data on number of prescriptions.

THE REVISED 2007 GROWTH RATES

An IMS insider recently shared the official adjustment factors for 2007 with me. The chart below presents my computation of the data on a historically comparable basis, i.e., I count Medicine Shoppe with “chains” to be consistent with previous data. (I included the 2006 growth rate for comparison.)

In contrast to my original post, purchases by mail order grew the fastest in 2007, followed by chains. Independents grew by only 2.5 percent (versus 8.4 percent in the original post). Perhaps one bright spot for independents is that the growth rate declined at a slower rate.

TIME TO RESTATE

In my opinion, IMS should now restate the historical data to create a comparable time series of channel distribution data. It was irresponsible for IMS to publish the data without clarification. Analysts and consultants like me follow these top-line data. These data are also used as inputs for statistical publications by NACDS and HDMA.

IMS has recently suffered some embarrassing public data disputes with Novartis, Millennium Pharmacueticals, and other drug makers. In contrast, their goof-up on channel sales seems to derive from sloppiness rather than faulty data.

Let’s just be thankful that there were no hanging chad.

Pharmacists Haggle over Pedigree Costs

Last week, three major associations representing retail pharmacy – NACDS, NCPA, and FMI – came out with a joint statement opposing H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008, a bill that would establish national standards for the pharmacy supply chain. I praised this bill last month in National Standards: It’s About Time.

Pay attention to this debate because it signals the inevitable divergence of interests as we get closer to actually paying for a system to track finished drugs in the pharmaceutical supply chain. I’ve been predicting this split almost since Drug Channels launched in 2006, so here are some thoughts on what’s really behind the phamacists’ opposition – and how much it might cost you.

CLOSING THE LOOP

Pharmacists are complaining that H.R. 5839 would “mandate an unproven, disruptive and costly ‘electronic pedigree/track and trace’ requirement that would severely interfere with pharmacies’ ability to effectively provide vital prescription medicines and health care products and services.”

Sure, anyone who understands the pharmacy supply chain will agree that authentication creates costs for retail pharmacies. (See Do Pharmacists want Pedigree?). Kevin Nicholson, VP of Pharmacy Regulatory Affairs at NACDS, highlighted the operation and administrative burdens of pedigree for pharmacies in his May 1 testimony to the House Committee on Energy and Commerce.

But unless I’m missing something, these costs will be even higher for a pharmacy forced to work with the hodgepodge of potentially incompatible state-level track-and-trace systems sprouting up all over the country. Wouldn’t NACDS and FMI members such as Walgreen (WAG), CVS Caremark (CVS), or Kroger (KR) benefit from national consistency instead of having to manage the expenses of multiple systems?

MONEY TALKS

According to this Drug Topics article, “pharmacy groups are split over federal e-pedigree legislation.” NCPA reportedly supports the “intent” of H.R. 5839 while NACDS opposes any bill.

Why the split? You may recall from my summary of the bill that it contains grants for technology upgrades to “small pharmacies,” which is effectively defined to be “anyone except large member companies from NACDS or FMI.”

So, how much will it take to get the support of NACDS members? Mr. Nicholson started the bidding at $30,000 per pharmacy in his May 1 testimony (see page 7). That’s about $180 million each to CVS Caremark (CVS) and Walgreen (WAG).

True, such a figure may be a mere gratuity in the world of Washington, but that’s still some serious moola. It's also a 50% increase from the $20,000 per pharmacy estimate that NACDS reportedly made in January to the California Board of Pharmacy (see p. 18). I guess gas is not the only thing getting more expensive this year.

We all know that the “business value” of track-and-trace for the manufacturer can only be fully realized when pharmacies authenticate at the point of dispensing. So, who wants to step up and fund pharmacy-level implementation and data transmission?

To paraphrase a quote often attributed to Winston Churchill: We have established what’s going on. Now we’re just haggling over the price.

Classy Move by McQueary

I wrote about McKesson’s (MCK) acquisition of McQueary Brothers last month in Big Premium in the McKesson–McQueary McDeal. So check out this recent Springfield (MO) Business Journal article in which President David McQueary explains why they sold the company now. There are also some comments from yours truly on the market and historical context.

Mr. McQueary is quite philosophical about the deal, saying:

“It’s not really a celebratory-type situation for us. We’ve been in business for 84 years, and we expected to be in business another 84. It’s kind of a bittersweet thing. It was done with a heavy heart.”

Further demonstrating why these guys will be missed, the owners of McQuery Brothers will be sharing $21 million of the $190 million sale price with long-time employees based on years of service. (See Drug Company Shares in its Sale.) Classy move!

My Op-Ed: Securing the Supply Chain

Pharmalot, the Newark Star-Ledger’s outstanding online pharmaceutical industry news site, has just published my op-ed arguing that America’s approach to tracking finished drugs in the pharmaceutical supply chain needs a radical overhaul. You can read it here:

Securing America's Pharmaceutical Supply Chain

Unlike the blog, this article is written for a general audience. Same great Drug Channels taste, but now with 82 percent less jargon!

I’d love to hear what you think, especially since the style is intentionally more accessible.

Drug Channel Profits in the Fortune 500

Since the Fortune 500 rankings were published last week, I thought it would be fun to look at the revenues and profitability of the ten companies on the list that participate in the pharmacy supply chain. (Hey, everyone needs a hobby!) The financial data also give me an opportunity to address critics who have accused me of being insensitive about the profits of pharmacies and wholesalers. I also look at average investment returns, which have been higher for the channel than for manufacturers.

TEN COMPANIES

Here are the ten wholesalers, pharmacies, and PBMs companies that I found on the Fortune 500 list along with rank and links to the financial data as reported by Fortune:

• McKesson (MCK): 18
• Cardinal Health (CAH): 19
• CVS Caremark (CVS): 24
• AmerisourceBergen (ABC): 28
• Walgreen (WAG): 40
• Medco Health Solutions (MHS): 51
• Express Scripts (ESRX): 135
• Rite Aid (RAD): 142
• Omnicare (OCR): 386
• Longs Drug Stores (LNG): 453

I only include companies that earned a majority of their revenues from pharmaceuticals. This criterion excludes other retail formats with pharmacies (supermarkets and mass merchants). I also do not separate the revenues from each company’s various lines of business. I'd be analyzing the original company data if this were a consulting project, but I'll stick to Fortune's admittedly crude metrics for the blog.

Keep in mind that the Fortune 500 rankings are based on sales revenues, so there is substantial double-counting in this list. For instance, revenue from the same prescription could be counted at least three times by companies on this list if:
(1) the drug is sold by a wholesaler to a pharmacy;
(2) the drug is sold by a pharmacy to a consumer; and
(3) the pharmacy receives reimbursement for from a PBM.

For comparison, there are nine pharmaceutical manufacturers on the Fortune 500 with revenues ranging from $61 billion (Johnson & Johnson) to $12.7 billion (Schering-Plough).

PROFITS

As you can see in the table below, Return on Sales (ROS; profit as percent of revenues) was in the low single digits for all companies in this group, regardless of their position in the supply chain (retail pharmacy, wholesaler, or PBM). The median for my Drug Channels group is 2 percent.

(CLICK TO ENLARGE TABLE)

By contrast, median profit as a percentage of revenues was 16 percent of revenues for the nine drug manufacturers (range: -12% to 21%). Thus, the manufacturer-to-channel ratio is 8X.

However, ROS only tells us part of the profitability story because it ignores the balance sheet assets required to generate an income statement profit. A more meaningful comparison relates ROS to the assets required to generate those operating profits, so the table above includes Profits as a % of Assets, which I will call Return on Assets (ROA).

The profitability of companies in the Drug Channels universe looks much more attractive on this basis, as my friends on Wall Street know. The group median is 5% (Range: 0% to 11%). Again, there is no clear pattern related to supply chain position.

The ROA figures are closer to the pharmaceutical manufacturers, whose median profits as a percent of assets is 9 percent (Range: -5% to 13%). The manufacturer-to-channel ratio is now only 1.8X (versus 8X for ROS) reflecting a risk-return tradeoff. The additional profitability for manufacturers can be considered an innovation/risk premium. Discovering and developing new medicines is expensive, risky, and time consuming. Obviously, the ratio could vary over time, although I just relied on the single year data provided by Fortune.

INVESTMENT RETURNS

Investment returns for the Drug Channels group were higher last year as measured by the average Total Return to Investors for 2007 reported in Fortune’s list:

• 10 Drug Channels companies: 15.2% (Range: -49% to 104%)
• 9 Drug Manufacturers: 3.5% (Range: -32% to 38%)

2007 appears not to be an outlier. The drug channels had a higher average 10 year total return than manufacturers. The channels group has a wider range for both time periods, in part reflecting a greater diversity of business models compared to manufacturers.

SO, WHAT HAVE WE LEARNED?

1) By a conventional metric (revenues), many drug channel participants are substantially larger than the manufacturers.

2) A frequently cited metric of profitability (Profit as % of Revenues) makes drug channels companies look worse than a more appropriate metric such as Profit as % of Assets.

3) Investors earned greater average total returns from the drug channels group last year and over the past 10 years compared to the manufacturers group.

Will these returns hold up in 2008? Well, if I knew the answer to that question with certainty, then I’d be retired on a Caribbean island instead of pecking out another blog post for you!

Wal-Mart Redux

Wal-Mart Stores (WMT) latest expansion of its generic drug program represents more of the same despite the company's promise on Friday to make a “major health care announcement.” Nonetheless, the company’s latest comments shed additional light on the true economics of the program.

Click here to see the complete list of eligible drugs.

Here are some high level points about Wal-Mart’s generic program.

More Volume = Lower Cost of Dispensing. Way back in my still-valid December 2006 analysis, I predicted that Wal-Mart would benefit from the program by generating incremental prescription volume for its relatively underutilized pharmacies. Wal-Mart senior vice president John Agwunobi confirmed my view yesterday in this Associated Press story, saying: “It also offers us the ability to add capacity to our pharmacies without adding people."

Wal-Mart’s generics are not loss leaders. Last October, I compared Wal-Mart’s retail generic prices to average acquisition costs and found average gross margins of 24%. These calculations dramatically underestimate Wal-Mart’s actual gross margin because Wal-Mart's product acquisition costs are much lower than the independents, supermarkets, and small chains that buy through wholesalers.

State governors love this program. Medicaid does not pay more than a cash customer at a given pharmacy because a pharmacy can not be reimbursed by Medicaid for more than its Usual & Customary charge. Thus, states pay less whenever Wal-Mart fills a Medicaid generic script for which Wal-Mart’s retail price is below the Medicaid reimbursement rate. State revenues are declining due to the economic slowdown, making Wal-Mart look good.

Cash-pay customers also love the program. Wal-Mart is offering a great value for uninsured and under-insured patients, a point that I made in the Financial Times on Monday. In contrast, consumers with third-party insurance do not save much versus standard co-pays, which is why chains such as CVS Caremark (CVS) or Walgreens (WAG) are not very vulnerable to Wal-Mart’s program.

Price shoppers are fans, too. There are wide and apparently persistent variations in pharmacy prices for many common, high volume generics. (See The Price Might Be Right.) Wal-Mart’s program simplifies the search process, especially for elderly Part D participants trying to stay below the donut hole. (See Part D and Generics.)

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Curiously, NCPA declined to issue its usual denunciation about how Wal-Mart’s program is a “classic bait-and-switch” (9/28/06) or “devaluing and destroying the practice of pharmacy” (9/27/07). Perhaps the surviving independents have figured out how to coexist with Wal-Mart, as implied by 2007’s unexpected growth at independent pharmacies?

Stark News from Cardinal and McKesson

Wealthy industrialist Tony Stark's new biopic is not the only thing making financial news today.

Last Thursday, the new CEO of Cardinal Health’s (CAH) distribution division described the company’s market share challenges with independent pharmacies following the disruption of controlled substances distribution at four locations. One day later, McKesson (MCK) announced a settlement with the DEA that temporarily suspends distribution of two controlled substances from two of its distribution centers.

See March’s DEA's Anti-Diversion Strategy blog post for background on the DEA’s strategy for combating diversion of legitimate controlled substances.

STRAIGHT TALK FROM CARDINAL’S GEORGE BARRETT

George Barrett, the new CEO of Cardinal Health’s Healthcare Supply Chain Services division, was refreshingly blunt in describing the need to “turnaround” the drug distribution business on last Thursday’s earning conference call.

Among other issues, Cardinal has been dealing with the fallout from controlled substance license suspensions in Washington, Florida, and New Jersey as well as limits on shipments to independents from Stafford, Texas. Last week, Cardinal disclosed that the disruption due to DEA compliance issues cost $15 million in the first calendar quarter of 2008.

Regular readers know that I’ve been critical of the way in which Cardinal handled this situation, especially the apparent lack of due process accorded to pharmacy customers. (See my exclusive interview with Washington pharmacist Richard Molitor.) I highlighted the marketplace impact in Cardinal's Customer Problems Deepen and have been discussing it privately with my clients for several months.

Here’s Mr. Barrett’s assessment of how Cardinal bungled the customer service aspect of DEA compliance:

“Our early efforts dictated that, at times we use something of a blunt tool to ensure that no diversion was occurring, rather than a precision instrument. We know that this has caused some disruption to our customers, particularly in the retail independent stage. We regret that and truly appreciate their support through a tough time. Having said that, we have lost some independent retail share over this and we’ve certainly made it a challenging environment in which to grow.”

I can’t yet say whether reality will follow the rhetoric. However, it’s encouraging that Mr. Barrett recognizes the challenges of the “enforcement” role that has been thrust upon the company by the DEA. No word from the company yet on whether he plans to fix these problems by flying around in red and gold armor.

MCKESSON SETTLES

McKesson (MCK) resolved its claim with the DEA for $13.25 million, an expected outcome given the company’s previous disclosures (described in New Signs of Rising Compliance Costs.) Florida got $7.5 million of the $13.25 million in civil penalties, ensuring that the state retains its infamous reputation.

A DEA press release describes McKesson’s alleged actions:

“Three McKesson distribution centers received and filled hundreds of suspicious orders placed by pharmacies participating in illicit Internet schemes, but failed to report the orders to DEA. They did so even after a Sept.1, 2005, meeting at which DEA officials met with and warned McKesson officials about excessive sales of their products to pharmacies filling illegal online prescriptions…As a result, millions of dosage units of controlled substances were diverted from legitimate channels of distribution.”

This Reuters story adds that McKesson must also temporarily suspend distribution of two drugs from two of its distribution centers. I presume that McKesson has learned some lessons from Cardinal’s troubles so the marketplace impact should be less severe.

For the record, I will remind you that “the settlement agreement is neither an admission of liability by McKesson nor a concession by the United States that its claims are not well founded.”

For the record, I will also tell you that Iron Man is an awesome movie.

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Check out the new Health Wonk Review, a compendium of health care policy posts from around the web.