Reality Check on Supply Chain Security

Last Thursday, The New York Times published Are You Buying Illegal Drugs?, a scary-sounding editorial by Katherine Eban (author of Dangerous Doses) and Aaron Graham (ex-Purdue Pharma). The authors explain the economic logic behind prescription drug theft and advocate a national track-and-trace technology infrastructure.

Yes, we do need a national system for tracking and tracing pharmaceuticals, although the risks are much lower today than 10 years ago. However, I wonder about the real-world potential for track-and-trace technologies.

Tag all you want, but if no one checks the tag, it's a waste of money. "Don't ask, don't tell" is the mantra of people who buy diverted products from unsavory resellers. Pedigree laws and track-and-trace technologies only work if pharmacy buyers refuse to buy outside legitimate channels and agree to authenticate (scan) an electronic tag.

Adding insult to potential injury, the FDA’s recent guidelines for serialization will do little to address our crazy patchwork of state rules and regulations for the supply chain.

IntegriChain (sponsor)

I am pleased to welcome a new sponsor to Drug Channels—IntegriChain, a pharmaceutical industry information services company.

This is a cool company. I’m a big fan of IntegriChain’s solutions. A number of my manufacturer clients use IntegriChain’s data and services to gain visibility into product demand from the factory to the pharmacy. I know first-hand that their approach provides unique insights into channel activity and can help to better target sales efforts.

In the spirit of full disclosure, I want to let you know that I participated on IntegriChain’s Advisory Board when the company was launched. However, I have no formal involvement with the company's management or operations right now.

Read more in the company's official description below.

Hidden Requirements in New Health Care Bill

Like you, I’ve been poring over the 2,409-page full text of The Patient Protection and Affordable Care Act (“PPACA”) .

There are lots of less well-known requirements buried in the legislation. Here’s a summary of what I found that will affect the pharmacy and pharmaceutical industry.

Pharmacy's MTM Challenge

President Obama signed the Patient Protection and Affordable Care Act into law on Tuesday. Section 3503 (page 1055 of the full text pdf) describes new programs for Medication Therapy Management (MTM) services provided by licensed pharmacists. I’m a fan of the MTM concept because it should improve health care outcomes and reduce costs.

But many pharmacies will have to rethink their businesses to allow store-based pharmacists to take full advantage of MTM opportunities. The latest National Pharmacist Workforce Survey (NPWS) shows pharmacists perceive themselves as overworked and not able to spend enough time on patient care services.

MTM money will presumably provide the financial incentives to fix this misalignment, but money won’t be enough. The pharmacy industry will have to rethink its business model while simultaneously navigating an increasingly competitive environment focused on low-cost prescription fulfillment, pharmacy automation, and call-center counseling from mail-order pharmacies. 

The big 3 Pharmacy Benefit Managers (PBMs) with mail pharmacies have already figured this out. Manufacturers should be thinking about how to support pharmacy-based MTM services that will benefit adherence and compliance.

Bruce Roberts to Leave NCPA, Embrace Mail Order

From yesterday's press release NCPA's Bruce Roberts to Conclude Tenure as CEO in June:

“The National Community Pharmacists Association (NCPA) today announced that Bruce T. Roberts, RPh, has decided to conclude his eight-year tenure as Executive Vice President and CEO on June 25, 2010...Roberts will join BeneCard PBF as President and CEO.”

Let me give credit where credit is due. Mr. Roberts has accomplished a lot during his tenure at NCPA, most notably his work in boosting the pharmacy industry’s influence in Washington, DC. The NCPA’s advocacy ensured that the new health care reform bills included many policies favorable to the retail pharmacy industry.

Health Reform: Impact on Drug Channels

Hey, did you hear that the House of Representatives passed a health care bill? Observant readers may have seen something about it in the news.

Anyway, here are my initial thoughts on the impact for the Drug Channels universe—Pharmacy Benefit Managers (PBMs), pharmacies, and wholesalers. Briefly:

• Pharmacy Benefit Managers (PBMs) will gain from the expanded coverage in the bill. The “transparency” requirements, while an unnecessary reporting burden, should not be material.
• Retail pharmacies will benefit from increased prescription volume and various legislative “fixes,” but face margin risk as the uninsured get the advantage of third-party bargaining power.
• Drug wholesalers will primarily benefit along with their pharmaceutical manufacturer suppliers.

We have a long way to go before many aspects of this flawed bill are implemented, although tax hikes start later this year. Consider my $0.02 to be a down-payment on future analysis.

Walgreen Grows in Graceland

The Mississippi Delta was shining like a National guitar yesterday when Walgreen announced the acquisition of prescription files and certain other assets from 17 USA Drug stores (Ike’s and Super-D) in the Memphis area. Read the press release.

Well, it didn't take long for one of my recent predictions to come true. In Walgreen Grabs Duane Reade: What It Means, I wrote that smaller drugstore chains are tempting targets for the big chains. The regional chains are trying to play the game of the nationals, but without the infrastructure or bargaining ability versus third-party payers.

I've a reason to believe we all will be seeing...more consolidation.

Pepsi, CVS Caremark, and the FTC

Dinah Brin at Dow Jones reports that a recent Federal Trade Commission (FTC) decision regarding Pepsi could have implications for the agency's ongoing probe of CVS Caremark (NYSE: CVS). See Pepsi Ruling May Have Implications For FTC's Review Of CVS.

An antitrust lawyer quoted in the Dow Jones article states: "There are parallels between the two cases.” Hmmm. I have no idea what evidence or documents the FTC will turn up in its investigation of CVS Caremark, but I’m skeptical of the Pepsi-as-precedent premise.

According to the FTC, PepsiCo must restrict its access to confidential business competitive information of rival Dr Pepper Snapple Group as a condition for proceeding with PepsiCo’s proposed $7.8 billion acquisition of its two largest bottlers and distributors, which also distribute Dr Pepper Snapple Group carbonated soft drinks. The supposed analogy is the business relationship between Caremark and CVS retail pharmacies.

Just to be clear, I'm not going to defend or defame CVS Caremark. Regular readers know I have been critical of how the CVS-Caremark combination is affecting the PBM business. However, Ms. Brin’s article does a very nice job of laying out the two opposing FTC storylines, so it’s worthwhile revisiting an issue I first addressed last April in Could the FTC undo CVS Caremark?

Is McKesson in the hunt for an EU acquisition?

Dow Jones is reporting that big EU drug wholesaler The Phoenix Group may be be up for sale after all. McKesson (NYSE:MCK) and Medco Health Solutions (NYSE:MHS) are both mentioned as possible bidders. See Merckle Family Could Sell Parts Of Phoenix.

McKesson seems to be the more likely candidate. Perhaps you noticed that McKesson ended 2009 with $3.4 billion in cash and cash equivalents and only $2.3 billion in long-term debt (source). They could certainly swing a big deal to create the world's first truly global wholesaler.

A Video Metaphor for the U.S. Health Care System?

Full disclosure: You won't actually learn anything about public policy from OK Go's "This Too Shall Pass" video. But it's the coolest Rube Goldberg machine that I've seen in a long time and made me smile on a rainy Friday in Philadelphia.

Enjoy!

Walgreen’s PBM Bypass Strategy

On Tuesday, Veronica Dagher at Dow Jones broke the story that Delta Air Lines Inc. (DAL) is talking with Walgreen Co. (NYSE:WAG) about a new direct-to-payer arrangement. See Walgreen, Delta In Talks Over Prescription Drug Plan. Such a deal would provide more momentum for cost-plus arrangements a la Caterpillar (NYSE:CAT)/Walmart (NYSE:WMT)/Walgreen.

A WAG-DAL arrangement signals a possible longer-term disintermediation threat to the Pharmacy Benefit Manager (PBM) business model in the large employer market. Walgreens has built the deepest, broadest multi-channel platform for pharmaceutical distribution and has an especially strong position for specialty drugs. An employer doesn’t need an intermediary (PBM) to assemble and manage a network that only has a single pharmacy provider. Notably, Walgreen recently restructured “to offer integrated ‘Pharmacy, Health and Wellness Solutions’ to employers, managed care organizations, pharmacy benefit managers and government clients.” (source)

A couple of years ago, Walmart was the first-mover bogeyman who was going to blow up the PBM industry. But Walmart is playing a much narrower game and may find itself poorly matched against Walgreens broader set of channel assets. The lack of new deals from Walmart makes me wonder they are having trouble closing deals for Employer Solutions, their name for direct-to-payer contracts.

Expect more disruptive moves as the drug channel ecosystem rearranges itself.

Pharmacy Profits and the Uninsured

The New York Public Interest Research Group just released A Bitter Pill, their latest annual review of retail pharmacy prices throughout New York state. The data shed light on our health care system's unfortunate “soak the poor” model, which provides 4X profits for pharmacies from consumers lacking insurance coverage.

As I show below, a retail pharmacy’s usual and customary list prices to the uninsured far exceed the reimbursement levels received from third-party payers. When President Obama was in Philly yesterday bashing insurance companies, he forgot to mention that the uninsured cash-pay customer must pay list price for a prescription while those of us with insurance pay the least.

The extreme vitriol aimed at PBMs by independent pharmacy owners makes sense once you see my pharmacy profit math example below. It’s also a downside of health care reform for pharmacies—fewer uninsured consumers would depress pharmacy margins.

Someday, Walmart (NYSE:WMT) will finally decide to launch a brand drug retail pharmacy price war over the uninsured consumer, especially if the healthcare reform effort fails. The model below shows that it’s a realistic possibility.