Harvard Drug Fights the DEA...and Wins

I have an important update to last Thursday’s post The DEA Nabs Another Wholesaler.

Incredible as it may sound, Harvard Drug Group immediately sued the Drug Enforcement Administration (DEA) after its license suspension…and won an impressive victory.

Here’s the lead from the company’s press release Harvard Drug Group Gains Injunctive Relief From DEA:

“Today, the Drug Enforcement Administration and U.S. Attorney’s Office, and Harvard Drug Group announced their agreement to immediately modify the suspension, upon certain conditions, of Harvard’s registration to distribute schedule III through V controlled substances out of its Livonia Distribution Center, and a mutual commitment to commence discussions, towards resolution of the issues raised in the DEA’s suspension order. The suspension remains as to schedule II controlled substances.”

You can also read this letter from Chairman and CEO Randy Friedman. No press release or retraction from the DEA, naturally.

I wonder if the executives at Cardinal Health (NYSE:CAH) are kicking themselves for not being more aggressive back in 2007. Lawyer’s remorse?

CVS-WAG: Doomsday Averted

BREAKING NEWS: CVS Caremark and Walgreens Announce New PBM Network Pharmacy Agreement

Both sides had good reasons to resolve this situation quickly. CVS Caremark needed to minimize damage to its PBM business, while Walgreen faced an enormous revenue hit from the loss of Caremark. Everyone also recognized the enormous disruption for patients caused by a permanent split.

The announcement is filled with PR fluff, but it looks like a bigger win for CVS Caremark since Maintenance Choice remains in place. It's definitely a short-term positive for Walgreen because they avoid a devastating $7 billion revenue loss. Longer term, Walgreen's perceived bargaining power in the drug channel has been reduced. However, CVS Caremark's has also raised questions for payers about its ability to manage the retail network.

So, what have the participants in this drama learned? Probably nothing, but I'll submit the following for your consideration:

1. Don't bring a knife to a gun fight. (Walgreens)
2. Don't cut off your nose to spite your face. (CVS Caremark)

Thanks to everyone who followed the brouhaha on Drug Channels! Blog traffic hit a new record over the past two weeks.

The DEA Nabs Another Wholesaler

6/21/10 Update: See Harvard Drug Fights the DEA...and Wins

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On Tuesday, the Drug Enforcement Administration (DEA) announced that it had suspended Harvard Drug Group’s license to distribute controlled substances. See Michigan Pharmaceutical Supplier’s DEA License Suspended.

Harvard Drug Group is a generics-focused pharmaceutical distributor with over $450 million in annual sales. What’s less well-known is that the company was acquired in April by private equity firm Court Square Capital. The transaction was led by none other than Court Square investment professional Kurt Hilzinger, former President and Chief operating Officer of AmerisourceBergen (NYSE:ABC). Kurt told me that he only has a Director position at the company.

Once again, the DEA seems intent on holding drug wholesalers accountable for diversion of controlled substances by the wholesaler’s pharmacy customers. See The DEA's Anti-Diversion Strategy for some historical perspective from the Drug Channels archives.

CVS-WAG: Escalation and Bridge Burning

Walgreen’s (NYSE:WAG) battle with CVS Caremark (NYSE:CVS) escalated sharply yesterday. Does this posturing and bluster mean that a resolution may be closer than it appears?

Perhaps. “Burning your bridges behind you” is a well-known strategy for demonstrating commitment. Succeed or perish, goes the theory.

CVS Caremark and Walgreen are (hopefully) negotiating some sort of resolution to this debacle behind closed doors. In public, we are witnessing each side signaling an intention to stand their ground as way to force the other side to compromise.

I see the next big deadline as next Tuesday’s earnings conference call from Walgreen. Consider these four possibilities, in order of decreasing attractiveness to Walgreen:

• Walgreen reconciles with CVS Caremark
• Walgreen announces a truce that postpones the July 9 deadline
• Walgreen makes a market-shaking announcement that strengthens its bargaining position, such as a mega-acquisition (Rite-Aid?) or a new direct-to-payer deal
• Walgreen spends the entire earnings call explaining why they picked this fight in the first place and how much they stand to lose. Ouch.

My Best Report on Drug Wholesaling Ever

I am pleased to announce the availability of The 2010-11 Economic Report on Pharmaceutical Wholesalers, my brand-new report on the U.S. drug wholesaling industry. I’m offering 10% off the regular price if you order before June 30, 2010.

As the headline above says, I really do think that this is my best report on the drug wholesale industry ever. I’ve packed enough into the report to make it valuable whether you’re new to the industry or a grizzled veteran. I highlight a few unique elements below.

My target audience is diverse:

• Manufacturers of pharmaceuticals and healthcare products (my primary consulting clients, BTW)
• Wholesalers (not my clients)
  
• Buyers and executives at pharmacies of all sizes
  
• Investors in the public companies
• Pharmacy Benefit Managers (PBMs)
• Policy analysts

I have worked hard over the past few months to make The 2010-11 Economic Report on Pharmaceutical Wholesalers into a comprehensive reference. I hope you enjoy reading it as much as I enjoyed writing it!

The Big Picture on Health and Wealth

It can be hard to step back and see the big picture when every day we witness the type of back-and-forth nastiness that I've written about this week.

So, I encourage you to visit an amazing visual history of the past 200 years from Gapminder. Click here and press "Play" to witness mankind's progress as shown in a bubble chart tracking income per capita and life expectancy for the world's nations.

The bottom line: 200 years ago, all countries were poor and life expectancy was less than 40 years. Today, no country has less than 40 years in life expectancy.

Hope it puts you in a positive frame of mind for the weekend!

CVS-WAG: Going From Bad to Atrocious

CVS Caremark (NYSE:CVS) fought back yesterday by announcing that it would drop Walgreen (NYSE:WAG) from its pharmacy networks in 30 days. Walgreen responded with its own I-know-you-are-but-what-am-I press release response.

Since when does negotiating by press release seem a good idea? Is everyone working with the PR Agency From Hell?

As I told Dow Jones, both parties need to step back from the brink and find a way to resolve this mess while saving face. The loss of ALL Caremark business (~12% of prescription revenues) would be a big financial hit to Walgreen, giving them an incentive to settle quickly. At the same time, I don’t see how Caremark will be able to survive in certain markets without Walgreen. Plus, CVS Caremark will now need to sell the world on a restricted network model without giving up more to retain clients than they save by excluding Walgreen.

The WAG-CVS Brouhaha: What's Really Going On

Big news yesterday as Walgreen (NYSE:WAG) announced a very public spat with CVS Caremark (NYSE:CVS). See from Walgreen Cuts Ties With CVS Caremark Plans from today’s Wall Street Journal.

Below, I provide a road map to the key issues in this dispute. Although it’s really just about money, there are a lot of moving parts and many players here.

Regardless of the resolution, a Caremark spin-off is now even more likely per my prediction in When will CVS and Caremark split up?.

The Strategic Value of Pharmacy

Today, I am pleased to bring you a thought-provoking guest post about the strategic value of pharmacy to manufacturers.

The article below is written by John Halpern, VP and co-founder of IntegriChain, a Drug Channels blog sponsor. Josh makes the case that drug makers are not investing enough time or attention on retail pharmacy relationships. Josh plans to follow up this article with case study examples drawn from IntegriChain client experiences.

Josh will be in Booth 518 at HDMA's 2010 Business & Leadership Conference in Orlando next week. Be sure to stop by and share your thoughts with him on this topical issue.

And don't forget to tell him the secret phrase: "Drug Channels sent me." (Please note that the secret phrase is no longer "Rollo Tamasi.")

Wholesaler Profits: Brand vs. Generic Drugs

On June 15, I’ll be releasing an all-new report called The 2010-11 Economic Report on Pharmaceutical Wholesalers. I want to share a sneak peek at one intriguing analysis of wholesaler profitability.

Although wholesaler revenues are linked most closely to sales of brand-name drugs, the majority of wholesaler profits come from generic drugs. As you can see in the chart below, I estimate that in 2009 generic drugs contributed $1.7 billion more in gross profits for the Big Three wholesalers than did brand drugs. The superior profits from generic drugs make it more challenging to align the economic interests of wholesalers and brand-name manufacturers.

On a related note, I’ll be attending HDMA’s Business & Leadership Conference in Orlando on Monday and Tuesday. Drop me a line if you’d like to meet in person and chat about what's going on. If you prefer, just introduce yourself during the conference and share your kudos (or complaints?) about Drug Channels.

McKesson Backs Away From A Mega-Acquisition

In case you didn’t notice, McKesson (NYSE:MCK) appears to have taken the possibility of a mega-acquisition off the table with two recent announcements about its cash hoard:

• The company’s Board of Directors authorized an additional share repurchase of $1 billion in the company’s FY2010 earnings announcement.
• McKesson raised its dividend by 50% last week.

McKesson ended the first calendar quarter of 2010 with $3.7 billion in cash but only $2.3 billion in long-term debt. (See chart below.) This cash mountain suggests McKesson had plenty of room to take on more debt and swing a major acquisition. A big acquisition is still possible, but just less likely.

Restat (sponsor)

I am pleased to welcome a new sponsor to Drug Channels—Restat, the largest privately-held Pharmacy Benefit Manager (PBM).

Restat is marketing a cost-plus, preferred pharmacy model to self-insured employers as Align, which they describe as "a proven way for self insured employers to reduce the cost of their pharmacy benefit." Restat cites the average savings per prescription in their text below.

Long-time readers will recognize Restat as the PBM working with Caterpillar (NYSE:CAT) on the model described in CAT + WAG = More Momentum for Cost Plus. Todd Bisping, Pharmacy & Informatics Manager at CAT, even provides a voice-of-the-customer testimonial in the text below. Restat manages the pharmacy benefit for 4,200 companies.

Read more in the company's description below and on their website.

Welcome aboard, Restat!

P.S. Please email me if you would like to discuss upcoming sponsorship opportunities on Drug Channels.