Surging demand for specialty Rx may be problematic for retail
Specialty and bio-engineered drugs are surging, and the explosive growth in demand for these highly tailored, high-cost medications poses both an opportunity and a major challenge for retail pharmacy.
There’s no question that the future of pharmacy will depend in part on how the industry adapts to the new era of biotechnology-based research and development and specifically targeted molecular entities. But for community pharmacy, the whole spectrum of specialized drug therapy remains problematic. Patients who depend on these medications require more oversight and more personalized care, and the drugs themselves pose special challenges in handling, administration and storage.
Demand for these products, however, is exploding. “Biotech products again remained a major growth engine in 2006, with sales increasing 20 percent to $40.3 billion,” noted IMS Health. Within this market, Amgen’s Aranesp led the way, growing 42 percent on the year to reach $3.9 billion. Amgen’s Enbrel rose 12 percent to $3.1 billion, and Amgen’s Neulasta climbed 28 percent to $2.9 billion. Major cancer-fighting therapies also realized strong growth: Rituxan grew 18 percent to $2.1 billion, Avastin rose 79 percent to $1.7 billion and Herceptin increased 66 percent to $1.2 billion.”
“The market for these medicines is growing at an astonishing rate: almost twice the rate of traditional medicines, accounting for…about 12 percent of the total pharmaceutical market,” noted the Generic Pharmaceutical Association. Some biopharmaceuticals can cost up to $200,000 per patient per year. For example, treatment with the colon cancer drug Avastin costs $100,000 per year. Cerezyme, used to treat Gaucher disease, costs an average of $200,000 per patient per year—with some adult patients paying more than $500,000 a year.”
Overall, the U.S. retail drug market grew 8.3 percent in 2006, according to IMS—and much of that growth was driven by specialty and bio-engineered drugs. “The majority of the 8.3 percent rise in sales was spurred by increased utilization by Medicare Part D beneficiaries and increased penetration and new introductions of specialty drugs,” noted investment analyst Meredith Adler of Lehman Brothers. Citing IMS research, she noted in a recent report that “there is increased likelihood that generic biologics will come to market, though not in the near term.”
Even with the introduction of me-too versions of bio-engineered drugs, however, “IMS does not expect significant reductions in price for these medications as we are seeing currently for traditional generics, since the complexity of biologics would limit the amount of competition.”
Consulting firm VCG & Associates defines specialty pharmaceuticals as “high-cost injectables, infused, oral or inhaled drugs generally requiring close supervision and monitoring of the patient’s drug therapy.” Among their characteristics are the need for frequent dosage adjustments, more severe side effects than traditional drugs, special storage, handling and administration requirements, a narrow therapeutic range, the need for periodic laboratory or diagnostic testing and a higher cost than traditional products.
For retail pharmacies, therein lies the rub. The market is potentially lucrative but highly problematic—involving not only a big investment in professional staff, training and resources to oversee patients’ lifesaving drug therapy, but also in high-cost product inventory.
There’s no question that specialized medicines are expensive, sometimes costing thousands of dollars per month. According to one cost-benefit study from PBM giant Medco Health, only 1 percent to 2 percent of the members of a typical health plan require biotech or specialty drugs, but those members can generate 25 percent or more of a plan’s drug costs.
For pharmacy chains and independents trying to break into the specialty pharmacy arena, the relatively small number of patients who depend on these expensive medications could put pressure on operating profitability over the long run. In a report on the specialty drug market from consulting firm VCG & Associates, company partner Dan Steiber noted that “Margins may significantly compress as large players compete for the small numbers of patients.” In turn, he added, that will pose “significant long-term risk in the market as specialty pharmacy is ultimately all about the number of patients being serviced.”
In a recent presentation, VCG also warned that “regulators and payers will not support the projected growth rates [of specialty and bio-engineered drugs] long term,” if just 2 percent or 3 percent of the patient population is driving “30 to 50 percent of the drug spend.”
In such a market, noted the firm, “Vertically integrated PBMs and [health plan] payers’ in-house specialty pharmacies will dominate.”
Nevertheless, specialized and bio-engineered drugs are fast gaining ground, despite the high cost, for one overriding reason: they are seen as highly effective at keeping patients healthy enough to stay out of even more expensive hospitals and long-term care facilities.
Also driving the biotech market is the growing push for generic versions of bio-engineered drugs. Members of Congress are under pressure from budget-minded health care advocates, the generic industry and some activist lawmakers themselves to pass legislation mandating that the Food and Drug Administration open an abbreviated approval pathway for generic biopharmaceuticals.
In response, a broad gamut of influential lawmakers—ranging from such liberal Democrats as Sen. Edward Kennedy of Massachusetts, Sen. Debbie Stab-enow of Michigan and Rep. Henry Waxman of California, to such conservative Republicans as Sen. Orrin Hatch of Utah and Sen. Trent Lott of Mississippi, have voiced support for legislation that seeks to create a clear regulatory pathway for follow-on biologics, or biogenerics.
“The science and the economics lead to the same conclusion: the time has come to establish a pathway for approving generic versions of biopharmaceuticals,” Waxman told generic industry leaders earlier this year. “Congress can no longer stand by and watch as our reliance on biologics increases, along with their costs.”
In the midst of the political groundswell for a biogeneric approval pathway, the FDA did clear for marketing one biosimilar drug last year—a human growth hormone branded as Omnitrope from Sandoz—under a narrow interpretation of existing review and approval procedures, according to IMS. The research company called that move a landmark decision, and noted it “provides a narrow opening for other biosimilars.”
This new era of highly targeted and specialized medications could reduce the number of blockbuster drugs reaching the market, according to one expert. Writing in the New England Journal of Medicine, David Cutler, Ph.D., noted that pharmaceutical companies are likely to aim their future R&D efforts in such drug classes as selective serotonin-reuptake inhibitors in a more and more targeted way to more effectively treat different groups of patients who respond differently to various drugs within the SSRI class of medications.
“The blockbuster model relies on the proposition that the same drug is good for everyone—that one size fits all,” Cutler reported in a recent article in the prestigious medical journal. “But even drugs with similar average efficacy do not have the same effect for all.”
In the case of SSRIs, for example, “the response to each drug is idiosyncratic and unpredictable” among different patients with depression, Cutler pointed out.
“Someday, genetic science may tell us why some patients are more responsive than others,” he noted. “When that happens and drugs can be targeted more accurately to patients likely to have the desired response, the market for any particular SSRI will shrink.”
It follows, Cutler wrote, that “In the new era, physicians might have to conduct genetic or biochemical analysis to determine which medication is the appropriate one” for patients, “before prescribing a medication.” In addition, he noted, “As molecules are increasingly targeted to niche markets, pre-approval study populations will necessarily shrink, and the need to monitor how drugs actually work after approval will intensify.”
It’s a given that bio-engineered and specialty pharmaceutical are expensive. Nevertheless, Cutler noted, “Prescription medications are expensive, but they are still a good value…[and] the cost-effectiveness ratio…is extremely favorable. According to one study, the median cost of a drug was $11,000 per quality-adjusted life-year, as compared with $140,000 per quality-adjusted life-year for medical procedures.”
Grocer sings new tune in community involvement
Meijer is taking another step in community relations, to the tune of promoting and selling CDs of local musicians.
The Michigan-based 176-unit grocery chain launched the Outside the Mainstream promotion in February with a solo CD from Josh Davis, a singer from Lansing, Mich., whose Fool Rooster CD was recognized by Performing Songwriter magazine for its lyric.
Each month, the chain is featuring a new performer in its circulars, which are sent weekly to 7 million households in Ohio, Michigan, Illinois, Indiana and Kentucky, according to company vice president of public affairs Stacie Behler. Meijer purchases 1,000 of the artist’s CDs and offers them for sale in all the chain’s stores for $7.49.
“The goal of the program is to bring some of the talent that we find in our own backyards to a wider audience than they can normally reach by themselves,” Behler said. “And by supporting this with a low price and a feature in our circular, hopefully it will lead people to gamble on the purchase of music that is worthy of discovery.”
Meijer, according to Behler, is trying to create regional loyalty to its stores by promoting local talent.
CDs chosen for promotion, according to the chain, must have a UPC and be professionally duplicated. Submitted CDs are sorted according to state and chosen on the basis of whatever state will be featured that month and how different the music is from the previous month.
Featured in April is Michigan-based Potato Moon with its CD “The Life of The Lonely Jones.”
CVS wins Caremark battles
WOONSOCKET, R.I. —The battle for Caremark Rx has finally come to an end. And, to the dismay of Express Scripts, CVS has emerged the winner, creating a $75 billion pharmacy benefit management powerhouse that is likely to serve as a benchmark for additional mergers within the industry.
“CVS/Caremark will offer end-to-end services, from plan design to prescription fulfillment, as well as the opportunity to improve clinical outcomes, which will result in better control over health care costs for employers and plan providers,” stated Tom Ryan, president and chief executive officer of CVS/Caremark, late last month when the deal closed. “The company will improve the delivery of pharmacy services and health care decision-making, enabling consumers to benefit from unparalleled access, greater convenience and more choice.”
With the close of the transaction—ultimately valued at $27 billion—CVS/Caremark has moved into a strong, competitive position. The combined company will be No. 1 in pharmacy sales, PBM-managed lives, specialty pharmacy sales and retail-based health clinics. It will be No. 2 in mail services.
That adds up to a lot of extra leverage for the retail health care juggernaut with suppliers, as well as insurers and payers.
In terms of synergies, CVS expects to realize between $800 million to $1 billion in revenue synergies in 2008, and significantly more thereafter. The company expects about $500 million in cost savings, largely related to better purchasing.
“We would like to note that every deal that both CVS and Caremark have done historically has yielded synergies significantly in excess of original guidance,” stated Citigroup analyst Deborah Weinswig in a recent research note. “We believe this deal will be no exception.”
Charles Boorady, also of Citigroup, believes that if the company achieves cost savings from the drug-procurement process, it likely will come from a combination of the following: manufacturers accepting the lower price or offering greater rebates, the wholesalers and distributors accepting lower prices and manufacturers bypassing the wholesalers and selling directly to the combined CVS/Caremark entity.
While many industry observers view the merger as a boon for the companies, it undoubtedly will have major implications on the industry, in general, as vertical integration is a new paradigm that—if successful—could clear the way for more mergers moving forward, with Medco and Express Scripts likely being the next targets.
“The fragmentation in the past may be the reason why vertical integration did not work, but the sheer scale of the CVS/Caremark company may be able to make it work,” Boorady said. “The only test will be whether customers buy into the concept or the concerns over the perceived channel conflict will outweigh it.”
Either way, Boorady sees it as a win-win for rival PBMs. “I see Medco and Express Scripts winning either way. If this integration works, they are likely to be the ones that are acquired next. If it doesn’t work then they could stand to gain customers that prefer a standalone [PBM] instead of a vertically integrated model.”
Another issue such a deal brings to the forefront is network restriction. If customers are willing to restrict the retail pharmacy so that employees can get their prescriptions filled at a single chain, or just a few chains in the market, then it will make the synergy from a vertical integration more obvious, according to Boorady.
However, this has been a concern for several years and has yet to materialize.
“I think most employers have concluded, and will continue to conclude, that the sheer hassle factor that you are putting on your employees by making them go to a CVS instead of a Walgreens, or vice versa, isn’t really worth what little savings you can get relative to other things you can do that present less of a hassle to the employee but can save a lot more money,” Boorady said.
However, prior to the deal, CVS Pharmacare controlled a provider network of more than 56,000 retail pharmacies. Meanwhile, Caremark’s network numbered more than 60,000 retail pharmacies, so it is unlikely that the combined company, post-merger, would suddenly pull back the size of its network—particularly, if the end goal is to remain attractive to insurers and payers and competitive with stand-alone PBMs.
According to William Blair & Co. analyst Mark Miller, the combined company is facing its first big test as it expects an announcement on the large Federal Employee Program contract—currently up for negotiation—as early as May. Three years ago, Caremark won this contract from Medco and it is likely that the two PBMs, among others, will bid for this business aggressively.
“While there are many moving parts to these types of negotiations, this will be the first big test for the new CVS/Caremark, and may provide some incremental perspective on the current state of the competitive environment,” Miller stated in a research note.
In related news, CVS/Caremark has announced the members of the company’s board of directors. As previously disclosed, the 14-member board was evenly split among designees from CVS and Caremark.
Former Caremark chairman and chief executive officer Mac Crawford has been elected chairman of the board of the combined company. Ryan will continue to serve as president and chief executive officer.
The following individuals named to the board from CVS are:
Ryan, president and chief executive officer of CVS/Caremark Corp.
David W. Dorman, senior advisor and partner, Warburg Pincus LLC.
Marian L. Heard, president and chief executive officer, Oxen Hill Partners.
William H. Joyce, chairman and chief executive officer, Nalco Co.
Terrence Murray, former chairman and chief executive officer, FleetBoston Financial Corp.
Sheli Z. Rosenberg, former vice chairman, president and chief executive officer, Equity Group Investments LLC.
Richard J. Swift, former chairman, president and chief executive officer, Foster Wheeler Ltd.
The following individuals named to the board from Caremark are:
Mac Crawford, chairman of CVS/Caremark Corp.
Edwin M. Banks, founder, Washington Corner Capital Management LLC.
C. David Brown II, chairman, Broad and Cassel.
Kristen E. Gibney Williams, former executive of Caremark’s Prescription Benefits Management division.
Roger L. Headrick, managing general partner, HMCH Ventures; president and chief executive officer, ProtaTek International
Jean-Pierre Millon, former president and chief executive officer, PCS Health Systems
C.A. Lance Piccolo, chief executive officer of HealthPic Consultants