Adam J. Fein, PhD, Pembroke Consulting

		The largest, US-based pharmacies and wholesalers are all expanding significantly outside North America. Manufacturers face new risks when interacting with, responding to, and defending against these new global channel companies. To maximize sales opportunities and minimize commercial risks, pharmaceutical manufacturers must begin preparing for these new relationships.

		Retail and wholesale markets operate very differently in other countries, creating opportunities for US pharmacy and wholesale companies to bring best practices to other parts of the world. These companies also seek advantages in a changing generic market. They do this by positioning for higher generic penetration in other countries and gaining scale to leverage over generic manufacturers.

		The following key transactions illustrate the pace and extent of global expansion:

			The newly-formed Walgreens Boots Alliance includes the legacy Walgreens pharmacies, 4,500 pharmacies outside North America, and one of Europe’s largest drug wholesalers. In 2014, Alliance Boots acquired Farmacias Ahumada SA (FASA), which operates more than 1,400 pharmacies in Mexico and Chile.

			In 2014, wholesaler McKesson acquired Celesio AG, a global retail and wholesale company. Celesio operates 2,175 pharmacies in six European countries and manages 4,300 pharmacies operating under brand partnership arrangements. Celesio’s pharmaceutical wholesale business, which operates in 11 European countries and Brazil, generates 70% of its revenues from France, the UK and Germany.

			In 2013, CVS Caremark acquired Drogaria Onofre, Brazil’s eighth-largest drugstore chain.

			In 2010, Cardinal Health entered China, which now accounts for more than $2.6 billion of its revenues. Cardinal is the only US-based wholesaler with a significant presence in China.

			In 2012, AmerisourceBergen acquired World Courier Group, a global logistics company. As part of its 2012 supply arrangement with Walgreens, AmerisourceBergen will be able to expand its specialty and manufacturer services businesses internationally in partnership with Alliance Boots.

			In 2014, AmerisourceBergen purchased a 19.9% minority stake in Profarma Distribuidora de Produtos Farmacêuticos SA (Profarma), a leading pharmaceutical wholesaler in Brazil. The companies also formed a 50/50 joint venture to provide specialty distribution and services to the Brazilian market.

		Manufacturers should understand and prepare for the ongoing growth of global wholesale and pharmacy companies. Here are four ways to get started.

 When a large trade customer starts demanding global concessions, manufacturers must prepare to respond in a fact-based manner. Begin by mapping all relationships between your company and a global customer’s many affiliates and subsidiaries. What agreements exist in each country? What are the terms and structures of these agreements? What are the total revenues flowing between your organizations? Manufacturers will discover that these companies are simultaneously customers, service providers, payers, healthcare providers and more. For instance, wholesaler AmerisourceBergen’s many non-wholesale services for manufacturers include a specialty hub, management consulting and a specialty pharmacy.

 Multinational channel companies challenge conventional organizational arrangements within most pharmaceutical manufacturers. Few manufacturers have a global account-management structure that can respond to cross-country requests or demands. No global function can readily provide global visibility to contracts and terms across all country subsidiaries. A manufacturer’s country subsidiaries manage their own relationships. It’s time to consider the global governance challenge of pharmacies and wholesalers that cross a manufacturer’s traditional internal organizational silos.

 Outside the US, the trade and channel strategy function is relatively undeveloped. For example, US wholesale channels are unique in having sophisticated distribution service agreements with detailed performance measurement and extensive data sharing. Manufacturers need to weigh opportunities to bring US standards to other countries. Despite differences in regulations and laws, can global pharmacy companies provide more integrated patient care and enhanced global brand awareness? Are there situations in which global contract terms could benefit both the manufacturer and its channel partners?

 Global trade accounts will demand concessions and policy exceptions from manufacturers. They will also request centralized purchasing and contracting, on proposed terms that will be highly favorable to the trade customer. Knowing your organization’s strengths and vulnerabilities will help you to know when to say “no.” In general, manufacturers of brand-name drugs can withstand global channel pressure more than manufacturers of generic drugs.

		Global channel customers are still getting organized. Now is the time to get ready. 

	Dr. Fein is president of Pembroke Consulting, Inc., and CEO of Pembroke’s Drug Channels Institute. This article is adapted from his new 2014—15 Economic Report on Retail, Mail, and Specialty Pharmacies, which is available at 

http://drugchannelsinstitute.com/products/industry_report/pharmacy/

Articles

Manufacturers: Get ready for global trade account management

	Specialty drugs will account for 50% of total US drug spending within five years. The projected growth is drawing many companies into the business of dispensing specialty drugs. The new entrants will increase competition and challenge manufacturers’ channel strategies.

		Here are six key factors driving this growth:

Smaller PBMs are opening specialty pharmacies.

 Following the lead of the largest Pharmacy Benefit Managers (PBMs), smaller PBMs have begun operating their own internal specialty pharmacies. Examples include Prime Therapeutics (Prime Specialty Pharmacy) and Catamaran (BriovaRx). Both pharmacies were launched in 2012.

2. Private, independent specialty pharmacies are growing quickly.

 There are 12 independent specialty pharmacies on the 2013 Inc. magazine list of the fastest-growing private companies in the US. Average revenue for these 12 pharmacies was $197.6 million, and the median 3-year revenue growth rate was 167%. All but three of these companies were founded within the past 15 years.

3. Accreditation is lowering barriers to entry.

 Independent accreditation organizations help community pharmacies develop and verify their capabilities to manufacturers and third-party payers. Accreditation thereby creates a pathway by which any pharmacy can build specialty pharmacy capabilities. As of December 2013, a Drug Channels Institute analysis shows 59 companies with 114 specialty pharmacy locations that had achieved “Full Accreditation” under URAC’s Specialty Pharmacy Accreditation. An additional 51 companies are “In Process” and are likely to be accredited shortly.

4. Hospital systems are seeking specialty pharmacy revenues.

 Some integrated delivery networks (IDNs) and health systems are developing their own specialty pharmacies, such as the Fairview Specialty Pharmacy (part of Minnesota’s Fairview Health System) and Commcare (a specialty pharmacy owned by hospital group purchasing organization Premier). Fairview Specialty Pharmacy has $360 million in revenues. Seven academic medical centers formed the for-profit Excelera network, which aims to “mitigate the ‘leakage’ of patients to for-profit specialty pharmacy companies.” Many of these medical centers will acquire specialty drugs under the 340B drug discount program, generating substantial profits for the hospitals.

5. Physician practices are establishing specialty pharmacies.

 The growth in oral oncology products is encouraging physicians to dispense these products from offices and clinics. These practice-affiliated pharmacies act as a “closed door” pharmacy by dispensing only to the practice’s patients. In-office dispensing gives the physician more control over treatment while creating an additional revenue source for the practice. Although one-fourth of practices operate an affiliated pharmacy, only 5% of oral oncology volume is dispensed from a provider’s office. RainTree Oncology Services has announced that its physician practices members will become part of Express Scripts’ pharmacy network. The physician offices are now “specialty network” pharmacies for Express Scripts’ plan sponsor clients.

6. Retail pharmacies are leveraging open government payer networks.

 Some entrepreneurial independent-pharmacy owners are focusing on patients who take specialty drugs and rely on Medicare Part D or Medicaid, which pay for about one-third of specialty drugs. The law governing the Medicare drug benefit contains an “Any Willing Provider” provision that can be interpreted as requiring that these pharmacies be admitted into the specialty network of a Medicare Part D Prescription Drug Plan (PDP).

		Despite new entry, market share for dispensing specialty drugs remains highly concentrated—for now. Drug Channels Institute estimates that the top three companies&mdash;Express Scripts, CVS Caremark, and Walgreens&mdash;accounted for 63% of revenues from pharmacy-dispensed specialty drugs. The next three largest players had a combined share of about 5%.

		The specialty industry is becoming much more competitive, which will compress margins for undifferentiated specialty pharmacies. Manufacturers will face enormous pressure to broaden limited distribution networks and provide additional financial support. Manufacturers will also need to manage specialty pharmacies owned by pharmacy benefit managers, retail drugstore chains, health plans, pharmaceutical wholesalers, physician practices, and hospital systems.

		Dr. Fein is president of Pembroke Consulting, Inc., and CEO of Drug Channels Institute. This article is adapted from his new 2013—14 Economic Report on Retail, Mail, and Specialty Pharmacies, which is available at 

http://drugchannelsinstitute.com/products/industry_report/pharmacy

What you need to know about the current specialty pharmacy landscape

Six factors driving new specialty pharmacies

The U.S. drug wholesaling industry is evolving faster than ever. Total revenues from the drug distribution divisions of the Big Three wholesalers were $257.1 billion in

	calendar year 2009, up 4.6% versus 2008. The biggest wholesalers are positioning themselves as indispensable intermediaries in the supply chain and staking out a powerful position in high-growth channels for specialty drugs. Pharmaceutical manufacturers must understand these evolutionary forces to negotiate and collaborate successfully with pharmaceutical wholesalers. 

Here are six significant trends that will affect the drug wholesaling industry during the next five years: 

Consolidation of the Pharmacy Industry—

Independent pharmacies are strategically important and profitable to wholesalers despite representing only 16% of wholesalers’ total sales. The ongoing consolidation of the pharmacy industry will continue to pressure wholesaler profit margins from drug distribution. Larger chains and mail-order pharmacies, which have much lower profit margins on brand-name drugs for wholesalers, continue to grow faster than other segments of the market. Consolidation also hurts wholesalers because large, self-warehousing customers bypass wholesalers to purchase more-profitable generic drugs. 

Slowdown in U.S. Pharmaceutical Spending—

Revenues of drug wholesalers are linked to growth in prescription drug spending rather than overall economic cycles. As such, the projected slowdown in U.S. drug spending will keep wholesaler’s revenue growth rates below historical levels. Although the slowdown in U.S. prescription drug spending will reduce drug wholesalers’ revenue growth, the additional profits from generic drugs will cushion the profit impact on wholesalers. 

Although wholesaler revenues are linked most closely to sales of brand-name drugs, the majority of wholesaler profits come from generic drugs. Pressure on pharmacy profits from generic drugs is rising as payers learn more about channel economics, implement new payment benchmarks and use novel cost-plus contracting strategies. The retail prescription price war launched by Walmart also threatens the overall profitability of generic prescriptions for pharmacies. Drug wholesalers will face margin pressure on generic drug sales because pharmacies will be more price sensitive and require bigger discounts to remain competitive. Discount generic programs are shifting retail market share away from wholesaler-supplied dispensing channels into self-warehousing retailers. 

The Battle for Control of Specialty Drug Spending—

The complex channels for specialty drugs make it hard for payers to get full visibility on specialty drug spending or to manage drug utilization effectively. Drug wholesalers and specialty distributors play the biggest role in the distribution of specialty drugs to healthcare providers, but wholesalers have a more limited role in the distribution of self-administered specialty products to specialty pharmacies. Some pharmacy benefit managers (PBMs) are developing services

	that shift responsibility for specialty drug management from the medical benefit to the pharmacy benefit. If successful, these programs will reduce the importance of specialty distribution channels by reducing the influence of physicians in the purchase decision. 

Manufacturer Consolidation and Value of Fee-For-Service Agreements—

Recent mergers of brand-name pharmaceutical manufacturers could reduce wholesaler payments under fee-for-service agreements. The consolidation of manufacturers is generally negative for wholesalers because a larger drug maker would have additional leverage in a fee-for-service negotiation. 

Supply Chain Regulation and Compliance Costs—

Wholesalers must comply with a range of state and Federal regulations regarding the supply chain. There is substantial uncertainty regarding both future regulations as well as the potential impact on wholesaler business practices and operating costs. 

Adam J. Fein, Ph.D., is president of Pembroke Consulting and author of the popular and influential Drug Channels blog (http://www.DrugChannels.net). This article is adapted from his new 2010-11 Economic Report on Pharmaceutical Wholesalers, available at http://www.pembrokeconsulting.com/wholesale.html. 

Just as the pharma industry is feeling price and margin pressure, so are wholesalers in today’s healthcare marketplace