Collaborative sourcing: Leveraging massive generic discounts
Recent strategic business initiatives are granting wholesalers more generic drug purchasing power than ever before.
Over the last few years, some major deals in the world of drug wholesaling have taken shape. While the business arrangements among the three top wholesalers differ slightly in terms of ownership, benefits and risks, one thing is for certain: all of the agreements will translate into growth opportunities for the companies involved and will help them improve their generic drug sourcing practices.
McKesson, Cardinal and AmerisourceBergen, also known as the “Big Three,” reportedly distribute more than 80% of all of the drugs in the United States. Below, DSN takes a look at the structure of their recent financial agreements and how the terms of the deals affect both wholesalers and pharmaceutical distribution. All of the deals appear to be centered on the tenet that the higher the purchasing volume, the better the price concessions.
Walgreens Boots Alliance Development (WBAD) with AmerisourceBergen (ABC)
Walgreens entered into an internationally advantageous partnership in 2012 with Alliance Boots and AmerisourceBergen. As a result of the deal, Walgreens earned a 7% stake in ABC, with the option to own up to 30% in the next few years, and can help ABC score lower drug prices from generic manufacturers. Typically, large pharmacies buy brand-name drugs directly from manufacturers, but get their generics from wholesalers. If ABC and Walgreens are combined, both may enjoy lower generic pricing and better contract savings.
The partnership will help all of the groups involved focus more on proprietary generics. In addition, ABC will be granted a 10-year contract and will get the opportunity to expand its specialty business both in Europe through Alliance and in the United States through Walgreens. ABC will be well-positioned on a number of fronts — adding Walgreens distribution will provide opportunities in the coming years.
One major caveat with the WBAD-ABC agreement is that ABC risks potentially alienating its other customer. Although the lower generic pricing points obtained through stronger contracting deals may appeal to ABC’s smaller pharmacy clients, some may feel uncomfortable with the idea that by supporting ABC, they are indirectly financially supporting a competitor, Walgreens.
McKesson and Celesio
Whereas ABC and Walgreens are buying into a transaction, McKesson is gaining full control of drug company Celesio, which operates a wholesaling business in 13 European countries and Brazil. The arrangement would allow McKesson to benefit through international generic expansion, while Celesio would benefit from the sales of McKesson’s proprietary generic brand, NorthStarRx.
Cardinal and CVS Caremark
Unlike the other two deals, Cardinal and CVS Caremark have an equal level of control within their agreement, which was signed in December 2013. Cardinal will pay a fixed fee — $100 million per year — to CVS, and in return will receive the same absolute drug prices. Although Cardinal’s presence overseas in China is steadily growing on its own, the partnership with CVS Caremark also will allow Cardinal to enjoy an enhanced focus on U.S.-based purchasing. Through one buyer, Cardinal believes they can more efficiently negotiate generic prices for both companies.
So, aren’t lower prices better for everyone? Not necessarily. Over time, margin compression could be a potential consequence of these business deals. The better these wholesalers are able to buy, the more they will drive the average manufacturer price down. This makes it harder for independent pharmacy members to compete with the Big Three, and could have perverse market effects.
Mapping out the next generics wave
From 2012 to 2017, global spending on medicines will increase from $205 billion to $235 billion, according to IMS Health. By 2017, 36% of the spend will be on generics, a number that is 9% more than the percentage in 2013.
As a result of the patent cliff, generic drug manufacturers have thrived while branded pharmaceutical manufacturers have suffered. Branded pharmaceutical manufacturers are expected to suffer even more in the coming years, as many more important patents will lose exclusivity.
A recent paper from the Centers for Medicare and Medicaid Services concluded that plan sponsors have been able to successfully control costs by using tiered co-payment and benefit management practices to encourage the use of generics, and that a “shift toward generic utilization cut in half the rate of increase in the price of a prescription during 2007-2009.” What is less clear, they noted, is how new market entrants with very few competitors — like specialty therapies — will influence future costs.
The patent cliff
Between 2013 and 2016, $73 billion in branded medications are expected to lose patent protection, according to IMS. While many manufacturers dread the loss of patents, patent expiries of traditional drugs generally help contain spending growth across the country. This will be especially important starting in 2014 because increased access to health care via the Affordable Care Act and lower patent expiry levels will cause spending levels to start to rise again during this year. In fact, IMS’s November 2013 report, “The Global Use of Medicines: Outlook through 2017,” estimates that market growth will double in 2014 as a result of these factors.
IMS also predicts that loss of exclusivity, along with slower transitions to new medicines and increased market access issues, will cause absolute spending on brands to decrease $113 billion by 2018, which is considered the end of the patent cliff. In addition, $83 billion in brand spending will shift to generics with lower prices.
Among the most notable products slated to lose patent protection in 2014 alone include: Nexium (esomeprazole magnesium), Cymbalta (duloxetine), Copaxone (glatiramer acetate) and Symbicort (budesonide and formoterol fumarate dihydrate). Although there are varying annual sales numbers on these products depending on the information source, these products represent roughly $16 billion dollars in patent loss.
In 2015, other important patent expiries include, but are not limited to: Abilify (aripiprazole), Gleevec (imatinib), Namenda (memantine) and Celebrex (celecoxib). Many of these drugs were scheduled to lose exclusivity in different years, but court proceedings will prevent the release of generic versions of these drugs until 2015.
Finally, in 2016, blockbusters Crestor (rosuvastatin calcium) and Benicar (olmesartan medocomil) are scheduled to lose patent protection.
The last phase of the generics wave
Just beyond the patent cliff, a huge generic wave will swell. The last big generic wave was around 2011 to 2012, and analysts predict another wave will begin to build over the next 12 months. Small-molecule drugs will increasingly be dispensed as generics, and the loss of patent exclusivity will cause an increase in spend on generics of about $40 billion dollars over the next five years, according to IMS.
This is not to say that the drug market will be devoid of innovation — however, many of the innovative medicines in development will be in the specialty or orphan drug sector. Thus, the age of the traditional small-molecule blockbuster will come to a close, at least temporarily. IMS estimates that more than half of research projects are currently for specialized medications, and nearly one-third of all projects are biologics. In fact, IMS predicts that there will be an average of 35 new molecular entities launched per year for the next five years, for an average total of 175 new products by 2018.
By around 2016, there are expected to be fewer growth opportunities for generic drug makers. However, companies can look into generic biologic manufacturing, or biosimilar production. There will be fewer competitors in this market, specifically because follow-on biologics are so difficult and expensive to produce, and because they follow a different regulatory procedure than do traditional generics. Much more is required in terms of clinical trials, and there are steep regulatory and marketing hurdles with biosimilars. At the pharmacy level, there are issues with substitution depending on a person’s state.
Adherence gets some stickiness
“No one gets paid unless patients improve adherence.”
That’s what Aaron McKethan, SVP of strategy and business development for RxAnte, had to say in a Jan. 13 article on Forbes.com, “A digital health acquisition to watch.” The story focused largely on RxAnte’s recent acquisition by Millennium Laboratories in December — which the author described as a “little-known, private equity-backed urine drug testing company” — and the technology it uses to improve patient adherence.
Basically, RxAnte employs predictive analytics to mine patient data, applying variables like past refill history and the number of drugs a patient takes to determine on a scale of 0% to 100% the likelihood that the patient will be compliant with their medications. In July, the company began a pilot with Coventry Health to measure the impact of having doctors and nurses who are signed up for the program, reach out to their patients that RxAnte has identified as at-risk. The results of the study are expected to be released in the spring.
What DSN finds most interesting about the Forbes.com article is not the story itself — DSN covers companies like RxAnte and its partners all the time and has for years. Moreover, it is a strong sign that adherence is becoming part of the public conversation around health reform, including lowered costs and improved outcomes — it’s not just community pharmacy advocates saying it any more. And as the rubber meets the road on health reform this year, and payers demand better results and more transparency, and physicians need help managing the risk of delivering better patient outcomes, DSN expects more of these stories to emerge.
Rob Eder is the editor in chief of The Drug Store News Group, publishers of Drug Store News and DSN Collaborative Care magazines. You can contact him at [email protected].