Three companies dominate this key piece of the pharmaceutical supply chain. The largest, San Francisco-based McKesson (MCK ), reported almost $138 billion in fiscal 2014 revenue. The companies earn slim margins from their massive revenue, however. And those thin profits have come under harsh pressure in recent years due to shifting trends in health care.

AmerisourceBergen (ABC), McKesson and Cardinal Health (CAH ) have been able to withstand this squeeze largely because they’ve combined their purchasing power with major pharmacy chains Walgreen Boots Alliance (WBA ), Rite-Aid (RAD ) and CVS Health (CVS).

Source:  www.fda.gov

The three dominant drug distributors control more than 85% of the market. Their stocks have trended higher the past five years, with AmerisourceBergen up 29%, McKesson up 27% and Cardinal Health ahead 20% the past 12 months.

Challenges And Benefits

The drug wholesaler-drugstore partnerships unite the two middlemen in the pharmaceutical supply chain. Their common bond is in wanting to defend the spread between the wholesale price the manufacturer charges and the retail price that the insurer lets pharmacies bill patients.

That spread can be paper-thin for branded drugs, and often substantially wider for generics. The catalyst for the distributor/pharmacy chain deals: “The payers in the U.S. have been looking at every single option to lower prices,” said Vishnu Lekraj, health care service analyst at Morningstar.

This price pressure, applied by the pharmacy benefit manager side, leverages the PBMs’ market power to control prices on behalf of insurers, Lekraj said.

The AmerisourceBergen-Walgreen, Cardinal Health-CVS and McKesson-Rite Aid ventures have each elevated their generics purchasing to $10 billion to $12 billion a year, estimates FBR Capital Markets data.

By joining together, drug wholesalers and drugstores can better withstand the profit squeeze and pass most of the pricing pressure onto generic drug manufacturers, Lekraj says. That advantage until recently has remained largely theoretical, although the partnerships have begun to bear fruit.

Rite-Aid’s latest quarterly results demonstrate the value provided by its deal struck last February to have McKesson purchase its generic drugs and deliver them directly to stores, notes Fein. The pharmacy chain’s total inventories were $255 million below year-ago levels in the third quarter, a boon to working capital and profit margins.

“If Rite Aid keeps posting such positive results, expect other large pharmacy buyers to give in … and begin sourcing generics through the large wholesalers,” he wrote on his Drug Channels blog.

One wrinkle to McKesson’s partnership with Rite Aid: the distributor’s plans to use its own NorthStar generic manufacturing arm for some generic production, providing more pressure on generic-drug makers to make concessions on price. McKesson suppliesWal-Mart (WMT) with branded drugs, but the retailing giant currently buys its own generics.

The Wholesale Story

Branded drugmakers have long used the wholesalers, rather than sell directly to big drugstore chains. Those branded drugs provide the Big Three with lots of revenue, but at margins of only around 1%.

Generics, though much lower priced, offer much higher margin opportunities. The recent wave of branded drugs coming off patent was bad news for manufacturers but a net positive for distributors and pharmacies, even though it dampens revenue growth. That trend is set to continue for the next few years.

Some of the big potential generic launches being eyed within the next couple of years include Nexium (acid reflux), Copaxone (multiple sclerosis), Abilify (anti-depressant), Enbrel ( rheumatoid arthritis) and Advair (asthma).

Aggressive Partnering

AmerisourceBergen has been the pace-setter in the industry. It kicked off the drugstore-chain partnering trend, striking a deal with Walgreen in March 2013. Last week it pushed into animal health territory, saying it would buyMWI Veterinary Supply (MWIV) for $2.5 billion.

The game changer was its deal with Walgreen. That relationship, including brand and generic drug distribution, fueled a 29.1% jump in AmerisourceBergen’s revenue from the prior year to $31.6 billion in the September quarter and a 30.1% rise in operating earnings to $423.8 million, or 1.34% of revenue.

The deal with Walgreen also provided scale in Europe for the drug wholesaler via Walgreen’s combination with Alliance Boots, the biggest U.K.-based pharmacy. Walgreen has since tapped its option to acquire an equity stake in AmerisourceBergen.

As of last August, Walgreen had bought 11.5 million shares of AmerisourceBergen on the open market, giving it a stake of less than 5%, though it has an option to acquire 23%. McKesson followed suit, strengthening its generic-buying clout when it acquired a controlling stake in German drug distributor Celesio in January 2014 for $5.4 billion.

While analysts have awaited a similar move into Europe by Cardinal Health, the company has instead directed its international push into China. That piece of the business has grown from $1 billion a year to $2.6 billion since 2011. Sales in China are growing more than 30% a year, and account for over 10% of Cardinal Health’s total revenue.

Specialty Segment: On The Rise

Amerisource has been the leader in distributing specialty drugs, which is the fastest-growing segment of the industry. The company’s oral oncology, opthalmology and plasma revenue grew 11% to nearly $20 billion last year. Cardinal Health’s specialty segment has grown from $1 billion to $5 billion the past four years.

Because these high-priced drugs often require special handling and delivery mechanisms, and can be geared to smaller patient pools, they aren’t normally distributed through the standard drugstore channels. Specialty pharmacies sometimes source directly from the manufacturer, bypassing the distributors.

Read more: http://www.nasdaq.com/article/drug-distributors-build-strength-in-an-era-of-change-cm433710#ixzz3P5ku5S1c

When the pharmacy told me how much the name-brand version of my daughter’s albuterol inhaler would cost, I inquired about the generic. I used to work in a traditional retail pharmacy, and remembered being able to obtain the generic version for about $2. The manager informed me that there was no longer a generic albuterol inhaler available.

A few years ago, pharmaceutical companies successfully lobbied the Food and Drug Administration ( to ban traditional inhalers over fears that the chlorofluorocarbon (CFC) used as a propellant was harmful to the ozone layer. The patents on those traditional inhalers had expired, so generic versions were readily available. The ban enabled drug makers to use new propellants, which could justify a new patent for the same drug. As a result, the price went from a few dollars per prescription to $60.

Source:  www.uspharmacist.com

A new report in the New England Journal of Medicine highlights how big the problem of high-cost generic drugs is getting. Generic drugs to treat everything from intestinal parasites to high blood pressure to depression have increased 570 percent, 2,800 percent and 5,200 percent, respectively — sometimes in as little as one year.

In 2012, the McKesson Corporation paid out $151 million to 29 states over allegations that the company artificially raised Medicaid drug prices. McKesson is the country’s largest drug wholesaler, and it was alleged that they artificially drove up prices on 1,400 drugs from 2001 to 2009.

Going forward, it looks as if things will only get worse. Bryan Birch, the chief executive of Truveris, which analyzes prescription drug prices, recently spoke to Medscape Medical News about the “unprecedented levels of generic price increases” over the last two years. “The folks who benefit from it are the manufacturers of generic drugs, the wholesalers in the United States, and the…pharmacy benefits managers,” Birch said, adding that the costs are eventually passed on to consumers.

When there is a legitimate shortage of generic drugs, the FDA can usually work to expedite companies’ ability to produce the drug, or even deal with overseas manufacturers to import more of the drug. Compounding, when a pharmacist creates a customized medication on a case-by-case basis, is another alternative for patients who need drugs that are hard to find commercially.

But the FDA cannot do the same with a single manufacturer of a drug, according to the NEJM report. “U.S. antitrust laws protect consumers only from anticompetitive strategies such as price fixing among competitors,” the report notes. “Manufacturers of generic drugs that legally obtain a market monopoly are free to unilaterally raise the prices of their products.”

I’m not begrudging pharmaceutical companies making a profit. These companies provide drugs that save lives, and they should be able to make money doing it. But these companies have become adept at extending patents, which are supposed to expire after 20 years. And as long as a company holds a monopoly, it can charge whatever it wants for a drug.

It’s assumed that drug companies have to charge high prices to fund research and development of new drugs; however, 84 percent of worldwide funding for drug discovery research comes from government and public sources. And pharmaceutical companies spend 19 times more on marketing than they do on research.

The FDA and the Federal Trade Commission, both of which oversee the pharmaceutical industry, need to work together to promote competition and remove incentives for pharmaceutical companies to monopolize. The American people are used to having a choice when they buy goods and services, from cable TV to razor blades to air travel.

One would expect that in this era of choice, there would be similar competition for the over $300 billion dollars Americans spend every year on prescription drugs. But the big pharmaceutical companies are allowed to obtain and keep monopolies, preventing the free market from operating as it should.

by Bill Goble, PharmD, a licensed pharmacist and the general manager of Brown’s Compounding Center in Englewood.

If a PBM expects to gain your trust and manage your pharmacy benefit, it is only reasonable they sign a fiduciary contract which reflects their claims to transparency. If the PBM agrees to your terms, it only follows that your plan goals are memorialized in a rock solid contract.

RFPs do not bind a PBM to their guarantees, fiduciary contracts do. You must eliminate the RFP process and instead draft an airtight fiduciary contract and put it out for bid. A contract is not a legal agreement until it is signed by all parties involved.  Consider this;

• Many times financial guarantees are not guarantees unless the client has spelled them out in a fiduciary contract. 
• All rebates may not be paid unless a fiduciary contract is signed.
• Full audit provisions generally will not be honored unless you have a signed fiduciary contract and a RFP is not a contract. 

According to America’s Health Insurance Plans, a national trade association, health care spending nationwide rose at its fastest pace in 10 years in the fourth quarter of 2013. The main reasons are the rising costs of medical services such as hospital care, costly new drugs and medical technologies, and the impact of hospitals and physician offices consolidating, leaving less competition.

One of these reasons may surprise employers — the availability of new and costly prescription drugs, also known as specialty drugs.

Specialty drugs are used to treat complex conditions such as cancer, cystic fibrosis, hemophilia, multiple sclerosis or psoriasis. You may have seen advertisements or news reports about the drugs Humira for treating inflammatory conditions such as rheumatoid arthritis or Crohn’s disease, and Harvoni for treating hepatitis C.

Specialty drugs are usually injected or infused, but also may be taken orally. And many of these drugs show great results in treating complex, chronic conditions and allowing patients to live fuller, longer lives.

Specialty drugs are used to treat serious conditions and can be complex to manufacture, the cost can be significant. The 2014 EMD Serono Specialty Digest reports that 3.6 percent of patients who use specialty drugs account for 25 percent of health care costs.

Data from Express Scripts, a national pharmacy benefits manager, shows the average cost of filling a specialty drug prescription for one month is $1,800 compared to $54 for other prescription drugs. CVS Caremark also projects that the costs of the entire specialty drug market will reach $402 billion by 2020. Thanks to advanced research, more than 900 specialty drugs are in various stages of development.

Knowing that an employee who has a complex medical condition such as cancer now has access to new and better treatments is certainly good news. But employers must understand that when health care costs increase for employees, so do health insurance premiums. The National Institute of Health Care Management Foundation attributes 97 percent of the rise in premium spending between 2006 and 2010 to increased spending by insurers to cover the actual health care costs of members.

We encourage employers to be aware of the drivers of health care costs and health insurance premiums and to work with their insurer to help manage those costs. [Publisher Comment:  work with your insurer to better manage rising prescription drug costs, but utilize the services of a PBM expert, internal or external, to hold the insurer/TPA accountable.  Insurers will surely take advantage of gaps in your knowledge in order to maintain their profit.]

For example, many health insurers implement utilization management procedures to help ensure that members receive coverage for the right medications to treat the right conditions. Many insurers work with employers to offer workers access to lower cost generic drugs when appropriate, and most also offer case and disease management programs to help chronically ill workers stay on track with self-management.

At Blue Cross of Northeastern Pennsylvania, we utilize a team of clinical professionals, including pharmacists, doctors and nurses, to conduct reviews of specialty drug use to ensure that our members have coverage for appropriate medications to treat their complex conditions. This review also helps ensure that specialty drug treatment is working effectively and is helping the member get better.

As 2014 comes to an end, employers should take the time to review their health care costs and work with their insurer to find ways to better manage those costs, including understanding two of the biggest drivers of health care costs — specialty and prescription drugs.

By Nina M. Taggart, M.D.

Source: Pembroke Consulting

For decades, generic prescription drugs have been considered the bargains of the pharmaceutical world. An industry group says Americans have saved more than $1.5 trillion in the past 10 years on brand name drugs, thanks to generics. But in recent months, prices on some of the most popular drugs have soared, and experts are trying to figure out why.

Buying generic prescription drugs feels like trading on the stock market for Cory Minnick.
“Just seems to snowball every month, it gets worse and worse. You see stuff you used to buy for pennies for a hundred, and now you’re paying $70 to $80 just to get it in,” he says.

Minnick, pharmacy manager at Royer’s on Sharp Avenue in Ephrata, Lancaster County, says he’s constantly checking with his three wholesalers to see what it’s going to cost to get a drug in the hands of a customer.

The popular antibiotic doxycycline is used to treat common problems like urinary tract infections and pneumonia. 

It cost a mere $20 for a 500 pill supply in October 2013. Yet this past April, its price had hit more than $1,800. Don’t do the math on the percentage increase, it could get ugly.

By the way, doxycycline has been on the market for 40 plus years, and the formula hasn’t changed. So what’s going on here?

Drugs have “life cycles”

“These recent drug shortage and price hikes illustrate a third stage of the life cycle of a drug that we haven’t really paid much attention to yet,” says Jeremy Greene, a Johns Hopkins professor and author of Generics: the Unbranding of Modern Medicine.

“What happens when a drug is no longer particularly attractive to generic manufacturers? Or when the interests of the generic marketplace continue to go towards the second pipeline, the pipeline of drugs that are going off patent now and the drugs that have been off for patents for a while are no longer particularly attractive and get neglected,” he says.

Greene says drugs used to have two cycles – the brand name stage, where the patent protects the work done by companies like Pfizer, and helps them recoup their investment in research.

But then the patent expires, and all manufacturers have a shot to make and sell the drug, ideally, at a much lower cost.

That what Ralph Neas, President of the Generic Pharmaceutical Association is focusing on.
“It may go up 50% or a 100%, whatever it might but you’re still in the pennies and sometimes you get up to a couple dollars. A very few number are more than that,” says Neas.

Here’s what we know: In 2010, the average cost of one of the 50 most prescribed generics was $13. In 2013, it hit $62. That data comes from Catamaran, which manages pharmacy benefits for 32 million people.

Why are prices rising?

A lot of theories are floating around, but the most prominent ones deal with raw material shortages and less competition.  To continue reading click here.

Written by Ben Allen