PharmExec Blog

Generics Win in an Express Scripts/Medco deal

As a preferred generics supplier to Medco’s mail-order business, Novartis’ Sandoz division, for one, should be waiting with bated breath – and champagne at the ready – for an FTC approval of Express Scripts’ proposed $29.1 billion acquisition of Medco, which would combine two of the three largest pharmacy benefits managers (PBM), according to industry sources.

With the “largest and most significant” mail-order business in the industry, according to Shaun Urban, president of Ogilvy CommonHealth payer marketing, and Ogilvy Healthworld payer marketing, Medco brings a high-margin platform to Express Scripts, a company with expertise in driving generics utilization. Patients using mail-order pharmacies are primarily suffering from chronic conditions, and need maintenance medications; by offering co-pay rebates to patients for a 90-day supply of a medication, the companies incentivize mail order use among certain populations.

That doesn’t sit well with bricks and mortar pharmacies, which sign contracts with PBMs often out of economic necessity, given the breadth of a PBM’s patient base. “The relationship [between PBMs and retail pharmacies] is not a fair relationship,” says John Norton, a spokesperson for the National community Pharmacists Association. “What PBMs generally do is steer patients into their mail-order pharmacies through mandates or incentives,” such as restricting a retail pharmacy’s ability to provide a 90-day supply, or offering a three-month drug quantity for a two-month co-pay price, says Norton. On top of that, PBMs nickel and dime pharmacies through contractual agreements, which establish drug reimbursement rates, and they (PBMS) also plague pharmacies with financial audits, says Norton. “They game the system to their advantage, and that’s the dynamic we’re faced with – this merger will create a bigger monster, who’s able to push the model in a more aggressive fashion.” Walgreen’s announced in June that it would not renew its contract with Express Scripts for 2012, despite an expected $5.3 billion in drug sales the pharmacy expects to realize through the relationship in 2011.

Indeed, a combined Express Scripts/Medco entity would “negotiate downward,” based on its size, for prescription filling fees and reimbursement at the pharmacy level, but also in discounts and rebate contracts with drug manufacturers, says Urban. Despite that kind of pricing leverage, Medco has a history of being “a little more pharma friendly” than Express Scripts or CVS Caremark, the third major PBM player. Medco “engages with pharma in areas like disease management programs, wellness and prevention initiatives, partnering on adherence interventions and programs,” on a fee-for-service basis, says Urban. On the specialty pharmacy side – Medco owns Accredo, the market leader, and Express Scripts owns CuraScript – Medco helps pharma with “injection training through their nurse educator resources,” and that kind of historic relationship with pharma “now may trickle over into the newly-formed Express Scripts/Medco organization,” says Urban.

Although Express Scripts led the industry in brand drug utilization when it introduced its proprietary “bid grid” system, letting drug manufacturers bid on the rebates they will provide to PBMs, the company also demonstrated an ability to drive generic utilization, a side effect of a more restrictive formulary system. The proposed Medco acquisition would potentially increase generic market share against brands, since Express Scripts has “a history among the three big PBMs of being able to most effectively drive generics utilization, and now with that reputation and demonstrated capability, and unequivocally having the largest mail-order piece, the risk of greater generic utilization is quite significant,” says Urban, adding that PBM margins on generic drugs are “much greater” than on brand drugs.

The deal, if it survives FTC scrutiny – Norton’s association, as well as the National Association of Chain Drug stores, will do everything thing they can to stop it – will offer yet another reason for generics manufacturers to raise a toast.

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4 Comments

  1. Posted July 27, 2011 at 11:41 am | Permalink

    Generic manufacturers will be toasting this deal? Really?!?

    When CVS and Caremark came together, they claimed more than $700 million in total “synergies” from generic drug purchasing—both sheer volume as well as contract comparisons between suppliers.

    Express Scripts and Medco will have an estimated 49% of the mail order market. They will leverage their buying power against generic manufacturers. See ESRX-MHS: Strategic and Market Analysis for more details and data.

    I seriously doubt the champagne will be flowing. More likely to be tears as margins drop.

    Adam

  2. Posted July 27, 2011 at 12:05 pm | Permalink

    Thanks for your comment Adam. But won’t margins on generics, particularly in the mail-order business, be a lot higher than margins on brand drugs, which could in turn provoke an even greater utilization of generics within the combined Express Scripts/Medco entity? Given that the generics model (from a manufacturing standpoint) is all about quantity, lower margins but higher volume, won’t preferred generics manufacturers like Sandoz stand to gain more than they lose in contractual rebates? Medco’s generics mail-order prescription volumes increased during the second quarter of 2011 by 6% – to 17.8 million – while branded mail-order prescription volumes decreased by 7.5% to 9.9 million, according to a Zacks Equity Research report.

  3. John
    Posted July 27, 2011 at 12:09 pm | Permalink

    Lets not hope and pray for the FTC to protect the common person. The merger represents a huge consolidation by corporate powers that will pressure generic manufacturers of low cost drugs to stop selling the same drug direct to a COSTCO, WALGREENS or WALMART and made available to the consumer at a retail cost LOWER than the price the consumer is charged by a MEDCO/EXPRESS PBM. Did you know that the cost of many generics at retail prices is 300% LESS then the price of paying your co-pay and receiving the same medication?

    This scam of mergers between PBM’s is a calculated strategy to prevent free and open competition to distribution channels by the larger PBM’s. I may be off a little on my charges, but there is something sinister going on here.

  4. Posted July 28, 2011 at 7:23 am | Permalink

    Ben,

    Right now, generic manufacturers sell 90%+ of their products in the U.S. to 9 major companies–the big self-warehousing chains and mail order pharmacies (CVS Caremark, WAG, RAD, ESRX, MHS, WMT) plus the big 3 wholesalers (ABC, CAH, MCK). Shrinking this to 8 customers will increase bargaining power, reduce generic manufacturer margins, and hasten the ongoing consolidation of generic manufacturers.

    So, I think you are suggesting that the biggest generic manufacturers might gain volume, but at the cost of margin. But when two big customers consolidate, the supplier doesn’t pop the champagne. Check out my case study of Prasco following the CVS Caremark merger on Drug Channels: CVS’ Channel Power.

    Not sure what you mean about profits. PBMs earn more than 50% of their EBITDA per script from dispensing generics at mail despite mail being less than 20% of total equiv scripts. But that doesn’t mean the business is more profitable for the generic manufacturer.

    Adam

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