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.