Industry Outlook: Drug chains adapt to shifting Rx sector

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NEW YORK — Even as U.S. health care expansion brings new opportunities for drug chains, a transformation under way in the pharmacy business is presenting new challenges.

The generic drug wave and the boom in specialty drugs are reshaping the pharmaceuticals sector, industry observers say. That’s pushing chain drug retailers to rethink their traditional prescription business model, as the market increasingly shifts toward low-price generic medications for the masses and expensive specialty medicines for small patient populations.

This new paradigm comes as drug chains continue to sharpen their focus on health care. With 25 million Americans expected to gain health coverage under the Affordable Care Act, pharmacy retailers have been expanding their clinical services and honing front-end offerings to cater to an influx of newly insured patients and aging baby boomers, who seek convenient, affordable health care and products for their daily living needs.

“The chain drug store industry has a pretty good few years ahead of it. Chains are very well positioned and are gaining share versus other dispensing formats,” said Pembroke Consulting president Adam Fein, an expert on drug distribution and the pharmacy supply chain.

Among retail channels, drug chains account for about 60% of dispensed prescriptions, followed by independent pharmacies (20%), food stores (14%) and mail order (7%), according to IMS Health’s latest data.

Yet by 2018, half of prescription sales will come from specialty medications, and drug stores will be battling for share with wholesalers, health plans, hospitals and physicians, a recent analysis by Pembroke’s Drug Channels Institute noted.

“The pharmaceutical industry is rapidly shifting to one that will be dominated by specialty drugs, and many companies are rushing in and starting new pharmacies to capture this opportunity,” Fein explained. “Drug stores are still trying to figure out how they’re going to get that opportunity, whether it’s by creating specialty-focused retail locations, acquiring specialty pharmacies or partnering with an established specialty pharmacy.”

Currently, just three players — Express Scripts Inc., CVS Caremark Corp. and Walgreen Co. — represent 63% of sales from pharmacy-dispensed specialty drugs, according to the Drug Channels Institute.

“That’s where the growth is going to be in the next few years,” said S&P Capital IQ equity analyst Joseph Agnese. “So everybody is positioning themselves for a surge in demand and an increase in revenue that’s expected to be generated nationally within that category.”

Meanwhile, drug chains also must map out their course for riding the generics wave, Fein said. Nearly nine out of 10 scripts are now filled with lower-price, higher-margin generics.

“We have another couple of years of major generic launches coming. That, in general, will be pretty good for pharmacies, because new generic drugs are more profitable than brand-name drugs,” Fein said. “But the generic wave is ending soon. So building a strategy for the ‘post-generic wave future’ is going to be very important.”

Increasingly, payers are seeking the most cost-effective channels for drug dispensing, added Fein. “In the last few years, third-party payers have become much more sensitive to differences in the cost of drugs in different sites of care. We’re seeing this in comparing hospitals versus cancer clinics and in the prices of drugs at different pharmacies. So the growth of preferred pharmacy networks, or limited networks, is going to continue.”

With all health care industry stakeholders trying to manage drug costs better, reimbursement will remain a key concern, Fein and Agnese said. “One aspect of the ACA is to establish new, lower reimbursement rates for Medicaid,” Fein noted. “We estimate that will take about $1.2 billion out of pharmacy industry revenue when those proposals are implemented. And private payers may decide to follow Medicaid’s lead.”

The Centers for Medicare and Medicaid Services (CMS) forecasts U.S. prescription drug spending to rise 5.2% in 2014, including a lift of 2.9 percentage points from the ACA. Key growth drivers, CMS said, include increased prescription drug use among people who are newly insured or transitioned to more generous health plans under the ACA. From 2015 to 2022, rising drug prices and expected increases in utilization stand to raise average annual growth in prescription drug expendituresto 6.5% per year, CMS projects.

“A near-term peak in benefits from the sale of generic drugs occurred in mid-2013, and we expect benefits to reaccelerate in the second half of 2014 as additional branded drugs lose patent protection,” Agnese said in a research note. “Additionally, we see in-store health clinic offerings helping drive store traffic and prescription and front-end sales as services are expanded.”

In the front end, drug stores saw the biggest gain in dollar sales of consumer packaged goods (CPG) in 2013, with 1.8% growth, followed by supermarkets (1.1%) and convenience stores (0.7%), according to IRI. The overall food, drug and mass retail market grew CPG sales 1.6% last year. Unit sales were essentially flat for all channels.

“Reflecting convenient locations close to consumers’ homes, retail drug stores are better positioned to take market share from nontraditional competitors,” Agnese observed. “Expansion of loyalty card programs will help support increased basket sizes and traffic, reflecting a more personal shopping experience for customers. Additionally, loyalty programs will help support retailer margins due to improved marketing and promotional spend efficiency.”

In its 2014 Predictions for the Retail Sector report, Kantar Retail said drug chains will stay competitive by leveraging their thriving loyalty programs.

“In 2014, expect CVS, Walgreens and Rite Aid to emphasize value through loyalty and services. As millions of shoppers enter the health care system, drug channel retailers will need to accurately communicate value to the newly insured or risk losing them to another channel,” the report stated.

To that end, the national drug chains will offer rewards to compete at a basket level instead of individual item level; step up personalization to tailor promotions and assortment to specific shoppers or customer segments; and add value beyond price, mainly via their pharmacists.

“Drug retailers’ overall health care expertise will give them an opportunity to create value through health services, education and one-on-one guidance,” Kantar said.

*To read the full State of the Industry 2014 report, including lists of the top chains, economic analysis, drug chain profiles, interviews with chain drug retailing leaders, and industry trend articles, please see the April 28, 2014, print issue of Chain Drug Review.



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