In recent years, the specialty pharmacy industry has been defined by rapid growth with considerable entry from new participants.
Factors driving growth include an increase of therapies introduced into the pharmacy benefit class rather than through the medical benefit, a growing number of patients receiving treatment for a wider range of conditions, price inflation caused by limited clinical competitors, and a lack of generic drug options (biosimilars) available to patients.
These factors are fueling projections that dispensing revenues will reach $240 billion by 2021, spurring new entrants to rapidly enter the market.
There are now more than 400 URAC accredited sites — a list that has grown more than 167% over the past three years, driven by a combination of new entrants and existing pharmacies pursuing accreditation.
This growth has attracted companies from across the value chain to move into specialty pharmacy. Among the newly accredited URAC pharmacy locations, we see the emergence of eight archetypes. Most specialty pharmacies today are not standalone but have been acquired or grown by other players. While traditional independent and stand-alone pharmacies continue to play a role, health plans, payers and pharmacy benefit managers represent the most numerous sites.
Nearly 20 health systems and providers have filed for accreditation in the past two years, including generalists and specialized systems such as infusion and cancer centers. More than half of the leading health systems and providers own an in-house specialty pharmacy. In addition, regional and national pharmacy chains have purchased and expanded their specialty programs.
As participants compete to capture market share, size and scale clearly matter as the top five companies control 70% of revenues. These same firms grew nearly 40% faster than the industry average. These top specialty firms’ impressive growth has come in part from acquisition — with CVS Health, OptumRx and Diplomat Pharmacy all executing more than 11 specialty deals in the past three years.
Deals seek not only to consolidate share but also to build capabilities that enable scale and growth. Acquirers are also extending the types of acquisitions beyond the traditional value chain into technology as they not only seek expertise in focused disease states, but also look for technology solutions that are scalable across multiple disease states.
Given how important size is to profitable growth, it is important to review not only traditional M&A activities but also partnership and collaboration opportunities for growth. Walgreens’ joint venture with Prime Therapeutics showcases a distinct approach where two archetypes have come together to create potential fulfillment scale advantages.
Although scale is a clear success factor, not all growth is concentrated in the largest companies. Midtier pharmacies also have opportunities to grow in revenue and share through collaboration and deal activity. There are several examples of independent retail community pharmacies organizing into collaborative networks and smaller specialty pharmacies collaborating to explore more cost-effective ways to provide the services and offerings necessary to be attractive partners for manufacturers. Growing these capabilities is essential to unlocking access to limited-distribution drugs (LDDs).
Deals in 2016 showed a wide range of transaction multiples — spanning 12 to 20 times EV/EBITDA, depending on target size and attractiveness. These high-valuation premiums are a testament to the fierce competition as fewer acquisition targets of scale remain, especially midsize companies with good LDD assets and clinical capabilities.
Over the next year, three acquisitions could fetch between $500 million and $1 billion. Once these targets have been acquired, however, there are few opportunities for consolidation among the midsize and large players.
These major strategic acquisitions enable the fastest growth in market share, provide lucrative LDD contracts and ease entry into various market segments. A well-planned strategy and a clear understanding of a potential target’s value to your business are essential as competitive bids and higher multiples are likely for targets of a certain scale.
A merger of equals or midsize transaction requires meticulous planning and coordination to manage the complexity that comes with integrating multiple systems, processes and organizations. These endeavors require organization-wide focus at the functional leader level with cross-functional touchpoints to coordinate and support synergy realization.
This high degree of consolidation will challenge smaller players’ ability to compete, which is evidenced by the rush of small firms exploring potential suitors. We expect these smaller companies to have a harder time finding buyers at attractive valuations as they simply don’t offer the necessary scale or unique capabilities and assets.
Developing a clear vision of your firm’s value play within the specialty market, with practical steps for how to partner or grow the necessary capabilities, will be essential to win share. Relying on a path of organic growth can make it difficult to build the scale required to compete in the specialty pharmacy market. However, selected tuck-in acquisitions, when complementary to your strategic vision and existing capabilities, can help quickly achieve targeted benefits and pivot to future opportunities.
A swift, well-executed integration into the existing operating model and organization structure is important to realize benefits and retain talent. Aligning the acquirer’s and target’s corporate cultures, values and objectives is crucial for those contemplating a tuck-in, as the target’s organization structure is likely to change unless it is being left alone in a holding company-type model.
When considering potential acquisition and partnership opportunities, it is essential to evaluate such dimensions as LDD relationships, therapeutic focus areas, IT capabilities and clinical platforms, as well as the level of experience in the business development, marketing and sales teams. As you consider the target’s value to your company, LDDs are the most important. Robust capabilities and payer relationships are essential to gain exclusive access to higher-priced therapies.
When considering therapeutic areas of focus, robust drug portfolios in key growth areas such as HIV, oncology, MS and inflammatory are important factors for long-term growth — and it is essential to consider whether the transaction would over-index your portfolio in a specific area.
In addition, IT and clinical platform capabilities can play a vital role in your ability to scale existing business and unlock faster growth in new areas. A well-executed M&A strategy can help realize significant growth ambition. Market timing is crucial.
Rodey Wing is a principal in A.T. Kearney’s Health Practice. He can be contacted at Rodey.Wing@ATKearney.com. Ella Berlyand and Katy Rauen are managers in A.T. Kearney’s Health Practice.