The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on investing in pharmacy businesses. It is authored by our colleagues Tim Loveland and Holly Buckley.
5 Key Points on Retail, Specialty, Compounding, and Other Pharmacy Investment Opportunities
By Tim Loveland and Holly Buckley
The pharmacy industry has been experiencing significant vertical and horizontal integration in recent years with retailers acquiring specialty pharmacies, pharmacy benefit managers (PBMs) acquiring long-term care pharmacies, and wholesalers acquiring pharmacy services administrative organizations (PSAOs) to name a few. Despite evolving regulatory challenges, there remain good opportunities for investment in various pharmacy businesses, according to experts who spoke on a panel at the 15th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 22.
Experts included Helen Figge, Adjuct Professor – Health Analytics, Massachusetts College of Pharmacy and Health Sciences, Paul Heldman, Managing Director, Heldman Simpson Partners, Michael Fieri, President and CEO, Orsini Healthcare, and Royce DuBiner, Associate, McGuireWoods LLP (formerly at Acella Pharmaceuticals).
Here are five key points from the panel discussion:
1. Evolving Regulatory Challenges. D.C. and various states have increased their focus on drug pricing, resulting in overtures by the Food and Drug Administration (FDA) to take a more substantial role in pricing oversight and regulation. The focal point of this discussion has thus far been on rebates and expanded transparency, however, the industry is concerned that regulators may take affirmative steps to “prescribe” permissible profit margins.
2. Dynamic Technologies are Shifting the Industry. The increasing presence and sophistication of technology in the pharmacy industry is resulting in reduced human error. The panelists noted that large conglomerates are taking the lead in innovation relative to technology. However, opportunities abound to innovate in this arena, as variation in state regulation, differentials in negotiating power with manufacturers, and federal government restrictions on direct reimbursement ensure that one system doesn’t fit all needs.
3. Delivery Models are Anticipated to Shape the Industry. Amazon’s market entry is anticipated to have a significant impact on mail order delivery and may further shape logistics and delivery models in other areas of retail pharmacy. The panelists indicated that the application of new logistics and delivery models to areas such as specialty medicine and drug compounding, however, will take much longer and will thus delay the impact of any industry shift on such investments.
4. Best Practices Should Drive Investment in Compounding Pharmacy Space. In the years following the death of more than 70 people from contaminated drugs compounded in a Massachusetts pharmacy, increased federal and state oversight and new regulations have dampened growth in the compounding sector. However, with baby boomers retiring, the estimated $8-$9 billion compounding pharmacy market continues to grow, particularly around Medicare Part D. When approaching a compounding pharmacy in any potential acquisition, investors should conduct careful diligence surrounding sterile compounding practices and other compliance issues.
5. Transition to Biologics and Genetically-Modified Medications May Present Opportunities for Compounding Pharmacies. The panelists discussed that modifiable medications are typically compounded at the manufacturing plant and subsequently sent to pharmacies. An example of such manufacturer-modified medication, Kymriah (approved by the FDA in August 2017), is a biologic therapy for leukemia occurring in pediatrics and young adults in which a patient’s T-cells are collected and re-programmed to identify and destroy mutated cancer cells. Compounding pharmacies are uniquely suited to produce and distribute such biologics, thus disrupting this structural dynamic and driving down costs.