The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses investing in the pharmacy space. It is authored by our colleagues Trey Andrews and Holly Buckley.
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Pharmacy Investment Trends: Market Consolidation, Non-Traditional Market Participants, and Other Activity – 3 Key Points
By Trey Andrews and Holly Buckley
Vertical consolidation of the pharmacy and drug delivery sector and the entrance of non-traditional players into the pharmacy space will accelerate disruption of the status quo in the drug delivery supply chain in coming years, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 21, 2019.
Experts included Taylor Phelps, Senior Vice President at Raymond James, Billy Suddath, Managing Director, HCIT at Robert W. Baird & Co., and Kathy Contratto, Healthcare Technology Consulting Leader at RSM US LLP (moderator).
Here are three (3) key points from the panel discussion.
1, Vertical Consolidation. In 2018, there was significant consolidation in the pharmacy and drug supply chain sector, with non-traditional combinations between insurers and pharmacy benefit managers taking center stage in the market. Panelists noted that vertical consolidation should be expected to continue and will translate into other large market participants entering the drug supply chain. With respect to non-traditional players entering the pharmacy space, there are mounting concerns that significant disruption could be coming to the drug supply chain—particularly by online pharmacies delivering drugs to patients. Both acquisitions in and offerings via the online pharmacy sector continue to expand and in practice are allowing both traditional and non-traditional drug suppliers to reach customers on a much larger scale. Ultimately, panelists are seeing drug distributors consolidate the drug distribution channel in ways that allow distributors to deliver drugs directly to patients and control the entire drug delivery process.
2. Rise of Specialty Pharmacies. The fastest growing subsector in drug distribution is specialty drugs. Panelists cited data that the specialty drug market will very quickly become greater than fifty percent of annual drug spend in the United States. Currently, oncology drugs are the specialty drug category with the greatest annual spend. Panelists expressed that the prominence of spend focused on oncology drugs could be a factor in investors increased interest in infusion therapy centers, where patient access to oncology drugs has increased in recent years. Orphan drugs—drugs manufactured for small patient populations—continue to be the fastest growing subsector in the drug distribution space. Large-scale specialty pharmacies should continue to be able to take advantage of the speed and prevalence in which orphan drugs are growing on an annual basis. Regional specialty pharmacies, which tend to focus on a specific therapeutic class of drugs, will also be able to capture significant growth in this vertical model. Panelists explained that some hurdles could prevent significant growth for regional specialty pharmacies, including, the ability to obtain consistent access to drugs and to provide value add to patients by developing data to support the patient experience. Panelists also noted that large health systems are beginning to enter into the specialty pharmacy sector to avoid losing refill business to retail pharmacies. In the coming years, it is likely that hospital pharmacies will begin moving out into communities to offer drugs to patients through ancillary pharmacies.
3. Year of the Consumer. 2019 will be the year of the consumer with respect to pharmacies. Consumers continue to demand pricing transparency and increased access via online pharmacies will continue to drive pricing transparency. In combination with pricing transparency for consumers, drug price reductions from manufacturers continue to be a significant focus in politics. Panelists highlighted several congressional hearings and proposed administrative regulatory changes to how rebates are provided as likely to influence overall drug pricing. Panelists noted that pharmacies are continuing to promote medication adherence, for both clinical and economic reasons, which will continue to integrate pharmacies into value-based care models with the intention of reducing hospitalizations. Some pharmacies are currently offering drug adherence tracking and monitoring to assist patients, and the pharmacy sector should continue to expect these types of offerings to be developed and integrated.