Supply Chain Integration or Bust… or Both

The supply chain for pharmaceuticals is becoming more integrated and the recent formation of three mega supply-chain purchasing groups (Walgreen’s-AllianceBoots-AmerisourceBergen-Rite-Aid, McKesson-Celesio, CVS-Cardinal) acts as a harbinger of a shift in the balance of power between wholesalers, chains, generic pharmaceutical companies and branded pharmaceutical companies, particularly in the U.S. and Europe. These shifts accompany the slower but just as inexorable consolidation by provider networks and insurers in the U.S.

The first indicator of this trend appears to be the deflationary effects on drugs where the heft of buying groups exerts leverage. In parallel there’s an important but more modest impact among sectors of the market where that leverage doesn’t matter.

Some generic companies have shifted to focus on very low-volume markets where lack of competition enables them to resist pressures from larger buying groups. Rather than attempting to balance their portfolios and manage profitability through efficiency and scale, these operations focus on high-value, low-volume markets where they can specialize.

Generally there’s no specific harm in any of this; however, where the drugs in question are essential medicines the consequences make headlines. Recent experience suggests that the high profile discussion of generic drug pricing is a natural consequence of the consolidation we’ve seen to date.

The distinction appears to be that low-volume markets may be too small to attract competitors unless or until prices increase as a result of market dynamics. While the large purchasing groups can drive down prices in highly competitive markets, they lack the leverage to truly control prices in low-volume sectors.

For payers, the potential to deal with larger and more efficient supply chains is seen as a major benefit. The integration of major wholesalers with major pharmacy chains on both sides of the Atlantic is bringing significant efficiencies.

The next horizon of mergers or alliances will likely be smaller and independent pharmacies, along with a separate wave of specialty mail-order services being acquired by the “big-buying” groups (or by insurers).

Increasingly insurers are managing preferred pharmacy networks, or specialty mail-order services to ensure protocols and formularies are managed as intended. These issues impact the intersection of brands and generics where maximizing generic use, or the use of a preferred brand or formulary protocol are essential to driving financial and clinical outcomes.

Specifically, generic medicines will continue to provide the vast majority of the prescription drug usage in the U.S., rising from 88 percent to 91-92 percent of all prescriptions dispensed over the next five years.

We estimate that spending on medicines in the U.S. will reach $560-590 billion, a 34 percent increase in spending over 2015 on an invoice price basis. While invoice price growth – which does not reflect discounts and rebates received by payers – is expected to continue at historic levels through 2020,  net price trends for protected brands will remain constrained by payers and competition, resulting in 5-7 percent annual price increases.

The volume and non-discounted spending on these medicines provide important insights into the importance of the shifting stakeholder landscape as payers seek to reduce cost growth while manufacturers scrabble for space on shrinking icebergs.

The part of the market that is open to consolidated-buying influence is a large part of the U.S. market volume and is growing very slowly. Conversely, the part of the market that is insulated from such influence is small but growing much more rapidly and is the part of the market that has driven much of the recent discussion and debate. 

It’s not surprising then that consolidation in the payer, provider and distribution spaces is following the wave of generic consolidation in the 2000’s.

What might be surprising, especially in light of the market trends, is that consolidation appears to be more of a symptom rather than a cure.

Michael Kleinrock is Research Director at IMS Institute for Healthcare Informatics.