PBMs: A Wall Street View

Las Vegas—As Citi Investment Research’s director of healthcare technology and distribution, George Hill spends most of his days researching and speaking with numerous people in the healthcare industry. Through the conversations and analyses, he has come to a conclusion: change in healthcare takes 5 times longer than in other industries. 

“Behavior change in healthcare is slow,” Mr. Hill said.

Still, there will be major changes in the next few years that will transform healthcare, according to Mr. Hill, who spoke at the PBMI conference. His topics included pharmacy benefit managers (PBMs), specialty pharmacy, biosimilars, and provisions in the Patient Protection and Affordable Care Act (ACA).

When PBMs originated in the late 1970s, they served as claims processors. During the ensuing 20 years, PBMs became involved in mail order pharmacy, network design and management, formulary design, and rebates according to Mr. Hill.

By the late 1990s, when PBMs expanded into specialty distribution and utilization analysis, Mr. Hill said they were scrutinized as “middlemen squeezing money.” Today, Mr. Hill noted that PBMs have evolved into integrated healthcare service providers and supply chain managers and are involved in adherence management, member education and counseling, and retail pharmacy. They negotiate rebates from brand drug manufacturers and discounts from retail pharmacies and manage utilization of specialty products.

Since 2000, there have been several mergers among PBMs, and Mr. Hill said he and his colleagues “expect continued consolidation.” According to data from AIS Health, the leading PBMs in 2000 were Merck-Medco (16% market share as measured by prescriptions), PCS Health Systems (15%), Express Scripts (14%), and Walgreens Health Initiatives (12%).

In 2011, the top PBMs were Medco (18%), CVS Caremark (17%), Argus (13%), and Express Scripts (12%). Last year, Express Scripts acquired Medco, creating the biggest PBM in the United States. In addition, SXC Health Solutions bought Catalyst Health Solutions in 2012. Each had a 4% market share as measured by prescriptions.

By next year, AIS Health estimates Express Scripts will have a 27% market share, followed by CVS Caremark (19%), OptumRx (12%), Argus (11%), and Catamaran (10%). Mr. Hill predicted smaller, undifferentiated PBMs could be in trouble, but they could thrive if they focus on specialty or niches such as workers’ compensation. He added that in the future, a handful of companies could control >90% of prescriptions.

Most PBMs are spending more time focused on the growing accessibility and use of high-cost specialty medications, according to Mr. Hill. For the 12 months ending in April 2012, the number of employees at Citi decreased 8.1% and the number of beneficiaries decreased 7.4%. However, the specialty spending increased 24%.

Based on his conversations with numerous people in the industry, Mr. Hill said most are experiencing increases in specialty costs of at least 15% each year. Although specialty medications only typically account for 1.5% of prescriptions, they represent as much as 20% of drug costs.

“[Specialty] is the hot topic with plan sponsors and consultants we talk with,” Mr. Hill said.

In the United States, the specialty drug market is around $80 billion, according to data from IMS Health that Mr. Hill presented. Approximately $47 billion is covered under the pharmacy benefit, while $33 billion is in the medical benefit.

As of January 2013, Express Scripts (31%) had the largest market share of specialty pharmacy drug spend, followed by CVS Caremark (23%), Walgreens (10%), Diplomat Specialty Pharmacy (2%), and Omnicare (2%). Other retail and specialty pharmacies accounted for the remaining 32%, according the data from Drug Channels Institute.

IMS Health projected the specialty market to increase 17.1% to $93.7 billion in 2012, another 19.0% to $111.5 billion in 2013, and another 22.0% to $136.0 billion in 2014. The drug categories that are expected to see large increases include cancer, multiple sclerosis, and inflammatory conditions. There are also numerous specialty drugs in the late stage pipeline.

“This is not a trend that is going away,” Mr. Hill said.

However, Mr. Hill does see the explosive growth in generic drugs slowing in the coming years. Generics now account for >80% of prescriptions, but Mr. Hill believes the percentage will stay around the same or even decrease.

Citi’s research shows that targeted branded drug sales will decrease from around $90 billion in 2010 to around $10 billion in 2016, while price increases on the remaining branded drugs and new introductions of drugs will mean dollar sales will remain around the same as they are now.

“We think generic utilization has reached its tipping point,” Mr. Hill said.

The ACA, signed into law in March 2010, included an expedited process for biosimilars, which are drugs that are similar to an FDA-approved biologic product. IMS Health predicts biosimilar sales could reach $20 billion, led by insulins, anti-tumor necrosis factor inhibitors, oncology, multiple sclerosis, and erythropoietin.

However, Mr. Hill noted that the high costs of developing biosimilars could dissuade companies from making them. Also, the price of biologics and biosimilars will be similar in the United States, according to Mr. Hill, so far fewer patients will take biosimilars than generics, which are much less expensive than branded drugs. He added that biosimilars will be more popular in other countries, including China, Korea, India, Vietnam, Brazil, and Mexico.

Since the economic conditions worsened in 2008, healthcare spending growth has been relatively flat, which surprised Mr. Hill and many of his colleagues. In the years prior, spending had increased dramatically, and Mr. Hill thought people did not consider healthcare as discretionary spending and would continue filling their prescriptions and visiting doctors.

Although several blockbuster drugs have lost patent protection in the last couple of years, Mr. Hill said the trend will not continue this year or next year. He expects both the number of prescriptions filled and the dollar sales of drugs to increase.

Mr. Hill also cited IMS Health research that indicates mail order pharmacy has stagnated between 17% and 18% for the last few years. However, he said that percentage should increase because 50% of prescriptions could potentially be delivered through the mail.

According to the 2012-13 Takeda prescription drug benefit cost and plan design report, 23% of plans had mandatory mail delivery in their designs in 2012, up from 18% in 2011. Mr. Hill said larger, self-insured plan sponsors have a mandatory mail provision in their designs, which could lead to higher utilization of drugs. At the largest PBMs, Mr. Hill estimated that mail service of generics may account for more than half of their earnings because they make the most money when filling prescriptions at the lowest cost per day.