Prescription for profits

When Pharmacy Benefit Managers (PBMs) enter new markets, the impact reverberates through the entire pharmaceutical supply chain. PBMs are third-party companies that manage prescription drug benefits on behalf of health insurers, employers and other payers. Recently, some PBMs launched new businesses that co-manufacture biosimilar products, creating copies of approved biologics.

 

For example, when the branded version of Humira lost patent protection, PBMs swiftly removed the product from its formularies and replaced it with its own co-manufactured biosimilar. This allows PBMs to both lower costs for members and capture meaningful new sources of profit. This has been fruitful for certain PBMs, with one capturing more than 20% market share of the Humira market. We expect this model will be used for drugs like Stelara in the near term.

 

As PBMs begin to control more of the economics and the flow of drugs within the pharmacy benefit, drug distributors have responded by acquiring specialty businesses where drug spend flows through the medical benefit.  For example, a large distributor recently announced a controlling interest in a physician-owned community oncology practice based in Florida. Another distributor acquired a management services organization (MSO) of retina specialists. Drug distributors are making these acquisitions to bolster exposure to specialty and to offset recent decisions by PBMs to capture more biosimilar market share within the pharmacy benefit. For reference, when PBMs co-manufacture biosimilars, the distributor’s revenue stream is either reduced or eliminated. While distributors make relatively low margins on these drugs, the evolution of the channel is relevant.

 

Overall, we view the PBMs’ decision to enter the biosimilar market as a positive one and expect it can help offset other areas of the PBM model where pressure exists. We also view drug distributor’s M&A strategy in the specialty clinic space positively, as it can offset the aforementioned PBM headwinds. These strategies allow both stakeholders to grow as demand for specialty continues. 

 

Another recent theme in drug distribution is PBM reimbursement changes. A major pharmacy chain introduced a new pharmacy reimbursement model at its 2023 investor day, which fundamentally changes how PBMs pay network pharmacies. The new model requires PBMs to pay a pharmacy based on a transparent price tied closely to the pharmacy’s actual acquisition price. The introduction of this model replaces an outdated model where pharmacies would often lose money on branded prescriptions.

 

This model could be slightly positive for retail pharmacies and, at a minimum, reduces the per-script volatility that retail pharmacies face related to reimbursement. On the other hand, more predictable reimbursement by PBMs to retail pharmacies could make it more difficult for companies offering coupons for branded drug savings. There are business models that arbitrage PBM network rates. However, the introduction of new PBM-to-pharmacy reimbursement models may restrict the ability for those models to arbitrage PBM network rates over time. Overall, major changes made by PBMs have first and second derivative consequences that impact distributors, pharmacies and other stakeholders. This will continue to create opportunities and threats for all involved. Generally, we feel that the more vertically integrated the PBMs are, the more insulated they are from the various structural threats.