In the vast ocean that is U.S. healthcare, there may be no business that has such a combination of medical knowledge, patient interaction and small-business entrepreneurship as independent pharmacies. They deliver high-tech pharmaceuticals; they deal with onerous Medicare regulations; they have more contact with patients than doctors do; and yet they worry about keeping sidewalks and windows of their storefronts clean and stocking the right seasonal candies.
The pharma industry, broadly speaking, spends relatively little time focused on independent pharmacies, simply because they are so dispersed and so numerous; the Big Three wholesalers have addressed this by rolling up thousands of independent pharmacies into semi-franchises or buying networks for pharmaceuticals. But in the coming world of “health management” and retail health clinics, they might pay a vital role in delivering healthcare and maintaining pharmaceutical market shares.
According to IMS Health’s analysis of pharmaceutical distribution channels, independent pharmacies rank No. 3 in terms of dollar volume (Fig. 1), but a strong No. 2 in terms of scrips processed. A main reason for this is the greater proportion of generic meds that independent pharmacies dispense, which greatly distorts the sales volume figures. If current trends in high-value, specialty pharmaceuticals continue, clinics, currently No. 4 on the sales list, will pass independents in 2010 or 2011, as that class of therapeutics—which tend to go into clinical settings—is growing much faster than pharmaceuticals overall.
Another hallmark of independent pharmacies is their concentration on pharmaceutical sales. Where chain drug stores have about 72% of their store sales from prescriptions, independents have 90%, according to the 2008 NACDS Chain Pharmacy Industry Profile.
In its 2008 NCPA Digest (sponsored by Cardinal Health), the National Community Pharmacists Assn. (Alexandria, VA) reports that average store sales have declined for two years running, reaching $3.6 million per store in 2007 (Fig. 2). Additionally, 19.2% of member pharmacies operated at a loss in 2007, a figure that is actually down from preceding recent years. Those economic factors are one of the reasons that, according to NCPA, 1,100 pharmacies closed their doors in 2006.
NCPA counts 23,218 independent pharmacies, many of which are members of its association. According to NACDS data (which totes up independents and other pharmacies slightly differently than NCPA does), the number of independent stores has been declining year by year since 2000, reaching 16,888 in 2007. (Chain stores, on the other hand, have been growing by several hundred per year over much of that time frame; the 2007 number is 22,209 chain stores.)
The year 2006 was when independents took a hit from the Medicare Part D program which, while increasing the number of Medicare patients who received government-subsidized pharmaceuticals, also damaged the reimbursement process, leading to cash-flow problems that pushed less-well-capitalized pharmacies over the brink.
Currently, the independents (like all retail pharmacies) are worried about the push by CMS to AMP (Average Manufacturers Price) for Medicare reimbursement. After attempting to establish the reimbursement system, and then setting AMP prices that were in some cases below the acquisition prices that pharmacies actually pay, NACDS and others sued CMS, winning a stay of the AMP reimbursement system.
NCPA wants to go one step farther: to establish a legal buying network for themselves, that would provide purchasing power comparable to the big PBMs and retail chains. In the last Congress, two bills (S.2161 and H.R. 971) were introduced to create an anti-trust exemption for independents. The bills are expected to be re-introduced in the new Congress, according to John Norton, a spokesman for NCPA. NCPA, along with other pharmacy groups, met with the Obama Administration transition team in mid-December, and has a long list of potential enhancements of the role of independent pharmacy that it hopes to achieve.
A communication conduit
Independent pharmacies, playing to a strength they developed long before the encroachment by chain and mail-in pharmacies, are proving themselves a key link in the pharma value chain: two-way conduit between drug maker and drug taker.
Their greatest potential—and the most important service they can provide to drug makers—lies in improving patient adherence to drug regimens, in counseling, and in monitoring patient health, and then feeding back data to manufacturers on the results of these efforts.
Such potential, as it is now being developed, is providing independents a competitive differentiator with large drug store chains and mail order pharmacies, as well as retail outlets and supermarkets.
“The patient relationship that the independent pharmacist has and is trying to maintain is something that pharmaceutical manufacturers cherish,” says Brian W. Huckle RPh, executive director at Pharmacy First, a national network of retail community pharmacies that provides both business services and purchasing programs on par with that available to big chains and retailers.
“The chains can’t do that,” he adds. “Manufacturers have spent years and millions of dollars trying to buy their way into the chain industry when in reality they’ve got nothing. The chains don’t have what the independents have.”
What manufacturers want
Independent pharmacies are “reflective of what manufacturers want,” says Timothy J. Canning, president of Health Mart, a McKesson Corp. franchise unit for independent pharmacies. “Their hallmark is patient relationships. It’s more critical today that patients are compliant with their drug regimens.”
Mining the independent pharmacists’ up-close patient relationships for information useful to drug makers and pharmacists alike has been a challenge. But the efforts of such industry groups as Pharmacy First and of the Big Three drug wholesalers—who are betting heavily on the independent pharmacy channel—are beginning to bear fruit.
“We create programs for independent pharmacies around what manufacturers want—compliance and persistence—via reminder letters, face-to-face counseling for patients, and more,” says Canning. “We also work with some manufacturers around disease states and wellness.”
AmerisourceBergen group VP for program management in the retail division Jim Grigg describes Healthy Connection, one of the tools that ABC provides to its independent pharmacy customers, which helps them communicate regarding a particular disease state, for example. “It’s what the suppliers are looking for,” he says. “We think we’ve carved a niche with the independent pharmacies.”
Things weren’t always so cozy between big drug wholesalers and independent pharmacies. “The wholesaler/independent pharmacy relationship has become more of a partnership than it was eight to ten years ago, when it was probably perceived as being more adversarial,” says Jay Williams, VP for marketing management at Cardinal Health’s retail pharmacy business.
Williams’s colleague, marketing director Rob Schlissberg, notes that independent pharmacies, as customers of wholesalers, have changed in multiple ways over the past few years. “Margins are down and they need to generate new revenues to compensate. Independents are also looking for ways to improve efficiency. They need to make up the dollars they’ve been losing over the past few years, and they need to make sure they’re being reimbursed every penny they’re owed.”
Reimbursements have becomes a particular challenge for resource-stretched independents, especially given rules surrounding Medicare payments. “For independents, the biggest pressure is from government. It holds Medicare reimbursements; sometimes for 30 or 45 days,” says Grigg. “There are challenges that we deal with on a regular basis. The Good Neighbor franchise program introduced in July provides coaching for pharmacies. We become expert eyes on their business, for financial as well as program matters,” he says.
McKesson’s AccessHealth managed care division, which provides third-party contracting, holds some 9,000 contracts with more than 70 pharmacy benefit managers (PBM)s and a portfolio of Medicare Part D plans.
Williams of Cardinal Health also puts reimbursement among the top needs expressed by independents. Focus groups have indicated that their evolving needs fall into four areas: reimbursement, streamlining operations, creating alternative revenue streams, and increasing patient market share.
“Because 95% to 96% of some retail independents’ business is in prescriptions, they need to make sure they’re collecting every dollar of reimbursement they’re owed, especially in a world where they’re competing with WalMart’s $4 prescriptions, Walgreen’s prescription club and other retail pharmacy giants who’ve followed suit,” Williams says. “We help with negotiations with PBMs, and on the operations side, so they can still spend time with their customers.”
Drug makers—like all businesses today—are closely gauging the money they spend. “They haven’t done a good job of getting a payback on their marketing expenditures,” says Huckle of Pharmacy First. He says he sees independents as best positioned to provide manufacturers a predictable return from their marketing investments because they are more flexible in their relationships than their retail-drug competitors.
One example he cites is Merck’s MAP program. The drug maker paid an additional fee to the pharmacy for stocking, says Huckle. “But it did nothing, and the program was dropped,” says Huckle. “Manufacturers saw it as paying out with no return.”
The Pharmacy First focus is at the dispensing end, says Huckle, and at the ultimate outcome end: patient compliance, and maintaining market share. “Those things can be calculated at the manufacturer level as return on investment.”
Another example: prior to FDA allowing the generic version of Abbott’s thyroid medication Synthroid, Pharmacy First boasted the top sales program for the drug, including the chains. But with the FDA ruling, Abbott canceled the program. “After five or six months, we continued to demonstrate that our network pharmacies weren’t transitioning to the generic, as was happening in the chains,” says Huckle. “We tried to keep patients on that product. As a result, Abbott did re-open the program to us.”
Speed to shelf
Also important to manufacturers, according to Canning of Health Mart, is speed to shelf, particularly during product launches. “We can cut in a new product in 30 days normally, or in some cases within 5 days, to all 2,000 of our independent Health Mart stores,” Canning says. When manufacturers intend to turn on advertising at a specific time, literature and displays must be at the pharmacies just before then. “Historically, it’s been more of a challenge for independents to ensure that product promotions are implemented on time because of lack of resources,” says Canning. “However, Health Mart takes care of this for them—ensuring that all 2,000 pharmacies are consistent in access and execution. This has substantial value for manufacturers.”
The help of big wholesalers comes at a good time for independents. “A lot of these guys went to pharmacy school,” says Schlissberg of Cardinal, where the emphasis is on medical knowledge and not necessarily business acumen. “They look to us to provide the tools and services that can help them run their businesses better, more profitably, and more efficiently.”
Canning of Health Mart notes that half of independent pharmacy owners are over the age of 55. The company announced a program in January to assist pharmacists in succession planning—either transitioning store ownership to an associate, or selling to a like-minded independent pharmacist. A new website, RxOwership.com, has been opened and, depending on the specifics of each business, McKesson could provide some financial assistance to a buyer.
McKesson is also supporting a pilot program, with the University of Wisconsin healthcare system, to expand the role of pharmacists in medication management. The program is expected to develop measurable results over the next few years in better patient care. “With these results, we hope to convince payers of the value of supporting independent pharmacists’ role, through lower overall healthcare costs,” says Canning. “The program is being designed so that it can be rolled out nationally when the pilot results are in.”
Besides hoping to get a legislated anti-trust exemption, NCPA is looking to pharmacists playing a larger role in medication management and patient adherence, according to spokesman Norton. Existing programs like the Medicare Part D medication therapy-management reimbursement, or the requirement for pharmacists’ oversight of dispensing at long-term care facilities (see Pharmaceutical Commerce, Oct 2008, p. 1) can be the “building blocks” for new initiatives, he says. PC
BOX: Quantifying ROI From Rx Marketing
Some independent pharmacies are taking advantage of services that might be useful to any retailer, but that have been tailored to the needs of drug retailer. Rx Edge, for example, a company launched to provide pharmaceutical marketers with an in-store alternative for their direct-to-consumer marketing efforts, uses a matched-panel research technique to analyze store-level data to determine the effectiveness of in-store promotional programs, providing an ROI gauge for manufacturers and pharmacists.
The methodology involves test and control panels that are representative of the pharmacy store base. Panels are refined based on volume during a 12-week base period to ensure that scripting volume was comparable in test and control stores prior to the launch of the in-store promotion. Script data is supplied by the retailers.
Next, analysis of a test and post period is conducted where relative changes in sales are compared for the test versus control panels. The analysis measures precisely the program’s effect on sales.
“We see an average 9.8% lift in script volume in test versus control stores,” says Kathleen Bonetti, vice president for marketing at Rx EDGE (a division of LeveragePoint Media). The company uses the same methodology for independents as chains.