NCPA Executive Update

NCPA Executive Update delivers insights on legislative, regulatory, policy, and industry developments from NCPA CEO B. Douglas Hoey, Pharmacist, MBA, to NCPA members and pharmacy leaders every Friday.

The Great Profit Shift | NCPA Executive Update | April 21, 2017

by NCPA | Apr 21, 2017

Dear Colleague,

Doug Hoey

Robin Hood would be scratching his head after watching some of the financial news from this week.

Perhaps of greatest interest to independent pharmacies were two earnings reports from Cardinal Health and UnitedHealthcare that came out Tuesday. UnitedHealthcare reported strong revenue growth of 9.4% compared to the same quarter last year. Of even more interest to community pharmacies was that OptumRx, owned by UnitedHealthcare, saw its quarterly revenues go up by nearly $700 million and the number of prescriptions they processed climb by 15 million.

In contrast, Cardinal Health saw its stock fall 11.5% on Tuesday after it told investors its earnings would likely be on the low side of its $5.35-$5.50 per share estimate. As you know, Cardinal is a multi-faceted company, but it was the pharmaceutical segment and generic drug deflation that were specifically cited as a major reason for the low side earnings forecast.

Let's summarize: One company's stock gets hammered because there are more, cheaper generic prescription drugs while the stock of a company that acts as a middleman for those cheaper, generic prescription drugs gets cheered on Wall Street. It reminds me of a mixed-up version of Robin Hood's story. You remember how he operated: Take from the rich and give to the poor. In this case, it's take the savings and give to the rich.

Some have speculated that generic deflation—which industry expert Bill Roth of the Blue Fin Group predicted last year and again this year in presentations at NCPA's Multiple Locations Conference—is resulting in independent pharmacies purchasing generics more cheaply. That may or may not be so, but based on OptumRx's financial report, any pricing benefit independents might be receiving is very transient. Those dollars are quickly transferred to PBMs like OptumRx. In fact, OptumRx and one of its acquired businesses, Catamaran, are not only taking the generic deflation margin, but they are some of the worst PBM offenders when it comes to paying pharmacies below their cost to acquire the medication.

Another interesting element to the financial reports is the way PBMs attempt to obscure their true role. For example, Optum said in a press release that it "fulfilled 322 million adjusted scripts in first quarter 2017." But in actuality it is retail pharmacies that are filling the clear majority of those "adjusted" prescriptions. Optum is certainly not alone in confusing—or at least not accurately characterizing—the middleman role that PBMs play.

The curtain is being lifted, though. Bloomberg published a particularly insightful story a few weeks ago on some "inside baseball" info that community pharmacists have known for years. Depending on your perspective, PBMs may drastically over report their top line revenue. Likewise, they drastically under report the percentage of the revenue they generate that falls to their bottom line. From that Bloomberg story: "Several drug industry analysts said that booking revenue in a way that shows lower margins might have helped the companies deflect criticism of their pricing practices. '"It hides a lot. It's as simple as that,"' said Ravi Mehrotra, a partner at the MTS Health Partners investment bank."

Next week should be another newsy one. Express Scripts and Anthem are expected to release their earnings reports. Congress will be back in session and may try to pass "repeal and replace" health care legislation again. And, NCPA will be holding its 49th Annual Congressional Pharmacy Fly-In April 26-27. Pharmacists from all over the country will be talking with their legislators about the negative impact of DIR fees on pharmacies, consumers, and taxpayers. They will also be talking about better ways to lower prescription drug costs for all Americans whether they be rich or poor. Robin Hood would be proud.

Doug Hoey

P.S. NCPA is now collecting data for the 2017 NCPA Digest sponsored by Cardinal Health. This information helps us better understand our industry and represent you and the interests of all community pharmacies. Fully complete the survey and receive a free benchmarking report that compares your pharmacy's financials to those of the average pharmacy. Take the survey today and help your business and your industry.