Specialty Pharmacy: Market Analysis and Industry Insights

Speciality Pharmacy Analysis Sankalp Khare The Paul Merage School of Business, University of California Irvine MGMTMBA 290 SEM HC2: Strategic Management of Healthcare Enterprise Professor Richard Afable, M.D. February 4, 2024

Introduction Specialty pharmacy services are increasingly recognized as integral components of modern healthcare, addressing the unique needs of patients grappling with complex, chronic, and rare medical conditions. By synthesizing existing literature, case studies, and real-world examples, this analysis provides insights into the different aspects of specialty pharmacies within the healthcare landscape. This paper explores the market landscape, business model of specialty pharmacy, role of PBMs , impact of 340B program and trends in specialty pharmacy industry . What are specialty drugs?? “Specialty medications have advanced the treatment of chronic and sometimes life-threatening diseases, including multiple sclerosis (MS), chronic hepatitis C viral (HCV) infection, and hematological/oncological disorders . While there is no single definition of a specialty medication, common characteristics include complexity, storage, handling and delivery requirements, comprehensive patient management, manufacturer restrictions, and high cost (i.e., >$1000 per member per month )” ( Zuckerman, Autumn D., et al,2019 ). The complexity of these medications derives from unique issues that necessitate particular distribution techniques, patient education, and monitoring. Their high costs are due to considerable research expenses and a limited patient population. Certain pharmaceuticals, which are critical for treating uncommon disorders, are granted regulatory privileges as orphan drugs. Using these drugs to improve patients' lives requires focused attention and resources. What is a specialty pharmacy and how is it different from a traditional retail pharmacy? 1

Specialty pharmacy mainly deals with specialty medications and provides all of the same services as the retail pharmacy such as “eligibility check, fulfillment, inventory analysis, insurance verification and authorization and payment services, but this segment also focuses on complex and expensive prescription drugs and includes mail order revenue ( Berdousis, Demetrios, 2023)” . Just like conventional retail pharmacies, “specialty pharmacies are governed by state licensing and regulations. However, specialty pharmacies distinguish themselves by securing accreditation from an independent, nationally recognized accrediting body or bodies” ( Baker, Kristin, et al.,2022 ). This ensures that specialty pharmacies are committed to a consistent standard for the specific needs of their patients. Accreditations from organization like Utilization Review Accreditation Commission (URAC) range from from $35,000 - $39,500 for three year, Accrediting Commission for Health Care (ACHC) charges $12000 for three years and The Joint Commision charge fee in the range of $7,769 -$13,740 for three year. In addition to this the software vendor costs can range from $18000 - $31000 annually (See Exhibit 1) . This high initial investment creates a high barrier to entry for the new entrants and thus, limiting competition from new companies. Specialty pharmacy industry at glance In 2021, the growth of speciality items exceeded that of regular products, accounting for 51% of total non-discounted spending ( See Exhibit 2). The specialty drug spending by manufacturer increased to 55% for the total spending from 28% in 2011. The key drivers f or this growth in oncology and autoimmune sectors (See Exhibit 3). In the year 2022 US prescription revenues from specialty drug sales reached $215.8 billion . The top three players CVS Health(28%), Cigna (24%) and United Health Group (13%) in the market account for 55% share of the market. The industry comprises a large number of companies such as Walmart (1%), Walgreens (5%) and Kroger(3%) which comprises marginal share in the 2

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market (See Exhibit 4) . This suggests that the industry is highly concentrated and makes it difficult for the smaller companies to compete. Business model of speciality pharmacy The American Society of Health-System Pharmacists Speciality Pharmacy resource guide, published in 2015, describes four business models for specialty pharmacy: (1) build; (2) partner; (3) outsource; or (4) manage individual patient risk ● Build Model - This model involves an organization creating and delivering specialty pharmacy services directly to its patients.The primary goal of is to offer comprehensive services to all specialty patients internally. The strength of the model is that the internal specialty pharmacy services help managing care coordination and transitions for complicated patients, as well as ensuring drug availability before release. Hence, reducing the risk of readmission rates and better customer satisfaction. ● Partner Model - Under this model a health system might choose to operate its specialty pharmacy but collaborates with another entity to provide all the services necessary for an accredited specialty pharmacy. The specific needs of the institution will determine the services required from a partner. These services may include call center management, assistance with prior authorization , contract negotiation, staff training and education, fulfillment services. The extent of collaboration with a partner depends on a number of factors such as existing infrastructure, healthcare system priorities, and internal expertise in specialty pharmacy. ● Outsource Model - Generally organizations which lack the in-house specialty pharmacy capabilities opt for outsourcing the speciality pharmacy process. This could be due to restricted access to capital, lack of substantial specialty physician groups, or the absence of owned retail pharmacies. Unlike the “partner model”, the outsourcing 3

model does not bring specialty pharmaceuticals services in-house. Continuity of care for patients can be challenging in this model as it depends on the service level provided by the partner. ● Manage Individual Patient Risk Model - Facilities which do not have any kind of a formal arrangement for supervising specialty pharmacy services fall under this model. Specialty pharmaceuticals are brought to facility either through white-bagging format, defined as the delivery of a specialty pharmaceutical by an off-site specialty pharmacy directly to the location of administration or through brown-bagging, who then brings the drug into the health system themselves as a “patient own medication”. In both the approaches the speciality pharmaceuticals reach the facility without any oversight of the institution. Facilities under this model should have a strict guideline to handle medications as specialty medications require special management and if they don't accept medication then how to refer patients elsewhere. What are PBMs and their role in specialty pharmacy Pharmacy Benefit Managers (PBMs) are third-party firms that operate as connections between insurers and pharmaceutical producers. Today there are 66 PBM companies in the United States, “Express Scripts (an independent publicly-traded company), CVS Caremark (the pharmacy service segment of CVS Health and a subsidiary of the CVS drugstore chain), and OptumRx (the pharmacy service segment of UnitedHealth Group Insurance) – controlling approximately 89% of the market and serving about 270 million Americans” (Pharmacy Benefit Managers, 2022). Pharmacy Benefit Managers make profits generally by charging a fee for their services, through the difference between what is paid to pharmacies and the payment from health plan , and sharing a percentage of the rebates or discounts negotiated with drug manufacturers. These PBMs primarily operate in two models with 4

specialty pharmacy : The PBM-owned specialty pharmacy and the passive specialty pharmacy/PBM ( Barrington, David.,2022) . The PBM-owned specialty pharmacy has an incentive to follow standards since compliance leads to increased sales. Compare this to the passive model. There is little motivation to follow standards, contact members or providers, or confirm ongoing therapy. Compliance and standards are defined collaboratively using the integrated model. The cooperation prioritizes patient care while also lowering customer costs. Historically, Pharmacy Benefit Managers (PBMs) primarily served as outside administrators for prescription medication programmes. Their responsibilities have expanded to include programmes that help minimize the cost of medications. They accomplish this by creating lists of low-cost therapy possibilities. With prescription prices rising, particularly for specialty pharmaceuticals, health insurers are turning to PBMs to keep costs under control. As pharma companies combined, PBMs joined forces to acquire more bargaining leverage. Furthermore, since healthcare focuses on offering value, PBMs are attempting to offer additional services that encompass the full patient experience ( Berdousis, Demetrios, 2023 ). While PBMs are critical to the administration and optimisation of specialized pharmacy services, there has been controversy and discussion concerning their impact on medication pricing, and transparency in their operations. PBMs control what drugs are covered and what you pay for them, but even where you can buy them – whether you can use your local community pharmacy or the mail order pharmacy they own and operate. The result is that consumers have been steered away from essential community pharmacies and toward PBM-owned pharmacies, further restricting competition and increasing the PBM’s profits” ( 5

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Blackley, Chris,2022) . In 2023 senate proposed “Pharmacy Benefit Manager Transparency Act of 2023” to make PBMs more accountable and prevent unfair practices and actions on PBMs side. How 340B Program helps speciality pharmacy earn high profit margin The 340B Medicine Discount Programme was established by the federal government in 1992 to encourage the supply of health care services to the underprivileged population.The program “enables covered entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.Manufacturers participating in Medicaid agree to provide outpatient drugs to covered entities at significantly reduced prices” ( Health Resources & Services Administration, 2017 ). The 340B drug price ceiling is set by law “at least 15% below the average manufacturing price (AMP) price for medications. Drug manufacturers that participate in the Medicaid program are required by the government to provide drugs to covered entities at a cost no higher than the ceiling price in the 340B program” ( Lee, Cho-Han, et al.,2020 ). To be covered by the 340B programme, the health care system must serve a disproportionately large percentage of Medicare/Medicaid participants or other low-income patients and apply for 340B programme eligibility. Prescription fees paid by 340B covered entities to contract speciality pharmacies follow three payment basic structure of payment ( Fein, Adam J.,2019 ) - ● Type 1: Flat fee. The average fee for a brand-name drug was $23. In some cases, the flat fees differed for brand vs. generic prescriptions or by product type. ● Type 2: Fee + % of Reimbursement. The average pharmacy fee was $19 plus 16% of the reimbursement negotiated between pharmacy and payer. 6

● Type 3: Fee + % of Spread. The average pharmacy fee was $8 plus 20% of the difference between (1) negotiated reimbursement between pharmacy and payer and (2) 340B acquisition cost. “The pharmacies that earn a share of total reimbursement are being grossly overcompensated. For a typical specialty drug, a pharmacy earns a gross margin of 15% to 20%—far higher than the profitability of a typical specialty prescription” (Fein, Adam J,2018). The reimbursement lowers the acquisition costs of the speciality drugs. The cost savings on the acquisition cost help in increased profit margins for the specialty pharmacy. When operating under Type 2 and Type 3 agreements specialty pharmacies make a profit of around $1000 per prescription for drugs with wholesale acquisition costs of $5000 (See Exhibit 5). This profit is three -four times the typical profit of a specialty pharmacy. Trends in specialty pharmaceutical and drug industry) Several trends and developments are likely to affect the future of specialist pharmacy, including advances in healthcare, technology, and changes in patient demographics. Here are some significant elements that might define the future of specialized pharmacy: 1. Biosimilars - Biosimilars are intended to be very similar to reference biologic medications, providing a more cost-effective option. In 2023 specialty pharmacies started dispensing biosimilars for the first time in the USA market ( Donofrio, Sharon, 2023 ). Many of the new biosimilars will be covered under patient’s pharmacy benefits and thus, specialty pharmacies will play an important role in distribution of these biosimilars. “SPs are prepared for the anticipated influx of inquiries regarding biosimilars. Most SPs (70%) will proactively reach out to high-volume prescribers to inform them of new biosimilar market entrants. Additionally, 43% of SPs plan to reach out to patients to streamline conversion by proactively addressing any potential barriers to biosimilar utilization” ( Donofrio, Sharon, 2023 ). 7

Biosimilar will definitely cause an impact in the specialty pharmacy sector. It will be interesting to see how the specialty pharmacy landscape changes when the incumbents will compete for acquisition , pricing and patient services in this new upcoming market. 2. Market Consolidation - Since 2018 merger and acquisition activity has been rising in the speciality market industry. In total 19 deals occurred in 2018 with the Express Scripts Holding Company merger with Cigna Corporation being on the prominent deals. The merger and acquisition activity has been increasing since then. In the year 2022 27 deals were announced and 13 M&A deals were announced in the first 9 months of 2023. PBMs have influenced this market consolidation ( Advisors, M&A Healthcare, 2023 ) . More and more businesses in the market are projected to join forces, as PBMs seek to gain more consumers and provide more services, allowing them to earn more profit. 8

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Exhibits Exhibit 1 Source : Baker, Kristin, et al. Specialty Pharmacy Stakeholder Workgroup Report. 11 May 2022. Exhibit 2 Source : Biggs, Scott , and Doug Long. “Insights into the 2023 U.S. Pharmaceutical Market.” www.iqvia.com, 25 July 2023, 9

Exhibit 3 Source : Biggs, Scott , and Doug Long. “Insights into the 2023 U.S. Pharmaceutical Market.” www.iqvia.com, 25 July 2023, Exhibit 4 Source : Fein, Adam J. “DCI’s Top 15 Specialty Pharmacies of 2022: Five Key Trends about Today’s Marketplace.” Drugchannels.net, 12 Apr. 2023, www.drugchannels.net/2023/04/dcis-top-15-specialty-pharmacies-of.html. 10

Exhibit 5 Source : Fein, Adam J., and Ph.D. “Here’s How PBMs and Specialty Pharmacies Snag Super-Size Profits from the 340B Program.” https://www.drugchannels.net, 7 Aug. 2019, www.drugchannels.net/2019/08/heres-how-pbms-and-specialty-pharmacies.html 11

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References 1. ASHP Specialty Pharmacy RESOURCE GUIDE . 2015. 2. Baker, Kristin, et al. Specialty Pharmacy Stakeholder Workgroup Report . 11 May 2022. 3. Advisors, M&A Healthcare. “The Durability of Specialty Pharmacy - M&a Healthcare Advisors.” Https://Mahealthcareadvisors.com, 2 Nov. 2023, mahealthcareadvisors.com/specialty-pharmacy/ 4. Barrington, David. “Lowering the Cost of Specialty Drugs.” Araya Pharmacy Benefit Management , 14 June 2022, arayarx.com/pbm-handles-specialty-drugs/. 5. Berdousis, Demetrios . “Log in to IBISWorld.” Services.ibisworld.com , Oct. 2023, my.ibisworld.com/us/en/industry-specialized/od4620/at-a-glance. 6. Biggs, Scott , and Doug Long. “Insights into the 2023 U.S. Pharmaceutical Market.” Www.iqvia.com , 25 July 2023, www.iqvia.com/locations/united-states/blogs/2023/07/insights-into-the-2023-us-phar maceutical-market . 7. Blackley, Chris. “Pharmacy Benefit Managers Inflate Drug Prices and Decrease Competition While Consumers Pay the Price. Does the FTC Have the Medicine to Fix It?” MedCity News , 18 Oct. 2022, medcitynews.com/2022/10/pharmacy-benefit-managers-inflate-drug-prices-and-decre ase-competition-while-consumers-pay-the-price-does-the-ftc-have-the-medicine-to-fi x-it/ 8. Donofrio, Sharon. “Specialty Pharmacies Are Ready for the Biosimilar Boom. Are You?” Https://Www.eversana.com , 18 July 2023, 12

www.eversana.com/insights/specialty-pharmacies-are-ready-for-the-biosimilar-boom- are-you/. 9. Fein, Adam J. “DCI’s Top 15 Specialty Pharmacies of 2022: Five Key Trends about Today’s Marketplace.” Drugchannels.net , 12 Apr. 2023, www.drugchannels.net/2023/04/dcis-top-15-specialty-pharmacies-of.html. 10. Fein, Adam J., and Ph.D. “GAO Confirms It: 340B Hospitals and Contract Pharmacies Profit from Low-Income, Uninsured Patients.” Https://Www.drugchannels.net/ , 10 July 2018, www.drugchannels.net/2018/07/gao-confirms-it-340b-hospitals-and.html. 11. Fein, Adam J., and Ph.D. “Here’s How PBMs and Specialty Pharmacies Snag Super-Size Profits from the 340B Program.” Https://Www.drugchannels.net , 7 Aug. 2019, www.drugchannels.net/2019/08/heres-how-pbms-and-specialty-pharmacies.html. 12. Health Resources & Services Administration. “340B Drug Pricing Program.” Official Web Site of the U.S. Health Resources & Services Administration , 21 Apr. 2017, www.hrsa.gov/opa. 13. Lee, Cho-Han, et al. “Specialty Drug Price Trends in the Federal 340B Drug Discount Program.” Journal of Managed Care & Specialty Pharmacy , vol. 25, no. 2, Feb. 2019, pp. 178–187, https://doi.org/10.18553/jmcp.2019.25.2.178. Accessed 20 Feb. 2020. 14. “Pharmacy Benefit Managers.” Content.naic.org , 11 Apr. 2022, content.naic.org/cipr-topics/pharmacy-benefit-managers. 15. Zuckerman, Autumn D., et al. “An Integrated Health-System Specialty Pharmacy Model for Coordinating Transitions of Care: Specialty Medication Challenges and Specialty Pharmacist Opportunities.” Pharmacy , vol. 7, no. 4, 3 Dec. 2019, p. 163, https://doi.org/10.3390/pharmacy7040163. 13

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