340B DISCOUNT DRUG PROGRAM OVERVIEW March 2014 Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC, and Harris Williams & Co. Ltd, which is authorised and regulated by the Financial Conduct Authority. Harris Williams & Co. is a trade name under which Harris Williams LLC and Harris Williams & Co. Ltd conduct business.
340B DISCOUNT DRUG PROGRAM OVERVIEW Section 340B of the Public Health Service Act provides access to prescription drugs at significantly discounted prices for eligible facilities ( covered entities ). On average, covered entities receive discounts of approximately 50% of average wholesale price ( AWP ) through the 340B program. Covered entities include disproportionate share hospitals ( DSH ), federally qualified health centers, and other healthcare facilities that serve predominately low-income, special need, and indigent patients. In order to maintain eligibility, covered entities must meet a number of requirements and are subject to annual recertification by the Health Resources and Services Administration ( HRSA ). Strict inventory control to ensure that medications reach vulnerable patient populations Increased billing and reporting requirements Maintenance of separate inventories and patient / claims processing records 340B Drug Pricing As of December 2012 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 66% 64% 51% 42% AWP GPO Medicaid Rebate 340B Avg VA Sources: Pembroke Consulting and GAO analysis of HRSA data. 1
340B PROGRAM GROWTH As a result of health reform-driven changes, drug spend through 340B is expected to reach $16 billion by 2019P from $7 billion currently. Since 2001, the number of covered entities has increased 6.8% annually. The Patient Protection and Affordable Care Act ( PPACA ) opened access to rural hospitals, freestanding oncology centers, sole-community hospitals, and critical access hospitals. Expansion in Medicaid coverage codified by the PPACA has also driven an increase in the number of covered entities 340B Drug Expenditures For the Years Ended and Ending December 31, 2013 to 2019P ($ in billions) 340B Covered Entities For the Years Ended December 31, 2001 to 2011 $18.0 $16.0 $14.0 $12.0 $10.0 $8.0 $7.2 $8.7 $10.1 $11.6 $13.1 $14.5 $16.0 18,000 16,000 14,000 12,000 10,000 8,000 14,076 14,725 11,442 12,162 13,139 11,926 12,404 10,325 8,605 9,193 16,572 $6.0 6,000 $4.0 4,000 $2.0 2,000 $0.0 2013 2014P 2015P 2016P 2017P 2018P 2019P 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Avalere Health analysis of HRSA data. 2
CHALLENGES OF THE 340B PROGRAM Covered entities are facing increased scrutiny at a time when discounts from the 340B program are most needed. Due to growth in utilization of the program, HRSA increased its 340B audit activity in late 2012. Manufacturers have begun to require independent audits due to revenue lost through discounts Recent reports by the Government Accountability Office and the Office of the Inspector General highlight abuse and misuse of the 340B program. Diversion providing discounted drugs to ineligible patients Duplicate discounts receiving both 340B pricing and other government program discounts, such as Medicaid Meanwhile, public sector hospital margins remain under significant pressure, driving the need for covered entities to maximize savings from 340B. Public Sector Hospital Margins 1 For the Years Ended December 31, 2007 to 2011 0% 2007 2008 2009 2010 2011 (2%) (4%) (6%) (8%) (7.0%) (6.7%) (5.9%) (7.2%) (10%) (8.5%) Covered entities often lack the expertise and resources to implement and maintain a compliant 340B program, presenting an attractive opportunity for outsourced providers. Source: MedPac. (1) Medicare margins. 3
OPPORTUNITIES WITHIN THE 340B MARKET The complexity of managing a 340B program has driven demand for pharmacy service providers specializing in serving the needs of covered entities. Pharmacy management firms with expertise in 340B are able to help unsophisticated covered entities implement efficient, profitable, and compliant 340B programs. Many eligible facilities are not aware that the 340B program is available to them Services include patient eligibility analysis, procurement assistance, licensing and compliance verification, and inventory control Contract pharmacies enable covered entities lacking in-house pharmacy services or facilities to dispense 340B drugs to patients. Covered entity purchases drugs, but contract pharmacy takes physical delivery and manages dispensing to patients Growth in 340B Contract Pharmacy Arrangements Representative 340B Pharmacy Service Providers For the Years Ended December 31, 2003 to 2013 14,000 12,000 10,000 9,783 12,240 8,000 7,325 6,000 4,000 2,000 0 2,981 364 699 1,075 1,449 1,733 2,063 2,410 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Avalere Health analysis of HRSA data. 4
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