Pharmaceutical Marketplace Dynamics Expenditures, Distribution, Coverage, Pricing

Pharmaceutical Marketplace Dynamics Expenditures, Distribution, Coverage, Pricing John M. Coster, Ph.D., R.Ph. National Association of Chain Drug Stores Presented at National Health Policy Forum Session, Pharmaceutical Marketplace Dynamics, May 31, 2000

Topics What are prescription drug expenditures among the various purchasers, and what factors are driving spending? How are prescription drugs purchased and distributed? Who pays for prescription drugs? How are prescription drugs priced? Pharmacy Economics 101

Pharmaceutical Expenditures and Factors Driving Spending

Forecast of Rx Dollar Growth US Pharmaceutical Market ($ Bill.) 250 200 227.5 200.8 177.2 150 100 50 57.5 61.7 68.4 77.9 87.9 121.7 137.9156.3 101.7 0 93 94 95 96 97 98 99 00E 01E 02E 03E 04E Compounded Growth = 13.3%

Manufacturers Sales of Prescription Drugs = $ 121.7 Billion 1999 Mail Service Mass Mdse 11.2% 7.3% LTC/HH 4.0% 0.3% Misc 30.5% Chain Drug Clinic Independent Phcy 18.3% Hospital 6.7% Food Store 12.4% 1.2% 8.2% This Market Grew 19.3% as Compared to 1998 Staff Model HMO

U.S. Prescription Drug Market Surpassed $127 Billion in 1999 MANUFACTURER SALES PRESCRIPTION PHARMACEUTICALS - BILLIONS 1999 % $$$$$ % Change PRESCRIPTION CHANNELS 91.8 76.6 + 20 Chains 37.1 30.5 + 22 Independents 22.2 18.3 + 15 Mail Order 13.6 11.2 + 23 Food Stores 10.0 8.3 + 20 Mass Merchandisers 8.9 7.3 + 18 INSTITUTIONAL CHANNELS 29.9 24.6 +17 Hospitals 12.6 12.4 + 16 Clinics 7.7 6.7 + 27 Long Term Care/HH 3.3 4.0 + 17 HMO s (Staff Model) 1.4 1.2-4 Miscellaneous 0.3 0.3-10 GRAND TOTAL 127.1 100.0 + 19 Source: Data on File Copyright 2000, IMS HEALTH

Factors Influencing Prescription Sales Increases % Growth Rate 17 15 13 11 9 7 5 3 1-1 Price New Elements Volume & Mix 11.0 4.8 4.0 6.7 10.0 1.4 2.7 3.5 4.0 1.9 5.0 3.6 4.0 8.4 3.3 5.0 3.0 7.2 4.5 5.9 2.8 2.8 3.0 1.7 1.9 1.6 2.5 3.0 4.0-0.5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 IMS Health, Retail & Provider Perspective TM, July 1999

Rx Insurance Matters Medicare beneficiaries with coverage fill one-third more Rxs than uninsured. Total expenditures on drugs in 1996 were 40% lower among Medicare beneficiaries without drug coverage compared to those with drug coverage $463 vs. $769. Uninsured poor spent 46% of what insured poor spent. As health status declined, the use and spending gaps between insured and noninsured widened. Source: Poisal and Chulis, Health Affairs, Vol. 19, No. 3, March/April 2000.

Average Number of Prescriptions Filled by Medicare Beneficiaries (by coverage status in 1996) Average number of prescriptions filled per year Total 16 21 Poor Health 27 38 3+ ADL 22 35 <100 of poverty 14 25 0 25 50 With Drug Coverage Note: ADL = Activity of Daily Living Source: Poisal, J.A. and Chulis, G.S., Health Affairs, March/April 2000 Without Drug Coverage

Elderly Population Is Increasing 80000 Population in Thousands 70000 60000 50000 40000 30000 20000 1990 2000 2010 2020 2030 2040 2050 Age 65-84 Age 85-99 Age 100+

Top Therapeutic Classes of Drugs (% sales) CNS drugs 22% Cardiovascular 18% Cancer 18% Anti-infective 15% Digestive/GI 13% TOTAL 86% Source: IMS Health

Pharmaceutical Distribution System

Pharmaceutical Distribution System Manufacturer (brand and generic) Wholesaler (prime vendors) Pharmacies (retail, hospital, LTC, physician office, clinics, pharmaceutical buying groups, etc.) Customer/Patient Payor/Insurance Company

Pharmaceutical Distribution System chargebacks Manufacturer (AWP) Wholesaler (Prime Vendors) Pharmaceutical Purchasers (Buying Groups) Managed Care (Staff Models) Managed Care/PBMs (PPO, IPA, Self Insured) Retail (Chains/Independents) Cash Customers Mail Order/ Internet Hospitals/ Institutional Settings Federal/State VA DOD PHS ADAP Medicaid (statutory rebates) Negotiate discounted fees from pharmacists and rebates from drug manufacturers

Pharmaceutical Pricing Terminology AWP (Average Wholesale Price) manufacturer-reported list price benchmark, based on surveys of wholesalers done by database companies: basis for reimbursement to pharmacies under third party programs, including Medicare and Medicaid, (plus a dispensing fee) only publicly-available mfgr price in the marketplace AMP(Average Manufacturers Price) created to calculate Medicaid rebate approximates the actual revenue received by manufacturer

Pharmaceutical Wholesalers Act as middlemen and prime vendors in distribution system. Operate on slim profit margins Execute chargebacks with manufacturers. 5 major pharmaceutical wholesalers have about 80% of the marketplace: McKesson $21 billion Bergen Brunswig $17 billion Cardinal $15 billion Amerisource $ 9 billion Bindley Western $ 8 billion Source: NWDA Industry Profile, 1998

Prescriptions Filled by Community Retail Pharmacies Increasing (Prescriptions in Millions) 2,726 2,418 2,535 2,072 2,105 2,173 2,297 2,975 1,089 1,145 1,213 1,342 1,431 1,522 1,665 1,865 795 748 724 697 692 685 693 721 188 212 236 258 295 328 368 389 1992 1993 1994 1995 1996 1997 1998 1999* Mail Order Independent Chain Source: IMS Health and NACDS Projections

Distribution of Retail Pharmacies 1999 = 51345 32079 30675 27401 26267 24862 23067 21975 20857 19990 19148 5264 5147 4979 5036 5149 3696 3808 4237 4595 4837 5091 5428 5950 6274 6612 6752 7078 7619 8193 5261 17781 17751 17029 17270 17329 17671 18196 18456 18740 16987 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Chain Drug Food Mass Independent

Pharmacy Buying Groups Help to pool the purchasing power of independent retail pharmacies/ small chains / hospitals for pharmaceuticals, OTCs, and other pharmacy items May have own brand of OTC items Examples: EPIC Pharmacies PACE Alliance Legend Pharmacies of Greater New York Premier

Different Types Internet Pharmacies traditional bricks and mortar pharmacies with internet connections (e.g. CVS.com, Walgreens.com, CornerDrugStore.com) mail order pharmacies with the internet as the primary method of ordering Rxs (e.g. DrugStore.com, PlanetRx.com) rogue sites that allow ordering Rxs through online assessment and Rx fulfillment from domestic and foreign pharmacies

Prescription Coverage and Payment Sources

Payment Method for Retail Prescriptions 63% 59% 56% 50% 45% 38% 33% 29% 25% 18% Cash Third Party (Including Medicaid) 37% 41% 44% 50% 55% 62% 67% 71% 75% 82% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: IMS Health

Pharmacy Gross Margins Declining 90 80 29 28 27 70 26 60 25 24 50 23 40 22 21 30 20 1992 1993 1994 1995 1996 1997 1998 1999 2000 Third Party Gross Margin Source: IMS Health and NACDS Data

Role of PBMs Evolved from Rx claims administrators Contract with employers, unions, health plans to administer and manage Rx benefit consolidating industry Perform certain management functions adjudicate claims on line negotiate discounts with retail pharmacies and rebates with drug manufacturers encourage generic drug use provide information to pharmacists for patient management and quality improvement how appropriate for Medicare population?

Merck-Medco Top 10 PBMs PCS Health Systems Express Scripts Wellpoint Advance Paradigm Caremark Aetna NPA Preferred Solutions Provantage 252 million Rxs 252 million Rxs 196 million Rxs 45 million Rxs 35 million Rxs 34 million Rxs 30 million Rxs 28 million Rxs 26 million Rxs 20 million Rxs

Pharmaceutical Pricing

Manufacturer Pricing of Prescription Drugs Each type of prescription drug generally has its own pricing pattern: Patented Single Source Innovative Drug with no therapeutic competitors Patented Single Source Innovative Drug with therapeutic competitors Patented Line Extension Off patent brand name drug Multisource generic pharmaceuticals

Manufacturing Discounting Brand manufacturers generally discount to purchasers who move marketshare for therapeutic alternates certain settings have tighter control over pharmaceutical use through drug formularies chains and independent retail pharmacies have traditionally purchased pharmaceuticals at relatively the same prices no reason for manufacturer to discount if retail pharmacy has to dispense the product as written by physician BUT pharmacists do much of the marketshare movement work for PBMs

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Retail Prescription Cost Components $43.07 (100%) Drug Manufacturers $32.03 (74%) Wholesaler $1.57 (4%) Retail Pharmacies $9.47 (22%) Cost of Materials ($9.39-21%) S G & A ($8.51-20%) R & D ($6.66-15%) Taxes ($1.96-5%) Net Profit ($5.51-13%) Cost of Ops ($1.01-2%) Taxes ($0.24-1%) Net Profit ($0.32-1%) Cost of Ops ($8.13-19%) Taxes ($0.54-1%) Net Profit ($0.80-2%) Source: IMS HEALTH, Hoover s Company Information, PhRMA, Retail Census, U.S. Bureau of the Census; average prescription price $43.06, 3rd quarter 1999.

Summary Complex, growing, increasinglyconcentrated market at all levels with a multitude of transactions Retail Rxs primarily paid for by third parties, i.e. PBMs - likely to increase with Medicare coverage Managed care, DTC advertising, elderly population, new drug replacement prices driving Rx expenditures