Inside This Issue - Opinion
Paradigm shift opens way for new solutions
February 3rd, 2014
In the landmark book The Structure of Scientific Revolutions, published in 1962, Thomas Kuhn established the concept of paradigm shifts, an idea that illuminates how progress in such fields as physics and biology is really made. His central argument is that when a new model governing thinking in a given discipline emerges, avenues of exploration and understanding that previously appeared to be dead ends, if they were evident at all, open up.
The health care system is in the midst of such a transition, and its impact is being felt by community pharmacy operators, drug distributors and pharmaceutical manufacturers. Fundamental structural changes that affect all of those sectors are under way. The increasing globalization of the supply chain is a case in point.
McKesson Corp. last month acquired Celesio Group, a German company that serves as the drug wholesaler for 65,000 pharmacies and medical facilities in 14 nations and has a significant presence in retailing, most notably Lloyds, the No. 2 drug chain in the United Kingdom. John Hammergren, chairman and chief executive officer of McKesson, says the combined company’s customers will benefit from increased scale, supply chain expertise and sourcing capabilities.
The importance that McKesson attaches to the deal, which is reportedly worth $8.6 billion including debt, is reflected by its persistence. When an initial bid of €23 a share was rejected in December, the company raised the price to €23.50. It was still not enough to satisfy Elliott Management Corp., a New York-based hedge fund that owned enough of Celesio to scuttle the transaction. After initially announcing that its attempt to buy Celesio had failed, McKesson negotiated a separate agreement with Elliott, the terms of which were not disclosed, to take control of Celesio.
The acquisition augments McKesson’s already considerable buying clout in the pharmaceutical marketplace. With operations in 20 countries, the combined company will have sales of some $150 billion. Perhaps more important, the deal will give McKesson access to the pharmaceutical market in Europe, where government policy keeps most prescription drug prices far below what they are in the United States.
The deal enables McKesson to compete on a level playing field with Walgreens and Alliance Boots, whose partnership includes a joint buying operation based in Switzerland. Walgreens Boots Alliance Development GmbH (which also purchases generics and related products for AmerisoureBergen, the drug wholesaler that serves Walgreens stores) is expected to account for the lion’s share of the $1 billion in combined synergies in the fourth year of the strategic partnership, following the full merger of Walgreens and Alliance Boots in 2015.
CVS Caremark and Cardinal Health entered the fray late last year when they formed the biggest generics buying group in the United States. The joint venture is intended to lead to the creation of innovative purchasing strategies and enhance supply chain efficiencies.
The unprecedented size and strength of the entities formed by those retailers and wholesalers will augment their position in negotiations with pharmaceutical manufacturers and could well result in more equity in drug pricing among developed countries. That’s good news for U.S. consumers, who for many years have paid higher prices than their peers in Europe, Canada and Japan.
Greater pricing parity would, however, create other issues, most notably the effect it would have on pharmaceutical makers’ ability to continue to fund research and development of new medications. The average cost of bringing a product to market now stands at some $1.2 billion. If people in this country are going to pay less, others will have to pay more or the work needed to develop breakthrough treatments will suffer.
The players shaping the new drug pricing paradigm, which in addition to companies in the private sector include governments and consumers, must balance the imperative to rein in health care costs and serve patients as efficiently as possible with the need to sustain the R&D mechanisms that have produced efficacious, relatively cost-effective treatments for a wide range of conditions.
It’s a tall order, but, as Thomas Kuhn pointed out, new models lay the groundwork for new solutions.