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Are we seeing the first early “green shoots” of a new industry disruptor? Possibly. Big Pharma has started experimenting with direct-to-consumer models to fill prescriptions, effectively circumventing the retail pharmacy. Is the position of neighborhood pharmacies in today’s delivery system secure, or could the pharmacy suffer the same fate as the corner bookstore, replaced by technology and direct delivery?
Today’s rapidly changing health care environment is forcing participants across the value chain to evaluate new models to drive efficient health care delivery, lower costs to preserve margins, and secure their place in the health care system of tomorrow. Pharmaceutical manufacturers, along with making other changes in their business models, are starting to challenge the traditional flow of drugs through the supply chain and ultimately to the end patient.
Redirecting the traditional flow of drugs via a direct model provides attractive benefits for the manufacturer, including improved margins, lower overall working capital, greater product security, reduced risk of product diversion and potential growth through customer intimacy while potentially improving health outcomes. But the model is not without challenges, including regulatory restrictions, payer acceptance and consumer inertia.
“Today’s rapidly changing health care environment is forcing participants across the value chain to evaluate new models to drive efficient health care delivery.” |
Today there are typically two middlemen between the pharma manufacturer and the patient: the wholesaler and the pharmacy. As a drug journeys from the manufacturing plant or warehouse to a wholesaler’s distribution center, the pharmacy and then the end patient, the product is marked up significantly and gets exposed to a variety of risks, which naturally raises many questions for the pharma manufacturers. In this age of cost pressures, do multiple points of receiving, stocking, picking, packing and shipping make sense? Does the risk of diversion to other countries and gray market product support the pricing strategy? As the pills in the bottle become “commoditized,” are pharma companies losing value and connectivity with consumers?
For branded manufacturers, a direct delivery model creates a more customer-centric relationship with the potential to develop new revenue streams through value-added services and the hope of forging patient loyalty that can become a barrier to switching when a product loses exclusivity. It also streamlines the clinical insights available, thus helping manufacturers more effectively target their R&D investments and improve health outcomes. In addition, it provides branded manufacturers more channel control across countries to minimize product diversion and limit counterfeiting.
For generic manufacturers, direct delivery allows them to recapture a significant portion of margin lost in the current model. Today, wholesalers and pharmacy margins can add up to 40% to the product cost for many generic drugs. The emergence of the three major buying groups (Walgreens/Alliance Boots/Amerisource Bergen, Rite Aid/McKesson/Celesio and CVS/Cardinal Health), each with more than $10 billion in generic purchasing power, is causing a significant pressure on margins for generic manufacturers, and going direct to consumers is a potential way to break free from this pressure.
One could easily construct a future where the role of the neighborhood pharmacy as a key touch point in this system is greatly reduced. If pharma manufacturers pursue a more direct route of delivery, enabled by technology, how plausible is the disintermediation of the pharmacy?
Imagine the health care model evolving to a degree that when the doctor writes the prescription it is sent electronically to the payer or even the PBM, where the prescription is reviewed, authorized, checked for drug interaction and then directed to the manufacturer to fill and ship to the patient. It’s unlikely that a single manufacturer could do this alone, but we could imagine a broad-scale generic player and several branded companies creating a virtual pharmacy, leveraging existing 3PL or alternative delivery methods.
“To remain viable in the system, the pharmacy needs to focus on improving patient outcomes and driving efficiency to reduce overall costs.” |
For this model to become reality throughout the industry, the regulatory framework needs to evolve. Payers or PBMs need to develop contractual relationships with manufacturers, and an electronic infrastructure needs to be in place to facilitate the interaction across provider, payer, manufacturer and last-mile delivery.
These barriers are not insurmountable, and the benefits of this model to the health care system could be great. In addition to those benefits already noted for the manufacturers, benefits to the patient include an enhanced experience with drugs arriving at home without a trip to the pharmacy, and overall quality of care, as prescription validation would be made against the patient’s EMR across all provider/pharmacy networks rather than a single network. The more seamless connectivity of the prescription writing-to-filling process should benefit many key players in the health care ecosystem, and the improved efficiencies could bring cost savings and better outcomes.
Big Pharma is starting to test the waters on the direct-to-patient model, and companies such as Pfizer, AstraZeneca, Merck and Teva are among the first movers. These companies have had mixed results thus far, but the industry should view these as test cases as they learn how to make this model work for the long term. As current Food and Drug Administration regulations require a pharmacist to fill a prescription, these companies have partnered with established pharmacies such as CVS Health to execute the model. While each company has initiated direct-to-patient models for different reasons, learnings from all of these efforts will define and enhance future solutions.
Recent case examples of direct-to-patient programs for branded drugs include Lipitor, Dutoprol, Nexium, Armimidex and Viagra. For Lipitor, Dutoprol and Nexium, Pfizer and AstraZeneca established direct programs to strengthen brand positioning against generic competition in preparation for loss of exclusivity. The Lipitor and Dutoprol efforts have since been cut, due to a lack of patient interest.
In response to consumer inquiries, AstraZeneca is offering Armimidex directly to patients who desire access to the original drug rather than the available generic formats. To combat the counterfeit copies currently in the marketplace and to offer consumers more convenience and discretion, Pfizer, maker of Viagra, announced a program to provide consumers who have a valid prescription direct purchase from Viagra.com. A range of drivers have inspired these market tests. Extending into the future, similar motivations could make drugs for lifestyle and chronic conditions good candidates for such programs.
Generic manufacturers are experimenting, too. In an effort to integrate point-of-care to consumer home delivery, Teva has partnered with MedStart Connect, a new direct-to-consumer prescription delivery channel from MedVantx, to deliver drugs directly to patients. This channel focuses on ensuring continuity in the appearance of medications, from the sample provided in the physician’s office through the fulfillment of prescriptions and mail-order home delivery. This process is designed to alleviate issues of confusion and nonadherence that studies have linked to changes in pill color or appearance.
While current examples have been small-scale and of varied success to date, a direct-to-consumer disruptor will be a threat if pharma companies invest in building or buying the capability to fully bypass the pharmacy and become a more vertically integrated health care company. Pharma companies don’t need to build all these capabilities on their own. For example, they could partner with firms with core competencies in the distribution/logistics end of the value chain to manage the last-mile delivery — 3PLs and package delivery companies such as UPS or FedEx.
However, a more nontraditional partnership with an online retailer such as Amazon could create significant value. Amazon has been investing in and testing capabilities to deliver the same day — a model that could be very attractive to pharma companies. The benefits of this type of nontraditional partnership go beyond cost savings — it could enable cross-selling and targeted promotions that bundle prescribed drugs with other relevant products (for example, diabetes drugs and sugar-free chewing gums).
A virtual pharmacy would substantially decrease the cost of delivery and could result in a significant decrease in prescription drug volumes for pharmacies. A manufacturing team with an accountable care organization that combines multiple services would be a significant disruptor to the current supply chain and could significantly alter the role of the pharmacist.
In the face of this disruption, pharmacy has a choice to make on the role it will play in the future health care ecosystem. An attractive opportunity for the pharmacy industry is to leverage the millions of patient contacts that happen every day and put the pharmacist at the center of the new health care ecosystem. This model requires the pharmacist and pharmacy to act as the orchestrator of health care delivery and form collaborative relationships with multiple players.
To remain viable in the system, the pharmacy needs to focus on improving patient outcomes and driving efficiency to reduce overall costs. The bottom line? If pharmacists do not step in and fill this role, someone else will.
Technology is a disruptor that has changed the way people read books, view movies, and purchase goods and services. Pharma manufacturers are recognizing that technology may enable them to redefine the current supply chain, give them more control at a lower cost and improve connections with their end-users. Disruptors have a way of bursting on the scene and impacting every aspect of a distribution system. It may be comforting for the corner pharmacy to believe that regulations will protect their current model, but as the future unfolds, new pathways to purchase are likely to become tomorrow’s reality. When the disruptors come, will there be a pharmacy in your future?
MICHAEL WISE (mike.wise@atkearney.com) is a partner with A.T. Kearney and a member of its global health care practice and is based in New York. VISHAL BHANDARI (vishal.bhandari@atkearney.com) is a principal with A.T. Kearney and based in Chicago. KELSEY CHRISTIAN (kelsey.christian@atkearney.com) is a principal with A.T. Kearney and is based in New York.
