Monday, April 19, 2004

Drugstore matrix shift   Competition can rear its ugly head in spite of the best efforts of the oligopolies. That’s certainly what’s happening in the drugstore sector. No sooner have the big drug chains (CVS, Rite-Aid, Walgreen’s) achieved dominance in the sector, then they are under assault from two sides. They’ve managed to drive out virtually every local drugstore and most small chains out of business. (Incidentally, the small pharmacy in my town just sank beneath the waves, selling its customer list to CVS.) They’ve even driven Eckerd to break up, much to the advantage of CVS.   And the profits are good. Even when there seems to be a CVS, Walgreen, or Rite Aid store on every block in America’s suburbs, they are still expanding. Walgreen, for example, plans to build another 3,000 stores by 2010, which will push its total to over 7,000. Same-store sales keep going up, by over 8% in 2003.   But new rivals appear. First, there’s Wal-Mart, supermarkets, and retailers that have opened their own in-store drugstores, with the convenience of having prescriptions filled while you shop. The second threat may be even more serious, as documented in an article in Forbes magazine (“In the Pill Box”, 04/26/2004).   Pharmacy Benefit Managers (PBMs) are now starting to horn in on the drug chains. These companies (primarily ExpressScripts, Caremark, and Medco), who had been limited to acting as middlemen for pharmacies and insurance companies, have recently started expanding in a big way into the mail-order pharmacy business. These companies are making mail-order a tempting alternative for consumers by offering 90 day refills by mail on long-term medicines, and by lowering co-pays considerably for the customer. By cutting out the middleman and lowering the cost through centralization for the operation, their profits are also bigger. Moreover, the PBMs are getting insurance companies to mandate or strongly push prescriptions by mail. The drug stores are relegated to filling one-shot prescriptions, like antibiotics.   The drug chains are trying to fight back. They are forming their own mail order services, or filling 90-day refills in their stores. They are trying to boycott insurance plans that use the local stores only for single-shot prescriptions. But while drug chains insist that PBMs need them, the reality is that there are enough alternatives out there, such as supermarket pharmacies, which would be glad to get the leavings from the mail-order business. So, as the article points out, “When all else fails, fall back on regulation. Walgreen has joined other retailers to support legislation in Michigan that would force PBMs to get rid of mail’s cost advantage by forcing PBMs to offer plans a retail version of any 90-day bargain they offer by mail.” Similar federal initiatives for Medicare are in the works as well.   All of the current triumph of the big drug chains could be soon overturned by new entrants into the competition matrix. And the last hope may be using political power to keep the market from getting “too free.”   6:14:45 PM

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