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The Future of Final-Mile Pharmacy

POSTED BY

Robert J. Feeney, Jr. , Founder and CEO

Final-mile delivery is set to be a critical competitive battleground for the pharma industry in the age of e-commerce and instant fulfillment.

The way consumers purchase goods and services is changing by the minute. Anticipatory logistics, final-mile transportation networks, and same-day delivery services are fundamentally shifting how consumers access goods and services. New technologies and supply chain models that combine the convenience of e-commerce with the immediacy of traditional brick-and-mortar stores are the direct descendants of the biggest influencer in recent retail history: Amazon. With its rapid delivery service model, Amazon has transformed the retail landscape, along with customer expectations, establishing an aggressive benchmark of near frictionless consumer experience in virtually every industry.

To accommodate growing consumer demand for instantaneous order fulfillment, an ever-expanding array of well-financed final-mile platforms like Uber, Postmates, and Deliv have entered the fray, investing billions of dollars in the race to create crowd-sourced and asset-light regional logistics networks. These networks are designed to support the scale economies required to provide same-day delivery service in urbanized areas with dense metropolitan populations. As the new retail model expands to healthcare, it’s really only a matter of time before companies that provide car service and food delivery are playing an integral role in the distribution of pharmaceuticals as well.

    Demand for Same-Day Delivery

  • 61% of internet users would pay more for same-day delivery
  • 82% of shoppers want same-day shipping options
  • 64% of millennials are more likely to purchase online if same-day is an option
  • 25% of shoppers would abandon their cart if same-day delivery was unavailable

A Supply Chain Ill-Equipped for the Future

The basic schematic of the pharmaceutical supply chain in the United States dates back to the turn of the century. Because it is inherently retrospective in nature, it is fundamentally ill-equipped to support the requirements of e-commerce platforms, including anticipatory logistics, distributed networks and home delivery. Industry pundits are quick to point out that prescription medications aren’t the same as books. And they’re right. The book industry doesn’t have to contend with the impact of entrenched middlemen, a crisis of runaway costs, poor product quality, and low consumer expectations. Would the book industry tolerate a supply chain where up to 37 percent of customer orders were never even filled?

Studies have shown that fully a third of all new prescriptions written by physicians for the treatment of patients with chronic disease are never filled. Research into the cause shows that much of the abandonment rate can be attributed to the byzantine complexity and inconvenience of today’s pharmacy process. While the complex supply chain requirements for prescription drugs differ from those for consumer packaged goods, Amazon’s entry into the pharmaceutical marketplace likely means the pharma industry is going to have to adapt to modern e-commerce models—not the other way around.

A Game Plan for the Amazon Effect

As consumer behavior continues to change, pharmaceutical manufacturers can expect competitors to respond with new fulfillment channels to meet increased customer expectations. Pharmacy Fulfillment by Amazon (PFBA) and its existing network of 150 distribution centers across the country will drive a paradigmatic industry shift in the coming years. Manufacturers need a game plan if they hope to survive the infamous “Amazon effect.”

What should that game plan look like? For starters, it needs a final-mile strategy. One option to consider for that strategy will be Amazon itself. For a defined set of service fees (as opposed to rebates and the traditional AWP, WAC and AMP gamesmanship), manufacturers will be able to advertise their brands on Amazon as well as have their products fulfilled by the company’s vast and rapidly expanding network of distribution centers. Whether or not to participate in Amazon’s prescription marketplace and/or outsource fulfillment to the company should be a carefully deliberated decision as the volume and commoditization entailed by the partnership would have a significant impact on a manufacturer’s brand and longer-term strategy.

An alternative to Amazon for pharmaceutical companies could be to partner with existing logistics companies like UPS, FedEx, or other third-party courier services to offer home delivery and position their product in regional distributions centers closer to consumers in population-dense geographic markets. The problem is that these companies don’t have the required licensure, pharmacy operations, dispensing automation, or expertise necessary to manage and dispense prescriptions to consumers at home.

An Independent, Direct-to-Patient Alternative

For manufacturers, the best alternative to partnering with Amazon is an independent solution, one that moves the traditional logistics and pharmacy process upstream in the value chain, closer to the end consumer. From e-commerce to pharmacy to final-mile fulfillment services, the best alternative to Amazon is a direct-to-patient platform that gives manufacturers faster, more efficient ways to reach patients. This anticipatory e-commerce pharmacy channel forms the backbone of the Medvantx platform.

With the industry’s only end-of-runway pharmacy, Medvantx is enabling manufacturers to reach patients anywhere in just hours. Partnering with UPS, we offer the largest dedicated healthcare storage and logistics capabilities in the U.S. Our proprietary final-mile solution and comprehensive fulfillment capabilities are designed to collapse the supply chain and bring manufacturers closer to patients.

Final-mile delivery is set to become a critical competitive battleground for the pharmaceutical industry in the coming age of e-commerce and instant fulfillment. To ensure the independence and long-term viability of their brands, especially in the face of increased formulary exclusion, manufacturers need to establish a final-mile strategy that will be able to keep pace with the evolution of consumer demand in the years ahead.

The Formulary Exclusion Squeeze

POSTED BY

Robert J. Feeney, Jr. , Founder and CEO

Formulary exclusion lists have become the blacklists of the pharmaceutical industry. Direct-to-patient channels offer manufacturers an alternative.

With the advent of managed care in the 1980s came prescription formularies—lists of medications that were approved for prescription to patients in various care settings. Originally, formulary inclusion was based on third-party assessment and clinical evaluation of the efficacy, safety, and cost-effectiveness of a given medication. These lists represented a sensible way for payors, providers and patients to determine which drugs qualified for coverage and optimized the cost vs. clinical effectiveness equation.

Over the past thirty years, however, formularies have evolved from straightforward, single-tier lists of brand and generic medications to become exceedingly complex matrices of as many as ten separate tiers with selection criteria than can be described as opaque at best. What was once defined by objective clinical standards is now dictated by for-profit middlemen in the form of pharmacy benefit managers (PBMs). The growth of tier-based differential rebates—created by PBMs as a means for pharmaceutical manufacturers to secure access to formularies—fundamentally altered the role of formularies and become the driving force of formulary inclusion. As the prevalence and size of these rebates has grown, formularies have become increasingly narrow, evolving from inclusion lists to the exclusion lists we know today. The result is that patients now pay larger and larger percentages of the cost of certain necessary medications, sometimes as much as 100 percent.

The Blacklists of the Pharmaceutical Industry

Formulary exclusion lists have become the blacklists of the pharmaceutical industry, created by PBMs to block consumers from gaining access to medications, not because of efficacy or safety concerns, but solely as leverage points for PBMs in their rebate negotiations with manufacturers. And the exclusivity of these lists only continues to grow. The size of formulary exclusion lists has increased by nearly 160 percent since 2014, during which time the combined number of treatments on CVS Pharmacy’s and Express Scripts’ drug formulary exclusion lists grew from 132 to 344. Over this same period, the prevalence of consumer-driven health insurance models also grew substantially; approximately 40 percent of consumers are now enrolled in some form of high-deductible health plan.

How did we get to a point where one healthcare company can pay another to block patient access to a competing product in the marketplace?

With patients taking on more and more responsibility for the management of their own healthcare and experiencing first-dollar exposure for the actual costs of prescription medications, should a PBM continue to decide which medications prescribers and their patients select as optimal for their care? When PBMs make these decisions based in large part on the scope and depth of the rebates that manufacturers are willing to pay, the resultant limitations on patient choice seem especially cynical. How did we get to a point where one healthcare company can pay another to block patient access to a competing product in the marketplace?

An Existential Threat to Manufacturers

Given the recent vertical integration trifecta of Aetna/CVS (a payor/retailer combination), Cigna/ESI (a payor/PBM combination) and Walgreens/AmeriSource Bergen (a retail/wholesale combination), now is a good time to think about the next logical step in the evolution of increasingly narrow formularies. If the PBM and the retailer are the same company, what motivation would they have to even stock non-formulary drugs in their stores? If wholesalers can’t get them into stores, why should they even include such medications in their supply chain or distribution networks? CVS and Walgreens comprise no less than a 40-percent share of the US retail pharmacy marketplace. The manufacturers of products excluded from these companies’ formularies face an existential threat when it comes to medications in which they’ve invested billions of dollars to research, develop and commercialize. Overnight, that investment could be all but wiped out by a large PBM/retailer partnership that decides not to stock their product.

The upward trend of mergers and acquisitions throughout the healthcare industry means that the scenario described above isn’t just pessimistic speculation. It’s only a matter of time before patient access to medication via traditional retail channels is defined by singular corporate entities who control both the playing field and the rules of the game. And that’s just brick-and-mortar retail. With its acquisition of mail-order pharmacy PillPack, Amazon’s entry into the space represents a consolidated corporate force majeure on the online flank of the competitive landscape as well.

Leveraging Brand Loyalty with Direct-to-Patient

To survive in this new industry paradigm, pharmaceutical manufacturers are going to have to take their fate into their own hands. Only by establishing independent, direct-to-patient channels can manufacturers ensure that the massive investments they’ve made and continue to make into innovation and development won’t be subject to the whims of PBMs and retailers who deem their products cost prohibitive. By utilizing direct-to-patient platforms driven by e-commerce and anticipatory logistics, manufacturers will always have an ace up their sleeve when it comes to patient access, engagement and retention. Brand loyalty, after all, is a powerful thing. Manufacturers can leverage that loyalty by engaging patients on the clinical value of their brand and offering a more consumer-friendly alternative to the fragmented and overly complex traditional pharmacy process—an alternative that is fully automated and streamlined by e-commerce technology designed with the patient in mind.

The reality is that today’s formulary lists are pay to play, and rebates are the cost of admission. But increasingly narrow formularies are just the tip of the iceberg when it comes to the challenges that pharmaceutical manufacturers will face in the years ahead. Brands that approach these challenges with passive strategies dependent on traditional channels risk facing existential threats to core products. Manufacturers that tackle these challenges head on, with independent, direct-to-patient platforms at the ready, will be poised to define the future of the industry themselves, rather than letting it define them.

The Amazon Pharma Threat

POSTED BY

Robert J. Feeney, Jr. , Founder and CEO

The global retailer’sentry into the pharmacy space means manufacturers need direct-to-patient solutions to counter the infamous “Amazon effect.”

Amazon has entered the pharmacy business. After years of increasing speculation, the company finally made it official by acquiring PillPack, a relatively new niche player in the mail-order and adherence packaging space, for a reported $1 billion in late June. With the purchase, Amazon acquired pharmacy licenses in 49 states (all except Hawaii). While the company was already actively supplying products to hospitals and healthcare facilities and recently announced a partnership with Berkshire Hathaway and JP Morgan Chase to manage employee healthcare costs, Amazon’s acquisition of PillPack suggests it has its sights set on becoming a significant player in the half-a-trillion-dollar U.S. pharmaceutical industry.

What does Amazon’s entry into the pharmacy space mean for pharmaceutical manufacturers and traditional supply and value chain providers? If its approach to other industries is any indication, Amazon will change the way consumers access pharmacy care and collapse the supply chain in the future. The question for manufacturers and the industry at large is, what now? Embrace Amazon? Or build, buy or partner to develop an e-commerce platform of their own?

    A Shifting Industry

  • With PillPack, Amazon has acquired pharmacy licenses in 49 states
  • 85% of Amazon Prime’s 100M members say they’d buy drugs from Amazon
  • Inefficiencies & rebates currently consume $94/brand drug
  • HHS Secretary Azar has threatened to eliminate rebates entirely
  • Amazon’s access to consumer data will redefine marketing & retail
  • The Prime algorithm could replace PBMs & retailers altogether

Consolidate or Innovate?

Amazon’s impact on the pharmaceutical industry was nearly instantaneous, as wholesalers, distributers, PBMs, insurers, and retailers lost over $20 billion in market capitalization on the day of the announcement. As has typically been the case in industries “disrupted” by Amazon, many of the legacy players in the pharmacy value chain decided to consolidate rather than innovate in the face of the news. Anxiety over Amazon’s entry was widely assumed to be a contributing factor in CVS Health’s bid to buy Aetna and Cigna's shareholders voting to support its pending acquisition of Express Scripts, just to name a few.

This recent spate of mega-mergers of wholesalers, retailers, PBMs and payors was a predictable reaction, but does little to actually solve the challenges presented by Amazon’s entry. Mergers and acquisitions do nothing to create new, sustainable competitive advantages; they merely double down on existing market forces. Companies that have withstood the Amazon threat in other industries are those that have turned to innovation, not consolidation, as a strategy.

The Amazon Effect: Prescription Medications

Changes to prescription medication formularies have already been well underway, as varying levels of co-pay tiers continue to evolve into exclusion lists. Drug formulary exclusion lists have increased by nearly 160 percent since 2014, according to a recent Doctor-Patient Rights Partnership report. In 2014, there were 132 treatments on CVS Pharmacy’s and Express Scripts’ combined drug formulary exclusion lists. In 2018, that number has grown to 344.

As a result, pharmaceutical manufacturers can no longer rely on payor and PBM rebate strategies to create access to, or a more level playing field for, their products. As part of the Trump administration’s plan to lower prescription medicine costs, U.S. Health and Human Services Secretary Alex Azar recently stated that it was within his agency’s power to actually eliminate rebates on prescription drug purchases altogether. With rebates threatened, pharmacy retailers owned or controlled by payors can be expected to take formulary exclusion to its logical conclusion—no longer even stocking non-formulary products in their pharmacies. The impact of this change would ripple backward up the supply chain, and manufacturers could find themselves without access to any large U.S. channels of distribution for their products.

While legacy providers battle it out for an increasingly smaller piece of the pie, Amazon could replace the concept of formularies, tiers and rebates all together. The Amazon Prime software algorithm would decide, favoring generic conversion over branded medications. Pharmaceutical companies that have invested billions of dollars into drug discovery and branding would find themselves commoditized as consumers look to Amazon for their medications along with everything else. Check-out baskets would begin to fill with private label Amazon Prime brand of generic pharmaceuticals.

The Amazon Effect: A New Retail Model

Amazon’s impact on traditional brick-and-mortal channels is well known—the Amazon Effect. The Amazon Effect has led consumers to expect an almost completely frictionless shopping experience with near-immediate results. Traditional retail stores and independent pharmacies are already rapidly disappearing, replaced by large chain drug stores as payor pharmacy networks become increasingly narrow and restrictive. Aetna members, for example, might soon only be allowed to purchase medications from CVS stores. With its massive marketplace business model and use of e-commerce vs brick-and-mortar, Amazon has demonstrated a unique ability to drive manufactures into fully commoditized marketplaces and to reach consumers upstream in the value chain.

Pharmaceutical companies will find themselves commoditized as consumers look to Amazon for their medications along with everything else.

Amazon’s ability to collect information about patients will further forever change the prescription medication marketing mix. The company could use data, for instance, to target ads for self-help books at patients filling prescriptions for anti-depressants. With its Whole Foods locations and Alexa voice command system, Amazon has a multifaceted arsenal to upsell pharmacy customers and cross-promote products. In his annual letter to shareholders, Amazon CEO Jeff Bezos recently revealed the company has more than 100 million Prime members. According to a recent study, the vast majority of Prime members who also have health insurance said they would be willing to purchase prescription drugs from Amazon online. No fewer than 85 percent of insured Prime members told Deutsche Bank they would be comfortable buying drugs straight from Amazon.com.

With the recent PillPack acquisition, Amazon now also has the pharmacy licensure and infrastructure, albeit nominal, to begin to disrupt the cash-pay prescription business. Prescriptions purchased by the uninsured and underinsured population represent an invaluable opportunity for competitive pricing in each of the 49 U.S. states where Amazon now has a license to ship medications. The traditional distinctions between prescription assistance, free trial, and direct-to-patient programs will only continue to blur as consumer engagement platforms shift from traditional to more e-commerce enabled approaches.

The Threat to Manufacturer Independence

Apart from the mergers and acquisitions in the value chain, many have viewed Amazon’s entry into the pharmacy industry with only tempered concern. Certainly Amazon represents a theoretical threat to the industry status quo, but immovable forces like market share consolidation among major PBMs will mean the company’s growth will be kept in check. Healthcare is complex and different. Right?

The reality is that seemingly immovable forces have never stopped Amazon in the past. The company has a history of starting small in the industries it enters, testing the market and fine-tuning its services, before launching full-fledged commercial operations. Kaiser Health News found that redundancies, inefficiencies and rebates in the pharmacy supply chain consume approximately 31 percent or up to $94 within the average branded medication. In the past, Amazon has disrupted vertical industries where the margin compression opportunities were measured in basis points, not hundreds of dollars per order. The question isn’t whether they will be successful in healthcare, but why buy a niche start up vs larger platform? And what took them so long?

Its puzzling entry strategy does not preclude Amazon from someday leveraging its unparalleled brand loyalty and massive e-commerce infrastructure to cut out PBMs and retailers altogether and simply sell product online for cash. Why fight against an entrenched, antiquated system when you can just build your own? As rebates no longer work—or disappear altogether—and chain drug continues to narrow, the system is increasingly ripe for change.

The Road Ahead

While it is certainly the most widely publicized, Amazon’s entry into the healthcare and pharmacy marketplace is really just the latest development in the rapidly changing landscape of the pharmaceutical industry. Changing industry fundamentals have been driven by the shift to a more consumer centric model, and that trend is certainly only going to accelerate.

If they are to survive, manufacturers will need independent, direct-to-patient anticipatory logistics powered by e-commerce technology.

If manufacturers are commoditized by an algorithm-driven e-commerce model, they can expect to be forced into reverse auctions to compete exclusively on price in a race to the bottom (also known as the Amazon Marketplace). As it has shown in nearly every industry it has entered, Amazon’s platform is unique in that brands either use it or they die. Like many retail brands before them, pharmaceutical manufacturers risk losing their independence in the new Amazon pharmacy marketplace model as they lose control of their brands.

As they look toward the future, manufacturers will need new and independent platforms powered by e-commerce technology, direct-to-patient anticipatory logistics, and innovative final-mile solutions if they are to survive in this new industry paradigm. They will need ways to move the pharmacy process upstream in the value chain so that it is as close to the consumer as possible. They will need a solution to the fragmented and overly complex pharmacy process that is fully automated and streamlined by e-commerce technology, so that what is now measured in days can be measured in mere hours. What manufacturers need is independent, comprehensive anticipatory logistics solutions.


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