Specialty Pharmacy Boom Will Continue And CVS Health To Be a Major Beneficiary

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At a time when everybody is worried about economic stasis, healthcare is one industry that continues to offer growth opportunities, that, too, are bigger than ever.   Be it pharmaceuticals, insurance, pharmacy benefit management or drug retailing, there is something on offer across verticals.

In the U.S., the Affordable Care Act, which is expected to bring in more people under insurance coverage, has created new opportunities in insurance and pharmacy benefit management. At the same time, drug manufacturers continue to come up with more effective ways of treating the rarest of conditions (called specialty drugs), driving drug spending upwards. The latter is what we will focus on in this article, while also discussing why we believe CVS Health (NYSE:CVS), among its competitors, is best placed to capitalize on these trends.

Interest From Both Patients And Manufacturers Is Driving Specialty Therapy Growth

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Specialty drugs treat complex diseases such as multiple sclerosis, hepatitis, cancer, and other diseases. Despite exorbitant pricing of these therapies, uptake among patients for some recently launched drugs has been strong. For example, the recently launched drug for Hepatitis C, Harvoni, costs $94,500 for 12 weeks of treatment and managed to generate revenues of $2.1 billion in the final three months of 2014 [1]. Patients don’t seem to be deterred by the pricing as they are very effective and the treatment involves less side effects. Compared to other recently approved drugs such as interferon-ribavirin, which have cure rates of about 50 percent or lower [2], Harvoni cures a near-perfect 92 to 100 percent patients. Moreover, it does so with far fewer side effects than interferon or ribavirin, which patients complain to be worse than the disease itself.

Specialty therapies are also receiving a lot of attention from pharmaceutical companies. Another recent success is Harvoni’s predecessor, Sovaldi, which generated $10.3 billion in sales in 2014, making it one of the most lucrative pharmaceutical launches ever. The emergence of these blockbuster drugs happens to coincide with the patent expirations of branded drugs. Naturally, to (more than) make up for the loss of revenues due to  patent expirations, manufacturers are shifting their focus towards specialty therapies. In fact, by targeting underserved niche groups of the population, pharmaceutical companies are able to charge a premium price for the new, innovative products.

How Big Is the Market For Specialty Therapies?

Spending on specialty drugs in 2012 in the United States was about $87 billion, according to a UnitedHealth Group (NYSE:UNH) report [3]. While the overall drug trend (year-over-year increase in spend per member) averaged in low single digits in the last 8 years, the rate for specialty drugs was almost 20% [4].

Drug Trend

Increased interest from manufacturers is evident in the number of FDA approvals that specialty drugs received in 2014. As of December 3, 2014, the FDA had approved 39 new molecular entities and new therapeutic biologics in 2014, and approximately 50% of those fit the commonly used definitions of specialty products [5].

This trend is expected to continue through 2015 and estimates suggest that spending on specialty drugs alone could quadruple by 2020, reaching about $400 billion.

Why We Think CVS Is Best Placed In This Market

CVS Health (NYSE:CVS) started out as a chain of drugstores and over the years, has transformed into a well rounded healthcare company, with presence in pharmacy benefit management and retail clinics. CVS not only has the necessary delivery and support systems (that most other specialty pharmacies have), but it also enjoys significant bargaining power with drug manufacturers because of its scale in both pharmacy benefit management and specialty pharmacy businesses.

CVS

For example, CVS was able to negotiate a confidential discount deal with Gilead for its drugs Harvoni and Sovaldi, which, given the expensive nature of the therapies, would have provided significant cost savings for its clients. These factors play a vital role in continued renewals of PBM contracts, as well as in gaining new business. CVS’ scale serves as a strong competitive advantage, as most of its competitors, except Express Scripts, do not possess the necessary scale in both businesses to yield similar benefits.

In the recently concluded quarter (ending June 30), the company grew its specialty revenues by 28.4%, which is more than double the market rate [6]. During the same period, the company also generated $11 billion in net new revenues in its PBM division. If CVS can sustain its competitive advantages, it will continue to outgrow the rest of the market and emerge to be a dominant player in specialty pharmacy.

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Other Sources:

Pharmacy Benefit Management Institute: 2014 PBM Market Shares

Drug Channel Institute: 2014 Specialty Pharmacy Market Shares

Notes:
  1. Bloomberg Business []
  2. Health Line News []
  3. UnitedHealth Group Report []
  4. Express Scripts Drug Trend Report []
  5. American Pharmacists Association []
  6. Seeking Alpha Q2 2015 Earnings Call Transcripts []