Pharmaceutical companies now are investing in new sciences: biotechnology, genomics and nanomedicine:
PBMs poised to profit from new generic-drug pipeline
Last Update: 4:53 PM ET Mar 10, 2006
PHILADELPHIA (MarketWatch) -- Pharmacy benefit management companies, already reaping healthy profits from their members' growing use of generic drugs, should see further increases in generic volumes as patents expire on more branded pharmaceuticals starting later this year.
PBMs such as Caremark Rx Inc. (CMX), Medco Health Solutions Inc. (MHS) and Express Scripts Inc. (ESRX), which oversee pharmacy benefits for health plans and employers, derive strong profits from members' use of lower-cost generics, especially those delivered through the mail.
"Currently, both mail and generics are among the fastest-growing aspects of prescription drug growth, working strongly in favor of PBM profit trends," Merrill Lynch said in a note Friday. With the patents on more branded drugs set to expire soon and in the coming years, the firm expects the volume of generic drug use among PBM members to accelerate.
Medco Health Chairman and Chief Executive David Snow said at an investor presentation this week that higher dispensing rates for generics helped drive profitability in 2005, and noted that "there's an unprecedented amount of generics coming out over the next five years," according to a Thomson StreetEvents transcript.
Some $46.5 billion worth of branded drugs - nearly 70 medications, including 19 blockbusters - are going off patent from mid-2006 through 2010, making way for generic competitors, he said. While the lower-cost drugs mean lower revenue, they produce higher profit margins, Snow noted. The CEO expects Medco's dispensing rate for generics to continue to grow at the same pace it has in the past few years, and possibly to accelerate a bit.
This year, $9.8 billion worth of branded drugs will go off patent with generic competitors available, which should add 9 cents to 11 cents to Medco's earnings per share in 2006, Snow said.
Patents for Zocor and Zoloft expire this year, while those for Ambien, Fosamax, Zyrtec, Prevacid and Singulair, among others, are schedule to expire in coming years, according to Medco.
"The big blockbusters that are about to go off patent were based upon the science of chemistry. And pretty much the science of chemistry has run its course and that's why you're going to see generic dispensing rates grow significantly in the core pill and capsule area over the next five years," he said.
Pharmaceutical companies now are investing in new sciences: biotechnology, genomics and nanomedicine, Snow said.
In the fourth quarter, generics accounted for more than 55% of Express Scripts' total prescriptions, and 52.5% of Medco's, according to the companies.
Generic-drug penetration at the major PBMs rose at retail stores and through the mail in the fourth quarter, according to Merrill Lynch. All three major standalone PBMs saw year-over-year increases in mail and retail generic volumes as a percentage of total claims, the firm noted.
Generic volumes, especially mail-order generics, should accelerate in the second half of this year and into 2007, as the patents on significant drug brands expire, the firm said.
Merrill expects to seek or receive investment-banking compensation from Medco Health Solutions within the next three months, owns at least 1% of Caremark and recently conducted noninvestment-banking services for Caremark.
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