What's happening in the pharmacy space? Key thoughts from 2 Provident Healthcare leaders

Whether its Amazon's entry into the pharmacy space or changes with the 340B Drug Discount Program, it's no secret that the pharmacy sector is evolving.

Here Michael Patton, a managing director at investment banking firm Provident Healthcare Partners, and Bill Bolding, an analyst at Provident, discuss several recent trends and pressures in the pharmacy space.

Editor's Note: Responses have been edited for length and clarity.

Question: What forces are placing the most pressure on hospital pharmacies?

Michael Patton: In the hospital pharmacy space, there has been a heightened workload for pharmacy teams. Hospitals are relying more on pharmacists to complete tasks beyond filling a prescription. Today, pharmacists are expected to help with utilization management, drug adherence for a patient population and prior authorization. With that said, hospital pharmacies may not have all the resources and staff like a standalone, fully built out pharmacy.

In addition, I think there are some uncertainties surrounding the 340B Drug Discount Program, which has been a profit center for many hospital-based pharmacies. There may be some increased reporting standards coming and some changes that may force hospital pharmacies to adapt. Overall though, this program has been highly profitable for hospital pharmacies over the last five years.

Q: Consolidation is occurring across many healthcare sectors. Can you describe why or how this is happening in the pharmacy space?

MP: The pharmacy space is rapidly condensing. For example, we've done 20 to 30 transactions over the past 20 years in this sector alone. Over the past few decades, consolidation created four major behemoths in the space [CVS, Walgreens, UnitedHealth and Express Scripts] that now make up over 80 percent of the total spending. In other words, the biggest players have eaten up a large majority of the separate, smaller drugstores. You will likely continue to see the smaller pharmacies, who maybe don't have the resources, infrastructure or payer contracts, be acquired by these four larger companies ... Many of the smaller guys see a path to solid payer contracts, better drug access and patient population management by joining one of those bigger entities.

Bill Bolding: We have seen the rapid consolidation as this pharmacy industry has grown … and we expect it to continue to grow at a rate of about 6 percent in next few years. What we've seen in this recent wave of consolidation, at least this year, has been interest in newer spaces. For example, OptumRx's purchase of Genoa Healthcare for $2.5 billion reveals UnitedHealthcare's interest in the behavioral and mental illness space, especially because Genoa offers telepsychiatry services and medication management for behavioral health patients.

Q:  Why is private equity so interested in healthcare? Will the interest by PE firms in the pharmacy space continue?

MP: The No. 1 reason PE is interested in this space is the demographics of the U.S. population, which is aging. This will equate to almost automatic growth for the healthcare sector and it means a lot of the areas in healthcare are recession-resistant. I think another main reason is that healthcare is very fragmented and PE firms can buy and build to coordinate care and see a return on investment in this new value-based era.

BB: Private equity has been interested in the pharmacy space for well over a decade. We have done 20 deals since 2000 in the space. In the mid to late 2000s, we saw rapid consolidation on the legacy pharmacy side by PE investment ... lots of those large players own much of the market now …  so there may not be as much wiggle room for new PE investment in the space. But there is a newly heightened interest by PE firms in outsourced pharmacy services like pharmacy IT and other pharmacy technologies. PE groups have been successful with businesses in the pharmacy space in the past, and we don’t see this decreasing or diminishing in the future.

Q: What other interesting trends are occurring in the pharmacy space?

MP: One of the interesting things, in my opinion, is Amazon's entry into the space with its PillPack acquisition. In addition, CVS's pilot program that was made to fend off Amazon … Overall, Amazon has been very successful in every other area in the market, disrupting just about every sector… so it makes a lot of sense for them to move into the pharmacy space. I think you'll continue to see more and more groups come into it after Amazon.

BB: One trend I find interesting is the increased emphasis on technology in deals. For example, on the discount pharmacy side, Silver Lake, a technology-based PE firm recently invested $2.8 billion into GoodRx, an online discount pharmacy website. In addition, it's been an overarching trend on many deals. Why Amazon would pay seven times revenue for PillPack was because of the technology component. Not just the software but also with labeling and processing. I think moving forward the technology component will play a bigger role in any deal we see in the pharmacy space.

Find out more about Provident Healthcare Partners here.

More articles on pharmacy:
Florida adds CVS, Walgreens to opioid lawsuit
Pfizer to hike price of 41 drugs in January
Bristol-Myers Squibb to lay off 69 employees in Florida

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