Drug Channels Predicts More Wholesaler Vertical Integration Over Next Couple of Years

While many retail pharmacies are backing away from their provider group subsidiaries, private-equity groups continue to invest in the space, activity that is likely to continue under the new administration. Roll-up mergers have been of great interest to drug wholesalers, which have become almost as vertically integrated as the major PBM/insurer entities. As pressure grows on the buy-and-bill system, this integration will be a big story over the next couple of years, asserted longtime industry expert Adam J. Fein, Ph.D., president of Drug Channels Institute, an HMP Global Company, during a Dec. 13 webinar.

Taking a broad look at the drug channel, Fein observed that private-equity groups have become a “big part of health care markets.” Retail pharmacies had been acquiring primary care organizations that were started by venture capital and private-equity companies but “have now realized that’s not such a great business.” He pointed to Walgreens Boots Alliance, which has considered selling VillageMD and, more recently, is reportedly in talks to sell itself to private-equity group Sycamore Partners, according to The Wall Street Journal.

“I guess some of the pharmacies realized that people didn’t want to get primary care at the same place that they get their cigarettes, Snickers and Band-Aids,” he remarked.

While many primary care providers work at hospitals, Fein pointed out that about 20% of them work for other corporate entities, such as vertically integrated health care companies like CVS Health Corp. and UnitedHealth Group, as well as private equity-backed organizations to a smaller extent.

But when it comes to oncology, rheumatology and neurology — areas with the biggest drug spend per physician — private equity is much more involved. For example, until the last six or seven years, hospitals and health systems were the main acquirers of oncology practices. But starting about five or six years ago, that changed, with private-equity firms representing two-thirds of oncology practice acquisitions over the last five years, he explained.

The new owners form roll-ups with the smaller entities that they’ve purchased, placing them under a management services organization (MSO).

The Federal Trade Commission, under current chair Lina Khan, has been “very skeptical of these roll-ups,” said Fein, who noted that the FTC even sued one, as well as changed merger guidelines targeting serial transactions in similar business lines.

However, President-elect Donald Trump has tapped current FTC commissioner Andrew Ferguson as the next FTC chair, and “it’s unclear that he is going to go along with these guidelines,” Fein remarked. “There’s an expectation that the roll-up slowdown which Lina Khan tried to trigger is going to reverse.”

Currently, the top focus of roll-ups is infusion centers, “which are probably where specialty pharmacy was 15 years ago, and we’re going to see a bunch of big infusion companies get rolled up and then sold to other financial buyers or strategic buyers.” Those purchasers, he forecast, may well be the vertically integrated insurer/PBM/pharmacy/providers, which “already have invested in some infusion business.”

Home health is another roll-up target, maintained Fein, who pointed to efforts to block UnitedHealth’s proposed purchase of Amedisys Inc., which has grown to be one of the largest home health companies through purchasing other home health firms.

Ultimately, he predicted, roll-up activity is likely to continue, and the “more business friendly” FTC should allow it.

Vertical Integration Impacts More Than Insurers, PBMs

According to Fein, physician market roll-ups “have led to another kind of vertical integration that people do not talk about that much.” While most of the focus is on the vertically integrated insurer/PBM/pharmacy/provider entities, “very few people talk about what’s been happening in the buy-and-bill space, the provider-administered drug space, with regard to vertical integration.”

He noted that similar to the insurer/PBM organizations, the three largest wholesalers — Cencora, Inc. (formerly known as AmerisourceBergen), Cardinal Health and McKesson Corp. — have multiple businesses. In addition to a wholesale distributor, each has at least one generic manufacturer, retail pharmacy franchise, pharmacy services administration organization (PSAO), group purchasing organization (GPO) and provider group.  

About 7,500 small pharmacy locations are in wholesalers’ pharmacy networks: Cencora’s Good Neighbor Pharmacy, Cardinal’s The Medicine Shoppe Pharmacy and McKesson’s Health Mart. The PSAOs are organizations that negotiate with PBMs on behalf of pharmacies.

Cencora, Cardinal and McKesson have been focused on helping “smaller retail pharmacies survive a challenging world,” said Fein. “But what’s happened in the last couple of years is they have made many significant investments in helping providers, particularly physicians who are using the buy-and-bill system to sustain their business,…through group purchasing organizations, which they’ve had for many years but have started to significantly invest in.”

Those GPOs are not for primary care but rather oncology, rheumatology or urology, he stated, and the wholesalers “continue to acquire companies,” with Cardinal closing on a deal for Specialty Networks earlier this year.

“And within the last couple of years, they’ve started to go one level deeper into vertical integration, which is starting to partner with and/or acquire the management service organizations that the private-equity firms have been building up and essentially becoming owners in their customers,” a practice Fein refers to as “private-equity enablement.”

As an example, he pointed to OneOncology, which Cencora gained a stake in by “partnering with another private-equity firm a little more than a year ago.” OneOncology “was formed in 2018 by a private-equity firm that acquired a whole number of practices. And by the time they got big enough and sold to Cencora, they had over 1,200 physicians at over 400 locations.”

In November, Cencora said that it had entered into an agreement to acquire Retina Consultants of America, an MSO with 300 physicians, from Webster Equity Partners. “These companies have been sort of rolling up the physicians, and they have strategic partners who want to buy this, who are the wholesalers,” Fein stated.

He also pointed to Cardinal’s purchase of Integrated Oncology Network and McKesson’s acquisition of a majority stake in a new holding company for Florida Cancer Specialists known as Community Oncology Revitalization Enterprise Ventures, LLC. While the latter deal did not involve a private equity-backed company, “it was one of the largest oncology practices in the country,” he stated.

Provider-Administered Biosimilars Will Be Impacted

“So what this means is you’re going to start to hear more and more about how the wholesalers are still going to start to control and influence biosimilar market access for provider-administered biosimilars,” he maintained. The FDA has approved more than 40 of these agents, “and the wholesalers are going all in on their vertical integration.”

This vertical alignment, asserted Fein, “is one of the biggest stories of the next couple of years because the buy-and-bill channel is going to be under enormous financial pressure. The IRA [Inflation Reduction Act] is going to crush margins in the buy-and-bill space. Potential reform of 340B may help tilt the playing field a little bit more in favor of non-340B-eligible hospitals — most of these practices are not 340B-eligible — but it’s creating a lot of chaos, and the growth of biosimilars is actually pressuring the economics of physician practices in the same way that low-price generics are pressuring retail pharmacies.

“If I’m a physician, and I’m getting a markup over the cost of the drug, and the cost of the drug drops by 60%, the dollar value of that markup goes down,” he continued. “And adding another couple percentage points, like the IRA did for Medicare Part B, doesn’t do a lot.”

Currently physician-administered biosimilars “are a meaningful portion of wholesalers’ profits, although still a single-digit share of their revenues. So I would keep this in mind if…you’re trying to get into this market: The wholesalers are going to become gatekeepers. They are gatekeepers already.”