Drug firms adding care management


May 17, 1994|By Patricia Meisol | Patricia Meisol,Sun Staff Writer

Will mergers and acquisitions in the drug industry cut prices in the long run? If big drug companies buy the upstart generic drugmakers and distributors that have eaten into their market share and profits, will generic drugs still cost less? What happens to brand-name drugs?

These are the questions being asked as the drug industry consolidates. Last week a top drug executive for SmithKline Beecham PLC, which recently bought Diversified Pharmaceutical Services, a prescription drug management firm, appeared in Baltimore to answer some of them.

The speech by J. P. Garnier, executive vice president/worldwide pharmaceuticals, at the Alex. Brown & Sons Inc. annual health care seminar, was scheduled before his company bought DPS from United Healthcare Corp., the managed care company, for $2.3 billion. But he took the opportunity to explain why he thinks it will "add value" to SmithKline's stock. His discussion also shows why pressure on drug prices will continue.

DPS is a pharmacy benefit manager, a company that figured out how to market generic drugs on a large scale to managed care companies, such as big health maintenance organizations, often through retail chains like Giant Food Corp. and Rite Aid Corp. In the process, PBMs, as they are called, pioneered a new industry -- managing people's use of prescription drugs. The idea is to find ways to eliminate waste and to get people to take drugs that prevent diseases, heart attacks or other problems that require hospitalization. At least 10 percent of hospital admissions are the result of failure to take prescribed medicines.

Is it working? "You bet," Mr. Garnier said, adding that 50 million Americans are enrolled in a managed pharmacy plan. Chrysler Corp., which has tens of thousands of retirees, saw its drug costs drop 25 percent in two years of working with a PBM, he said.

The management companies run large, efficient claims processing and information data bases that help them assess use and effectiveness of drugs for each patient. They suggest drugs that are cheaper.

Thus, they have enormous power to influence market share. The management business is expected to double in three years, as

more managed care companies and big corporations hire them.

Big drug companies can't do this now, because they lack information about patients using the drugs. They also don't know how to set prices for a group, the way PBMs do.

So the drug companies need to acquire PBMs first to get into the fast-growing new industry and, second, to open up distribution for their own name-brands where there are no generic substitutes. In short, Mr. Garnier said, companies like his must evolve from selling pills to total pharmacy care management.

Here's why: Today SmithKline's exclusive patent on its ulcer drug, Tagamet, which accounts for 7 percent of sales, expires. Other companies are lining up to manufacture generic versions at prices 30 percent lower, according to the New Drug, a Washington newsletter. (To defend its market share, SmithKline will produce a generic version; it also will offer $20 rebates on Tagamet to those not covered by prescription plans.) The generic drug business will boom in the 1990s, and as prices drop, SmithKline needs to diversify. "Tagamet is our past, not our future," Mr. Garnier said.

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