WSJ: Selling Generic Drugs by Mail Turns Into Lucrative Business

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The Wall Street Journal

Strategic Position

Selling Generic Drugs by Mail Turns Into Lucrative Business

Benefit Managers Say They Save Employers Money, As Their Own Profits Rise
Off-Patent Bonanza Ahead
By BARBARA MARTINEZ
May 9, 2006; Page A1

In many industries, middlemen scrape by on small margins. Not so in generic drugs.

Documents from 2001 filed in an Ohio court case show that Medco Health Solutions Inc. paid $90 that year for the pills to fill 114 prescriptions for a generic copy of Valium. Medco sent its client, the State Teachers Retirement System of Ohio, a bill of $1,028 for the drugs, which also reflected its dispensing costs. Medco paid $766 for the pills to fill hundreds of prescriptions for the blood-pressure medicine atenolol. It billed the Ohio teachers $25,628. Today, Caremark Rx Inc., another middleman, charges the federal government and employees $96.88 for 90 pills of generic Prozac, according to a Caremark Web site. The same pills can be bought wholesale for less than $5.

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It's a hugely lucrative place in the food chain. Generic drugs are popular because they save money by offering alternatives to expensive brand-name drugs. But the PBMs have figured out how to use mail order to turn generics into a bonanza. Buying in bulk, the PBMs typically pay a few cents per pill, then turn around and bill employers a quarter, 50 cents or even a dollar a pill. A Medco spokeswoman, Ann Smith, says final profit is much smaller than that spread because of administrative and dispensing costs. For the employers, the generic prices look like a bargain because they're generally still much lower than those of brand-name drugs. The employers often don't know the spreads enjoyed by the PBMs.

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The business has brought gains for PBM shareholders and made some PBM executives rich, chiefly from valuable stock options, even as many employers and employees struggle to afford health insurance. Caremark's chief executive, Edwin M. "Mac" Crawford, has sold $185 million in stock since November. At Express Scripts, Chairman Barrett Toan has sold $64.8 million in stock since last fall. It helps the PBMs that many employers are unfamiliar with the economics of manufacturing pills. While a brand-name pill such as Lipitor or Prozac may cost employers $2 or more, most of that goes into marketing, research into future drugs and profit for the drug company. The cost of actually producing the pills is usually only a few cents each.

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Recently, some states have been pushing back against PBMs, weighing laws to force the middlemen to reveal where their profits come from. The laws would also make PBMs fiduciaries of their clients, just like accountants or lawyers. That would limit the PBMs' ability to grab lucrative margins through pricing methods that employers find hard to follow. Meanwhile, a handful of employers are looking for ways to buy generics for a price closer to what they cost to make. But for now, the generic mail-order business is booming. It represents the latest evolution of an industry that has played a key behind-the-scenes role in the $250 billion U.S. pharmaceuticals business.

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URL for this article:
http://online.wsj.com/article/SB114713546203047327.html (subscriptin)

[question everything]

1. self-kick this is what we need to run with

in the elections. On how many of us are squeezed from health care while the CEOs of companies that do not treat patients, do not invent new treatment, are only shuffling papers - reap millions.