Drugstore megachain CVS Caremark (NYSE:CVS) issued a press release stating that, according to an internal report, specialty drug spending will quadruple by 2020 -- now just six years away. In dollar terms, that is north of $400 billion per year. A specialty drug is one that is used to treat a small percent of the population, but makes up for an outsized chunk of health-care costs. For the big three pharmacy chains -- CVS, Walgreens (NASDAQ:WBA), and Rite Aid (NYSE:RAD) -- this spells tremendous opportunity, both in the near and long term. Beyond the simple sale of the drugs to patients, all three have the potential to expand into value-added services that help the patients and open up new revenue streams for the businesses.
Issued Wednesday (admittedly by an optimistic source, the company), CVS Caremark's industry report puts a fat number on the growth of specialty drugs -- currently serving less than 4% of patients but accounting for a quarter of health-care costs. The patients are people with cancers, hepatitis, MS, and other complex diseases that often come with frequent hospital visits, multiple drug regimens, and out-of-the-home administration.
Specialty drugs are usually very expensive, though that does not equate to improved margins for the drug retailers -- it can actually be the opposite. So, with this trend, we are looking at bigger top line sales figures nearly guaranteed for CVS and its peers, but it does not suggest increased profitability on its own.
Where these companies can really capitalize on the situation is value added services that are more profitable and keep the patients' care within the purview of the pharmacies. So what does that look like?
CVS' report mentions site of care, medical benefit versus pharmacy benefit, and comprehensive care as the areas of greatest potential.
Site of care refers to the fact that many of these specialty drugs are not taken at home. Some are done at the physician's office, infusion centers, hospitals, and other locations. This can increase the cost of both the drugs themselves and their administration. CVS plans to offer services that steer patients toward the most cost-effective method of care.
Medical benefit versus pharmacy benefit references where exactly the drug spending (see $400 billion figure above) occurs. About 50% of specialty drug spending falls under medical benefit -- done via a health plan that takes place in hospitals, doctors' offices, mobile therapy units, etc. Pharmacy benefit refers to self-administered medication. For providers, these costs get very tricky to keep track of and manage, as sometimes the drug itself is a pharmacy benefit while its administration is a medical benefit.
Finally, the company believes there is opportunity in comprehensive care -- bridging the gap between a patient's care providers and the pharmacy. The company plans to offer services to both patients and doctors to help streamline the various avenues of care -- drug administration, lab tests, doctor visits, monitoring, etc.
Given the low margins on the drug sales themselves, these services should improve the bottom line in a manner that mimics expected top line sales growth, if not beyond. The role of the neighborhood pharmacy looks to be expanding, and it could spell even bigger implications for investors.