Admittedly, the headline from a recent Express Scripts' (NYSE:ESRX) press release, "Specialty Biotech Drug Spending Skyrockets," could be seen as self-serving. It seems designed to stoke anxiety at companies providing drug coverage for their employees, and drive them to seek out the services of the pharmacy benefits manager (PBM) -- which is, after all, in the business of lowering the expense of providing prescription drug coverage for its clients. Even so, the data is worth a closer look, since it has important implications for certain well-positioned drug makers.
The 2006 Express Scripts Specialty Drug Trend Report indicates that spending on specialty drugs increased 17.5% in 2005; by contrast, spending on conventional prescription medicines rose 10%. The $40 billion spent on specialty medications last year still represents a relatively small proportion of total spending on all drugs, at about 19% of the bill. However, Express Scripts expects that to change rapidly. In just three years, outlays on such treatments are expected to more than double to $90 billion, which is projected to be 28% of the total drug expense at that time.
The burgeoning growth in specialty-drug sales bodes well, of course, for makers of biotech drugs, which make up a large portion of the specialty drug category. Express Scripts singled out growth in the anti-inflammatory category -- which includes products from companies like Amgen (NASDAQ:AMGN) and Abbott Laboratories (NYSE:ABT) -- as being particularly robust last year.
At the same time, the expansion in the sales of biologics will undoubtedly provoke aggressive responses to contain costs. Express Scripts and other PBMs like Medco (NYSE:MHS) and Caremark Rx (NYSE:CMX) have already taken measures to keep expenses in check, but their tactics can go only so far toward stemming expenses. Instead, PBMs and prescription drug coverage providers are likely to become more forceful in demanding access to cheaper alternatives, which means more biogenerics. Express Scripts, for example, notes in its press release that a generic alternative to Sanofi-Aventis' (NYSE:SNY) Lovenox could keep a lid on future costs in the anticoagulant category.
Given the current cost dynamics, Food and Drug Administration approval of a pathway for clearance biogenerics appears inevitable, and more likely sooner rather than later. As a result, investors may want to investigate companies equipped to offer biogenerics, including Novartis (NYSE:NVS), TevaPharmaceutical (NYSE:TEVA) and Barr Pharmaceuticals (NYSE:BRL).
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
