Splash 4 Partners: The Evolving Prescription Drug Ecosystem

The Evolving Prescription Drug Landscape

The Arms Race For Market Share

Blurring Lines Between Services, Markets, and Channels

The Tug of War Between Payors, PBMs, and Drug Manufacturers

Industry Players By the Numbers

Contact Us:

Jacob Grosshandler [email protected] Grosshandler [email protected]

Copyright © 2015 – 2016 Splash 4 Partners, LLC

The Evolving Prescription Drug Market Landscape

Splash 4 Partners (“S4P”) was engaged by ahealthcare focused investment fund to help diligencethe evolving prescription drug ecosystem and thecompetitive factors impacting its contemplatedinvestment in the space. The following is a high-levelsummary from S4P’s competitive analysis of theprescription drug space.

Contact S4P to leverage our principals’ years ofexperience in private equity, lending, andmanagement consulting to enhance your diligencefindings and improve your business.


Consolidation & The Arms Race For Market Share

(1) Source: http://www.vox.com/2015/7/24/9034747/anthem-cigna-merger-consolidation. Assumes Anthem’s acquisition of Cigna and Aetna's acquisition of Humana are both approved.Otherwise, top 5 = ~50% of Americans under 65 years of age.

(2) KPMG Consulting as referenced in Fortune: http://fortune.com/2015/07/28/why-pharma-mergers-are-booming/.(3) Estimates based on 2014 prescriptions filled from Deutsche Bank Securities and Pembroke Consulting. Estimates based on 2014 covered lives by Health Strategies Group.(4) Pembroke Consulting and public company filings for McKesson, Cardinal Health, & AmerisourceBergen.(5) 70% revenue estimate is pro-forma assuming Walgreens Boots Alliance completes its acquisition of Rite Aid and CVS’s completed acquisition of Target’s pharmacies. Based on all 2014

outpatient pharmacies of any kind / channel (i.e., retail, specialty, and mail order).(6) NY Times and Pembroke Consulting.

Mail Order Pharmacies &Specialty Pharmacies(6)

Mail Order: Top 3 = 90%+Specialty: Top 5 = 60%+

Market Share

Drug Manufacturers(2)

Closed Deal Activity in 1H 2015

~$221 Billion in Closed M&AActivity in 1H 2015

All Pharmacies(5)

Top 5 = ~70%Market Share

Top 3 = ~50% of non-Medicare Aged

Population(1)

Drug Wholesalers(4)

Top 3 = ~85% - 90%Market Share

Health Plans / Payors(1) PBMs(3)

Top 3 = 75%+Top 5 = ~90%Market Share

Mail Order Pharmacies &Specialty Pharmacies(6)


Blurring Lines Between Services, Markets, and Channels

All major PBMs own their own mail order pharmacies, and many own specialtypharmacies.

Most of the major PBMs are owned by health plans or large pharmacy chains.

Drug manufacturers sometimes bypass wholesalers and supply specialtypharmacies directly.

Large pharmacy chains and their primary wholesalers are deepening theirrelationships (e.g., partial ownership relationship between Walgreens &AmerisourceBergen).

Evidence of drug manufacturers increasingly trying to disintermediate certainparties in the distribution channel and/or limit their distribution partners.

Large retail pharmacy chains are expanding into other areas: specialty, mail order,PBM services, health clinics, attempting to get pharmacists recognized directly as“healthcare providers,” and other areas.

Traditional boundaries are blurring as participants in the broader prescription drug ecosystem arecompeting, collaborating, and encroaching on each other’s once previously siloed areas of focus.

Retail Pharmacies

Mail OrderPharmacies

SpecialtyPharmacies &

Hubs

PBMsDrug DiscountCard Providers

DME Providers

Drug Wholesalers


Blurring Lines Between Services, Markets, and Channels Continued

Brea

dth

of O

fferin

gsCustomer Service Levels

Large pharmacy chains are diversifying into other complimentary healthcare services with the goal being to capture more of the overallhealthcare spend by being a destination and offering a continuum of services and reaching consumers through a variety of channels of theirchoosing. This trend runs even deeper with the larger chains trying to expand their participation and reach to “own the patient” and providethem nurse practitioner clinic services, flu shots, immunizations, etc. in addition to traditional pharmacy services.

Expectation that pharmacists will eventually get “provider” statusand to control costs the overall healthcare system will push moreresponsibility and power to them (e.g., in CA & OR pharmacistscan already write a script for birth control without a physician).

Attempt to control pricing better or slow the margin leakage bycontrolling the pharmacy benefit through PBM ownership.

General trend in U.S. healthcare for inclusion of more people inthe system, but at the price of lowering quality, service levels,choice, and patient control (e.g., passage of the Affordable CareAct).

*Graph is for directional and illustrative purposes only. Exact positioning of the degree of tradeoff between breadthof offerings and customer service levels can be debated.

Confidential


The Tug of War Between PBMs, Payors, & Drug Manufacturers

Manufacturers are increasingly opting for alimited or exclusive network model to restrict

the number of pharmacies permitted todispense their specialty drugs ensuring

specific capabilities and data tracking, andthey are funding copay offset programs to

spur additional sales.

PBMs and health plans / payors areincreasingly creating preferred

pharmacy networks that include onlythose pharmacies willing to take lower

reimbursement for inclusion in thenetwork.

Both manufacturers and payors can limit the dispensing of specialty drugs to a small set ofdesignated pharmacies. Pharmacies of all types (retail, mail order, and specialty) are often caughtin the middle.


The Pharmacy Benefit ManagersPharmacy Benefit Managers (“PBMs”) wield increasing influence and power over the prescriptiondrug ecosystem. Significant consolidation has resulted in the top 3 PBMs accounting for 75%+ of the market.

Most of the major PBMs are owned by health plans or large pharmacy chains, extending their reach and influence.

Nearly all major PBMs have significant owned mail order and/or specialty pharmacy capabilities.

Prescriptions(1) Est. Covered Lives(2) Mail Order Specialty# PBM Parent Company Ownership % Share # (millions) % Share Pharmacy Pharmacy

1 Express Scripts Independent 29.0% 76.7 33.8% Largest 2nd Largest2 CVS Health (Caremark) CVS Health - Chain Retail Pharmacy 24.0% 50.1 22.1% 2nd Largest Largest3 OptumRx(3) UnitedHealth Group - Health Plan / Insurer 22.0% 50.6 22.3% 3rd Largest 4th Largest4 Prime Therapeutics Owned by 13 Blue Cross Blue Shield Plans 6.0% 17.9 7.9% 4th Largest 7th Largest5 Humana Humana - Health Plan / Insurer 6.0% 6.8 3.0% 5th Largest 9th Largest6 Medimpact Private - Backed by SilverStream Capital 5.0% 5.9 2.6% None None7 US Script Centene Corporation - Health Plan / Insurer -- 2.3 1.0% Yes Yes8 PerformRx AmeriHealth Caritas, backed by 2 BCBS plans -- 1.5 0.7% Yes Yes (4)

9 All Others -- 8.0% 15.1 6.7% -- --

Total 100.0% 226.9 100.0% -- --

(1) Estimates as of 2014 by Deutsche Bank Securities and Pembroke Consulting based on number of prescriptions fi l led.

(3) Includes Catamaran, which OptumRx / UnitedHealth acquired in July 2015.(4) Opened a specialty pharmacy called PerformSpecialty in 2015.


Specialty PharmaciesThe PBMs (or entities owning a PBM) control significant market share in dispensing specialty drugs. The two largest PBMs also own the largest specialty pharmacies (>45% of the market).

On the list of top specialty pharmacies, only Diplomat and Avella are “pure-play” independents.

Est. 2014 Specialty Drug# Specialty Pharmacy Parent Company Revenue ($ in billions) % of Total

1 CVS Specialty CVS Health Corporation $20.5 26.3%2 Accredo Express Scripts 15.0 19.2%3 Walgreens Specialty Walgreens Boots All iance 8.5 10.9%4 OptumRx UnitedHealth Group 2.4 3.1%5 Diplomat Pharmacy Diplomat Pharmacy 2.1 2.7%6 BriovaRx Catamaran (now part of UnitedHealth) 2.0 2.6%7 Prime Therapeutics Specialty Prime Therapeutics 1.8 2.3%8 Advanced Care Scripts Omnicare (now part of CVS Health) 1.3 1.7%9 RightsourceRx Humana 1.2 1.5%

10 Avella Avella (fka The Apothecary Shops) 0.8 1.0%-- All Others -- 22.4 28.7%

Total Specialty Pharmacy Revenue $78.0 100.0%

Source: NY Times , http://www.nytimes.com/interactive/2015/07/16/business/specialty-pharmacy-top10list.html.


Specialty Pharmacies – Continued While the specialty pharmacy market share is concentrated among the bigger players, smaller specialty

pharmacies are common. They typically focus on one or two specific disease states and/or focus on a particulargeographic niche, partnering with other participants in the ecosystem like prescribers, regional payors, andhospitals / health systems.

− Example: Family-owned, regionally focused (DE, NJ, MD, & PA) independent pharmacy Burman’s Pharmacy generated~90% of its revenue from hepatitis C treatments before selling to Diplomat in 2015.

Further illustrating the growth in specialty drugs and specialty pharmacies, the 2014 Inc. magazine list of fastestgrowing private companies included 13 specialty pharmacies.(1)

− The list had a median revenue of nearly $100 million and a 3-year median growth rate of 156%.

According to a 2014 study, 66% of commercial health plans mandate the use of specialty pharmacies forpatient-administered specialty drugs.(2)

Specialty drugs now account for a third of all U.S. drug spending (up from ~19% in 2004) and is expected toexceed 50% of total spend by 2024.(3), (4)

(1) Source: 2014 Inc. magazine database.(2) Source: Pembroke Consulting; EMD Serono Specialty Digest, 10th Edition, 2014. 52.(3) Source: NY Times, http://www.nytimes.com/2015/07/16/business/specialty-pharmacies-proliferate-along-with-questions.html?_r=1.(4) Source: Express Scripts Investor Presentation for the William Blair Annual Growth Stock Conference 2015.


Other Questions & Themes Splash 4 Partners Explored The Impact of Affordable Care Act (“ACA”) on Pharmacy Reimbursements

Patient Data Collection Models

Trends in Retail Pharmacies – Both Large Chains & Independent Pharmacies

Emerging Alternative Pharmacy Business Models

Chronic Illnesses Demographics

Technology Risk to Existing Standard Treatment for Select Chronic Diseases

Key Performance Indicators Used to Evaluate Market Position, Evaluate Operational & InvestmentRisks, and Benchmark for Operational Improvements

And more


About Splash 4 PartnersSplash 4 Partners supports middle market businesses and financialsponsors by accelerating growth and increasing profits. We provideactionable insights and data driven solutions to executives andinvestors in the health, wellness, education, and informationtechnology industries that:

Identify new strategies to capture market share

Expand existing relationships with current customers

Explore evolving competitive dynamics of a market, and

Align the firm’s capital structure with its long term objectivesContact Us:Jacob Grosshandler [email protected] Grosshandler [email protected]


Splash 4 Partners: The Evolving Prescription Drug Ecosystem

Healthcare

Transcript of Splash 4 Partners: The Evolving Prescription Drug Ecosystem