Proposed legislation compounds pharmacy risks
If passed, the bill to reform compounding medicines could create opportunities to some pharmacies.
The pharmacy industry is likely to undergo a number of changes over the next few years with the implementation of the Affordable Care Act. The industry has had to deal with a number of major legal issues surrounding prescription security for opioids like Oxycontin. This issue has still not been fully addressed. Another issue relates to compounded medicines.
Just last week news broke of yet another contamination scare of compounded steroids made at a pharmacy in Tennessee that sickened patients. Last year, a breakout of fungal meningitis was linked to the same compounded steroid. And now, a bill to change compounding practices is heading to the Senate floor. This could create risks as well as opportunities to companies in the industry.
Pharmaceutical compounding is the customization of medications to fit a particular patient's needs. These meds, often manufactured by compounding companies on which the U.S. Food and Drug Administration has only limited oversight.
All of the major pharmacy chains like Walgreen (WAG) and CVS Caremark (CVS) offer compounding services. Walgreen recently inked a partnership with major drug compounding company AmeriSourceBergen (ABC) in what looks like a move that anticipates these legislative changes. Walgreens Specialty Pharmacy, LLC. is a subsidiary of Walgreen that carries out this part of the business. It generated $419 million in revenue in 2012.
The proposed legislation, which has made it out of the Senate committee, is up for a vote some time this summer. The bill will expand the FDA's oversight of the entire compounding supply chain and likely result in the closing of a number of small compounding pharmacies. Legislation like this, if passed by Congress, will almost certainly raise the costs of compounding. Larger companies like Walgreen will benefit directly from these changes in a classic barrier to entry effect, further rolling up revenue of prescription drug distribution to large chain pharmacies and away from independent ones.
Between this scare over quality of compounding medicines and the increased need for prescription chain-of-custody security for highly-demanded street drugs, pharmacies, especially independent ones, will have to specialize if they want to find opportunities for growth as the major chains move into more traditional roles of community or local pharmacies.
The effect of the proposed compounding legislation and other drug-oversight legislation at the state level will create new niches for pharmacies to fill and from which to build client lists. For niches like these it makes more sense for the major players to partner with local service providers rather than compete directly with them. However, we see this drive to greater legislative oversight continuing, and the risks associated with that for small companies quite high.
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