Drug Makers Can’t Beat ‘Em So They Join Managed Care : Pharmaceuticals: In separate deals, Pfizer and SmithKline Beecham link up with cost-cutting groups.
Two major drug companies announced separate deals Tuesday to join forces with managed health care companies, acknowledging those firms’ growing influence over how drugs are priced and distributed.
Increasingly, health maintenance organizations and companies that manage drug benefits for employers and other groups are overseeing decisions about which medications are prescribed and how much they cost, often demanding steep discounts. Ten years ago, doctors had a virtual free hand in deciding which drugs their patients should receive.
The trend contributed last year to the lowest overall price increase for new and existing drugs in years--3.1%, down from 6.4% in 1992 and 7.8% in 1991--presumably saving consumers money on their health insurance premiums.
Rather than resist the managed care trend, officials of drug makers Pfizer Inc. and SmithKline Beecham said they were striking deals with managed care firms to gain more control over the price and distribution of their products.
Taking its first step into managed care, London-based SmithKline Beecham said it would pay $2.3 billion in cash to buy Minneapolis-based Diversified Pharmaceutical Services, a fast-growing prescription benefit management company that controlled drug expenditures of nearly $2 billion for 11 million Americans last year.
“We all know the environment in which we work is changing rapidly,” said Jan Leschly, SmithKline’s chief executive. “The winners will position themselves to capitalize on change. Those who fail to adapt will lose.”
The Pfizer and SmithKline announcements came a day after Switzerland’s Roche Holdings offered to buy struggling Silicon Valley drug maker Syntex Corp. for a whopping $5.3 billion. In yet another drug-industry deal, Eastman Kodak Co. said Tuesday that it is putting its pharmaceutical subsidiary, Sterling Winthrop Inc., up for sale to focus on its core photography and imaging businesses.
Analysts said the deals signal that the pace of consolidation in the $65-billion-a-year drug industry is quickening.
The announcements set off a flurry of activity in U.S. and European drug stocks as investors placed bets on the drug makers most likely to attract suitors. Most of the takeover speculation focused on medium-size drug makers, such as Upjohn Co. and Schering-Plough Corp., which analysts view as most vulnerable to the changes swamping health care.
Analysts said the merger activity got jump-started last year when New Jersey-based drug maker Merck & Co. paid $6 billion for Medco Containment Services, a drug benefit management and mail-order drug firm.
“The rest of the industry is basically trying to figure out how to respond to a new competitor (Merck-Medco) that controls 35 million lives and is growing rapidly,” said Eran Broshy, a partner in charge of health care research at the Boston Consulting Group.
SmithKline said the acquisition of Diversified Pharmaceutical Services allows it to move beyond its traditional business of developing and manufacturing drugs into the area of managing health care delivery.
SmithKline, the world’s third-largest drug maker, also reached a six-year agreement for exclusive rights to disease management data from HMOs owned by DPS’s parent firm, United HealthCare Corp.
Meanwhile, Pfizer said it had struck a series of agreements with Connecticut-based managed health provider Value Health Inc. aimed at boosting sales of Pfizer drugs through managed care networks. They include a $100-million joint venture to develop health care businesses focusing on such illnesses as cancer, diabetes and heart disease.
Also, Pfizer will gain assurances that its drugs will be listed on Value Health’s “formularies,” or its approved list of prescription drugs.
Drug makers’ efforts to align themselves with firms like Medco, DPS and Value Health are being driven by remarkable growth in the drug management business. According to figures supplied by SmithKline, about 50 million Americans have their prescription drug benefits managed by such firms. The drug maker expects that figure to double to 100 million by 1997, with even faster growth if Congress passes health reform legislation that encourages managed care.
To help employers control drug costs, HMOs and managed care firms negotiate deep price discounts with drug makers. In exchange, the drug makers get more sales. The negotiating clout of managed care firms is boosted by the increasing availability of generic drugs, which are identical to brand-name drugs but often cost far less.
Kaiser Permanente, the nation’s largest HMO with 4.5 million members in California and 6.6 million nationwide, is a case in point. Kaiser spent roughly $750 million on drugs last year, and thus wields significant influence over the drug industry.
Kaiser designates a physician group to determine which medications for heart, ulcer or other illnesses are the safest and most effective. When several drugs are judged of equal medical benefit, Kaiser takes bids from drug makers to include their products on its approved list. It usually picks the two or three least expensive drugs out of that group, said Albert L. Carver, director of pharmacy operations for Kaiser Permanente of Southern California.
Kaiser is also highly effective at getting its 9,000 full-time doctors to prescribe drugs from the approved list. In Southern California, about 99% of Kaiser prescriptions are from the list, while more than 60% of the total are generics.
“We are very successful at influencing the market share of drugs in our program,” Carver said.
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