Medco’s Prescription for Growth
Medco CEO David Snow keeps the pharmacy healthy despite an ailing economy.
The global economy is in the dumps, and no one knows when the bears will leave Wall Street. But some things are still pretty safe bets: Aging baby boomers will keep demanding more health care, and companies will look for more ways to control the growth of medical costs — or better yet, reduce them outright.
All of which is good news for Medco Health Solutions, the largest U.S. administrator of pharmacy benefits by revenue. The Franklin Lakes, New Jersey–based company posted a very nonrecessionary 20.9 percent jump in net income last year, to $1.1 billion, on revenues that were up 15.3 percent, to $51.3 billion. Record mail-order-prescription revenue boosted results. A 15 percent increase in the price of prescription drugs also helped. Management expects profits to grow an additional 15 percent in 2009, notwithstanding the sharp decline in the economy. Medco has added $15 billion in new revenue in the past two years, according to CEO David Snow Jr.
“Our 2009 looks rosy because we are part of the solution to containing health care costs and improving quality outcomes,” he notes.
Medco, which was spun off from Merck & Co. in 2003, has evolved from a straightforward pharmacy benefits administrator and online drug dispensary into a health advisory company that helps patients and their doctors manage chronic illnesses by keeping track of drugs and how they are prescribed and used. It also works with businesses to lower their health costs.
Medco isn’t completely recession-proof, of course. It can lose prescription business when its client companies lay off employees. And studies show that in hard times, many people try to make medicines last longer by taking smaller doses than prescribed.
Shareholders clearly recognize those dangers. Medco’s shares closed at $42.99 on April 21, well below their 52-week high of $52.00. The share price is down 2.16 percent over the past 12 months, which compares favorably with a 17 percent decline for the retail drug sector. In a recent conversation with Institutional Investor Contributing Writer Claudia Deutsch, Snow elaborated on why he thinks Medco will thrive.
Institutional Investor: Your revenues rise in tandem with prices on branded drugs, so aren’t you violating your fiduciary responsibility to your shareholders if you promote generic drugs?
Snow: We have much wider margins on generics than on brands. Our clients save money on generics, so that’s where we choose to make our profits. Our fiduciary responsibility to shareholders and clients is the same, which is to keep the patients healthy and out of the hospital.
While Medco was part of Merck, it was accused of pocketing rebates from pharmaceuticals companies. A related lawsuit brought by 20 states was settled for $42.5 million in 2004. Medco admitted no wrongdoing, but how can you overcome that kind of a taint?
Medco always followed the rules, and I always thought the lawsuits were specious. But when your name keeps appearing in The Wall Street Journal, it looks bad. The spin-off allowed us to rebuild trust. We immediately opened the kimono, doing things like instilling full visibility in our rebate policies. And we settled the lawsuits for a lot less money than anyone expected.
How does a benefits manager innovate?
We launched programs that help clients get an accurate picture of each employee’s health care. We also got deeply involved in personalized medicine and in treatment of chronic and complex diseases like diabetes and cancer. Traditional pharmacists are generalists whose knowledge of drugs and diseases is wide, not deep. We hired pharmacists who specialize in chronic diseases.
If the treating physician is a specialist, doesn’t the pharmacist just fill the requisite prescriptions?
Not all physicians follow established treatment protocols, and not all patients follow instructions. Such lapses account for $350 billion a year in health care costs. We can tell whether patients are taking their drugs by their refill patterns. Our specialists will call a patient and say, ‘’You need to take that drug your doctor prescribed, or you risk renal failure.’’ Or they’ll call a doctor and say: “Hey, the protocol for a diabetic in this stage of the disease is to prescribe a cholesterol-lowering drug. Why haven’t you done so?”
We keep adding to our capabilities beyond plan administration. In the past few years, we bought specialty pharmacy Accredo Health Group. We bought PolyMedica Corp., a provider of glucose-testing supplies for patients with diabetes, and we now dispense those for Part B Medicare and corporate clients. Since 40 percent of biotech drugs in the pipeline will be administered by infusion, we bought a company that has specialty infusion sites across the country.
Are you also interested in expanding overseas?
Our business model doesn’t work everywhere. Some societies are protective of retail pharmacies and won’t let drugs be mailed. And some socialized systems really don’t accommodate private entities.
But yes, we are expanding our global footprint. Last year we bought Europa Apotheek Venlo, a mail-order pharmacy serving Germany and the Netherlands. And in Sweden, where 33 percent of emergency room visits can be traced to bad drug interactions, we formed a joint venture with the government to track what retail pharmacies are dispensing.
You mentioned personalized medicine before. How can a drug dispensary be involved in that?
We manage total pharmacy benefits for a huge number of clients, and we dispense drugs to millions of people. That means we know everything that patients take, which is data that brand manufacturers don’t have.
We’re helping to move the country from shotgun medicine to precision medicine. Here’s an example: We did a study with the Mayo Clinic that showed that, in some patients, heartburn medications bound up the enzymes needed to make the anticlotting drug Plavix effective.
You have data only on prescription drugs.
Many heartburn medicines are over-the-counter. Don’t you need that input too?
We really do. Late last year we announced a joint venture with drugstore.com to dispense over-the-counter drugs to patients. That way we can warn them about drug-to-drug interactions.
That kind of data is going to become even more important as we gain a better understanding of the role genetics plays in metabolizing drugs. For example, some cough medicines contain codeine, which is turned into morphine in the body. There are some people who can’t easily eliminate morphine. We could have that genetic information in our database, and we’d alert you to the problem if you ordered cough syrup from us.
Health care reform is, of course, a huge subject in Washington now. Want to weigh in with some ideas?
There’s no big-bang answer to reforming health care. You have to build reform on a series of building blocks.
I agree with the Obama administration about the importance of electronically wiring the health care system. You need a patient-centric database that can measure the results of everything a hands-on caregiver does, because that’s the only way you can hold people accountable for preventable bad outcomes.
Once that’s done, we need to ensure that doctors are following evidence-based protocols to treat complex and chronic diseases. Medicare and Medicaid should only pay doctors who use methods that are proven to work.
That would address another huge cost too. We waste $200 billion on malpractice claims in this country, so doctors who follow protocols should be held harmless for malpractice.
It sounds like the ultimate effect will be to replace doctors with computers.
Doctors are still very important for diagnostics. But treatment really can be routinized.
Are there issues specific to the aging population that need to be addressed?
As a society we’re not very good at handling end-of-life issues, and we throw $130 billion down the drain every year by taking unnecessary measures to prolong life. We can’t ask the private sector to address that; it would be demonized if it tried to pass judgment on hope. We need to have protocols set by an august body of respected scientific experts who don’t make money practicing health care and whose recommendations society would trust and accept.
Your ideas so far address treatment of disease. What about prevention?
We really need a wellness program that tackles obesity.
What else can we do?
Remember that old ad, with the American Indian shedding a single tear over pollution? It really raised consciousness about the environment. Well, we need to make Americans feel equally guilty about obesity.
The Japanese have recognized obesity as the top driver of health care costs, and they’ve made weigh-ins mandatory. Maybe that’s too draconian for us, but we’ve got to be guilted into doing more than the nothing we do now.