There are three decisions or events that should have a positive impact on the retail pharmacy business and the pharmaceutical industry. The first is the recent decision by the Supreme Court concerning brand-name drug companies paying generic competitors to delay introducing cheaper generic versions of drugs on the market. According to the Supreme Court these brand name drug companies can now be subject to antitrust laws for paying the generic competitors to delay the introduction of their generic drug. The second is the American Medical Association (AMA) recognizing obesity as a disease. And the third is the government’s Affordable Care Act, which has been a highly debated topic.
The Affordable Care Act will have by far the largest impact. Consumers, retail pharmacies and the pharmaceutical industry will feel the effects, as it is expected to add an additional 30 million people to the insurance pool by the end of 2016. But the Supreme Court’s decision should affect both consumers and pharmacies in a positive way as well -generic drugs are less expensive for the consumer and they come with a higher profit margin for the pharmacy, and both are important considering that generic sales account for 77 % of all retail prescriptions. And while it’s clear that the major retail pharmacies like CVS Caremark (CVS), Walgreen (WAG), and Rite Aid (RAD), along with the major pharmaceutical companies will be the main beneficiaries of the Affordable Care Act, there are a number of small biopharmaceuticals companies and specialty retail pharmacies that should also gain from the coming Affordable Health Act.
BioScript A Rising Home Health Care Company
One such company BioScrip Inc. (BIOS) has seen its stock rise over 128% in the past year. BioScrip is the leading provider in pharmaceutical and home care solutions and continues to carve a stronghold in the home health care services business including home health care, skilled nursing, physical therapy,clinical respiratory care services, home health aide, and hospice services. The company has grown by partnering not just with government agencies but with health care providers, doctors, and patients. They’ve also partnered with pharmaceutical manufacturers to provide access to infusible medications for chronic and complex healthcare conditions. But what BioScrip appears to do best is provide services that are designed to be cost-effective in the delivery of pharmacy benefits. BioScrip works with pharmacy plan sponsors and local healthcare professionals to control pharmacy costs primarily through financial risk-sharing arrangements and by substituting name brand drugs for lower-cost yet higher profit margin generic drugs. And with the Supreme Court’s decision on generic drugs BioScrip should over the years profit from the decision.
Earlier this week, to bolster its infusing therapy business, BioScrip agreed to acquire CarePoint Partners Holdings LLC, for $223 million cash adding roughly 100,000 new patients to its home infusion service. Chief Executive Rick Smith commented on the deal. "This transaction is a significant milestone for BioScrip. It meets our stated goal of expanding our infusion business through strategic acquisitions to build scale in a highly-fragmented industry." Currently BioScrip services over 20,000 patients annually, with 28 service sites in nine states within the East Coast and Gulf Coast regions.
Earlier this week, in a research note, Feltl & Co. raised its price target on BioScrip from $17.00 to $20.00 per share and gave the stock a strong buy rating. While last month Jefferies Group initiated coverage and set a buy rating with a $17.00 price target on the stock. BioScrip closed on Friday June 21 at $16.55 per share. Though the company, which has a market cap of $1.12 billion, has yet to see profits, it is an aggressive company, and given that the Affordable Care Act is just around the corner I can see this stock continue to climb, and I agree with Feltl & Co. and see BioScrip as a buy.
Arena and Vivus - Two Small Caps Looking to Fatten Up On Weight Loss Drugs
While the AMA recently recognizing obesity as a disease may do harm to the food and beverage industry it can only bolster Vivus (VVUS) the biopharmaceutical company that developed the diet drug Qsymia, and Arena Pharmaceuticals (ARNA), the makers of the competing weight loss drug Belviq. Though the AMA backing has no force of law or guarantee of a prescription, according to Dr. Patrice Harris, a member of the AMA board said in a statement; "Recognizing obesity as a disease will help change the way the medical community tackles this complex issue that affects approximately one in three Americans." The AMA expects that by changing the designation of obesity from a condition to a “disease” it will nudge the industry to prescribe medicine as a treatment for obesity, and insurance companies will be more apt to reimburse the costs of the new diet pills that have hit the market.
Launched last fall, Qsymia, the first diet pill on the market in over 13 years, has so far seen modest sales due in part to insurers’ reluctance to reimburse the cost of the drug. These modest sales brought Vivus stock, once a high flyer, crashing down almost 50% and the stock has yet to regain momentum. Add to that a proxy war with its top shareholder, First Manhattan Co, which owns 9.9 percent of the company, has put pressure on management to ramp up sales of the drug, while at the same time voicing concerns about management’s inexperience in the ability to launch a major drug. Vivus's finance chief, Timothy Morris, said the company remained confident about its sales strategy and was currently in partnership talks with larger pharmaceutical companies to market the drug.
The new AMA designation may be the pill that Vivus needs, especially if and when doctors begin to prescribe Qsymia and insurance companies begin to reimburse the costs. However, the same could be said for Arena, as its stock also took a beating over the past year, down over 31%. Arena’s management appears to be more proactive and the company has already teamed up with the much larger Japanese pharmaceutical giant Eisai Co. (ESALY) to market and distribute Belviq in the U.S., and has hired an additional 200 sales reps and 50 specialists to work with the insurance companies.
Arena has a market cap of $1.75 billion. The stock closed on Friday June 21, at $8.05 up 7%. On June 11th analysts at Piper Jaffray reiterated an “overweight” rating on shares of Arena and raised its price target from $9 per share to $12.50 per share while forecasting U.S. Belviq sales of $68 million in 2013, Eisai expects sales for Belviq to reach $150 million in sales through March 2014. If the AMA’s new designation of obesity as a disease does indeed lead to the medical community to prescribe weight loss pills and if the insurance companies do reimburse the costs, add to that the millions of obese patients that will soon be covered under the Affordable Care Act, both Arena and Vivus could begin to see higher than expected sales, and may well be good long term investments. However, due to Arena’s partnership with Eisai, if I had to choose one of the two companies to invest in, I’d pick Arena.
Assured Pharmacy Carving a Niche in Retail Pain Medicine
Assured Pharmacy (APHY) is a retail pharmacy company that may have come up with a big idea, which could lead to a national chain of specialty pharmacies. The company is carving out a niche in the $30 billion dollar pain medication business by targeting physicians specializing in patients with long-term, acute, chronic pain conditions and pain management including orthopedics, neurology, oncology, psychiatry, physical rehabilitation and industrial medicine. One of the main challenges for dispensing these needed medications is that they are also one of the most highly abused class of drugs. Pain medications are the most regulated medicines in the industry, and thousands of people with chronic pain who require the need for these highly regulated pain drugs are having difficulty filling their prescriptions. Many pharmacies, both big box and independents, are reluctant to fill Schedule II drugs, or have placed limits on quantities dispensed due to tighter controls and increased liability.
The reluctance of the big box pharmacies and many of the independent pharmacies to carry these Schedule II pain medications has created an opening, which APHY intends on filling with its retail pharmacies. These retail pharmacies have nothing in common with most pharmacies; there is no store front, no front end merchandise, no snacks or sodas. For safety and security the pharmacies are located in medical office parks, not highly trafficked strip centers. In each of its pharmacies the sales staff targets doctors that specialize in pain or diseases that are associated with pain. The sales staff personally picks the prescription up from the doctor’s office, so the prescription never touches the patients’ hands which eliminates the risk for altered, lost, or copied prescriptions. APHY’s process and control of the prescription assists doctors in monitoring prescriptions by providing an extra level of security and diversion protection that is not part of the normal big box retail pharmacy model.
APHY is a small but growing company, its four year expansion plan includes opening pharmacies across the country in the top 25 major metro areas, with a minimum of two new pharmacies in 2013, and a least four new pharmacies in 2014. Though the stock is well off its 52 week high of $1.02 per share the stock is up over 97% YTD. This is a company with large ideas; in 2013 the company had gross revenues of over $14 million. Though APHY is by far the most speculative of the companies discussed in this article, what is interesting about this company is that it is not competing with the big box pharmacies, but is targeting a segment of the pharmacy business that most pharmacies would rather not pursue. But there is an aging population that is in need of pain relief and with the Affordable Care Act soon to be implemented there should be little doubt that pain management will continue to grow significantly, and if APHY can continue to open more locations this might be a sleeper stock with plenty of room to grow.
The Supreme Court decision, the AMA designating obesity as a disease, and The Affordable Care act has the potential to affect both the pharmaceutical industry and the retail pharmacy business in extremely positive ways. While choosing the right small biopharmaceutical company can be a risky venture the retail pharmacy business appears to be a solid bet. There is little doubt that the pharmacy will continue to grow, as more people gain access to health insurance. BioScript will continue to grow with it, and should not be overlooked as a stock in one’s portfolio. For a larger risk/reward both Vivus and Arena may sell a lot more diet pills than expected with the Affordable Care Act soon to be implemented, and the AMA’s decision on obesity that their drugs. However, Assured Pharmacy may be the sleeper of the group, especially if the company can continue to open new doors around the country.