Cardinal Health Sees Opportunity (but Faces Challenges) in Specialty Drugs
Cardinal Health (NYS: CAH) sees a big growth opportunity in the specialty drugs distribution market, but catching up with its top two rivals could be a tough slog.
Specialty drugs are typically complex, injectable biologics that are used to treat somewhat small groups of patients for specific conditions like multiple sclerosis, cystic fibrosis and certain types of cancer, for example. They often require special handling throughout the supply chain and are usually distributed to patients at doctors's offices rather than through traditional pharmacies.
Sales of specialty drugs are expected to explode in coming years -- and therein lies the opportunity for Dublin, Ohio-based Cardinal and competitors AmerisourceBergen (NYS: ABC) and McKesson (NYS: MCK) . The specialty drug market is expected to expand to twice the size of the traditional pharma market within a few years, hitting $100 billion by 2013, according to research firm IMS Health.
Given those numbers, it's no surprise that Meg Fitzgerald, president of Cardinal's specialty solutions group, calls the specialty business "very important to Cardinal Health's future" and says the company is "committed to continue to invest in this market."
But it'll take a big commitment for Cardinal to make inroads in the specialty distribution market. Adam Fein, president of Pembroke Consulting and operator of the insightful Drug Channels blog, estimates that Cardinal controls a very small portion of the specialty distribution market for physicians's offices, while AmerisourceBergen holds about half the market, and McKesson controls roughly 25 percent.
"Cardinal is in some sense a little bit of an also-ran in the market for specialty drug distribution for physicians's offices," Fein said.
Still, Cardinal has made some recent progress in the area, with one notable recent client acquisition coming in the form of South Carolina Oncology Associates, the state's largest community oncology practice.
"While we are still in the early stages with respect to our specialty distribution business, we are building momentum and competing effectively, as seen through some of our key customer wins," Fitzgerald said.
Plus, the company reported year-over-year revenue growth of 30 percent in its specialty solutions group in its most recent quarter. It is important to note that Cardinal's specialty solutions business includes a number of initiatives and that specialty distribution is just one part of that business.
Cardinal's biggest bet on its specialty business came in the form of its $517 million acquisition of Healthcare Solutions Holding last year. That acquisition brought the lynchpin of Cardinal's specialty strategy, its P4 Healthcare business. Focused on oncology, P4 works with doctors to develop best practices called "clinical pathways" for treating cancer patients.
The idea behind P4 is to align incentives between doctors, drug companies, patients and insurance companies to deliver higher-quality, lower-cost care. Broadly, the clinical pathways program aims to improve cost and quality in three ways, according to Bruce Feinberg, chief medical officer for P4.
First, the program aims to convert the use of branded drugs to generics when appropriate. Second, the clinical pathways program emphasizes dropping treatment regimens that aren't supported by today's best-available medical evidence. And third, the program is aimed at reducing the variance that occurs in treatment regimens for the same condition, Feinberg said.
By strengthening Cardinal's relationships with physicians and drug companies, P4 could help Cardinal acquire new customers for its specialty distribution business, Fitzgerald said. Plus, Cardinal's plan is to apply P4′s business model to other therapeutic areas in the future.
"While P4 Health care primarily focuses on the field of oncology, we believe that its model is scalable and brings significant growth potential to broaden its reach to other specialty areas such as urology, rheumatoid arthritis, dermatology and others," Fitzgerald said.
Cardinal scored another recent win when it contracted with large health insurer Aetna to offer P4′s services to Aetna's member physicians in four states and Washington, D.C. That deal focuses on three types of cancer: breast, lung and colon.
As for Cardinal's specialty distribution business, Fein is skeptical that P4 will give it a big boost. For one thing, AmerisourceBergen and McKesson already control most of the business, so Cardinal will have to strip customers away from its competitors. Plus, the number of private physician practices in the U.S. is shrinking, so Cardinal will be competing for a slice of an ever-smaller pie.
"It's going to be slow going to penetrate the specialty distribution market for Cardinal," Fein said. "They're very behind right now."
The good thing for Cardinal investors is that the company's executives seem to know that and aren't afraid to admit it.
"We knew that specialty distribution was going to be a building process and I would still describe it as that," CEO George Barrett said earlier this month in a conference call with analysts. "We've begun to feel some momentum recently, but it does take a while to get rolling."
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