Ms. Wolk: In terms of health care reform, the impact is fairly modest on the overall distribution sector. I would say that for two reasons, one of which is prescription drugs in total represent a minority of spending within the health care system, so they generally have not commanded primary focus around the reform agenda. If we look at total distribution of health care expenditures in the U.S., prescription drugs are somewhere between 10% and 15% of total expenditures, so not top priority. With that being said, if you want to reduce prescription drug expenditures in the U.S., the pharmaceutical manufacturers are probably the focus in terms of distribution of dollars within the supply chain, not the retail pharmacies, PBMs and wholesale distributors that I cover. So I would say the group that I cover is relatively immune from the health reform agenda. In fact, they can possibly benefit from what is intended in terms of coverage expansion to the uninsured. Any expansion of access or coverage for some portion of the 50 million uninsured would actually increase prescription utilization significantly. We estimate it's somewhere between 2% and 6% growth in prescription volumes. That could actually benefit the group in terms of volume and profits for the distribution sector.
TWST: The PBM industry has changed a lot in the past few years. Do you think that will be affected by any of the factors going forward?
Ms. Wolk: From a PBM perspective, a PBM's value proposition is very much focused on managing drug expenditures to achieve the lowest possible cost while maintaining quality of care. I believe PBMs have now adapted their business model and pricing scheme to be aligned with the payer. Therefore, maximizing the use of generic medications, which benefit the payer and the public in terms of saving money on prescription drug costs, also benefits the PBM in terms of margin expansion. I think that particular positioning is critical for the PBM's margin sustainability through health reform. PBMs have been a huge growth engine over the last five years, and the stocks have all performed quite well, with their margins expanding commensurate with generic conversions. I think the question is, is that kind of growth gaining attention on Capitol Hill? The answer in my opinion is largely no because the PBM value proposition makes sense. Even though they make more money on generics, they are saving much more for the payer. Whether that payer is the employer, health plan or even the consumer in this case who pays different copayments depending on brand versus generic drugs, there is such a compelling benefit to generics, and payers are generally willing to pay the PBM. So I don't think the PBMs have been a focal point based on their own success. Not to say, however, that the PBMs have not garnered any attention in D.C. There are PBM-specific issues on the radar screen in terms of health care reform. PBM transparency or disclosure requirements appear to be gaining traction in the debate over health care reform, although I believe the impact would be very modest. It's more about reporting what the PBMs are doing, not giving away proprietary information. Moreover, PBM transparency initiatives are not new. While today they are being discussed at the federal level, they have been around in state or local government regulations for the last five or six years. There has also been a history of litigation around transparency and other related issues, which have not negatively affected the large public independent PBMs from a market share perspective. I would argue that PBMs are generally looked at as part of the solution in terms of reducing health care costs by maximizing generics. Issues like transparency are not likely to materially impact the PBM segment in my view.
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