RETAILERS ACT TO MAINTAIN GENERIC DRUG PROFIT MARGIN

DAVID VACZEK

Supermarket pharmacies are acting aggressively to preserve the most profitable part of their prescription business -- generic drugs.

In attempting to maintain generics margins and bring acquisition costs down, pharmacy directors are putting drugs out to bid on a line-by-line basis, consolidating the number of supplier companies, launching patient-adherence programs and cementing relationships with generics vendors who are offering value-added services.

Generics have grown quickly to account for an ever-increasing portion of the retail pharmacy business. Last year, generics accounted for 40% of the prescription market. In 1980, they represented just 2% of the market. "By many estimates, that number is probably going to grow to nearly 60% by the year 2000," said Joseph Papa, vice president of market planning at CibaGeneva Pharmaceuticals, Tarrytown, N.Y., a new sales and marketing division for brands and generics of parent Ciba Geigy Corp.

While generics volume has climbed, pressure from third parties to slash costs through maximum-allowable-cost pricing has cut sharply into retailers' generics margins. Therefore, retail pharmacy is being forced to reassess the way it procures drugs and must closely scrutinize third-party drug reimbursement programs, it was said.

"The pharmacy benefit management companies, in many cases, have instituted

extremely aggressive MAC lists," said Mike Roberts, director of pharmacy, Buttrey Food & Drug, Great Falls, Mont. "You are seeing that last bit of [retail] profit being ratcheted out of the system."

Buttrey has consolidated its three drug contractors down to one in an effort to improve the cost of goods. Schein Pharmaceuticals, Florham Park, N.J., will supply the majority of the chain's generics, said Roberts.

To improve its costs, Schnuck Markets, St. Louis, has identified what it refers to as "core products," items on which vendors frequently offer rebates.

"On a core product, you have a little more room to negotiate. The more core products you add to your mix the higher your rebate percentage is on total sales of all your products," explained Jim Cordes, pharmacy director at Schnuck.

Chains also can obtain better discounts and rebates by putting top-volume drugs out to bid and committing stores to dispense the contracted products through a formulary. Price Chopper Supermarkets, Schenectady, N.Y., has taken this approach by putting together a "consortium" of generics companies in one-year supply agreements, said Bill Marth, the chain's director of pharmacy.

"You end up with about six vendors doing most of your business. There are about 50 items that account for the lion's share of volume. Get those prices down to the best possible costs and a large percentage of your dollars are taken care of," he added.

MAC rates set by health maintenance organizations and PBMs "give us a goal to shoot for. We know we can negotiate much better than that," said Marth.

The cash-paying customer also has become a source to leverage pharmacy profits and offset the effect of lower reimbursements on generics sales from third-party payers. For those paying cash, retailers are either raising prices or not reducing prices as often.

Despite growth of generics prescriptions, the pressure mounts to look for alternative sources for drugs on which pharmacy benefit managers have often drastically reduced MAC reimbursement.

Pharmacy directors say there are opportunities to lower the cost of generics across the board, as well as for generics newly facing competition. For example, pharmacies are buying cephaclor at 20% to 30% less after several generics vendors emerged this year as competition to Mylan, which is selling and distributing the drug for Eli Lilly.

Of more significance, chains are improving costs for their entire generics programs, buying in some cases below the MAC reimbursement set for many multisource drugs. Efforts to drive generics volume, such as with compliance programs, also can offset reduced margins from third-party plans. Next month, Kash n' Karry Food Stores, Tampa, Fla., will kick off a program in which the pharmacy computer keys off the drug identification number to generate a letter for a patient whose refill is coming due in five days. Preliminary tests have shown an overall 11% improvement in maintenance drug refills, with some categories as high as 35%, said Dana Greenhoe, director of pharmacy.

As an example of new services being offered by generics companies to retailers, Schein Pharmaceutical has 20,000 patients enrolled in a patient information and prescription support service launched this year in an alliance with Elensys, Woburn, Mass., said Steve Basile, vice president of marketing at Schein.

In select categories -- including antihypertensives, antidiabetics and antidepressants -- patients receive first-class delivered mailings with standard patient counseling information along with the refill reminder. The first mailing goes to patients after the new prescription is filled and it is followed by subsequent reminders. Patients who don't respond are dropped from the system, said Basile.

Comparing results against a control group, Elensys provides the retailer with reports on refill rates, which preliminary data shows increase 10% to 20% over control groups, said Basile.