PHARMACY DIRECT DRAWS SUPERMARKETS

JANICE ZOELLER

Supermarket companies are well represented among the 35,000 or so individual pharmacies that have joined Pharmacy Direct Network as of July 31 as charter members.

Supermarket members of Pharmacy Direct Network include Safeway, Oakland, Calif.; Kroger, Cincinnati, Ohio; Albertson's, Boise, Idaho; Grand Union, Wayne, N.J.; Randall's Food Markets, Houston; Tom Thumb, Dallas; Hannaford Bros., Scarborough, Maine; Abco Markets, Phoenix; Schwegmann Giant Super Markets, New Orleans; and Tidyman's, Greenacres, Wash.

"We've made a real effort in the last few weeks to reach food stores," said Robert Pfotenhauer, chief executive officer of PDN, shortly before the July 31 deadline for charter memberships. A charter membership cost $300 per store; the fee to join the organization rose to $1,000 per store after July 31. Additional stores later opened by member chains will be eligible to join PDN for a nominal fee.

"My expectation, based on dollars received to date and firm commitments, is that we will have a network of charter members of at least 35,000," said Pfotenhauer. "I think that's a significant start. It will probably give us, from day one, the fourth- or fifth-largest national and geographically diverse network."

PDN was formed by the National Association of Chain Drug Stores in March with seed money from several NACDS-member drug chains. PDN operates independently with its own staff and board of directors. The chairman of PDN's board of directors is Ronald Ziegler, who is chief executive officer and president of NACDS.

Supermarket pharmacy directors are hopeful that PDN can help break the stranglehold that third-party plan administrators, also known as pharmacy benefit management companies, have had on retail pharmacies in recent years as prescription reimbursement rates have been reduced and exclusive contracts have become more prevalent.

PDN will compete for third-party plan contracts against PCS Health Systems, Phoenix, and Paid Prescriptions, a division of Medco Containment Services, Montvale, N.J., among others.

"I'm optimistic," said the pharmacy director of an East Coast supermarket chain, which has joined PDN. "We may not be getting a better [reimbursement] rate than from PCS or Paid, but at least there will be open networks, and we will be able to deliver the message that we are more cost-effective than mail-order." Besides, he said, "I've yet to see something that NACDS and Ron Ziegler have been involved in fall flat on its face."

A pharmacy director of a Southwest supermarket chain said: "I think they will come up with better programs than are out there now. It's going to be well funded and will be a pretty big player out there. Who knows? It might eventually rival a PCS not too long in the future."

Supermarket pharmacy directors said it was not difficult to convince food store management of the need to join PDN, mainly because the cost of not joining could be very high.

"It wasn't a tough sell to management," said Cyrus Miller, director of pharmacy at Schwegmann Giant Super Markets, New Orleans. "They understand what's going on."

Said the East Coast pharmacy director: "We have to do it because everyone else is going to be in there. It may be a last-chance effort at forming our own network. What would happen if it took off and we were not a member? Then we'd have to pay [$1,000 per store]. We also looked at it as a capital expense, and figured it's going to be worth something one day if we ever sold our pharmacies."

The Southwestern supermarket pharmacy director commented, "It was not a fun decision having to write a check for future business, but we felt we needed to be part of it."

Barrett Moravec, director of pharmacy at Abco Markets, Phoenix, said, "No one wants to be in the position of being the only one in the market who is not filling those prescriptions." He added that he found it extremely significant that in forming PDN, the chain-drugstore group has reached out to the grocery industry and to independent pharmacies.

PDN's independence may turn out to be its best asset. As one pharmacy director put it, "They are not owned by anyone else and they are not going to be owned by anyone else."

Recent news that pharmaceutical manufacturer Eli Lilly, Indianapolis, is purchasing PCS from McKesson Drug, San Francisco, has apparently boosted PDN's membership recruitment efforts.

This sale is only the latest in a series of acquisitions of prescription drug benefit companies by pharmaceutical manufacturers. Last year Medco was sold to Merck, Rahway, N.J. That sale was followed by Philadelphia-based SmithKline Beecham's purchase of Diversified Pharmaceutical Services from United Healthcare Corp., Minneapolis.

"Lilly buying PCS made it more attractive to join PDN," said Miller of Schwegmann. "Having two major vertical networks will mean more opportunity for PDN to get contracts with companies that don't want to go with either of those two and are looking for a broader network without limitations on what's prescribed."

Another pharmacy director noted that pharmaceutical companies that are not aligned with a pharmacy benefits company might be especially interested in working with PDN to avoid having company information on patients and prescriptions accessible to a competitor.

"The sale in the last year of three major competitors to pharmaceutical manufacturers are three distinct wakeup calls that pharmacy retailers do not have the luxury of remaining on the sidelines," said Pfotenhauer. "PDN provides a vehicle by which retail pharmacies can effectively compete in the managed care marketplace."

"One of the reactions to the $4 billion price tag [that Lilly paid for PCS] has been a question of whether there is room for more players in the game," said Pfotenhauer. "We have to be clear in differentiating the capital needs of a startup pharmacy benefits network with the value created over time in a successful PBN.

"Our initial capitalization," said Pfotenhauer, "which will be in the $9 million to $10 million range, will be more than sufficient to allow PDN working capital until we get our revenue stream from new contracts."

PDN will begin selling the network to insurance companies and others this fall, seeking contracts with a Jan. 1 effective date, said Pfotenhauer.

"Our intent is to be out there with competitive products and to take full advantage of the community pharmacy base operations," said Pfotenhauer. PDN has indicated in its membership recruitment literature that it may be willing to accept lower processing fees than its competitors charge.

"We will have to offer competitive deals, but the second part of the equation, which others are not going to be providing, will, I think, provide pharmacy retailers with a real return on their $300 investment," said Pfotenhauer. Recruitment into the network was also said to be running high among both chain and independent drug stores.