Original article written by Kate Humphrey, Editorial Analyst, is linked below. Andre Ulloa’s contributions were provided in a Q&A format over the phone.
Navigating the Dynamic Landscape of Specialty Pharmacies
In recent years, the specialty pharmacy market has experienced significant transformations. While grappling with surging demand, it has also faced challenges such as narrowing profit margins and escalating costs. Despite these hurdles, the specialty pharmacy industry has proven its resilience. Specializing in medications not commonly found in regular pharmacies, these pharmacies focus on highly specialized drugs designed to treat intricate conditions and diseases like cancer, multiple sclerosis, hemophilia, and HIV/AIDS.
Mergers & Acquisitions Activity in the Specialty Pharmacy Market
Mergers and acquisitions activity within the specialty pharmacy sector has steadily increased since 2018. While 2018 saw 19 announced transactions, 2019 experienced a significant surge, with 25 deals reported. Although deal volume dipped to 21 transactions in 2020, it rebounded to 24 acquisitions in 2021 and 26 in 2022.
However, 2023 has not mirrored the robust activity of previous years. The first three quarters of 2023 witnessed only 13 transactions, the lowest annual total in the past five years when annualized. This decline can be attributed to the market’s consolidation, with major players like Express Scripts, CVS Caremark, and OptumRX controlling approximately 80% of the market share.
Source: Levin ProHC, October 2023
Private Equity in the Specialty Pharmacy Market: Opportunities and Challenges
Interestingly, private equity (PE) firms have not been as prevalent in the specialty pharmacy market. In 2023, private equity and portfolio companies accounted for only four transactions, constituting roughly 31% of the sector’s year-to-date activity.
According to Andre Ulloa, Partner and Executive Advisor at M&A Healthcare Advisors, “As private equity exits an investment, they expect returns to be enhanced by an increased multiple, or ‘multiple arbitrage.’ They achieve this by scaling and integrating the portfolio within desirable market sectors that are not overly burdened by regulations which diminish the services (or products) to the constituents utilizing them.”
Trends and Insights: A Closer Look at 2023 Transactions
In terms of disclosed spending, 2023 witnessed a substantial drop, totaling $75.35 million across two deals. This contrasts sharply with 2022, which saw a total of $1.75 billion in disclosed spending across three deals. The largest transaction in 2023 was Belmar Pharma Solutions’ acquisition of Innovations Group, Inc. from UpHealth, Inc., amounting to $56 million.
The Impact of FDA Approvals on Specialty Pharmacies
In recent years, the specialty pharmacy market has experienced a significant boost due to the surge in FDA-approved specialty drugs. Notably, in 2016, half of the new drugs approved by the FDA fell under the category of specialty pharmaceuticals. This marked increase from previous years has paved the way for innovative treatments in various therapeutic areas.
IQVIA’s 2021 report, Global Oncology Trends, highlighted the introduction of 17 new drugs to treat rare cancers in 2020, with an additional 30 novel oncology medications in 2021. While specific data on specialty pharmaceuticals was not provided, the report emphasized that over 30% of new medicines in 2020 were oncology-related, targeting specific genetic mutations. This trend underscores the growing importance of specialty drugs in the pharmaceutical landscape.
Emerging Trends and Challenges in Specialty Pharmacies
PBM Dominance and Market Consolidation
One of the prevailing trends in the specialty pharmacy market is the dominance of Pharmacy Benefit Managers (PBMs). PBMs, with their ability to negotiate lower rebates, have significantly influenced market consolidation. Ulloa noted that when there are high-volume, expensive drugs that are not a challenge to dispense or for the patient to take, PBMs can handle them easily. However, their preference for expensive drugs over cost-effective alternatives has raised concerns. This trend has made it challenging for independent specialty pharmacies to compete, leading to decreased investor interest in these businesses.
Rise of Long-Term Care Pharmacies
Another notable trend is the rise of long-term care pharmacies (LTC). LTC pharmacies distinguish themselves by providing holistic healthcare solutions working directly with patients and physicians. Their multifaceted capabilities have made them attractive to investors, leading to their prominence in the M&A market.
Notable Transactions: Insights into Industry Dynamics
PANTHERx Rare Acquisition
In 2022, Nautic Partners, The Vistria Group, and General Atlantic acquired PANTHERx Rare for $1.4 billion. This significant transaction highlighted the growing demand for specialty pharmacies catering to rare and orphan diseases. Despite the challenges, private equity groups strategically collaborated to navigate the market and spread the risk of the acquisition.
Walgreens’ Strategic Moves
Walgreens, a retail giant, made strategic acquisitions to establish a foothold in the specialty pharmacy industry. Their acquisition of Shields Health Solutions and Medly Health‘s pharmacy assets demonstrated a shift toward specialty pharmacies providing niche services. With these strategic moves, Walgreens aims to compete with other retail pharmacy-based PBMs like CVS Caremark.
Looking Ahead: Challenges and Opportunities in 2024
Despite the existing challenges, the specialty pharmacy industry is poised for enduring growth. While the rest of 2023 may not witness a significant increase in deal volume, Andrea Ulloa predicts, “I don’t expect an uptick in M&A activity this fourth quarter, but certain indicators suggest that 2024 will be a big year for transactions. There are several portfolio companies which are looking to exit the market and if the PBM strangle loosens…then these pharmacy assets will be more desirable.”
As the specialty pharmacy market evolves, M&A Healthcare Advisors play a pivotal role in guiding investors and stakeholders. While challenges persist, opportunities abound for strategic investments and acquisitions. The industry’s dynamic nature requires astute navigation, and with the expertise of M&A Healthcare Advisors, stakeholders can make informed decisions in this ever-changing landscape.
In conclusion, the specialty pharmacy market remains dynamic, presenting both challenges and opportunities for investors and stakeholders. By staying informed about emerging trends and industry dynamics, M&A Healthcare Advisors can help you navigate the complexities of this evolving landscape, enabling you to make strategic and informed decisions.