(Fifth in a Series of Pharmacy Articles)

We have discussed the great risk and cost involved in creating and bringing new drugs to market. In this article I discuss some inefficiencies in the retail drug process which further pushes up the price of drugs on the poor, sick consumer. In essence, we’re talking about Pharmacy Benefit Managers, Insurance Carriers and the Federal Government.

It begins with the drug manufacturer making the drugs and then obviously wanting and needing to sell them. It used to be that they would ship them to pharmacies who would buy them wholesale and then turn around and sell them at retail. That was a simple model that fit most operations. The manufacturers decided it would be easier to simply sell their drugs to a middleman (a distributer) and then having that organization deal with all of the pharmacies and the hassles of delivery. The idea was to save the manufacturer costs, which it did, but it added a layer of cost to the consumer. These middleman got bigger, richer and more powerful in the supply chain.

Now, a couple of distributers have gotten big enough to close down the competition and control almost all aspects of how drugs get to the public. It is easy to see that now if the manufacturer(s) doesn’t dance to the distributer’s music that they can be frozen out of having their products delivered to an extent. This had never been an issue prior because the manufacturers had their own distribution network. This means, then that the manufacturers lost some control over their product(s) and costs. Now they have to pay the mark up billed by the distributers. At the end of the process is the poor old consumer who in the end pays it all.

It is also the fact that the Federal Government has to a large extent remained on the sidelines with the issue of drug costs. Clearly, given the enormous buying power of Medicare the Feds could weigh in and force the drug prices down and are now looking to do just that. They do that both with making appropriate law and/or simply with the pure buying power of drugs that Medicare and Medicaid represent. In essence, there is no way that a distributer could simply write off distributing Medicare drugs, Medicaid drugs and Military and Federal employee plans for drugs.

Politically, there is now a fight brewing in Washington with respect to NAFTA where the current Administration has proposed getting into the Agreement by making it more palatable to Big Pharma. It wants to protect Big Pharma from any loss of their drug business by excluding drugs from the Treaty. There is also currently pending Legislation to allow people over 50 to join (opt in) to Medicare insurance programs. In this way the Federal Government will slowly increase its coverage of Americans while at the same time gain more purchasing clout in the drug market. It is argued that all of this plus limits on what Big Pharma can charge will help bring drug prices down.

But finally, from an investment stand point, the stock market should remain a very active and profitable place for drugs and so hopefully this 5 part mini-series on drugs will be somewhat helpful for investors to understand what drugs do and how they do it and to be able to connect investment decisions with drug theory. The stock market provides ample opportunity to buy and hold Large-Cap stock purchases in your portfolio for a long time (going long in the vernacular) and profit well therefrom just as it provides the more active trader the opportunity to possibly ring the bell with a shorter term Micro-Cap drug stock.