The world of specialty pharma

June 1, 2005
Tony Pinsonault
Tony Pinsonault

Tony Pinsonault is a managing partner at Flanders, NJ-based Pinsonault Associates L.L.C., a managed care training and information company for the pharmaceutical industry. He can be reached at (800) 372-9009 or by e-mail at

Pharmaceutical Representative

A look at the value and growth of specialty products.

Specialtypharmaceuticals are among the hottest products in U.S. healthcaretoday. They're attracting lots of attention in the media and themarketplace because they promise to effectively manage a variety ofexpensive chronic-care diseases and conditions.

How big is the specialty sector?

In 2002, specialty pharmaceuticals generated $17 billion in sales, or13% of the total United States drug spend of $162 billion. By the endof 2005, the specialty spend should reach approximately $35 billion --that's a twofold increase in just three years, a growth rate that is twice that of traditional pharmaceuticals.

Of course, with the promise comes a price, and the relatively high costof specialty medications is attracting a lot of notice too, especiallyamong administrators and actuaries at managed care plans, hospitals,medical practices and pharmacy benefit managers. Patients, who mustshare a portion of specialty drug costs out-of-pocket, are concernedtoo.

Regardless of your place in the industry, it's important for you tounderstand the differences between the specialty sector and the marketfor traditional prescription medications. If your company has notalready entered the specialty market, it may very well do so. Marketingand distribution of specialty products are dramatically different, andit will be important for you and your company to be able to make aseamless transition if and when the time comes.

What are specialty pharmaceuticals?

Every health plan, institution, medical group, pharma/biotech companyand PBM seems to have its own definition, but specialty pharmaceuticalsare generally understood to be medications that are:

* Injectable.
* Indicated for the treatment of chronic -- and often rare -- illnesses.
* Expensive -- a single therapy can cost anywhere from $5,000 to$350,000 per patient per year.

That's the simple definition. Beyond these three points, there are afew additional characteristics that usually apply to specialtypharmaceuticals:

Non-oral administration. Specialtydrugs are almost always administered by non-oral means (such asinjection or infusion).

Biological origin. Manyspecialty products (such as blood products and gene-based therapies)are manufactured with a biological basis by biotech companies, or bytraditional pharmaceutical companies through biotech divisions orthrough business partnerships with biotech companies.

Non-hospital administration.Usually, specialty products are administered in a non-hospital setting(such as a physician's office, a clinic or the patient's home).

Reimbursement via the medical benefit.In managed care, specialty drugs are typically managed and reimbursedoutside of the pharmacy benefit, usually through the medical benefit.

Special requirements. Specialtymedications usually require special storage and handling (such asrefrigeration). They also demand comprehensive patient education andrequire continuous monitoring.

Specialty pharmaceuticals deliver a number of clinical benefits thatfurther distinguish them from traditional oral medications. For onething, specialty products tend to offer new and effective treatmentsfor diseases with few therapeutic options. Think of oncology, forexample. Not long ago, treatment choices for cancer patients wereessentially limited to surgery and radiation. Currently, in addition tomany widely used chemotherapeutic and blood-cell replacement agents,cancer therapies include a wide range of specialty products that notonly attack the disease, but also help to diminish pain and sideeffects such as nausea.

Many specialty medications provide targeted therapy for severe, chronicand rare diseases. These are conditions that afflict only a very smallpercentage of the population, and traditional therapies are oftenineffective, if they are available at all.

Regarding general benefits, consider that specialty pharmaceuticalsenhance the functional status of patients living with chronic diseaseby reducing pain, increasing mobility and improving quality of life.And even though specialty products are considered expensive, they cansometimes prove to be cost-effective in the long run by limiting oreliminating hospitalization and by reducing demand for surgery andemergency care.

Evolution of specialty pharmaceuticals

Specialty pharmaceuticals are not new. In fact, they have been aroundfor about fifty years, originating with home infusion companies. Theseearly models were "high touch" operations, which means that theyrequired high levels of patient training and physician interaction.Competition was limited, so vendor profit margins were impressive.

Specialty pharmacy came into its own in the early 1990s with theemergence of breakthrough oncology therapies and the new biotechindustry. As the market grew, the original home infusion companiesoften spun off specialty operations into separate business units, andspecialty-only companies appeared. These businesses typically madetheir reputations by marketing a single product for a single diseasestate.

The specialty market accelerated with the rapid growth of managed care.Managed care organizations offered vendors large payer contracts, whichin turn led to the growth of high-volume specialty pharmaceuticalscompanies. For the first time, specialty pharma companies became keyplayers in healthcare delivery.

Over time, the volume contracts attracted more players, which led toprice compression, reducing margins and forcing companies to developmany of the efficiencies we see today, such as centralized distributionand billing, comprehensive customer service operations, sophisticatedcost-tracking, and extensive mail-order capabilities.

Key players

A look at the key players helps to clarify how the specialty marketsector works. The dominant players today include specialty pharmacyproviders, pharmacy benefit managers, care management and diseasemanagement companies, and MCOs.

Specialty providers have emerged out of several sectors in thepharmaceutical industry, but they share one trait: They offer specialtyproducts and services to their various constituencies.

Full-service specialty companies provide patient and physicianservices, reimbursement support, therapy management assistance (such ascompliance programs and caregiver assistance), and product-launch andpull-through support for manufacturers.

Retailers are deeply involved in the specialty market, and severalchains operate their own specialty pharmacy divisions. Many retailers,including Walgreen's, CVS, Rite Aid and Wal-Mart, also partner withpharmaceutical and biotech manufacturers to offer compliance programs,reimbursement assistance programs and distribution channels.

Pharmacy benefit managers have expanded into the specialtypharmaceuticals sector by providing specialty vendors with access tomillions of covered lives. They also support MCOs with utilizationmanagement services, data management and reporting, and cost-controltools, such as tiered formularies.

Care management/disease management companies provide completeepisode-of-care management, physician reimbursement services andnursing support for those with chronic illness. Managed careorganizations offer specialty pharmacy coverage to employer groups andprovide patient care through their physician networks.

Regarding distribution, the path from manufacturer to patient forspecialty drugs differs from the one traveled by retail prescriptiondrugs. The typical oral medication moves from the manufacturing plantto the wholesaler and then to a retail pharmacy for dispensing to thepatient. In the specialty environment, the specialty pharmacy providertakes the place of the wholesaler, and there are multiple endpoints inthe distribution chain. Examples include infusion suites, stand-aloneclinics, physician offices and patients' homes (for self-injectables).

Keep in mind that specialty drug manufacturers usually contract withmore than one specialty provider, and distribution models vary. Forexample, a specialty manufacturer may manage an open distributionprogram in which it sells to any authorized purchaser. In other cases,a manufacturer will create a limited -- or closed -- network ofspecialty pharmacy providers to distribute the product.

MCOs and reimbursement

As noted earlier, MCOs often use PBMs to manage specialty drugs(especially if they are covered under the pharmacy benefit). The PBM,in turn, manages distribution and reimbursement through the specialtypharmacy provider. This is the basic model, but in today's evolvingmarket, it's not always explained so easily.

For example, many PBMs have merged with or acquired specialty pharmacyproviders, creating direct business partnerships between health plansand specialty vendors. A case-in-point is the recent merger betweenAetna and Priority Healthcare Corp., a leading specialty provider. In2004, the two organizations united to create an Aetna-branded specialtypharmacy business.

Regarding reimbursement, physicians have typically administeredinjectable drugs in their offices and controlled reimbursement forspecialty pharmaceuticals, which have traditionally been reimbursedthrough the medical side ofthe healthcare benefit. Essentially, physician offices have purchased,stocked and administered these agents, then marked up product cost whenbilling for services -- the classic "buy and bill" proposition.

Until recently, there have been few controls on this practice, andphysician practices (especially in the oncology sector) have enhancedtheir incomes substantially using this model.

This is changing. With the explosive growth in specialtypharmaceuticals, reimbursement practices are shifting.

As specialty drug utilization increases, MCOs are now transferringcoverage for injectables, biologics and other high-cost medications tothe pharmacy benefit, where costs are more easily tracked. Currently,about 70% of specialty pharmaceuticals are reimbursed through themedical benefit, and 30% through the pharmacy benefit, but this trendis shifting rapidly toward the pharmacy side.

This shift warrants a closer look. When reimbursement is embedded inthe medical benefit, physicians typically include the cost of the drug(with markups) in "physician services" under J codes (which areassigned to injectables). This system does not identify product size,packaging or dose, and makes it difficult for MCOs to track utilizationand costs. In addition, at many physician offices, paper-based manualprocessing systems add to tracking problems and delay reimbursement.

On the pharmacy side, however, MCOs use National Drug Code numbers totrack drug costs and utilization. This system allows e-processingsystems to monitor product size, packaging and dose, significantlyenhancing the management of utilization and costs.

Here's a brief final note on reimbursement: The Medicare PrescriptionDrug, Improvement and Modernization Act will significantly change theway Medicare pays for physician-administered prescription drugs.Beginning in January 2006, the MMA will reduce physician reimbursementfor certain drugs and will change reimbursement for Part B,office-administered drugs. Medical practices that frequently administerdrugs in the office, including specialties such as oncology,hematology, urology and rheumatology, will feel the effects.

These changes bear watching. If you require more information aboutspecialty pharmaceuticals under the MMA, check with your company'sgovernment affairs division or visit the Medicare Web site (


Future trends

The specialty pharmaceuticals market will continue its rapid growth,driven by hundreds of product launches through the end of the decadeand beyond. It's difficult to predict how the market will shake out,but here are a few generalizations:

The high per-patient costs of specialty products will probably promptemployers and MCOs to exert pressure on prices, and this will push backthrough the system to manufacturers.

Look for stricter formulary management, as well as the growth of rebateprograms to help meet demands from payers for reduced costs. One factorthat may check costs is the growth of enhanced information technologiesin the specialty sector. This will make it easier for MCOs to managechronic disease and target specific populations for disease managementservices.

Web-based patient education, personalized care management, and improvedpersistence and compliance all benefit chronic-care patients and helpcontrol costs. For manufacturers, all of these areas offeropportunities for value-added programs targeting physicians, nurses,patients and caregivers.

Finally, specialty pharmacy providers, looking to sustain their growth,are likely to develop innovative long-term partnerships withpharma/biotech manufacturers, payers, MCOs and patients.

As the specialty market grows, it will be important for pharmaceuticaland biotech professionals to learn how specialty products targetdiseases in ways that conventional therapies cannot. Stay on top ofindustry trends, watch for competitive launches that may affect yourcompany's business, and take advantage of growth opportunities for yourcompany and your career.

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