Proposed Legislation Compounds Pharmacy Risks

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The pharmacy industry is likely to undergo a number of changes over the next few years in the U.S. with the Affordable Care Act. It is an industry that has had to deal with a number of major legal issues surrounding prescription security for opioids like Oxycontin.  This is an issue that has still not been fully addressed.  The drive for legislation is set to continue.

In the news now, however, is the scare over contamination of compounded steroids across pharmacies in Tennessee that have been the cause of illness.  Last year a breakout of fungal meningitis was linked to the production of the same steroid.  And now legislation is circulating on Capitol Hill to alter how compounding is done and in the U.S. and will have effects on how the market responds to it.

Compounding is the traditional part of a pharmacist where they would create medications from scratch; tailoring the dose to the patient’s needs.  Today, most drugs are manufactured by large compounding companies and the U.S. Food and Drug Administration has limited oversight on them.  All of the major pharmacy chains like Walgreens (NYSE:WAG) and CVS Caremark (NYSE:CVS) offer compounding services.

Walgreens recently inked a partnership with major drug compounding firm AmeriSource Bergen (NYSE:ABC) in what looks like a move that anticipates these legislative changes.  Walgreens Specialty Pharmacy, LLC. is a subsidiary of Walgreen that carries out this part of their business and generated $419 million in revenue in 2012.

The proposed legislation, which has made it out of the Senate committee, is up for a vote sometime this summer.  The bill will expand the U.S. Food and Drug Administration’s oversight of the entire compounding supply chain and likely result in the closing of a number of small compounding pharmacies.  Legislation like this, if passed by Congress, will raise the costs of compounding, of that there is no doubt.  It always does.

Larger firms like Walgreen will benefit directly from these changes in a classic barrier to entry effect, further rolling up the revenue from prescription drug distribution to large chain pharmacies and away from independent ones.

Between this scare over quality and the increased need for prescription chain-of-custody security for highly-demanded street drugs, it means that the pharmacy industry and especially independent pharmacies will have to specialize if they want to find opportunities for growth as the major chains move into more traditional roles of community or local pharmacies.

A small company like Assured Pharmacy (NASDAQOTH:APHY) has the right idea by providing a cradle-to-grave service for handling a patient’s prescription.  It specializes in delivering chronic pain medications but is expanding its offerings into other self-administered and home-care pharmaceuticals.  Assured’s business model is what is intriguing.

As a closed-door operation with its own inventory it works directly with the prescribing physician to pick up, fill and deliver the prescription to the patient without there being any chance of losing or altering the prescription.

The effect of this proposed legislation and other drug-oversight legislation at the state level will create all new niches for pharmacies to fill into and build client lists off of.  For niches like these it makes more sense for the major players to partner with local service providers rather than compete directly with them.  We see this drive to greater legislative oversight to continue, however and the risks associated with that for small firms like Assured are quite high.

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