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Stock Strategist Industry Reports

Drug Supply Chain: Winners and Losers

We analyze the trends affecting retail drugstores, distributors, and PBMs.

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Between manufacturing facilities and patients stand a multitude of middlemen involved in both the physical distribution and financing of pharmaceuticals. These include pharmacy benefit managers (such as  Medco Health Solutions (MHS) and  Express Scripts (ESRX)), managed care organizations (such as  UnitedHealth (UNH) and  WellPoint (WLP)), retail pharmacies (such as  Walgreen (WAG)), and drug wholesalers (  McKesson (MCK),  AmerisourceBergen (ABC), and  Cardinal Health (CAH)). A recent report in Morningstar Healthcare Observer explored several trends that will affect the future competitive advantages and performance of companies in these industries.

The Generics Wave
Competitive dynamics are completely different along the respective supply chains for generic and brand-name drugs. Although brand-name drugs account for only about a third of the prescriptions dispensed in the U.S., their premium prices mean they account for about 85% of the dollar value of the pharmaceutical market, according to  IMS Health (RX). Even so, the monopoly power afforded brand-name drugmakers by patent protection means that manufacturers generally retain most of the economic value of their drugs, earning high margins and returns on capital, and regularly increasing prices. In contrast, the generics market is highly competitive, and characterized by rapid price depreciation.

Matthew Coffina has a position in the following securities mentioned above: ESRX. Find out about Morningstar’s editorial policies.