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Stock Strategist

Untangling the Pharma Supply Chain

The flow of drugs and money along the pharma supply chain can be complicated.

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We prefer to view the pharmaceutical supply chain--which includes retail pharmacies, pharmacy benefit managers, or PBMs, pharmaceutical wholesalers (distributors), brand-name and generic drug manufacturers, patients, and payors such as managed care organizations, or MCOs, employers, and governments--holistically. While we don't have any recommendations in this space currently, we think  Express Scripts (ESRX) and  Medco Health Solutions (MHS) are high-quality companies with expanding economic moats, and are worth keeping an eye on in case a buying opportunity presents itself.

Dispensing: Retail and Mail-order Pharmacies
Patients are the ultimate consumers of pharmaceuticals. In general, patients fill their prescriptions through either a retail pharmacy, or a mail-order pharmacy. Retail pharmacies include independent pharmacies, small chains, large chains such as  Walgreens (WAG),  CVS (CVS), and  Rite Aid (RAD), and pharmacies embedded in other retailers, including grocery stores such as  Safeway (SWY) and  Kroger (KR), and mass merchandisers such as  Wal-Mart (WMT) and  Target (TGT). The largest mail-order pharmacies are owned and operated by pharmacy benefit managers such as CVS Caremark, Medco, and Express Scripts.

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