In my last post, I discussed 7 trends I have observed from the rise of tech start-ups tackling pain points in the pharmacy industry, with a couple of companies as examples for each trend. As I come across more of the players in the pharmacy industry, I thought I’d re-summarize those trends and put them into the following categories:

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💊Online Full-Service Virtual Pharmacies

The companies in this category operate as online pharmacies where patients can directly request a medication delivery or in-person pick-up (if the option is available) by sending in the prescription from their providers. The pharmacies have warehouses in the regions (or adjacent areas) they operate in where they fulfill the order requests and ship from warehouses to patients’ homes.

How do they make money if they not only waive your delivery free but also save you money on the prices? These virtual pharmacies have the same business model as traditional pharmacies — they profit from the margin between what they get reimbursed from the insurance companies and what they pay for the drugs. Traditional pharmacies compete for a set number of patients by operating on each corner of the street. Alto noted in this article that in a city like San Francisco which houses 800,000 people, there are roughly 120 pharmacies in the crowded space. Contrary to the mainstream belief that pharmacies get their revenue mainly from the packaged goods sold at the front of the stores, the actual pharmacy typically contributes 2/3 of the total revenue. Traditional pharmacies have to find ways to cover their overheads (rent and utility) and labor costs as well as to make up for the thin margins from the other products sold at the store. For companies like Alto, Capsule, and Medly, one physical location can cover the same geography as hundreds of physical pharmacy chains would do. Additionally, some skip the wholesalers and negotiate prices directly with manufacturers, which helps their patients save another layer of premium charge.

🌱New Type of Pharmacy Benefit Manager

Traditional PBMs monetize primarily from differential pricing between health plans and pharmacies. They also make money from administrative and dispensing fees, rebates, group purchasing organizations, research grants, sale of claims data, prior authorizations, and valued-added programs. Below is a breakdown of PBM’s revenue streams:

  1. Differential pricing: PBMs charge insurers more for a drug than what they pay to pharmacies (e.g., for a $15 retail price drug sold at a pharmacy, the patient makes a copay of $5 towards that charge, and the PBM pays the pharmacy the remaining $10, but it charges the insurer $12 instead and pockets in that $2 difference) — the differential pricing is more common for generic drugs
  2. Rebates from manufacturers: PBMs get rebates from manufacturers for promoting certain drugs as a % of the wholesale acquisition cost set by the manufacturer, which is slightly cheaper than the retail price marked up by the pharmacy (e.g., for a $15 retail price drug, the manufacturer set the wholesale acquisition cost for $13, the PBM gets a 30% rebate from the manufacturer for $13 x 30% = $3.9, and the PBM passes through 90% of that rebate to the insurer while retains the balance of $3.9 x 10% = $0.39) — the rebate is more common for brand drugs
  3. Direct and indirect remuneration (DIR) fees from pharmacies: PBMs charge pharmacies who participate in their networks a flat fee or a % of the drug price per transaction (e.g., for a $15 retail price drug, the PBM gets a $0.2 flat fee paid by the pharmacy, and the PBM passes through 50% of that to the insurer while retains the balance of $0.2 x 50% = $0.1) — DIR fee can be commonly found in Medicare Part D contracts where almost all the rebates from manufacturers are passed through to CMS
  4. Others: as PBMs become more vertically integrated — being both insurer and PBM or owning specialty pharmacies themselves — they can find many additional ways to make a profit

Because of this business model, traditional PBMs (top 6 players making up 95%+ of the US market) make more money when patients purchase more high-cost prescriptions, and their interest is not aligned with patients who want to save costs and pay for the most effective medications nor with health plan sponsors who want to cut loss ratio by getting patients on the right treatment. New type of PBMs like Drexi, Capital Rx, and Navitus strive to disrupt this model by establishing a fee-based business model — pass through 100% of the rebates with no differential pricing but rather charge a fee per employee (health plan member) or a flat fee per drug. Companies like WithMe and RxBeneifts serve as a complementary layer to PBMs and help employers access better rates, transparent rebates, and offer tailored medication management solutions to employees.

🚚Prescription Delivery / Distribution

While players like Medly and NowRx operate as a full-service virtual pharmacy meaning they have their own storefront, warehouses, and pharmacists, and handle relationships with manufacturers or distributors, insurance carriers and PBMs, others focus purely on the logistics part alone, taking on the responsibility of serving DTC tele-prescription companies (Truepill), independent pharmacies (RxDN, Nimble), pharmacy chains (ScriptDrop), manufacturers (Phil), health systems (Phox), etc.

💰Prescription with Price Transparency

When patients go pick up their prescription, it’s always full of surprises, not in a pleasant way, as to how much they might need to pay out of pocket. That is because, for the same prescription, different brands may charge differently, one pharmacy may have a different negotiated price with a PBM from another, and the health plan coverage could also be different depending on your copay / coinsurance / deductible.

Companies such as Blink Health and GoodRx built out an online storefront that shows you the prescription drug price upfront, be it home delivery or pharmacy pick up, and lets you choose whichever brand, pharmacy, or delivery method that works best for you. They work with PBMs and pharmacies at the back end to pull in favorable prices for patients and make a fee from each transaction.

Honeybee is a different kind that skips insurance and PBMs but works directly with manufacturers to distribute the drugs at favorable prices, in some ways, it is similar to a full-service virtual pharmacy like Alto and Capsule. However, as it cuts out the middleman, drugs are not covered by insurance; the business model, on the other hand, could also make it appealing to customers as the cash price could be cheaper than the out-of-pocket responsibility of a price tag inflated by the PBMs.

💻Direct to Consumer Tele-prescription

Telehealth providers have seen a surge in 2020 as a result of regulatory tailwinds amidst the pandemic:

  1. There is more flexibility around HIPAA compliance that allows providers to use everyday popular applications to deliver telehealth services
  2. Providers can now deliver telehealth services across state lines depending on their local states’ licensure
  3. CMS also expanded the Medicare & Medicaid coverage for telehealth services

As for the e-pharmacy landscape, a game-changing policy taken effect in January 2020 allowed providers to prescribe controlled substances without the need for an in-person medical evaluation. While some of the most commonly-known prescriptions such as insulin, asthma inhalers, and antibiotics are non-controlled medications, many are classified as controlled medications for their potential cause for dependence — such as medications that treat anxiety (Xanax), ADHD (Adderall), and manage pain (Tylenol with codeine).

The DTC tele-prescription companies in the market map are ones that emphasize on the end-to-end prescription delivery experience, which means they are specifically tailored to patients looking for prescription to treat their symptoms, as opposed to the broadly-defined telehealth companies (e.g., HealthTap, K Health, Dr. On Demand) that focus on consultation with a treatment plan that may or may not include the on-demand prescription delivery service.

In addition to the bigger players like Hims & Hers, Nurx, Lemonaid, and Ro which started from one health condition and now expanded to mental health, acne treatment, hair loss, sexual health, etc., a few players have ventured into areas such as substance abuse (Bicycle Health), metabolic health (Calibrate), and ADHD (Klarity).

📈Data-Driven for Better Outcomes

Medication optimization / intervention refers to the following approaches taken by the stakeholders in the ecosystem:

  1. Provider to prescribe the most suitable treatment plan for each patient (Arine, InsightRx, Synapse)
  2. Health plan to identify the most cost-effective medication under coverage (Sempre)
  3. Pharmacy to track patients for timely check-ins and refills (PatchRx)
  4. Patient to take prescription per instruction and check in with provider to report progress (Medisafe)
  5. Provider and health plan to receive feedback and fine-tune the treatment plan (ClosedLoop.ai, Cureatr)

Additionally, other players are addressing a few other areas in the industry. GNS Healthcare focuses on the discovery and development phase of the drugs, providng manufacturers and health plans the tools to evaluate the most promising hypotheses, design the study, identy the target population, etc. SamaCare targets the specialty drug enrollment process where they help providers prepare tailored prior authorization forms to have better success with specialty drug coverage by the insurers.

These players together aim at the high-cost healthcare system in the US by bringing in the data-driven insights to improve better and faster health outcomes with reduced spending.

💪Empower Pharmacies / Pharmacists

This category broadly covers tools provided to pharmacies or pharmacists that allow them to better deliver patient-centric care. Companies mentioned here include ones that automate pharmacy workflow, enhance their existing offerings, and improve patient engagement, except for those that have been previously discussed.

  • Pharmacy management automation: Kit Check’s RFID solution combined with its software platform gives hospital pharmacies unit-level visitability of pharmaceutical products from manufacturers to patients, allowing them to more efficiently manage the supply chain and eliminate medication errors and drug diversion.
  • Pharmacy offerings enhancement: Asteres’ prescription storage lockers and kiosks safely and securely store the prescriptions and navigate patients through a self-served pickup process which frees up pharmacists’ precious time. HealNow helps independent pharmacies modernize the patient onboarding experience and allows them to take the patient checkout experience completely online, handling payments on the platform.
  • Revamped pharmacist-patient relationship: Aspen RxHealth’s intelligent matching technology pairs patients with pharmacists most suitable for their needs. It allows pharmacists to extend their talent beyond dispensing medication and fully utilize their expertise to help patients navigate medication management. DocStation empowers pharmacies to administer clinical programs in partnership with health plans, turning pharmacists to front-line providers to realize their full expertise in providing value-based care.

Thank you for reading and I’d love to hear your thoughts. You can connect with me on Twitter or LinkedIn.

Tech VC . Ex-tech investment banking. I write about all things tech & finance on this channel.