In­vest­ing in com­pounders

Drug short­ages are per­sist­ing, lead­ing to the deals

Modern Healthcare - - FRONT PAGE - Jaimy Lee

On­go­ing short­ages of ster­ile in­jectable drugs have trig­gered a wave of in­vest­ment in new and ex­ist­ing com­pound­ing phar­ma­cies, which so far, at least, hasn’t al­le­vi­ated the short­ages.

A com­bi­na­tion of high mar­gins, per­sis­tent drug short­ages and cash-strapped hos­pi­tals un­will­ing to in­vest in their own ster­ile phar­macy fa­cil­i­ties has ig­nited in­ter­est from a num­ber of in­vestors. They in­clude pri­vate eq­uity firms, drug and de­vice man­u­fac­tur­ers and health­care man­age­ment firms.

“This whole in­dus­try popped up,” said Lou Dio­rio, a prin­ci­pal with LDT Health So­lu­tions, a phar­macy con­sult­ing firm. “It’s gained such mo­men­tum over the last three or four years.”

Com­pound­ing be­gan at lo­cal phar­ma­cies, which tra­di­tion­ally for­mu­lated ster­ile and non- ster­ile pre­scrip­tions for in­di­vid­ual pa­tients. How­ever, the ris­ing num­ber of drug short­ages as well as the in­tro­duc­tion a decade ago of new reg­u­la­tions that es­tab­lished stricter rules for the pro­duc­tion of ster­ile drugs have made hos­pi­tals in­creas- in­gly re­liant on ob­tain­ing ster­ile in­jectable drugs from com­pound­ing phar­ma­cies, some of which are op­er­at­ing more like small drug man­u­fac­tur­ing plants.

Lit­tle at­ten­tion had been paid to this un­der­reg­u­lated and largely frag­mented seg­ment of the drug mar­ket un­til a con­tam­i­nated batch of steroid in­jec­tions com­pounded by the New Eng­land Com­pound­ing Cen­ter last year led to the deaths of 44 peo­ple and sick­ened an ad­di­tional 678 pa­tients. The Food and Drug Ad­min­is­tra­tion for the most part, left

has, over­sight of the in­dus­try to the states.

The scale of NECC’s reach—the com­pany even­tu­ally re­called more than 2,000 prod­ucts af­ter dis­tribut­ing 17,000 vials of the tainted steroid in­jec­tions to 23 states—pushed fed­eral reg­u­la­tors and law­mak­ers to con­sider new rules for com­pound­ing phar­ma­cies that op­er­ate more like drug man­u­fac­tur­ers. New in­dus­try reg­u­la­tions are likely, but are still some time away.

Phar­ma­cists say that what­ever the scope of the new reg­u­la­tions, com­pounders will con­tinue to play a cru­cial role in the sup­ply chain and that should drive more in­vest- ment in the sec­tor.

“In health sys­tems, with so much un­cer­tainty, with health­care chang­ing on a daily ba­sis, a hospi­tal might not want to give a cou­ple mil­lion dol­lars to its phar­macy to get it up to snuff,” said Erin Fox, di­rec­tor of the drug in­for­ma­tion ser­vice at the Univer­sity of Utah Hos­pi­tals and Clin­ics. “It’s eas­ier to spend a lit­tle ex­tra to get the drugs from some­one else.”

Deals, part­ner­ships and in­vest­ments in the sec­tor have ac­cel­er­ated in re­cent years. Wal­green Co. ac­quired a com­pounder owned by Om­ni­care in 2010. Arise Health­care, which owns surgery cen­ters and other health­care fa­cil­i­ties, opened the Texas Com­pound­ing Phar­macy in 2009. The com­pounder is now li­censed in 15 states.

Pri­vate eq­uity firms also have been ac­tive in the space. Last year, Bax­ter In­ter­na­tional con­sid­ered pur­chas­ing Pharmedium, a na­tional com­pound­ing phar­macy owned by Oak In­vest­ment Part­ners, Baird Cap­i­tal Part­ners and Baird Ven­ture Part­ners, but it backed away be­cause of the pos­si­bil­ity of new in­dus­try reg­u­la­tions, ac­cord­ing to me­dia re­ports. A Bax­ter spokes­woman said the com­pany does not com­ment on ru­mors, and Pharmedium did not re­turn calls for com­ment.

In De­cem­ber, two more deals were an­nounced. Arseus, a Rot­ter­dam-based med­i­cal sup­plier, said it would buy B&B Phar­ma­ceu­ti­cals, an Aurora, Colo.-based

sup­plier of con­trolled sub­stances and raw ma­te­ri­als used in com­pound­ing. Phar­ma­gen, a pub­licly traded dis­trib­u­tor of spe­cialty and scarce drugs, spent $1.1. mil­lion to ac­quire Bryce Rx Lab­o­ra­to­ries, a Stam­ford, Conn.based com­pounder.

Phar­ma­gen, for­merly Sunpeaks Ven­tures, aims to serve as the pri­mary backup sup­plier of drugs in short sup­ply to U.S. hos­pi­tals, said Mackie Barch, Phar­ma­gen pres­i­dent and CEO. It bills it­self as the first in­te­grated com­pany that is work­ing ac­tively on the ster­ile drug short­age.

The num­ber of new drug short­ages has nearly tripled in the past six years, jump­ing from 70 in 2006 to 204 in 2012. There were 299 ac­tive short­ages in the fourth quar­ter of 2012, com­pared to 188 in the same quar­ter in 2010.

“I don’t see any near-term res­o­lu­tion” to drug short­ages, Barch said. “I wouldn’t be in this busi­ness if we saw it go­ing away in a year or two.”

Barch is the former man­ag­ing di­rec­tor of Health-Rite Phar­ma­ceu­ti­cals, a now-closed phar­macy that was cited in a con­gres­sional in­ves­ti­ga­tion into sec­ondary drug dis­trib­u­tors that were ac­cused of sell­ing drugs in short sup­ply at marked-up prices.

The link high­lights how some com­pa­nies have emerged as play­ers in the sec­ondary drug distri­bu­tion and phar­macy com­pound­ing mar­kets. NECC, along with sell­ing com­pounded drugs, had also been mar­ket­ing drugs in short sup­ply to providers be­fore the menin­gi­tis out­break.

A report pub­lished by re­search firm IBIS World cited drug short­ages, the pub­lic’s in­creased aware­ness of com­pound­ing phar­ma­cies and an ag­ing pop­u­la­tion as fac­tors in the in­dus­try’s growth dur­ing the past five years. A sep­a­rate report re­leased last year by the pri­vate eq­uity firm Bain & Co. iden­ti­fied phar­ma­ceu­ti­cal com­pound­ing as a con­sol­i­da­tion op­por­tu­nity that could yield “out­sized profit mar­gins.”

Dio­rio of LDT Health So­lu­tions said an­other fac­tor driv­ing provider re­liance on com­pounders is the num­ber of hos­pi­tals that choose not to build their own ster­ile fa­cil­i­ties. About 70% of hos­pi­tals sur­veyed in 2011 by the Amer­i­can So­ci­ety of Health­Sys­tem Phar­ma­cists said they “par­tially or com­pletely out­source some drug prepa­ra­tion ac­tiv­i­ties.”

“You’re al­ways go­ing to have the 50-bed hos­pi­tals that are not go­ing to be able to make that in­vest­ment,” Dio­rio said. “There’s al­ways go­ing to be a need for some com­pound­ing.”


A con­tam­i­nated batch of steroid in­jec­tions from the NECC led to 44 deaths.

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