A Prescription for M&A – Compound Pharmacies Face Change

May 8, 2014                       

The compounding pharmacy industry is ripe for consolidation and many anticipate a pickup in M&A activity. As compounding pharmacist head to Washington, DC to attend the industry insiders “IACP’s 20th Compounders on Capitol Hill 2014” summit later this month, it is worthwhile to provide insight on this subsector.Industry Changes on the HorizonPrompted by recent deaths and hundreds of injuries caused by contaminated drugs produced in unsanitary conditions at several compound pharmacies, the industry has come under increased scrutiny.  As a result, the Drug Quality and Security Act of 2013 (DQSA) was passed. The law passed in late 2013, brings clarity and heightened Federal regulatory oversight of the compounding pharmacy industry. State regulators will continue to oversee smaller compounding pharmacies such as those operating in hospitals. However, in order to supply compound prescriptions in bulk to healthcare providers, DQSA requires that compounders register and be regulated by the Food and Drug Administration (FDA) as an Outsourcing Facility.Since the passage of DQSA, the FDA and many other healthcare industry regulators, associations and leaders have openly urged hospitals and other healthcare providers to purchase only from FDA-registered outsourcing facilities. Additionally, insurance payors and benefit providers, like PBM giant Express Scripts, have turned an eye towards heightened scrutiny of the compounding industry.While veterinary compounding was not addressed in DQSA, the American Veterinary Medical Association created a task force in February to develop proposed federal legislation. Driving an increase in demand for drug alteration for animals, this specialized compounding market is expected to continue to expand as pet ownership is forecasted to grow.Industry at a Glance Compounding Pharmacies in the US are expected to see revenues reach $5.3B and profits exceed an estimated $1.4B in 2014. According to IBISWorld report published earlier this year, industry revenue is forecasted to grow at an annualized rate of 3.5% to $6.2B in 2019. The 3,500 plus industry operators’ revenue is driven by providing five major product or services: Ingredient Alteration The primary service offered is compounding drugs with alternate ingredients often required because of allergies or other conditions that prevent a customer from using a standard manufactured pharmaceutical product. Application or Delivery Alteration For patients unable to swallow medication in pill form, compounding pharmacists reproduce a drug in liquid or transdermal gel form. Pharmaceutical Dosage Alteration Primarily serving young children who require lower dosages, this compounding service makes up approximately 15% of the industries revenue. Shortages Filling orders when drug manufactures experience a supply shortage in availability of raw materials needed for mass productions or they cut production as a results of low profitability of certain drugs. Animal Specialized Manufacturing A service that has seen steady growth over the past several years is compounding drugs for animals.  This market growth is driven by the need to alter the ingredients, application or delivery methods for animals continue to read here