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Four health systems to address drug prices, shortages by forming new generic drug company

Jan 22, 2018

In consultation with the Department of Veterans Affairs, four nonprofit health systems—Salt Lake City-based Intermountain Healthcare, Ascension and SSM Health, both based in St. Louis, and Livonia, Mich.-based Trinity Health—will collaborate to form a not-for-profit generic drug company. Collectively, the four health systems have 280 hospitals.

Their intent is to form an FDA-approved manufacturer that either will make the drugs itself or contract the work out to accredited third-party manufacturers.

Intermountain said in a press statement that the goal is to provide patients “an affordable alternative to products from generic drug companies whose capricious and unfair pricing practices are damaging the generic drug market and hurting consumers.” Another goal is to stabilize the supply of essential generic drugs used in hospitals.

Intermountain attributed many of the current issues surrounding the generic drug market to “a reduction in the number of suppliers, consolidation of production volumes and a concentration of market pricing power.”

According to SSM Health’s CEO, Laura Kaiser, the new drug company won’t limit itself to providing drugs for the inpatient setting. She noted that the plan is to get the new drug company operating as quickly as possible.

A panel of industry experts will guide the new company. Along with senior executives from the four founding health systems, the panel includes two retired executives from Amgen, a professor from Harvard Business School, former CMS administrator Dr. Don Berwick and former Nebraska governor, U.S. senator and pharmacist Bob Kerrey.

Intermountain did not specify which drugs the new company would focus on, but reports suggest that drugs such as saline, morphine, sodium bicarbonate, older antibiotics and certain commonly used heart medications could be among the likely initial targets.

According to Modern Healthcare, executives said several health systems have asked about partnering on the new drug company since the news came out Thursday morning.

Our Take: Intermountain Healthcare already operates outside the scope of health care delivery per se, so while the news surprised most of us, it shouldn’t. The Salt Lake City-based integrated health system is a research powerhouse. In 2015, Intermountain acquired the GPO Amerinet, which it renamed Intalere. The nation’s third-largest group purchasing organization serves nearly 2,000 hospitals and, perhaps not coincidentally, is based in St. Louis. SelectHealth, Intermountain’s insurance division, serves 750,000 customers in Utah and Idaho.

All four health systems are regional leaders that own multiple physician groups, skilled nursing facilities, ambulatory surgery centers, urgent care clinics, home health, hospice and other elements of the care continuum. Another business line shouldn’t be that hard to manage.

You would think that innovator drug companies like Pfizer won’t be affected by the move. But this is a major shot across the bow to the largest generic drug companies—and some of the largest innovator companies have outsized generic divisions. In 2016, Novartis’ Sandoz unit, which manufactures generics almost exclusively, posted $9 billion in revenue; Pfizer had $4.6 billion in generic drug sales.

All that noted, it seems to us it would make more sense for the health systems to partner with a contract manufacturing company, or acquire a generics company, rather than build one from the ground up. St. Louis-based Reliable Biopharmaceuticals would be a good fit.

What is most intriguing about this event is that health systems—which are inherently service providers—would seek to be manufacturers as part of their own supply chain.

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