Should Eli Lilly Acquire Walgreens? Should Novo Nordisk?
Different Strategy Starts with Different Questions
Healthcare in the United States is a $4.3 trillion carnival of markets managed by mental fantasy: the idea that any one piece can be isolated from its context and measured with precision.
“The method of freezing the frame, and including in it only measurable moves, works well enough in the analysis of individual markets in isolation, but it breaks down when applied to a whole economy,” explains Robert Skideslky, a British economic historian in What’s Wrong With Economics?: A Primer for the Perplexed, his critique of mainstream economic theories. Skidelsky takes aim at the way that economics is taught and practiced, particularly models which are “beautiful to behold but of little practical relevance.” Economists, he says, “are forced by the requirements of their own reasoning to squeeze their explanations of human behavior into absurdly narrow channels.”
It’s almost as if economic theory assumes away reality.
Economists almost never start with the facts; there are too many. Their general approach is to represent individual choices as parallel straight lines….to ‘make the crooked timber of humanity straight’….by expanding the zone of exclusion in order to make the subject matter of the enquiry “work” within the requirements of the model. So the thing being studied is forced to fit the math, the analytical model serving as a starting point that leads to an unrealistic destination: that an 'optimum equilibrium' is out there waiting to be discovered and proven.
Look no further for evidence of this methodological persistence than The Right Price: A Value-Based Prescription for Drug Costs , by a team from the Evaluation of Value and Risk in Health at the Institute for Clinical Research and Health Policy Studies. Said another way, the discursive war the pharmaceutical industry has been fighting around “drug pricing” is based on deeply flawed and illogical economic theory, an 'untrue simplification' guiding an entire body of business models and market forecasts that rarely deliver as forecast.
Discovering the “economic truth” of a market entails converting an open system into a closed one, and then making recommendations born from that false sense of separation.
This is the “division of labor” as path to productivity, introduced by Adam Smith in the first sentence of his Wealth of Nations in 1776. As a frame for novel strategic thinking, though, mathematical gymnastics around a single market is not only intellectually fraught, it’s root cause of the nearly 60-year “crisis” in the American Way of healthcare.
Houston, We Need a New Narrative
The implications of this psychic disintegration are profound.
The Western urge to break things apart to study (and sell) them has, to quote the Talking Heads, stopped making sense. Outcomes happen at a system level: never just one thing, but many things simultaneously and interactively.
It’s the and that matters.
A Modern Synthesis
The “drug market” is actually a system of markets. (Technically, it’s a ‘system of systems’ around which hundreds of billions of earnings and investments and projections — and shareholder value — is pegged.)
This system of markets is loosely coupled, but does all those things related to researching and producing the drug factor to healthcare, the technical input, the physical product that gets studied, developed, supplied and promoted to prescribers and their patients.
Enabling and supporting the drug factor to healthcare is a business ecosystem whose central bulge is comprised of a CRO market (roughly $133 billion), a commercial pharmaceutical analytics market (roughly $13 billion), a drug wholesale and distribution market (roughly $844 billion), an advertising and marketing market(roughly $400 billion), a contract sales market (roughly $16 billion), a pharmaceutical CRM software market (roughly $6 billion) and, of course, the artificial intelligence drug discovery market (still small and figuring itself out, roughly around $2 billion).
All of this gets applied to creating $714 billion in sales for prescription drugs in the United States alone. The first cousin of the drug market is the retail pharmacy market.
Retail pharmacy is the rapidly-becoming irrelevant infrastructure in healthcare, where the “patient” (using the language of a pharmaceutical brand team) or “shopper” (using the language of a soon-to-be-laid-off retail pharmacy manager) or “mom” (to use the language of most families — 78 percent of women identify as the primary household shopper, according to Supermarket News) visit to get the drug product produced and promoted by the $1.4 trillion economic system described above. (Hopefully, for the professionals at said retail pharmacy whose career and bonus is pegged to “pharmacy growth and innovation”, the patient-as-shopper-as-customer will have the patience to tolerate the miserable experience these places have become, and pester a store clerk to unlock the Hot Pockets or a bottle of Diet Coke while waiting in line at the pharmacy counter.)
Retail pharmacy is another one of those “ecosystems” — treated as a separate thing, somewhere out there in the ether — whose central bulge is a pharmacy management software market (roughly $90 billion), an e-commerce technology market (roughly $10 billion), a retail supply chain management market (roughly $60 billion) a retail logistics market (roughly $800 billion) and an organized retail crime/shoplifting market (roughly $100 billion). The latter is growing at more than 50 percent a year.
Sitting astride both of these markets is the Big PBM market.
In ecological terms, Big PBM are the apex predators OptumRx, ExpressScripts and CVS Pharmacy, three companies who control almost 90 percent of the meta-market in pharmacy benefit management, valued around $520 billion, and its first cousin, the employee benefit consulting market, valued around $100 billion.
At a system level, Big PBM + Big EBC powers the self-organizing behavior of both the ‘drug market’ and the ‘retail pharmacy market’ in the Untied States, in the sense that the pressure to survive — much less grow, innovate and increase shareholder value — depends on successfully rotating in their orbit. Big PBM, more than the healthcare professionals and the pharmaceutical industry, controls the practice of medicine in the United States because it defines the rules of play in the drug market, including its economics.
These are the ‘control points’ who have a variety of tools at their disposal, developed over decades, to help insurance plans manage prescription use and cost — such as requiring prior authorization before a patient can fill a prescription, or putting quantity limits on the amount of a medication that a customer can purchase through their insurance plan, or ensuring utilization management, or even weaponizing the fax machine to deploy “passive contracts” as a form of market control.
From Barron’s (Confidential Files Detail PBMs’ Backroom Negotiations — and Their Role in the Opioid Crisis):
“PBMs’ days of obscurity might be ending. The Federal Trade Commission recently accused the industry’s largest players of inflating insulin prices. The PBMs say they have worked to make insulin more affordable and have vowed to defend themselves against the FTC lawsuit.
Barron’s reporting raises fresh questions about the companies’ involvement in the pharmaceutical supply chain.
PBMs receive billions in fees and rebates from pharmaceutical companies seeking to guarantee that their products get in front of insured consumers. Through their management of so-called formularies, PBMs have the power to grant drugs preferred spots versus competing products; place restrictions on drugs, like requiring prior authorization; or to exclude certain products altogether. The industry is dominated by CVS Caremark, UnitedHealth’s Optum Rx, and Cigna’s Express Scripts. Together, they control nearly 80% of the market for prescription claims.
The industry records viewed by Barron’s stem from years of opioid litigation across the country. They’re now held in the Opioid Industry Documents Archive maintained by University of California, San Francisco, and Johns Hopkins University.
The documents show how financial terms negotiated by PBMs are intertwined with the availability of medicines to consumers….”
The “Value” Of Walgreens?
When you connect both markets, the drug market + the retail pharmacy market, and understand them as a single economic unit, a single organism, they constitute a big part of the $734 billion investment employers spend every year on healthcare (data from Trilliant Health).
Part of the reason drug store chains are struggling is because of falling reimbursement rates for prescription drugs and higher fees imposed on them by Big PBM. The retail pharmacy market has complained bitterly that PBMs have too much control over the industry and can squeeze pharmacies.
“If reimbursement rates start to come down and drug stores can’t offset it with other growth, then it has a negative impact on their profitability,” says pretty much everybody, but the quote goes to Elizabeth Anderson, an analyst at Evercore IRI in Why Walgreens, CVS and Rite Aid are Closing Thousands of Drug Stores Across America, “At the same time, the rest of the store that’s supposed to pad the margins aren’t doing it so much anymore” because of lower foot traffic.
Around 25 percent of Walgreens’ stores aren’t profitable.
No doubt, it's been a difficult couple of decades for Walgreens, which has seen its stock lose two-thirds of its value this year alone. It currently trades at levels not seen since the 1990s.
Walgreens, like much of the drug market, has fallen victim to consistent drops in drug reimbursement payments from Big PBM over the years, not too mention a poor acquisition Walgreens made to position itself in primary care, as well as a cost-conscious consumer demanding a different pharmacy experience altogether. [Notably, Amazon is expanding its primary care business while its competitors Walgreens and Walmart are stepping away.]
Which raises a “crucial long-term question” for Walgreens in its search for strategic direction: why carry products at all? And for Eli Lilly (or JNJ): why depend on Walgreens as a channel? [Note: Walgreens’ effort to sell itself to Sycamore Partners is now “mostly dead”, per CNBC on Monday.]
Consider, but consider interactively:
Companies spent more than $1 billion on ads to promote the consumption of weight loss and diabetes medicines in 2023, up 51% from the prior year.
Fewer than 1 in 5 employer-sponsored plans cover GLP-1s for weight loss. While employers footed the bill for health plan price increases in 2024, they were largely unwilling to give employees access to popular weight loss drugs.
Oracle has a brand-new, AI-enabled, cloud-fueled electronic health record, its most significant health-care product update since acquiring Cerner. Cerner contributed $5.9 billion to Oracle’s total revenue in fiscal 2023. Its competitor Epic generated $4.9 billion in revenue last year.
Largest-ever Ozempic and GLP-1 drug study finds they lower risk of 42 health conditions, including heart attacks and Alzheimer’s disease. The study included nearly 2 million patients, making it the largest ever conducted on this group of glucagon-like peptide-1 receptor agonists. All the participants, who were followed for a median of about three-and-a-half years, had type 2 diabetes. About 215,000 used GLP-1 drugs, while the rest were taking various other diabetes medications.
For Lilly (or Novo, or JNJ, or Amgen, or Pfizer): Why not just buy Walgreens for its value as a care and service infrastructure, turn it into the backbone to reorganize the practice of medicine around the ‘production of cardiometabolic health’? Once the ecosystem takes root, invest $1 billion (the equivalent of an ad campaign) with Oracle Cerner (or Epic) to create the first specialized EHR in ‘the management of cardiometabolic health’?
Then package the whole thing as a new B2B brand, a different care experience with different economics — a ‘storyline of system value’ — sold directly into self-funded employers? Said differently, invest in and build the capability to create ‘gravitational pull’ into the new ecosystem rather than promotional push of pieces and parts into strategically-collapsing channels.
The retail pharmacy market has long been considered e-commerce proof, writes Geoffrey Seiler, in a market commentary for The Motley Fool. “While there have been mail-order and e-commerce pharmacies for quite some time, catering to people with predictable prescription refills, many patients need their medicine immediately, not in a few days.”
“However, Amazon is now looking to turn the industry on its head by rapidly expanding its same-day pharmacy services. Amazon began its e-commerce pharmacy service in 2020 and started testing same-day delivery in a few select cities last October. It expanded to the greater Los Angeles area and New York City in March and now has ambitious plans for 2025.
The e-commerce giant now plans to offer same-day pharmacy services in 20 more cities next year, including Boston, Dallas, Minneapolis, Philadelphia, and San Diego, among others. The move is expected to help the company provide same-day pharmacy delivery to nearly half the U.S. by the end of next year.
For its part, Amazon said it was looking to capitalize on the growing number of "pharmacy deserts" that were being created by store closures. Walgreens told the Wall Street Journal that it plans to close a “significant” number of its roughly 8,600 stores in the United States. CVS, the largest US chain, closed 244 stores between 2018 and 2020. In 2021, it announced plans to close 900 stores. And Rite Aid filed for bankruptcy last year and will close up to 500 stores.
Invent a New Peer Group
There is a perpetual short-circuit in the way of thinking about top-line innovation in healthcare. This is because operations (i.e., cost-cutting) is being confused for strategy at the highest levels, and because a small handful have the ‘agenda power’ and thus control the discussion and the production of better and bigger ideas.
What gets lost is this:
Healthcare is a ‘nested market’ where the whole system happens at once.
So entangled are the pathways within it and through it and around it and above it and below it that any analysis — no matter how intelligent and thoughtful — will be wrong at the title slide. It’s jumping-off point is illogical because it is fragmentary. The statistical machinery is powered to analyze and argue, in a sort of a cooperative equilibria. The players have become conditioned by each other’s behavior.
In his book on the history of soccer tactics, Inverting the Pyramid, Jonathan Wilson writes that soccer "is not about the players, or at least not just about the players; it is about shape and about space, about the intelligent deployment of players, and their movement within that deployment.” Unlike chess, soccer is open.
The Standard Model of thought and action — the typical playbook — in health market strategy today prefers to treat the economics as a game of chess rather than a game of soccer. It reduces complex psychological and social phenomena to simple linear mathematical models, often without further justification or enquiry.
It focuses on the players, not about creating new space within which to deploy them.
The stuck market — whether that’s the collapsing retail pharmacy market or the collapsing Big PBM market or the drug market floating somewhere in between — will need different policy, economic and business constructs for what lies ahead, better ‘navigational knowledge’ to move faster than the current, to get in front of change rather than become a victim of it.
Why DeepSeek Shouldn’t Surprise
“What’s changed is the world around us is now within us,” said Robert Cardillo, director of the National Geospatial-Intelligence Agency, during a Senate Intelligence Committee on a new context for military strategy. “What we used to hold exclusively — because we had capabilities that others didn’t — is now more shared.”
The massive grapple is escaping Adam Smith’s fragmentary worldview, to resist attempting ever more tortured reductionist accounts that lead to structural stalemate, an epidemic of arrested development and commercial withering across the board.
Instead of trying to “control costs” and limit access to GLP-1s, what if we reposition them as a keystone to economic growth, reorganize The Wealth of Nations around the production of cardiometabolic health? And in the process invent an entirely new form of economic competition, where continuous health engagement becomes the center-of-gravity to break 60 years of structural stalemate?
If we want to change the game, we should be asking different questions about how the players are deployed.
/ jgs
John G. Singer is Executive Director of Blue Spoon, the global leader in positioning strategy and innovation at a system level. Blue Spoon specializes in constructing new industry ecosystems.