The Impact of Cost Plus Drug Company on Retail Pharmacy

Volume 9, Issue 15, July 19, 2022

About six months ago, the Cost Plus Drug Company, entrepreneur Mark Cuban's online pharmacy, officially launched. As of late, the pharmacy is receiving significant media attention, including a study published in the journal Annals of Internal Medicine which showed Medicare could have saved nearly $4 billion in 2020 by purchasing generic drugs at the same prices offered by Cost Plus. Cuban took to Twitter to share the results with and tag President Joe Biden and other elected officials.

Here's a brief overview of Cost Plus: The company launched in January offering 100 generic drugs. Medication pricing is easy to follow. Cost Plus takes the cost to manufacture the drug, marks it up 15%, adds $3 to cover labor, and finally adds the cost to ship the medication and applicable taxes. To avoid working with pharmacy benefit managers (PBMs), Cost Plus is currently cash-only (i.e., patient out of pocket). The pharmacy uses Truepill for all its fulfillment needs. While Cost Plus currently acquires medications on the open market, it is building a pharmaceutical facility in Dallas to produce its own medicines, with an expected opening in the fourth quarter of 2022.

With the considerable buzz surrounding Cost Plus, I wanted to share some thoughts on the company, its competition, what I believe is the long play for Cost Plus, and how this and other online pharmacies are affecting and likely to affect retail pharmacy and independent pharmacies.

Cost Plus isn't a New Concept.

The company joins a host of other online pharmacies, including those operated by established drug chains like Walgreens and CVS; other newcomers like Amazon, Honeybee Health, and ScriptCo Pharmacy; and more established companies like HealthWarehouse.com and Costco.com. The proliferation of online pharmacies was recently the cover story for an issue of Consumer Reports.

Cost Plus undoubtedly benefits from Mark Cuban's name recognition, which is important as the company has indicated it has no immediate plans to invest in marketing. The company is hoping the Cuban name and reputation, fueled by his work as owner of the NBA's Dallas Mavericks and as one of the investors on the popular television show "Shark Tank," combined with the ease of purchasing and price transparency will help build awareness of the company and grow its customer base.

Cost Plus is Growing. Fast.

As noted earlier, Cost Plus launched with 100 generic drugs. That number recently surpassed 800. Running the business through an established company like Truepill helped the company avoid the hiccups often associated with the launch of a new company and allowed Cost Plus to expand its offerings with relative ease. The opening of the Dallas facility should further help the company improve its offerings and possibly what it charges for medications.

Cuban has indicated that generics are just the start for Cost Plus. Longer-term plans include adding brand-name drugs to its offerings. It wouldn't be surprising to see Cost Plus eventually accept insurance — getting into the PBM/retail space — and offering telehealth services.

Brick and Mortar is Likely in its Future.

It also won't be surprising to see Cost Plus — and other online pharmacies — establish brick-and-mortar locations. If they hope to begin billing insurance, some states require the operation of a physical location within the state. We're currently seeing companies like Ro, the parent company of Roman and Rory, and Hims & Hers getting more aggressive with establishing physical footprints.

Increased Accessibility to Medications is Good News for Consumers.

Medication adherence is a significant health challenge. Research has shown that nonadherence can account for up to half of all treatment failures, around 125,000 deaths, and up to 25% of hospitalizations annually in the United States. One of the biggest obstacles to adherence and achieving "optimal therapeutic efficacy" (often defined as adherence rates of 80% or more) is cost. When patients struggle to afford their medications, they will often fail to fill or refill a prescription or skip or ration doses. Online pharmacies that can reduce cost and make it easier for consumers to acquire their medications should help with adherence.

Are Cost Plus and Online Pharmacies Bad News for Retail and Independent Pharmacies?

Although an online pharmacy, as mentioned earlier, is not a new concept, the launch and growth of Cost Plus likely presents yet another potential challenge to retail and independent pharmacies. More competition, after all, is rarely good for business, although it can serve to motivate more mature companies to innovate and invest in improvements. The Mark Cuban name, the company's strategy to focus on low prices and price transparency, and the significant attention the company is getting may motivate more consumers to order their medications online.

Concerning the proliferation of online pharmacies, when a consumer purchases their medications over the internet, this means the individual is not purchasing the drugs at a retail pharmacy. In addition, eliminated visits to the retail pharmacy also eliminates the potential for non-medication purchases that have become increasingly essential to retail pharmacy success. If the likes of Cost Plus open a brick-and-mortar pharmacy, it's likely to be a simple operation where a consumer walks in, picks up their medications, and leaves rather than have the bells and whistles one associates with retail pharmacy. Some consumers may find a simplified, in-person shopping experience more attractive.

Retail and Independent Pharmacies Must not Remain Stagnant.

Cost Plus and other online pharmacies aren't going anywhere. Retail and independent pharmacies need to be considering how they can compete with this business model. One way could be to offer online medication sales with both delivery and pickup options. For consumers who have prescriptions that cannot be legally distributed and dispensed via the internet (e.g., controlled substances), they will still need to go to a physical location to pick up these medications. If retail pharmacies can make this experience easy, consumers may be more inclined to continue filling all their prescriptions with their local pharmacy.

Another important strategy for building and maintaining customer loyalty is to emphasize the value of the customer/patient-pharmacist relationship — something typically not available through an online pharmacy experience. Pharmacists at independent pharmacies must interact with customers and take on a role that goes beyond the "sale" and dispensing of medications. Pharmacists should be engaging with customers around issues like adherence and health goals, offering guidance, and undertaking other initiatives that can make the relationship with the pharmacist feel indispensable to a customer. The good news for retail and independent pharmacists is there will always be those consumers who want and value the interaction and personal relationship with their local pharmacists.

A third strategy is to embrace telemedicine. Virtual services can help independent pharmacies expand the types of services they provide, meet the growing demand for telepharmacy, and better meet the needs of those patients who would benefit from collaboration between their pharmacist, a physician, and possibly a case manager around medications. As I wrote in my column, "Retail Pharmacy Update: Opportunities, Challenges, and Valuations," the addition of telepharmacy services can help pharmacies reach new patients and strengthen support for existing patients, all while improving patient care.

Cost Plus may be a Prospective Buyer.

As noted, online pharmacies that want to accept insurance are increasingly looking to establish physical footprints, particularly in those states that require a brick-and-mortar location to bill insurance. The easiest path to that physical store is to acquire an existing pharmacy. That acquisition tends to check several requirements and do so fast. The buyer gets the license, contracts, and personnel (assuming they want to remain on the staff). Once the acquisition is complete, the buyer can immediately begin (i.e., continue) operations.

While online pharmacies are likely to be looking for deals on brick-and-mortar locations, owners of independent pharmacies interested in selling but not at a discount can still make themselves an appealing prospect to online pharmacies. Ways to do so include good contracting, a high-performing staff that likes the physical location, and establishing the infrastructure to provide telemedicine.

Mark Cuban Cost Plus Drug Company: Another Player, but Not Likely a Market Changer

Despite the buzz, Cost Plus Drug Company's entry in the online pharmacy space is not likely to have a significant effect on retail pharmacy. The company is most likely to put pressure on others already in and entering the online pharmacy space — a space that's quickly becoming overcrowded.

While there's every reason to believe Cuban's latest venture will prove successful, it won't likely transform the pharmacy industry. But what the launch and rapid growth of Cost Plus shows are that online pharmacies are here to stay and will likely grow in popularity as awareness and appreciation for the service grows. Retail and independent pharmacies must continue to take this competition seriously and be identifying how and whether they can remain competitive. If pharmacy owners do not believe they are in a strong position to effectively keep their company afloat for the long term, they will be well-served to engage with an M+A advisor who can provide the guidance necessary to help them prepare for and execute a successful sale.