HOLLY HEA LTH

Market entry Medium difficulty

Healthcare Interviewer-led case

This case discusses a new market entry for a pharmaceutical distributor.

The case covers all elements of the case interview scorecard. The industry is a little obscure and will test
candidates’ ability to comprehend new information quickly.

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Problem definition

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Holly Health is a leading Canadian pharmaceutical distributor with a significant share of the distribution
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market. The cost of drug plans has skyrocketed in the past several years at a double-digit rate. This has
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led insurance companies to raise their premiums to cover cost increases. These premiums increases fall
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onto employers, who are increasingly finding the cost of their drug plans unsustainable and are looking
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for alternatives. Insurance companies have noticed this and are looking for ways to control costs.
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Recently, Pharmacy Benefits Management (PBM) offerings have begun to arise in other markets. PBMs
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work between drug providers and plan providers to negotiate the best prices and drug options for the end
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consumer.
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Holly Health believes that there is an opportunity for this kind of business in Canada. Currently, there is
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no one in Canada providing a complete end-to-end PBM solution, and Holly Health aims to be the first to
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provide such an offering to the market.

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Should Holly Health introduce a PBM solution to Canadian market, and what are the important
factors they should take into consideration?

Additional information

Share Exhibit 1 and walk the interviewee through it. The interviewee will most probably not be aware of
the PBM industry, so allow them time to ask questions.

In addition, if asked, please share that:

• Three large insurers currently cover two thirds of the market with smaller players taking up the rest
• Current players in the PBM market only offer parts of the whole solution and not an integrated one

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• It is difficult and expensive to switch between providers in this industry
• All of the large insurers have currently partnered with a pharmacy chain to form a PPN (preferred
pharmacy network), which negotiates lower dispensing fees for their plan members
• Many smaller organizations offer plan administration services
• Specialized technology companies are offering remote healthcare services and data analytics
capabilities to go along with health plans
• Holly Health is a market leader in the distribution and retail of pharmaceuticals from manufacturers
to pharmacies. They have their own pharmacy chain in Canada, and strong relationships with large
manufacturers and pharmacies

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Holly Health - 2/11

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Exhibit 1: The PBM value chain

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Additional information
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Please share with the candidate:

• The main function of a PBM is to reduce costs of drugs and plans for the insurer and/or employer.
They negotiate lower drug prices with manufacturers (as rebates) and lower dispensing fees with
pharmacies in exchange for diverting volume to them
• Other functions covered by PBMs include administrating drug/health plans, providing additional
services for plan members and plan sponsors (e.g., more flexible and more customizable solutions
to employers than insurers)
• Their revenues come from small margins they keep on savings realized for their plan sponsors. E.g.,
If PBMs negotiate a 25% discount on a drug, every time the drug is purchased, they pass on 20%
savings to the sponsors and keep 5%
• Plan members (employees) are encouraged to buy specific drugs from specific pharmacies through
lower prices and co-pays

Holly Health - 3/11

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Question 1 (Structuring)

What does Holly Health need to consider before entering the PBM market?

Possible answer

1. Market
a. What is the size of the market and expected growth?
b. What are the market segments?
c.
2. Potential share
a. What do plan sponsors want?

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b. Who are our potential competitors (direct and indirect) and their advantages?

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c. What could be offer?

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3. Potential profitability
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a. What revenues and margins can be expected?

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b. What capital and operational investment will be required?

c. What is the breakeven point?
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4. Risk and capabilities

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a. Are there new relationships, expertise or operational components that need to be in place?
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b. Is there any potential channel conflict?

c. Are there government regulations or trends in the healthcare space that can affect operations?
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Holly Health - 4/11

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Question 2 (Judgement and insights)

We have gathered information on the high-cost drugs that have been available in the market over the
past 10 years [share Exhibit 2].

What can you conclude from this exhibit?

Possible answer

The exhibit shows the number of high-cost drugs that have been available in the market the past 10
years, segmented by drug costs. Several insights can be drawn from this chart for our client:

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● The number of high cost drugs has grown by a factor of 9 over 10 years

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˗ The year with the fastest growth was last year (18%)
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˗ Over the past 3 years, the drugs with a cost >$20,000 have seen the fastest growth (~50% for
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drugs with a cost between $20,000 and $49,999, and ~100% for drugs with a cost > $50,000)
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● Drivers for this increase in high-cost drug availability could be an increase in demand (e.g., aging
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population, the prevalence of chronic diseases like diabetes) or scientific advancements in the
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pharma industry
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These findings indicate that the cost of drug plans will likely continue to increase significantly in Canada.
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Next steps would include looking at the actual usage of these drugs by plan members, and if it is directly
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affecting costs. We also need to investigate how our client could control costs for plan sponsors, either
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by negotiating better prices or offering potential low-cost alternatives (e.g., generics, therapies, other
prevention programs). Last, we want to explore the opportunity for Holly Health to not cover high-cost
drugs, by identifying what the impact of this decision could be on plan users.

Holly Health - 5/11

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Exhibit 2: Number of high-cost drugs available in the market over the past 10 years

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Want to put your preparation to the test?

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consultant on CaseCoach.com

Holly Health - 6/11

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Question 3 (Judgement and insights)

Your team was able to gather information on plan members and the costs of their drug plans for
employers, this year [share Exhibit 3].

What can you conclude from this exhibit?

Possible answer

The graph shows the distribution of plan members by their annual costs, and the relative contribution of
each category of member to the total cost of drug plans for employers.

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The main observation that can be drawn from this chart is that a very small part of plan members (14%)

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account for the majority of the costs (72%): the members in the higher cost brackets (>$1,000) cost the

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plan about 15 times more per user than the lower cost ones. This indicates that only a small fraction of
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users is in need of or using some of the high-cost drugs, while the majority need relatively little coverage
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due to no requirement for high-cost drugs and/or low frequency of drug usage.
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Next steps would be to analyse the most effective way to reduce costs, such as reducing the number of
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high-cost members or reducing their costs. It would be interesting to better understand what is driving
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these high-costs (e.g., explore what type of drugs they buy, look into the trends in individual plan
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members costs over time, and determine if the trends are consistent across other factors like industry,
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age or region).
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Holly Health - 7/11

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Exhibit 3: Percentage of members in private drug plans and percentage of plan cost by annual cost
per member, Y0

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Holly Health - 8/11

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Question 4 (Numeracy)

About 55% of all Canadians have employer-sponsored drug plans. It is estimated that Holly Health could
generate an average revenue of $600 per plan member. The cost of running the PBM would be $800
million annually in fixed costs and $140 per plan member.

What market share (in terms of lives covered) should Holly Health’s 5-year target to generate a
margin of 10%?

Additional information

Let the candidate ask for the following information, but share it even if the candidate does not ask:

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• Population of Canada is 36 million, zero growth expected for the next 5 years

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• In this industry, market share is calculated by dividing the number of lives under one drug plan by

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the total number of lives covered by all private (i.e., employer-sponsored) drug plans
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Possible answer
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1. Number of lives covered necessary to achieve 10% margin = 

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10% margin = 0.1 = (Revenue – Variable costs – Fixed costs) / Revenue

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= ($600 x  - $140 x  - $800M) / ($600 x )

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 = 800 M / (600 – 140 – 0.1 x 600) = 2 M

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2. Market share = No. of lives covered by Holly Health / Total no. of lives covered by private drug plans
= 2 M / (0.55 x 36M)
= 0.1 = 10%

Holly Health would need to capture 10% of the market to generate a 10% margin within 5 years. This
seems to be a very ambitious goal that could be difficult to achieve by only selling plans to employers. In
order to gain market share faster, Holly Health could target insurers and offer services on their existing
plans, and would need to define their marketing and sales strategy. Next steps involve quantifying the
possible value proposition for insurers (to define a marketing plan), identifying existing partnerships to
leverage to generate clients, and analyze which large insurers can be targeted and how to approach
them

Holly Health - 9/11

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Question 5 (Creativity)

To achieve the 10% target margin, Holly Health will need to acquire a large market share. The company
believes that it has the right relationships and leverage to negotiate bulk discounts to help contain drug
costs in drug plans. However, to do so, it needs scale and have to acquire market share quickly.

What would you suggest Holly Health do to enter the market and attain scale quickly?

Possible answer

Business market
● Make switching easy for companies:

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˗ Prove that the value proposition exceeds switching costs

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˗ Offer to handle the transition for companies (e.g., train staff and employees)

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Offer flexible option, allowing employees to decide to participate
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● Target employees and create referral programme where employees put us in touch with their HR
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department
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● Partner with other organizations that target HR departments (e.g., other benefit providers, unions)
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Insurance market
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● Partner with a large insurance company, allow them to take share in the business if needed
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● Partner with other players across the value chain (e.g., pharmacies, brokers and consultants)
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● Acquire drugs plans businesses from insurance companies

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Holly Health - 10/11

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Question 6 (Synthesis)

The Strategy Head is interested in what you’ve put forward. She wants to run it by the executive team
during a corporate retreat and asks you for a short summary of what you’ve come up with as the strategy
for Holly Health to enter the PBM space.

What would you tell her?

Possible answer

You have asked us whether Holly Health should enter the Canadian PBM market and what factors they
should consider.

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Our view is that there is definitely a demand in the market for PBM services, due to rising drug costs

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(18% growth last year). Holly Health should consider the following criteria for its entry:
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• To reach the 10% profit margin target, Holly Health will need to capture a 10% share of the drug
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plans market. This is an ambition goal, which could be achieved by targeting both the business and
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the insurance markets. This might involve, for instance, a strategic partnership with a large insurer,
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or acquitting existing drug plan businesses.

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• To manage prices and profitability, Holly Health should focus on containing the costs of high-cost
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plan members and consider offering them special services

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Before we confirm our recommendation, we would like to have a look at potential competitors and see
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whether our market entry plans can be implemented.

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Holly Health - 11/11

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