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Stock Pick: Drug Scares and Pharmacy Security Create Opportunity for Small Player

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Quality control fears and a changing legislative landscape are producing new niche business models in the pharmacy sector.

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Last month, one of the raging news stories concerned the problems cropping up over compounded drugs, specifically steroids, and contaminated doses reaching and poisoning patients. With the Affordable Care Act now being phased into effect the restrictions on pharmacies and doctor's ability to prescribe drugs will continue to become more onerous. The latest bit of legislation in the war on Oxycontin for example, is making its way through the Oklahoma government, where it will be flat-out illegal to write a prescription for hydrocodone.

In its zeal to combat the problem of prescription-drug addiction, Oklahoma is taking the extreme approach and going beyond what was done to combat prescription abuse in Florida. Pain sufferers will have to get something else for pain relief.

This will likely force those people to procure their medication from an online pharmacy, but, according to LegitScript, more than 95% of the websites that sell medications online are not reputable. The trend in medicine in the US is more regulation, not less, and with that will come greater liability placed on the pharmacist, if history is our guide . So, in this sense, the major retailers -- such as Walgreen Company (NYSE:WAG) and CVS Caremark Corporation (NYSE:CVS) -- will de-emphasize this part of the market, and instead allow specialty pharmacies to take on that risk. That will also allow the big retailers to turn attention to the growing market for diabetes drugs and other treatments.

In particular, Walgreen is leading with its retail clinics, which are beginning to offer both diagnosing and on-site treatment services, and, oddly enough, cater to a higher-income customer. If wealthier customers are choosing to use such services, why would the retailers continue taking on the risk of prescriptions for handling Schedule II narcotics in large quantities when they can be selling coffee and wine along with their value-added pharmacy services.

Prescription alteration and abuse is one of the main vectors of supply for the Oxycontin gray market, so controlling prescriptions makes a ton of sense. When I look at the market, I see a great opportunity for community pharmacies to find niche roles that focus on mitigating those risks and working more specifically and closely with doctors to ensure that they are not the targets of a government witch-hunt.

This is why, when I look at a small company like Assured Pharmacy, Inc. (OTCMKTS:APHY), I see some real opportunities for growth within this sector. As a closed-door operation, Assured has designed itself to handle a prescription -- from the writing of it to the retiring of it -- for some of the most dangerous and most-often abused drugs on the market. Assured works directly with the doctor to ensure that the prescription is not altered, by picking it up directly and filling it from its own inventory.

Drug security is becoming a bigger and bigger problem, but because Assured's locations are in medical-office parks and not high-traffic retail locations, casual thievery is dissuaded. Prescription pain medications represent a $30 billion-per-year industry serving more than 75 million people and it's being driven to change by changes in regulations.

Moreover, with primary care physicians in short supply due to the very same regulations driving the changes in health care, Assured's model gives a doctor the peace of mind to write a 90-day prescription for something like Oxycontin where he or she would not (or could not) under other circumstances. This creates a side-benefit of convenience for both the doctor and the patient that Assured can pass on in terms of price.

Regardless of whether Assured is successful or not, it is an example of the kind of new business model that will be carved out over the next few years as the US health-care system undergoes the transformation from a patient-/service-provider model to a fully-centralized managed care model. Investors should be on the hunt for small caps like these in which to take small speculative positions -- they could reward handsomely in the long run.
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No positions in stocks mentioned.
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