The US pharmaceutical supply chain is highly efficient and ensures that products are safely and reliably available to a wide variety of providers, meeting patients needs.

The Pharmaceutical companies have transferred the complete responsibility of supply of drugs to the wholesalers such that they can concentrate on drug development and its marketing. The logistical costs of drug distribution would have pushed this activity out of pharma’s scope.

What was the traditional wholesale model?

In the past, wholesalers limited their operations to a traditional distribution function. They provided the link between manufacturers and pharmacies (and other entities, e.g., pharmacies, hospitals, long-term care facilities, clinics and other healthcare providers) by warehousing products and managing inventory.

US Distribution of Outpatient Drugs

US Distribution of Outpatient Drugs

Not so Traditional Anymore……

  • While “traditional” distribution services remain the main source of business, the industry has developed a more elaborate list of services in response to an ever-changing marketplace.
  • Today, wholesale distributors provide a number of specialized services, including: specialty drug distribution, drug repackaging, electronic order services, reimbursement support, and drug buy-back programs.

Primary pharmaceutical distributors purchase medicines in bulk from the drug manufacturers. 

The wholesalers assume the responsibility of helping maintain the inventory at numerous pharmacies, hospitals, long-term care facilities, clinics and other healthcare providers across the country. Wholesalers rely on their ability to purchase large volumes of generics and other drugs at low prices and quickly get them where they’re needed.

 

Who are the biggest players?

Cardinal, Mckesson & AmerisourceBergen

Cardinal, Mckesson & AmerisourceBergen beat S&P 500 by a margin

Cardinal, Mckesson & AmerisourceBergen beat S&P 500 by a margin

 

Combined, the wholesalers handle more than 90 percent of the drugs in the U.S.

The industry has consolidated itself into the Big 3 players for want of better control and margins.

 

Mergers & Acquisitions in Drug Distribution made by the Big 3

Each of the Big 3 have added many different revenue streams over their history; some examples below:

  1. Private-label Manufacturing
    1. Major/Rugby (HDG) – Cardinal Health
    2. Northstar RX – McKesson
    3. Good Neighbor Pharmacy – Amerisource Bergen
  2. Specialty Pharmacy Distribution
    1. Metro Medical, Raintree Oncology and Sonexus Health – Cardinal Health
    2. Vantage Oncology and US Oncology – McKesson
    3. ABSG (ASD Healthcare, Besse Medical, ICS, IntrinsiQ, ION Solutions, Oncology Supply) – Amerisource Bergen
  3. Full-line Distributors
    1. DIK, Borschow and Kinray – Cardinal Health
    2. McQuery and D&K – McKesson

 

How do the Wholesalers make money?

Wholesale Acquisition Cost (WAC): The price paid by a wholesaler for drugs purchased from the manufacturer of the drug.

Wholesale Acquisition Cost (WAC)

Wholesale Acquisition Cost (WAC)

 

The Pioneers in use of Insights from Big data

In the book ‘Data-ism by Steve Lohr, there is an example of how Mckesson Drug Distribution reduced its inventory by $1 Billion, an efficiency gain of 13%.

The granularity of data and its visibility at an account level led them to strategically build distribution hubs which further led to an extreme efficiency in operations.

 

Tryst with DEA: Opioid Crisis and More…

Cardinal Health

Mckesson Corp.

 

 

Cardinal Health Inc. paid a $34 million fine after the DEA brought a case in 2008 that claimed the company filled “blatantly suspicious” orders from online drugstores. (Gary Gardiner/Bloomberg News)

In 2007, the agency took action against McKesson, the nation’s largest drug distributor, for failure to report hundreds of suspicious orders. The company paid $13.2 million. (Justin Sullivan/Getty Images)

The DEA would ultimately bring at least 17 cases against 13 drug distributors and one manufacturer. The government said it assessed nearly $425 million in fines over a decade. Those fines reflect only a small portion of the hundreds of billions of dollars in revenue the companies receive each year.

In summary, Drug Distribution Business Continues to grow with acquisitions and use of efficient logistics. The Big 3 and the HDA – Health Distribution Alliance lobby really well to keep DEA at bay and have been successful about it.

This industry will also see a lot of innovation if, well ‘Amazon’ enters this industry and brings a revolution (Pharma execs would welcome Amazon into drug distribution, say the space is ‘ripe for disruption’)

References:

  1. https://www.fiercepharma.com/special-report/big-3-distributors
  2. https://books.google.com/books?id=8WThBwAAQBAJ&pg=PT34&lpg=PT34&dq=mckesson+were+the+first+to+use+big+data&source=bl&ots=VRZh-Z__Xi&sig=Bw8ObQT9eKD4RE2ny4HJJPFy_Rk&hl=en&sa=X&ved=0ahUKEwj6tdiE9_PXAhVkxYMKHe3FDSYQ6AEISzAG#v=onepage&q=mckesson%20were%20the%20first%20to%20use%20big%20data&f=false
  3. http://avalere.com/research/docs/Follow_the_Pill.pdf
  4. https://www.fiveriversrx.com/single-post/2017/09/26/Industry-Rumor-McKesson-to-Acquire-Masters-Pharmaceutical-in-177M-Deal
  5. https://www.washingtonpost.com/graphics/2017/investigations/dea-drug-industry-congress/?utm_term=.7e2fb60a62c3
  6. https://www.cnbc.com/2017/11/01/pharma-ceos-welcome-amazon-to-disrupt-drug-distribution.html
Categories: Healthcare

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