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Editor’s note: This article was provided by Adam J. Fein, Ph.D., founder and president of Pembroke Consulting, Inc., and one of the country’s foremost experts on pharmaceutical economics and channel strategy. He also writes the writes the popular and influential Drug Channels website and publishes an annual report on the pharmaceutical wholesaling industry.
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Market Leaders
Three companies generate about 85% of all revenues from drug distribution in the United States: AmerisourceBergen Corporation (NYSE:ABC), Cardinal Health, Inc. (NYSE:CAH), and McKesson Corporation (NYSE:MCK). In calendar year 2012, total revenues from the drug distribution divisions of these Big Three wholesalers were $289.8 billion, down slightly from 2011.
In addition to these three companies, there are a number of smaller companies. Here are some other large wholesalers and their estimated annual revenues:
- Morris & Dickson ($3.6 billion)
- H.D. Smith ($3.4 billion)
- Smith Drug ($2.2 billion)
- Curascript Specialty Distribution ($2.1 billion)
- NC Mutual Wholesale Drug ($1.1 billion)
- Anda Distribution ($1.0 billion)
- Rochester Drug Cooperative ($825 million)
Additional regional and specialty wholesalers include: Burlington Drug, Dakota Drug, FFF Enterprises, Florida Infusion, Harvard Drug Group, King Drug, Metro Medical, Miami-Luken, Seacoast, and Value Drug. There are also thousands of very small companies that are licensed as wholesalers. Over the past 10 years, the Big Three companies have acquired many regional and specialty wholesalers. Notable acquisitions in the past few years include Cardinal Health’s acquisition of Kinray and DIK Drugs, and McKesson’s acquisition of US Oncology and PSS World Medical.
The industry includes two primary types of companies:
- Full-line wholesalers purchase, inventory, and sell a manufacturer’s complete pharmaceutical product line unless otherwise designated. These wholesalers sell primarily to pharmacies outside a wholesaler’s ownership control. These wholesalers service a diverse set of outlets, although 74% of the drug wholesale industry’s revenues derives from sales to retail, mail, and specialty pharmacies.
- Specialty distributors sell specialty pharmaceuticals primarily to physician-owned/operated clinics, hospitals, and hospital-owned outpatient clinics. Many specialty drugs sold via wholesale distribution channels usually require administration by a healthcare provider, such as a physician or nurse. Oncology products account for almost half of sales by specialty distributors.
The largest specialty distributors are divisions of full-line wholesalers. These include the distributors in AmerisourceBergen Corporation’s Specialty Group (Oncology Supply, ASD Healthcare, and Besse Medical) and McKesson Specialty (a business unit of McKesson Corporation). We estimate that these two companies generate about 75% of total specialty distributor revenues. Other large specialty distributors include CuraScript SD (owned by Express Scripts) and such independent specialty distributors as Metro Medical and Florida Infusion.
Pharmaceutical wholesalers are diversifying beyond traditional core product distribution services by offering new services to manufacturers, payers, and providers. For instance, AmerisourceBergen operates the largest service business providing manufacturers with reimbursement support, clinical support, and patient assistance programs for specialty pharmaceuticals. (See Why ABC Grabbed Caremark’s Reimbursement Hub.) Cardinal Health owns p1 Healthcare, which provides a variety of oncology-related services and products to physicians, payers, and manufacturers. McKesson is the country’s largest provider of health information technology products and services.
Industry Trends
Four significant trends are affecting the drug wholesaling industry:
Pharmaceutical Market Growth and Healthcare Reform—U.S. healthcare reform will increase spending on drugs due to such factors as the healthcare coverage expansion and the shrinking Medicare Part D coverage gap. (See Who Will Pay for Prescription Drugs in 2021?) Wholesalers will benefit from this projected growth. Over the next few years, revenues in the pharmaceutical industry will shift from traditional brand-name drugs to specialty drugs. (See More Drug Trend Forecasts: An Exclusive Look at Prime Therapeutics vs. the Big Two PBMs.) Specialty distributors will benefit from growth in specialty products administered in physician offices and clinics. Full-line wholesalers will benefit most from specialty drugs administered by healthcare providers in hospitals and from those dispensed by smaller pharmacies.
Consolidation and Changes in Pharmacy Industry Market Structure—The ongoing consolidation of the pharmacy industry will continue to pressure wholesaler profit margins from drug distribution. Independent drugstores are a crucial customer set for drug wholesalers, because they purchase almost all of their pharmaceutical needs from drug wholesalers. However, smaller pharmacies continue to lose market share. (See How the Pharmacy Industry Ch-ch-changed in 2012.) The top five dispensing pharmacies—CVS Caremark, Walgreens, Express Scripts, Rite Aid, and Walmart—account for almost two-thirds of U.S. prescription dispensing revenues. (See 2012 Market Share of Top Pharmacies.) The largest self-warehousing chain drugstores and mail pharmacies continue to buy brand-name drugs—but not generics—via a drug wholesaler rather than directly from a manufacturer. (See CVS Caremark Renews with Cardinal and McKesson and McKesson/Rite Aid: The Early Bid Catches the Contract.) These large customers are much less profitable for wholesalers.
Risk and Reward from the Generic Wave—Over the next few years, an unprecedented volume of brand-name drugs will lose exclusivity and face generic competition. (See A New Generic Wave Update, Courtesy of Express Scripts.) The substitution of generic drugs for brand-name drugs will reduce drug wholesalers’ revenue growth. Wholesalers will benefit from this wave, since a majority of their profits comes from generic drugs. However, pressure on pharmacy profits from generic drugs is increasing. (See What Free Generic Lipitor Says about Pharmacy's Future.) This pressure will have a derivative effect on wholesalers, because pharmacies will be more price sensitive and require bigger discounts to remain competitive. Wholesalers are responding with novel strategies. McKesson now sells private-label generic drugs as a manufacturer under the NorthStar Rx brand. AmerisourceBergen entered into a unique arrangement that allows it to purchase generic drugs via Walgreens Boots Alliance Development (WBAD), the Swiss joint venture formed in August by Walgreens and Alliance Boots. (See Making Sense of ABC-Walgreens-Alliance Boots.)
The Battle for Control of Specialty Drugs—Third-party payers are becoming dissatisfied with the buy-and-bill process for specialty pharmaceuticals covered under a patient’s medical benefit. (See The Future of Buy-and-Bill According to Payers and Oncology Practices.) In response, some payers are replacing the specialty distributor-to-provider distribution channel with a specialty pharmacy-to-provider distribution channel. (See Specialty Pharmacies Keep Gaining on Buy-and-Bill.) Specialty distributors also face risks as health systems acquire oncology practices. (See What’s Behind AmerisourceBergen’s Disappointing Oncology Results?)
2013 Distribution Trends Report
MDM’s annual distribution trends report provides a look at the key trends, opportunities and challenges facing wholesaler-distributors across distribution sectors. The report also includes a snapshot of sector-specific trends.
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