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In The News:

2011 MDM Market Leaders: Top Pharmaceutical Wholesalers

May 26, 2011
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View the 2012 Top Pharmaceutical Wholesalers

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 widely-read Drug Channels blog and publishes an annual report on the pharmaceutical wholesaling industry. Click here to download The 2010-11 Economic Report on Pharmaceutical Wholesalers. Dr. Fein’s 2011-12 report will be released in September 2011.

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MARKET LEADERS

Three companies generate about 85 percent of all revenues from pharmaceutical wholesaling in the United States: AmerisourceBergen Corporation (NYSE:ABC), Cardinal Health, Inc. (NYSE:CAH), and McKesson Corporation (NYSE:MCK).

Total U.S. revenues from the drug distribution divisions of these Big Three wholesalers were $272.4 billion in calendar year 2010.

Pharmaceutical Market Leaders

In addition to these three companies, there are a number of smaller primary and secondary drug wholesalers, including:

  • Morris & Dickson
  • H.D. Smith
  • Smith Drug
  • NC Mutual Wholesale Drug
  • Value Drug Company
  • Anda Distribution
  • Harvard Drug Group

The non-Big Three drug wholesalers play three important roles in the industry. One, they are the primary wholesale supplier for smaller retail and non-retail customers. Two, they provide a secondary source of supply for customers of the Big Three wholesalers, especially independent retail pharmacies and small chains. Three, they often focus on a subset of the market, such as a geographic region or specific product categories (generic or specialty drugs).

INDUSTRY TRENDS

Here are six significant trends affecting the drug wholesaling industry:

Consolidation of the Pharmacy Industry—The ongoing consolidation of the pharmacy industry will continue to pressure wholesaler profit margins from drug distribution. the top six dispensing retail and specialty pharmacies—CVS Caremark, Walgreens, Medco Health Solutions, Rite-Aid, Walmart, and Express Scripts—accounted for almost two-thirds of U.S. pharmacy dispensing revenues in 2010. (See 2010 Market Share of Top Retail and Specialty Pharmacies.) Larger chains and mail-order pharmacies, which have much lower profit margins on brand-name drugs for wholesalers, continue to grow faster than other segments of the market. (See Chains in 2010: Winning.) Consolidation also hurts wholesalers because large, self-warehousing customers bypass wholesalers to purchase more-profitable generic drugs.

Slowdown in U.S. Pharmaceutical Spending—Revenues of drug wholesalers are linked to growth in prescription drug spending rather than overall economic cycles. As such, the slowdown in U.S. drug spending has reduced wholesaler’s revenue growth rates below historical levels. Revenues at the big Three wholesalers may even decline year-over-year by 2013, marking the first ever decline in top-line revenues for these companies. (See Drug Wholesaler Outlook: Revenues Down, Profits Up.) However, the additional profits from generic drugs will cushion the profit impact on wholesalers. (See Wholesaler Profits: Brand vs. Generic Drugs.)

Pressure on Generic Profitability—Although wholesaler revenues are linked most closely to sales of brand-name drugs, the majority of wholesaler profits come from generic drugs. Pressure on pharmacy profits from generic drugs is rising as payers learn more about channel economics, implement new payment benchmarks and use novel cost-plus contracting strategies. The retail prescription price war launched by Walmart also threatens the overall profitability of generic prescriptions for pharmacies. Drug wholesalers will face margin pressure on generic drug sales because pharmacies will be more price sensitive and require bigger discounts to remain competitive. Discount generic programs are shifting retail market share away from wholesaler-supplied dispensing channels into self-warehousing retailers. Government agencies are also questioning the profits that the distribution channel earns from generic injectable drugs. See Profits from Generic Injectables: Too High or Just Right?

The Uncertain Future of Buy-and-Bill—Specialty distributors play the biggest role in the distribution of specialty drugs to physician offices and clinics—the “buy-and-bill” channel. Some pharmacy benefit managers (PBMs) are developing services that shift responsibility for specialty drug management from the medical benefit to the pharmacy benefit. Examples include Express Scripts (Express Scripts' Disruptive Specialty Strategy) and Medco Health Solutions (Cancer Care and the Future of PBMs).  If successful, these programs will reduce the importance of specialty distribution channels by reducing the role of wholesalers in the purchase decision. One recent survey found that a majority of payers and almost half of oncology practice managers want buy-and-bill to end for infused cancer therapies. See The Future of Buy-and-Bill According to Payers and Oncology Practices.

Manufacturer Consolidation and Value of Fee-For-Service Agreements—Recent mergers of brand-name pharmaceutical manufacturers could reduce wholesaler payments under fee-for-service agreements. The consolidation of manufacturers is generally negative for wholesalers because a larger drug maker would have additional leverage in a fee-for-service negotiation. See Are You Saving from Wholesaler Efficiencies?

Supply Chain Regulation and Compliance Costs—Wholesalers must comply with a range of state and Federal regulations regarding the supply chain. There is substantial uncertainty regarding both future regulations as well as the potential impact on wholesaler business practices and operating costs. See Drug Theft + Diversion Gets Bigger.

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