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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 CEO of the Drug Channels Institute. He is one of the country’s foremost experts on pharmaceutical economics and the drug distribution system. Dr. Fein’s Drug Channels blog is the go-to source for definitive and comprehensive industry analysis, delivered with a witty edge.
The article is adapted from his 2015-16 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors – the most comprehensive, non-partisan tool for building deep business acumen about the economic and business realities of U.S. pharmaceutical distribution. The report contains the latest industry and financial data, along with detailed information about the strategies and market positions of the largest public companies: AmerisourceBergen, McKesson, and Cardinal Health. Click here to download a free report overview.
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 2014, total estimated U.S. revenues from the drug distribution divisions of these Big Three wholesalers were $327.7 billion, a 13.4% increase from the 2013 figure.
In addition to these three companies, there are a number of key industry participants. Here are some other large wholesalers and their estimated annual revenues from drug distribution:
Other regional and specialty wholesalers include: BDI Pharma, Burlington Drug, Capital Wholesale Drug Co., Dakota Drug, FFF Enterprises, Frank W. Kerr Company, Miami-Luken, Prescription Supply and Value Drug. There are also thousands of smaller companies that are licensed by U.S. states as wholesalers.
Full-line wholesalers purchase, inventory and sell a manufacturer’s complete pharmaceutical product line unless otherwise designated. They service a diverse set of pharmacy outlets. These locations include outpatient outlets (such as independent drugstores, chain drugstores, supermarkets with pharmacies, mass merchants with pharmacies and mail pharmacies) and institutional, non-retail healthcare facilities (such as hospitals and physician offices). Retail, mail and specialty pharmacies account for about three-quarters of full-line wholesaler revenues.
Specialty distributors sell specialty pharmaceuticals primarily to physician-owned/operated clinics, hospitals and hospital-owned outpatient clinics. Specialty distributors also supply self-administered drugs to specialty pharmacies.
Specialty drugs are sold both by full-line wholesalers and specialty distributors. Therefore, the revenue figures above include sales of traditional and specialty drugs. The biggest specialty distributors are divisions of the Big Three wholesalers. These include the distributors in AmerisourceBergen Corporation’s Specialty Group (Oncology Supply, ASD Healthcare, and Besse Medical), Specialty Solutions (a business unit of Cardinal Health), and McKesson Specialty Health (a business unit of McKesson Corporation).
Here are five significant industry trends that are impacting the drug wholesaling industry:
1. Growing U.S. Outpatient Pharmaceutical Spending
Over the next 10 years, spending on prescription drugs sold through outpatient retail, mail and specialty pharmacies is projected to grow by $259.2 billion (+85%), to $564.8 billion in 2024. Wholesalers will benefit from the expected overall growth in demand for prescription pharmaceuticals and the corresponding increase in drug spending. See New CMS Forecast: Drug Spending Grows Along with Impossible Hospital and Doctor Spending.
2. Consolidation and Changes in Pharmacy Industry Market Structure
As the overall prescription market grows, we expect the pharmacy industry to continue consolidating and share to become more concentrated. Consolidation and acquisitions, however, generally hurt wholesalers’ margins, because the acquiring companies consolidate their buying power.
Larger chains, which provide much lower profit margins for wholesalers, keep growing faster than other market segments. They are winning the battle for retail prescriptions with new store openings, organic growth from larger and busier pharmacies, and acquisitions of regional chains. See 2014’s Winners and Losers: Prescription Market Share by Dispensing Format.
Significant recent transactions include:
Independent drugstores, physician offices and other smaller customers are crucial customers for pharmaceutical wholesalers. Wholesalers provide a broad range of services intended to increase the profitability and competitive viability of their smaller, higher-margin customers.
3. New Vertical Relationships with Large Retail Drugstores
Over the past few years, wholesalers have successfully deepened their relationships with large retail chains. Large pharmacy retailers are shifting from self-warehousing to establishing direct-store deliveries from a wholesaler. Here are the two most significant changes:
Wholesalers and retailers have also become more aligned in generic purchasing. Over the past three years, the big three wholesalers have established novel generic relationships with their largest customers. See New Cardinal and McKesson Customer Deals Show A Changing Generic Channel.
The reduced acquisition costs from these retail-wholesale purchasing relationships are encouraging other pharmacies to shift generic purchasing to wholesalers. Examples include Albertsons, Fred’s, Omnicare and OptumRx. These deals increase wholesalers’ influence, by shifting generic volume to the wholesale channel.
In addition, new vertical ownership relationships are also developing. Walgreens Boots Alliance can own up to 30% of AmerisourceBergen’s equity and will have two board positions. See Why Walgreens Boots Alliance is Triggering a Huge AmerisourceBergen Stock Buyback.
4. The Promise and Peril of Specialty Drugs
Revenues in the pharmaceutical industry will shift from traditional brand-name drugs to specialty drugs over the next few years. (See Pharma’s Bright Future: Meet The Top 10 Drugs of 2020.) To compete for the specialty drug opportunity, each wholesaler operates subsidiaries that focus on specialty drug distribution and related services.
Payer strategies, however, create profitability risks for the pharmacy-dispensed specialty drugs that wholesalers sell. That’s because these specialty product sales are being shifted into the largest specialty pharmacies (and wholesalers’ largest customers) with the smallest margins for wholesalers. See Why Blockbuster Hepatitis C Drugs Are Squeezing McKesson’s Profits.
5. The Changing Generic Marketplace
Generic drugs now dominate U.S. prescription activity. Wholesalers benefit from this trend, since a majority of their gross profits comes from generic drugs.
Wholesalers have benefited from the unexpected and somewhat unprecedented increase in the prices of some generic drugs. (See Winners and Losers from Generic Drug Inflation.) However, our analyses of pharmacy acquisition costs indicate that generic inflation was greatest in 2013 and 2014, and appears to have eased in 2015. See The Retail Generic Drug Inflation Slowdown: It’s Real.
Pressure on pharmacy profits from generic drugs is increasing, which will indirectly affect wholesalers that supply pharmacies. These challenges include a retail generic price war, the growth of narrow pharmacy networks, and new pharmacy reimbursement methods.
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Methodology Note: Unless otherwise noted, revenues reflect the 2014 fiscal year. Revenues for all companies in this report are in U.S. dollars. For companies who report their data in other currencies, we converted their revenues to U.S. dollars using the exchange rate in place on the last day of that company’s reported fiscal year to determine ranking. Click here to view the full methodology.