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20162016 MDM Market Leaders | Top Pharmaceuticals Distributors

View 2015 Rankings | Methodology

This list does not include master distributors.

NOTE: 2017 Pharmaceuticals Market Leaders will be available Fall 2017.

By Adam J. Fein, Ph.D.

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 popular and influential 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 2016-17 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.

Market Leaders

Three companies account for about 85% to 90% of all revenues from drug distribution in the United States: AmerisourceBergen Corporation (NYSE:ABC), Cardinal Health, Inc. (NYSE:CAH) and McKesson Corporation (NYSE:MCK). We estimate that in calendar year 2015, U.S. revenues from the drug distribution divisions of these Big Three wholesalers were $378.4 billion, a 14.8% increase from the 2014 figure. Note that this figure includes sales of traditional and specialty drugs.

U.S. Drug Distribution & Related Revenues at Big Three Wholesalers, Calendar Year 2015

In addition to these three companies, there are a number of key industry participants. Here are the other large wholesalers and their estimated annual revenues from drug distribution:

  • Morris & Dickson: $4.2 billion
  • H.D. Smith: $4.0 billion
  • Smith Drug: $2.7 billion
  • CuraScript Specialty Distribution: $2.4 billion
  • Anda Distribution: $1.5 billion
  • North Carolina Mutual Wholesale Drug: $1.3 billion
  • Rochester Drug Cooperative: $1.1 billion

Other regional and specialty wholesalers include: BDI Pharma, Burlington Drug, Capital Wholesale Drug Co., Dakota Drug, FFF Enterprises, Miami-Luken, Prescription Supply and Value Drug. There are also thousands of small companies that are licensed by U.S. states as merchant wholesalers.

Over the past 10 years, the Big Three companies have acquired many regional and specialty wholesalers within the United States. Notable acquisitions in the past few years include: (1) Cardinal Health’s acquisition of Kinray, DIK Drugs, Metro Medical and Harvard Drug Group, and (2) McKesson’s acquisition of US Oncology and PSS World Medical.

Since last year’s report, two noteworthy changes have occurred among smaller wholesalers:

  • Teva Pharmaceutical Industries acquired Allergan’s Anda Distribution business for $500 million. Anda is one of the largest distributors of generic pharmaceuticals in the U.S. Its business, however, suffered when CVS Health acquired Target’s pharmacies and shifted generic purchasing volume to CVS’ Red Oak joint venture with Cardinal Health.
     
  • Regional wholesaler Frank W. Kerr shut down unexpectedly, having operated for more than 100 years. It’s rare for a small full-line pharmaceutical wholesaler to close rather than be acquired. 

Business Types

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 three-quarters of wholesaler revenues.

Specialty distributors sell specialty pharmaceuticals primarily to physician-owned/operated clinics, hospitals and hospital-owned outpatient clinics. Independent physician offices and outpatient clinics were the largest customer group for specialty distributors

Specialty drugs are sold both by full-line wholesalers and specialty distributors. 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).

Industry Trends

Here are five significant industry trends that will substantially impact the drug wholesaling industry in the coming years. Many of these issues are headwinds for the wholesalers, which is one reason that the stocks of the largest public wholesalers are valued at a discount to the overall stock market average.

1. U.S. pharmaceutical spending – and drug prices – are still growing.

Outpatient prescription drug spending is projected to grow along with overall national healthcare expenditures. (See Latest CMS Forecast Shows Big Drug Spending Growth Through 2025.) Wholesalers will benefit from this additional spending. We project that in 2016, for the first time, the Big Three wholesalers’ combined drug distribution revenues will exceed $400 billion.

Brand-name drugs remain the key driver of wholesalers’ revenue growth. Wholesalers’ revenues are most closely tied to increases in gross drug spending, so wholesalers will also gain from the expected list price increases of brand-name drugs. See Drug Prices, Manufacturer Rebates, and the Risk to Channel Economics. A change in historical brand list price inflation will be negative for wholesalers’ profits. See EpiPen, Channel Economics, and the Great PBM Rebate Debate.

The pharmaceutical industry’s revenues will continue to shift from traditional brand-name drugs to specialty drugs. (See Our 2020 Outlook for Specialty Pharmacy Revenues.) As we discuss below, wholesalers are being challenged by this shift.

From 2013 to 2015, wholesalers profited from unexpected and somewhat unprecedented generic price inflation. Wholesalers could typically pass price increases directly to their pharmacy customers. Generic inflation began easing in 2015, due partly to the FDA having cleared much of the backlog for new generic drug applications. (See The FDA Is Finally Ending Generic Inflation—and Hurting Wholesaler Profits.) Generic deflation reduced wholesalers’ gross profits from generic drugs in 2016. (See AmerisourceBergen Charts the Profit Headwinds Facing Drug Wholesalers.)

2. The consolidation of pharmacy and provider markets shows no sign of slowing

Mergers and acquisitions among pharmacies and payers are pressuring wholesaler margins, especially as the acquiring companies consolidate buying power. The top tier of dispensing pharmacies – CVS Health, Walgreens Boots Alliance, Express Scripts, Walmart, Rite Aid, and UnitedHealth Group – account for the majority of U.S. prescription dispensing revenues. (See The Top 15 Pharmacies of 2015.) Such pending deals as the Walgreens-Rite Aid acquisition and the Walgreens-Prime Therapeutics combination will create even more concentration.

For provider-administered drugs, wholesalers have been facing hospital acquisitions of physician practices and care that is shifting to hospital outpatient departments. (See The Decline and Fall of Physician Buy-and-Bill For Specialty Drugs.) Proposed changes to the buy-and-bill model could accelerate these consolidation and practice acquisition trends. (See Why CMS’s Crazy Plan to Remake Medicare Part B Won’t Work.)

3. Payers and manufacturers are narrowing drug channels, pressuring wholesalers’ profitability

Narrow pharmacy networks – either preferred or limited models – are now a widely accepted element of pharmacy benefit design. Such networks dominate Medicare Part D prescription drug plans and are a crucial element of payers’ specialty drug management strategies. (See Preferred Pharmacy Networks Are Back in 85% of the 2017 Medicare Part D Plans.)

These payer and PBM network strategies are further concentrating dispensing revenues with the biggest specialty pharmacies. Wholesalers therefore face new challenges in capturing the value and profits from the specialty drug market, particularly for patient-administered, pharmacy-dispensed specialty drugs.

Many manufacturers limit and manage the specialty pharmacies eligible to dispense expensive specialty medications. For pharmacy-dispensed medications, the expansion of these limited specialty networks is reducing the value of – and, in some cases, is displacing – the wholesale distribution channel. (See How Specialty Pharmacy Is Penetrating Buy-and-Bill Oncology Channels.)

To manage costs and improve patient management, pharmacy benefit managers (PBMs) and health plans often further limit the number of specialty pharmacies selected by the manufacturer. These payer and PBM network strategies are shifting specialty dispensing into the largest, payer-owned specialty pharmacies, which offer the smallest margins for wholesalers. (See The Top 10 Specialty Pharmacies of 2015.) Due to specialty growth, for example, CVS Health accounted for about one-quarter of McKesson’s 2016 North American drug distribution revenues. (See How CVS Health Got McKesson Under Its Thumb.)

Wholesalers’ largest – and least profitable – retail chain customers are also benefitting from the trend toward narrow network models. (See Walgreens’ TRICARE Win: Tracking WBA’s Aggressive Preferred Network Deal Strategy.)

4. Large pharmacies have entered into multifaceted partnerships with wholesalers

Larger pharmacies now have a new level of top-to-top partnering that is securing wholesalers’ role in the distribution system. This sometimes underappreciated benefit of consolidation is creating a channel supply alignment among the largest wholesalers, largest PBMs and largest retail chains. Wholesalers have become virtually impossible to displace for broadly distributed traditional drugs.

Wholesalers and retailers have also become strategically aligned via such generic purchasing consortia as Walgreens Boots Alliance Development (Walgreens and AmerisourceBergen), Red Oak Sourcing (CVS Health and Cardinal Health, and McKesson’s purchasing arrangement with Walmart. (See Why Walmart Is Finally Joining McKesson for Generic Purchasing.) New vertical ownership relationships are also developing:

5. Biosimilars are unlikely to provide superior profits to wholesalers.

Biosimilars – biological drugs that are highly similar to an FDA-approved biological product – seem poised to deliver only minimal benefits to wholesalers.

We expect patient-administered, pharmacy-dispensed biosimilars to be marketed as brand alternatives rather than as interchangeable generics. Competition between a biologic drug and biosimilar is therefore likely to resemble brand-to-brand competition rather than brand-to-generic competition. (See Seven Takeaways from the New 2017 CVS Health and Express Scripts Formulary Exclusion Lists.) Without interchangeability, wholesalers will not receive the superior profits of generic drugs.

Growth in provider-administered biosimilars will be more positive for wholesalers and specialty distributors than will growth in biosimilars covered under a patient’s pharmacy benefit. Wholesalers should have a greater opportunity to influence biosimilar adoption for provider-administered medical benefit drugs than they do for patient-administered pharmacy benefit drugs. However, wholesalers are also unlikely to experience the same profit benefits from biosimilars that they gain from the brand-to-generic conversions for products paid in the buy-and-bill system. (See Zarxio: How Channel Dynamics Will Limit the First U.S. Biosimilar and Two Important Updates on Zarxio and Biosimilar Reimbursement.)

 

Methodology Note: Unless otherwise noted, revenues reflect the 2015 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.