The Drug Channels blog delivers timely analysis and provocative opinions on pharmaceutical economics and the drug distribution system. It is written by Adam J. Fein, Ph.D., one of the country's foremost experts on pharmaceutical economics and channel strategy. Learn more...

Friday, December 15, 2006

Santa's Supply Chain

This is my final post of 2006. I'm grateful for the positive response to my blog and very much appreciate the many positive emails and comments that I have received since launching 6 months ago.

Let's wrap-up the year with some homegrown Drug Channels supply chain humor, straight from the pages of The Wall Street Jovial:


I will be back with my outlook for 2007 on January 2. Until then, have a great holiday!

Adam

Wednesday, December 13, 2006

Catching up on AMP and PDMA

Here are a few noteworthy news items on AMP and PDMA that I want to recommend:

1. Roundtable: Deficit Reduction Act (Pharmaceutical Executive, Nov. 2006)

I believe that 2007 could go down as the year of Average Manufacturer Price (AMP). I still believe that AMP will ultimately have a much bigger impact than many people expect. (See my June post McClellan and the magic AMP for background.) This roundtable article has some good insights about:

  • The class of trade issue
  • The use of AMP for rebates vs. reimbursement
  • Implications of a public release
I recently heard that CMS will be issuing guidance on AMP very soon. Keep an eye on this apparently obscure issue because it will change life for PBMs, wholesalers, retailers, and insurers.

2. Injunction May Slow Momentum for RFID E-Pedigrees (RFID Update, Dec. 12 2006)

Check out this interesting article on PDMA that quotes Jayne Juvan, my favorite (and the only?) healthcare law blogger, as saying: "Ultimately, the courts tend to favor the government in cases such as this that allege Equal Protection Clause and Due Process Clause violations when the rational basis test applies." She's referring to the RxUSA et al case against the FDA.

The article also calls Drug Channels a "pharmaceutical law blog," which almost offends me. Maybe I should sue?

Sunday, December 10, 2006

Thank You for Buying Counterfeits

Can’t get enough PDMA news?

Well, head over to Jayne Juvan’s surprisingly readable legal analysis of the recent injunction entitled RX USA Wholesale v. Department of Health & Human Services: A Legal Perspective. Jayne is a fan of yours truly, so allow me to return the compliment and suggest you read her thought-provoking perspective. She concludes: "Despite this victory, the Plaintiffs in this case have a long way to go, as the litigation only began a few months ago and this is only one hurdle among many that the Plaintiffs must overcome."

I was immediately reminded of a scene from the very funny movie Thank You for Smoking in which the main character (a Washington lobbyist) is asked by his son: "Dad, why is American government the best government?" Without looking up, Dad the lobbyist quickly replies:"Because of our endless appeals system." (This is a great DVD and an even funnier book, so make haste and pick it up today.)

More prosaically, I believe that the very concept of “pedigree” may need to be reconsidered. Counterfeits enter via diversion in the secondary market. But counterfeit sellers require counterfeit buyers, a problem that is not directly solved by pedigree requirements of the PDMA.

In Our Demand Side Counterfeit Drug Problem, I describe three rules that must be followed for pedigree to make the supply chain safer:

  1. Pharmacy buyers must demand pedigree documents (electronic or paper) from wholesalers and be able to validate the authenticity of these documents.
  2. Pharmacy buyers must only purchase from wholesale distributors in the “Normal Distribution Channel” or wholesale distributors that are willing and able to supply pedigree.
  3. Consumers must (a) refuse to do business with any pharmacy that does not adhere to the preceding two rules, and (b) be able to validate a pharmacy’s compliance with these rules.
Rules 1 and 2 are on hold, at least outside Florida. Unfortunately, consumers and their political representative seem intent on ignoring rule 3. (See Of Spammers and Senators.)

In response, the National Association of Boards of Pharmacy launched a new website in November called http://www.dangerouspill.com/, complete with self-congratulatory press release. Like its PhRMA-sponsored counterpart http://www.buysafedrugs.info/, the NABP site aims to educate consumers about the dangers of buying counterfeits.

Business Week also jumped on the bandwagon this week with Bitter Pills, an article outlining the dangers of ordering drugs from “shady online marketers.” (Good tip!) Business Week helpfully portrays the sordid world of online pill sales as a cartoon, although I don't think my kids will be seeing that cartoon on Nickelodean following The Fairly Oddparents!

These worthy efforts aim at consumers. But I must note that the NABP and PhRMA sites sidestep the culpability or responsibility for pharmacy buyers to follow safe sourcing practices. Yes, I know that the NABP Model Rules outline various “Criminal Acts” associated with knowingly handling counterfeit drugs. Even legitimate pharmacists sometimes purchase in the secondary market. For example, a 2004 study found that two-thirds of hospital pharmacy directors use secondary wholesalers as a resource to obtain needed supplies during a product shortage. (Source: A research article published in the American Journal of Health-System Pharmacists.)

The industry sites do not help consumers identify legitimate pharmacies nor do they provide a way to validate that a pharmacy is behaving ethically in its sourcing practices. “End-to-end” visibility is a long way off, so we in the industry must confront the pharmacy buyer problem sooner or later, regardless of the endless appeals that are likely to dog the FDA's attempts to implement the PDMA.

Wednesday, December 06, 2006

The Impact of the PDMA Injunction

What will the injunction against the Prescription Drug Marketing Act (PDMA) mean in the pharmaceutical industry? (For background, see No PDMA for you! and It's Official: PDMA is Back On Hold.)

The FDA has not updated their PDMA resources page as of this morning, so it’s unclear what their formal strategy will be. Since I’m not qualified to opine on the FDA’s legal options, I’ll focus on a few business implications for manufacturers and wholesalers.

Manufacturers
This injunction should serve as a channel strategy wake-up call to manufacturers. In my opinion, senior executives in commercial operations at pharmaceutical companies should push their trade relations teams to develop formal channel management strategies. Frankly, the PDMA’s conception of “authorized distributor of record” is somewhat simplistic relative to channel management practices in other industries. (More on this topic below.)

I also want to reinforce my belief that manufacturers should invest more resources into gaining visibility into the movement of their product from factory to patient. Despite the RFID hype, the U.S. is still many years from a functional track-and-trace infrastructure, which was defined by Dr. von Eschenbach as “from the assembly line to the dispenser” at the NACDS/HDMA RFID conference. (See The FDA on PDMA.)

The Secondary Market
Let’s not delude ourselves –secondary markets will always exist when there are opportunities to arbitrage price differences between identical products being sold at different prices in different markets. In Europe, this arbitrage occurs as products are diverted across national borders and is called parallel trade. (See London Calling: Fake Drugs Get Real.) In the U.S., arbitrage also occurs as products are diverted between different classes of trade. Check out this graphical depiction of gateways into the U.S. supply chain.

While diverted or resold products are not necessarily counterfeits, all counterfeits enter via diversion in the secondary market. As the Chairman of the Subcommittee on Criminal Justice, Drug Policy and Human Resources noted in November 2005: “The FDA confirmed with Subcommittee staff that drug diversion was the entry point for every case investigated by that agency involving counterfeit drugs going into legitimate pharmacies.” Thus, any wholesaler operating in the secondary market should reasonably expect a higher level of scrutiny over their activities.

Secondary wholesalers
I am impressed by this legal victory, especially given my earlier skepticism. However, secondary wholesalers should recognize that manufacturers in many industries can and do legitimately limit the number of intermediaries that are authorized to sell its products. For example, Apple only allows iPods to be sold through authorized resellers.

The degree of distribution selectivity is a strategic channel design issue for a manufacturer, ranging from a single distributor (exclusivity) to an unrestricted number of distributors within a given market (intensive distribution). There is a large body of academic research on distribution channel selectivity in economics, law, and marketing supporting these channel strategies. Fans of academic jargon may enjoy reading an academic research paper on the topic that I published almost 10 years ago (available here), although the data did not include the pharmaceutical industry.

Given my comments about diversion above, secondary wholesalers must be willing to provide complete transparency to manufacturers about their business practices and product sources. Legitimate secondary wholesalers must be willing to clearly and unequivocally demonstrate how they differ from the unsavory wholesalers that traffic in potentially counterfeit product.

Big 3 Wholesalers
I believe that the introduction of Inventory Management Agreements (IMAs) and Fee-for-Service agreements now limit product leakage into the grey market, closing a significant entry point for counterfeiters. Drug makers literally pay for greater product security by purchasing data from wholesalers to monitor orders, inventories, and product movement in real-time.

In addition, wholesalers such as AmerisourceBergen Corp (ABC) and Cardinal Health Inc (CAH) publicly renounced secondary market sourcing, the HDMA tightened its membership requirements, and major pharmacy chains such as CVS committed to secure sourcing. My conversations with executives at the big 3 wholesalers – McKesson Corp (MCK), Cardinal Health, and AmerisourceBergen – have convinced me that these companies are genuinely committed to a secure supply chain.

Two more things
  • Before we let the rhetoric about “extinction of small distributors” get out of hand, I must ask: How come we have not heard about secondary wholesalers going out of business in Florida after the July 1 implementation of state-level pedigree? Just wondering…
  • I must be touching a nerve on this topic because a few individuals prefer to insult me via private emails. One of these fellows (“D.K.”) is too cowardly to disclose his affiliation in this matter. I have posted my opinions for all to see. Perhaps he will open himself up to the same scrutiny by posting a (non-anonymous) comment on this blog.

Tuesday, December 05, 2006

It's Official: PDMA is Back On Hold

The pedigree requirements of the Prescription Drug Marketing Act (PDMA) are back on hold. This is a big loss for the FDA and a big win for secondary wholesalers, especially RxUSA. I'll post tomorrow on possible implications for the pharmaceutical supply chain in 2007.

See my post from last Friday -- No PDMA for You! -- for background. Then read Federal Injunction Will Delay Part of Drug-Tracking Law in today's Wall Street Journal, which states:

"In a surprising decision that strikes a blow against Food and Drug Administration efforts to curb counterfeit drugs, a federal judge granted an injunction that delays part of a long-stalled drug law that was to have taken effect Friday of last week.

Yesterday, U.S. District Court Judge Joanna Seybert of the Eastern District of New York sided with a group of drug wholesalers who argued that the law is in breach of equal protection and due process because it requires certain recordkeeping of some wholesalers but not others, according to lawyers for both sides of the case."

BTW, Heather Won Tesoriero of the WSJ and I appear to be the only people writing about this topic. Although that's surprising given the hype leading up to Dec. 1, I think of it as just one more good reason to tell your friends in the industry to read this blog. 'nuff said.

Monday, December 04, 2006

Sloppy reporting about Wal-Mart

Last Thursday's New York Times included some very sloppy reporting about Wal Mart Stores Inc (WMT). See Side Effects at the Pharmacy. (The story was widely syndicated, so here's an alternate link: Side Effects at the Pharmacy.)

The article questions the profitability of Wal-Mart’s program by incorrectly interpreting prescription data and then quoting a “consultant” with an undisclosed bias against Wal-Mart. This type of shoddy reporting only further confuses the debate about health care spending.

Since the New York Times’ editors read this blog, allow me to clear the air a bit by answering four questions:

  1. How busy is an average Wal-Mart pharmacy? (A: A lot less than an average Walgreens)
  2. How many more prescriptions did the $4 generic program generate? (A: About 16% more)
  3. Did Wal-Mart have $31.5 million in extra dispensing costs? (A: Nope.)
  4. Why was the Times so unbalanced? (A: Piling on?)

Q1: How busy is an average Wal-Mart pharmacy?

As a baseline, let’s estimate the typical volume at a Wal-Mart pharmacy in 2005.

  • According to Drug Store News, Wal-Mart’s 2005 Rx sales were $11.036 billion.
  • The average price per script in the mass merchant pharmacies was $62, implying that Wal-Mart dispensed 178 million prescriptions in 2005.
  • Wal-Mart had 3,289 stores with pharmacies (per DSN).

After a little math, I estimate that the average Wal-Mart store dispensed 148 prescriptions per day in 2005 (assuming 365 selling days per year). For comparison, the same calculation for Walgreens yields an estimate of 270 prescriptions per pharmacy per day in 2005.

Q2: How many more prescriptions did the $4 generic program generate?

According to Wal-Mart’s Nov. 16 press release: “To date, as new states have been added to the program, 2.1 million more new prescriptions have been filled in those states as compared to the same time periods last year.

  • As of November 15, the generics program was available in 2,507 Wal-Mart stores.
  • Stores were added on four different days (9/21; 10/6; 10/19; and 10/26). A calendar and some math shows that Wal-Mart had almost 65,000 total available selling days for the $4 generics program in these stores.
  • Wal-Mart’s claim of “2.1 million more new prescriptions” translates into almost 15,000 new prescriptions per available selling day, or 32 new prescriptions per store per available selling day.

In other words, the average Wal-Mart pharmacy’s daily volume has increased by 22% (32/148) from September 21 to November 15.

However, IMS data indicates that total prescription growth was 6% from mid-September to mid-November 2006 versus the same period last year.

Therefore, it appears that Wal-Mart’s $4 generic program has added about 16% in real incremental prescription volume to the typical Wal-Mart pharmacy.

Q3: Did Did Wal-Mart have $31.5 million in extra dispensing costs?

The New York Times pooh-poohs the program, noting “…Wal-Mart might be able to declare the overall program profitable only by spreading the costs well beyond its pharmacy ledger.” The reporter then quotes “a pharmacy consultant in Stoughton, Wis.” named Ed Heckman: “But other costs, including store overhead and pharmacists’ paychecks, can add as much as $15 to the cost of dispensing a prescription, Mr. Heckman said. ”

Let’s see…2.1 million prescriptions @ $15 equals …$31.5 million!! So the program must be a boon for all of those pharmacists who are working extra hours, right?

Wrong. Total volume at a Wal-Mart pharmacy has gone up by about 32 new prescriptions per day – about 2 per hour given typical store hours. Marginal (incremental) overhead costs are probably $0.00 for an average Wal-Mart pharmacy. Following Mr. Heckman’s quote, the reporter notes that “selling drugs at $4 might be well below cost for many pharmacies.” Perhaps, but probably not for Wal-Mart.

Q4: Why was the Times so unbalanced?

I’m afraid I can’t really answer this question. Perhaps they are piling on after the post-election bashing given by Senator Barack Obama and former Senator John Edwards?

Nevertheless, I feel compelled to note that the New York Times failed to disclose a major conflict behind the quote above about costs. Mr. Heckman is not just a “pharmacy consultant,” but also President of PAAS National, a company that is "supported and endorsed by the NCPA” (the National Community Pharmacists Association). According to its website, PAAS also operates the Community Pharmacy Contract Clearinghouse for NCPA.

I note this lack of disclosure because NCPA has been a very outspoken critic of Wal-Mart. Check out the rather unambiguous titles of NCPA’s press releases "analyzing" Wal-Mart's $4 program:

Hmmm, wonder what NCPA really thinks?

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Anyway, this point of this post is simply to highlight that sometimes what passes for analysis in the mainstream media is really just opinion. Or as U.S. Senator Daniel Patrick Moynihan famously quipped: "Everyone is entitled to his own opinion, but not his own facts."

Friday, December 01, 2006

No PDMA for you!

Looks like the PDMA will not be going into effect after all.

I've been skeptical about the injunction filed by a group of secondary wholesalers to stop implementation of the pedigree requirements of the PDMA on Dec. 1. (See The FDA on PDMA and Channel Conflict as Pedigree Looms.)

But on Thursday, Magistrate Judge Kathleen Tomlinson recommended that a preliminary injunction against the Department of Health and Human Services and the FDA be granted. See the Wall Street Journal story Judge Rules on Long-Delayed Drug Law. (Fans of legal reasoning will surely enjoy the full injunction report and recommendation.)