Wednesday, October 07, 2009

A Peek at Drug Wholesalers' Economics

If you sell to (or buy from) drug wholesalers, you should consider buying the new 2009-2010 HDMA Factbook, just released by the research arm of the drug wholesaler’s trade association.

This report is valuable for anyone who negotiates with or analyzes drug wholesalers, although you’ll need to be careful when interpreting the reported statistics. I note a few highlights about drug wholesalers' profitability below and suggest two creative uses of the data.

Unfortunately, I must qualify my purchase recommendation because HDMA has decided not to make the report available as an electronic PDF document. Huh?

A PEEK AT THE REPORT

HDMA’s Factbook is based on data from 18 reporting companies. I notice that at least one large wholesaler—Kinray—did not provide sales data.

The Factbook presents a confusing array of figures—weighted averages, averages, medians, and middle ranges. The weighted average is most meaningful because it summarizes the business of the big 3 wholesalers—AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK).

The weighted average profitability figures in the HDMA Factbook correspond roughly to the SEC filings of the big 3:
  • Gross profit margin = 2.70%
  • Operating profit to net sales = 1.54%
  • Return on Investment = 19.2%
Other statistics use the distribution center (DC) as the unit of analysis. Presumably, the DC-level data strip out the effect of ancillary businesses such as packaging or automation. There are 130 DCs in this year’s sample.

However, two of the three big wholesalers have national DCs that supply other, smaller DCs within their network. The report doesn’t address this complexity, making the interpretation of the DC averages a bit murky.

A PEEK BEHIND THE REPORT

Over the years, I have found the Factbook to be quite useful for deriving or confirming intriguing statistics that do not appear in SEC filings.

For instance, did you know that vendor payment terms, a.k.a. prompt-pay discounts, from drug manufacturers still represent about half of drug wholesaler’s gross profits in 2008? (I computed this figure based on Table 22.) Fee-for-service payments, which get so much attention, represent less than half of the balance.

The report could also help you figure out various wholesaler revenue and profit streams. For example, I used data from the HDMA Factbook to quantify how much more wholesalers earned from generic drugs versus brand-name drugs. See Exhibit 12 of the U.S. Pharmacy Industry: 2009 Economic Report and Outlook for my answer.

TWO CAVEATS

The report does not provide much substantive analysis to help you interpret the data. That's one reason that I included these topics in my 2009 Economic Report on Pharmaceutical Wholesalers.

Another shortcoming is HDMA’s decision to make the report available as a hard-copy spiral-bound book but not as an electronic PDF file. I find it much more difficult and less convenient to locate material in a hard-copy book versus searching an electronic file, the format of reports such as the NACDS Industry Profile or the NCPA Digest.

I asked HDMA about this decision. Karen Ribler, Executive VP and COO of the HDMA’s Center for Healthcare Supply Chain Research, told me:
“HDMA has a long tradition of offering this book to the healthcare industry as a hardcopy reference tool. What we do offer is a CD that allows users to download pertinent data for marketing, benchmarking or planning. They can then put Factbook data straight into their powerpoints.”
The Factbook is available for sale from the Center for Healthcare Supply Chain Research. The non-member price is $225.00 (book only) or $325.00 (book plus data CD). I did not evaluate the more expensive version with the data CD.

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I’m mindful of the FTC’s new guidelines for bloggers, so you should know that HDMA provided me with a complimentary copy of the report (value=$225.00).

4 comments:

  1. Can I presume you got a free Obama chia also?

    ReplyDelete
  2. I like the term prompt-pay terms...2% 30, net 31. Is one day really prompt pay? I was discussing this with a Trade Exec once and asked about removing the 2% and rolling it all into the IMA/FFS. He was mortified and refused to discuss it because "the wholesalers have already given this away to their customers". I found that very interesting. 2% is a big gift and I'd think a manufacturer should want to get more for that than just one day of faster payments. -A

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  3. 2% is a historical gift indeed. The origin, I believe, goes back to manufacturers trying to respond to some of the wholesalers concerns around costs involved with handling chargebacks, etc. Unfortunately, they used much of this guaranteed profit to drop their pricing downstream, in the quest for top-line revenue and share growth. The same continues to occur in the FFS world.

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  4. Actually, the 2% goes way back further than chargebacks. Chargebacks have never played a part in this "gift". In the past (OK, way back) wholesalers made an upcharge on sales, even chargeback sales. In fact, when contracting started manufacturers sold direct (no chargeback mechanism). Wholesalers ASKED to be let in on the sales and came up with the idea for chargebacks. -A

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