Thursday, June 03, 2010

Wholesaler Profits: Brand vs. Generic Drugs

On June 15, I’ll be releasing an all-new report called The 2010-11 Economic Report on Pharmaceutical Wholesalers. I want to share a sneak peek at one intriguing analysis of wholesaler profitability.

Although wholesaler revenues are linked most closely to sales of brand-name drugs, the majority of wholesaler profits come from generic drugs. As you can see in the chart below, I estimate that in 2009 generic drugs contributed $1.7 billion more in gross profits for the Big Three wholesalers than did brand drugs. The superior profits from generic drugs make it more challenging to align the economic interests of wholesalers and brand-name manufacturers.

On a related note, I’ll be attending HDMA’s Business & Leadership Conference in Orlando on Monday and Tuesday. Drop me a line if you’d like to meet in person and chat about what's going on. If you prefer, just introduce yourself during the conference and share your kudos (or complaints?) about Drug Channels.

Below is one of the 31 exhibits from my forthcoming report. Generics represent about 9% of revenues but 56% of gross profits. Note that these figures represent an industry average model. Any individual wholesaler's performance will vary based on sales mix, customer mix, and other factors. To facilitate comparisons, the data are on a calendar-year basis even though each of the three large wholesalers reports financial results on different fiscal-year schedules.

What’s going here? Well, generic drugs are more profitable for wholesalers because of the channel’s enhanced bargaining position with generic manufacturers compared to manufacturers of brand-name drugs. Generic-drug makers must offer significant price concessions to win supply contracts with large wholesalers.

The chart above reflects a customer mix issue, too. A wholesaler's generic drug profits come from a sub-set of the market, whereas brand profits come from sales to the whole market.
  • Pharmaceutical wholesalers are the primary channel for generic drugs sold to smaller customers—independents, supermarkets, regional chain pharmacies, healthcare providers, and mass merchants without self-warehousing capabilities.

  • In contrast, the largest chain and mail-order pharmacies—including CVS Caremark, Walgreens, Medco Health Solutions, Rite-Aid, Wal-Mart, and Express Scripts—use their negotiating power and in-house warehousing capabilities to bypass wholesale intermediaries and buy directly from generic manufacturers. However, the largest pharmacy customers still purchase brand-name drugs via wholesalers—a little-understood state of affairs that I explain in the new report.
My forthcoming report explains how wholesalers use generic sourcing formularies to boost buy-side discounts from generic manufacturers. I also walk through the tactics that wholesalers use to increase compliance—the share of a pharmacy customer’s total generic purchases made through a pharmacy’s primary wholesaler.

I’ll tell you more when the report in launched on June 15. Stay tuned!

--

GO FLYERS!!!

8 comments:

  1. Adam,
    Very interesting analysis and yes, a nice OT win by the Flyers last night. Now if only the Phillies could snap out of their funk.

    ReplyDelete
  2. What a tease! But I will be first in line for the new report!

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  3. AnonymousJune 03, 2010

    Looking forward to the report. But, more importantly: Go Blackhawks!

    ReplyDelete
  4. With 70% of all dispensing being generics the “units” being sold by distributors should match those figures. The mark ups and GP for Generics is about 10 fold of that of brands with the FFS agreements and that is likely driving the shifts from just a couple of years ago. On the net side of the equation however might be the operational costs. Moving a generic “widget” vs a high cost brand widget is the same for an ambient product. Another hidden financial “gem” with generics is the ability to take a cash discount on a full WAC vs the actual contract cost.
    Good information and figure it was a matter of time.

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  5. Dan,

    Yes, you get it.

    Note that wholesaler profitability computations such as Return on Assets (operating profits as a percentage of assets) increase following a generic launch. The dollar value of generic inventory on a wholesaler’s balance sheet is much, much lower for a given level of prescription volume.

    Another complexity: Margins also vary over the generic drug life cycle, whereas brand-name drug margins are comparatively stable before patent loss.

    Adam

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  6. AnonymousJune 03, 2010

    Adam,

    wholesalers also generate fees and profits by managing the allocations of products in short supply for manufacturers. They decide which customers get a share of a limited supply of product. Also the big guys with lots of hospital customers are heavily focused on selling technology.

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  7. AnonymousJune 04, 2010

    This is new? Every level of the supply chain maximizes profit where it has maximum leverage. This occurs in virtually any industry you care to study. What you should really be exploring is the oligopoly/oligopsony dynamics of the Big Pharma - PBM relationship, where verifiable pricing and profit is lost in the tidal surges of rebates, kickbacks, and other contrivances. There is no industry quite like it.

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  8. AnonymousJune 05, 2010

    Generics continue to give retailers increased profitablity, but not like 12 months ago.

    We druggists enjoy the lower carrying costs, fatter dollar margins in the 6 month honeymoon period for new to mkt generics, and the pleasure of saving the patient dollars with tier 1 generic copays.
    Yet even the percent margin may be much greater, the dollar margins have taken a big, big tumble. With the increased transparency (aka, margin squeeze from the pbm sector), the days of the fat mac are gone.

    Today, the average dollar margin per generic Rx is not much different than that of a brand.

    Adam, missed you in DC two weeks ago.

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