Friday, June 01, 2007

Attack on the Big Three

Russ Britt, LA Bureau Chief for MarketWatch, has just published a fascinating series of articles on drug wholesalers. These are "must read" articles if you want to anticipate key forces shaping the future wholesale channel. Here are the links:

I commend Russ for his thorough look at a wide range of issues facing the wholesale drug channel. He clearly did a lot of research and spent time trying to understand the real issues. He also was kind enough to include my comments in the main story. (Thanks, Russ!)

Conflict in the channel

The articles accurately portray the channel conflict that I predicted in October. Nevertheless, Russ paints a surprisingly favorable portrait of the secondary wholesale market, based in part on ample quotes from familiar companies such as RxUSA and QK Healthcare. (‘nuff said.)

Given the checkered history of secondary wholesalers (especially in Florida), honest secondary wholesalers should expect additional scrutiny and be willing to clearly and unequivocally demonstrate how they differ from the unsavory wholesalers that traffic in potentially counterfeit product. Smaller wholesalers seem strangely bothered by this idea.

I was quite puzzled by many other statements, too. For example, the articles imply that the FDA wants to help the Big Three at the expense of smaller wholesalers, although I find this notion a bit far-fetched based on my own research. Sentences such as “the average price of a prescription drug has nearly tripled since 1990, as the number of major wholesalers has dropped” imply a cause-and-effect relationship at odds with the historical evidence.

Three Clarifications

I want to clarify three factual points from the main story.

1. “[D]rugmakers prefer to deal with the Big Three.” More accurately, manufacturers prefer to deal with a relatively small number of customers. Contrary to popular belief, most pharma companies have many authorized distributors beyond the big 3. The largest eight manufacturers had an average of 79 authorized distributors prior to the PDMA injunction on December 1. Like manufacturers in other industries, drug makers can and do legitimately limit the number of intermediaries that are authorized to sell their products. (See The Impact of the PDMA Injunction for more.)

2. “Anecdotal evidence suggests these wholesalers could add as much as 25% to the price of drugs.” False. The big 3 added $6.4 billion (2.3%) to 2006’s total prescription drug spending of $275 billion. This figure represents the total wholesaler gross profit (mark-up), computed using wholesaler gross margins for drug distribution (about 3%) on $213 billion in total big 3 drug revenues.

3. “Recent efforts to quash the reimportation of drugs probably have strengthened the position of the Big Three.” Not necessarily. Widespread importation would give secondary wholesalers access to products and, under S.242, the legitimacy of FDA registration. Pharmacy customers will likely embrace importers as a legitimate source of supply. Don’t forget that wholesalers are the prime beneficiaries of parallel trade in Europe. The big 3 will then face a tough strategic choice: If they remain loyal to suppliers and refuse to import, then they will be at a competitive disadvantage and will lose market share. I note that the HDMA officially opposes importation.


Regular readers of my blog know that I often put forth strong opinions on the business practices and strategies of the big 3 wholesalers. However, I must refrain from posting any further public comments on these stories.

I’ll be at the HDMA DMC meeting in Boston starting on June 11. If you see me there, I’d be happy to share some further thoughts.


  1. One more factual clarification:

    The number of reported "wholesalers" has dropped sharply in some states. However, this reflects the pressure on independent pharmacies plus the fact that many independent pharmacies no longer carry a wholesale license. It does *not* mean that competition has put small wholesalers out of business.

    Here's an example: Carew Pharmacy closes


  2. AnonymousJune 01, 2007

    Adam, I enjoyed the comments on the wholesalers. Manufacturers are leary of having so many eggs in just 3 baskets. Should one of them "go under" (nothing to suggest this will happen) it would put a serious hurt on a manufacturer. History has shown us that large wholesalers can have problems (Foxmeyer?).

    Wholesalers provide an efficient distribution network and I'd like to discuss how they add any cost to distribution at all. If we removed them and manufactures had to ship direct I suspect it would be more than 3% to do so. At least that is the analysis I have seen kicked around the industry.

    I'll be at DMC and hope we can find time to Chat. Thanks as always for your blog!

  3. AnonymousJune 01, 2007

    Adam, I just want to add to the last comment and also thank you for this blog. I always learn something from your writings and our conversations. I expect that we'll catch up at DMC.

  4. AnonymousJune 08, 2007

    I had a question about how could the big 3 wholesalers earn around 200 billion annually in revenues, when the US spends around 250 billion on drugs.

    I was under the impression the wholesalers in general charge a %age of the final drug price. So would the wholesalers not earn a %age of the 250billion ( total drug spend ) annually ?
    I was wondering how could the wholesalers total revenue be the almost the same as that of the drug manufacturer's revenue in USA.

  5. The answer involves not double-counting product that is boughht and resold within the supply chain.

    Total revenues of wholesalers are $200B+. However, revenues of a wholesalers include the cost of the products that are resold. (Cost of goods are the revenues received by the manufacturer.)


    Revenue = $213B
    Cost of Goods = $207
    Gross profit = $6B ~ 3%

    The GP represents the value added by wholesalers to the supply chain. This avoids double-counting revenues. BTW, the same principle applies to computing the GDP of a country.