Wednesday, February 22, 2012

To Limit Counterfeits, Build a Solid Channel Strategy

Over the past week, I've looked critically at the counterfeit Avastin situation. See Greedy Physicians Invite Fake Avastin Into the Supply Chain and What's Behind Counterfeit Drug Demand.

Today, I take a more normative approach by describing elements of commercial channel strategy that support product security and reduce the risk of counterfeit infiltration. In my experience, a good channel strategy complements such traditional anti-counterfeiting tools as package design, security features, pedigree, track-and-trace, and aggressively prosecuting the bad guys.

Below, I discuss the rationale for limited networks for specialty drugs and provide 6 channel strategy guidelines that manufacturers can use to improve product security. Please add your own suggestions below.


An important feature of specialty pharmaceutical channels is the widespread use of limited distribution arrangements. Most pharmaceutical manufacturers limit the number of specialty distributors that are authorized to distribute their specialty products and the number of specialty pharmacies authorized to dispense their specialty products.

There are many good reasons to create limited networks:
  • Specialty drugs serve relatively small patient populations, so a manufacturer can efficiently reach the entire market with a limited number of channel partners.
  • Specialty drugs have special handling and storage requirements, such as temperature control. Only distributors that meet a manufacturer’s criteria should be allowed to inventory and dispense these complex, delicate therapies.
  • For physician-administered drugs, manufacturers need distributors with the distinctive capabilities required to efficiently and effectively serve patients, providers, and payers. Medical practices require very different services than a retail pharmacy.
Product security is another motivation for limited networks. The risk that a drug could be sold outside its intended distribution channels—known as “diversion”—supports limited distribution arrangements for specialty pharmaceuticals. Secondary markets for pharmaceuticals can develop to arbitrage price differences between different classes of trade or countries. Specialty pharmaceuticals are especially vulnerable given the relatively high expense of specialty drugs. To reduce the risk of diversion, a manufacturer of a specialty pharmaceutical must know and trust its channel partners.

For more detailed explanation of limited networks for specialty distribution or specialty pharmacy, please see the 2011-12 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors (Chapter 3) and the 2011-12 Economic Report on Retail and Specialty Pharmacies (Chapter 8).


Free advice is worth what you pay for it. Nonetheless, here are six recommendations for building a channel strategy to support product integrity.

Create a limited distribution network for specialty products. Given the risks of diversion, a manufacturer of a specialty pharmaceutical should work with a limited number of highly trustworthy partners. The number, type, and performance criteria will vary based on such factors as market coverage requirement, capability analyses, competition, etc.

Contractually require direct purchasing only. Distributors must agree to purchase 100% of products from the manufacturer. Failure to comply is grounds for termination. This is pretty much standard language these days, after the problems of the pre-2005 forward-buying era forced major wholesalers to give up secondary market trading. Still, make sure your agreements are solid.

Contractually define the channel’s available market. Manufacturers should contractually specify the markets and buyers to which a distributor may sell, limiting a distributor’s ability to resell to other buyers. In practice, pharmaceutical manufacturers should include own-use resale provisions in contracts with specialty distributors or specialty pharmacies. For example, a specialty distributor may be permitted to sell products to physician offices but not to sell products to a pharmacy or another distributor. Specialty pharmacies must agree to dispense products only to patients and not sell to physicians.

Educate providers on the list of your product’s authorized distributors. In addition to product knowledge, a manufacturer's sales reps should understand how products and money move through U.S. drug channels. Then, the reps must explain the authorized channel and its strategic rationale to providers. Providers should know that purchases from non-authorized are wrong and dangerous. (BTW, I’ve developed and delivered in-person and e-learning training programs, so send me an email if you’d like to discuss how to get your field force up to speed on this topic.)

Make it easy to find the list of authorized distributors. Put information about the authorized channel front-and-center on the public web sites aimed at providers and pharmacies. I visited the web sites of the top specialty drug manufacturers, a number of which are my clients. Frankly, I'm surprised how hard it is to find a list of authorized distributors on certain sites. (Sorry, no names!) It's not easy to find the list on on product-specific sites, either.

Reward the channel for educating providers. Here’s a more speculative idea. When creating a specialty distributor agreement, build a pay-for-performance metric linked to providers’ awareness of the manufacturer’s limited distribution network. I haven't seen such a metric in any contract, but there's no reason something couldn't be developed.

While nothing can completely stop rogue medical practices that put profits over patients, these 6 steps will reduce risks and strengthen the channel system. Can you do it? Yes you can!

Any other suggestions?


  1. Good points here.  How about a drug like Tarceva which is commonly called a specialty product but is available at retail pharmacies?  Should this drug be limited to specialty distributors/pharmacies?  As more "specialty" products move from, for example, injectable/refridgerated items to, for example, oral solids, they will find their way into the retail channel.  Should they also be limited? 

    Regarding unique services that patients might need (I'm putting aside provider-dispensed items for now) for these types of drugs, some retailers are teaming up with outside vendors to create an offering acceptable to the manufacturer. 

    Would love your thoughts on this.

  2. I agree that dispensing networks will expand, but that doesn't mean specialty drugs should be put into open distribution. 

    projected growth in specialty drug dispensing is encouraging market entry and
    will increase competition for specialty pharmacy services, especially as regional chains and independents pursue the dispensing of specialty drugs. I'm including "specialty at retail" strategies as well as the emerging networks (Armada, CSPN, et al). There
    are 10 independent specialty pharmacies on the 2011 Inc. magazine list of the fastest-growing private companies in the

    For more, see pages 82-85 of my 2011-12 pharmacy industry report
    Anyway, this might be a good topic for a future article.

  3. What about REMS?

  4. Another good reason for a limited network, IMHO.

  5. You still need patient tools since the Big 3 use to claim they only buy from the manufacturer, but this is not true.

  6. It seems that by restricting the market too much, you will create inefficiencies in the supply chain.  I get the point that you are creating a hierarchy-of-trust (rather than a web-of-trust).  Each level down the hierarchy is less trustworthy & peers may not sell to each other.  But you have to supplement that with some other mechanism to guard against shortages, excess supply, soon-to-expire stock, etc.

    A simple way to do that is for the manufacturer to offer a drop-ship solution to all participants.  This would be another channel to buffer shocks to a restricted supply chain.  Of course, the manufacturers may outsource the drop-ship channel to all of the first-tier distributors!

  7. Adam,
    One thought on this subject concerns product safety / integrity liability.  If a drug is not properly stored or procured through an unreliable source (i.e. via diversion), what entity is ultimately liable for the product's safety?  For example,  lets say a product was somehow diverted, stored improperly and a patient that was given that drug had a sever reaction (requiring hospitalization) or worse ultimately dies.  Who is on the legal hook?  I could see the headlines "Patient on XYZ drug made by ABC pharmaceutical company dies".  I think the liability issue would ultimately come out through proper investigation albeit months / years from when the event occurred.  However, the physician's and patient's perception of the drug could be dramatically affected. In fact, this negative impact could be felt for the rest of the drug's patent life. 
    All the more reason a pharmaceutical company should limit its distribution channels to reliable sources.

  8. Don't forget that there are a growing number of self-insured or self-funded payers. They too will have a voice on how specialty products are distributed to their health plan members, as they are forging direct relationships with specialty pharmacies. If a specialty pharmacy can forge that type of relationship with a larger self-funded client and the potential volume of covered lives is large enough, a specialty pharmacy can force their way into the "buying club".