Tuesday, December 08, 2015

Five Industry Trends for U.S. Drug Wholesalers

Modern Distribution Management just published my article 2015 MDM Market Leaders | Top Pharmaceuticals Distributors. It is an excerpt from the 2015-16 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

Below, I republish the section highlighting five significant industry trends affecting the U.S. drug wholesaling industry. I think Drug Channels readers will enjoy this summary.

Tomorrow, I'll be giving the keynote address at CBI's 11th Trade and Channel Strategies conference. Hope to see you there!

Bonus wholesaler trivia question: In 2010, which prominent drug wholesaler CEO wanted Donald Trump to run for President? (Answer below!)

(from Modern Distribution Management, November 2015)

1. Growing U.S. Outpatient Pharmaceutical Spending

Over the next 10 years, spending on prescription drugs sold through outpatient retail, mail and specialty pharmacies is projected to grow by $259.2 billion (+85%), to $564.8 billion in 2024. Wholesalers will benefit from the expected overall growth in demand for prescription pharmaceuticals and the corresponding increase in drug spending. See New CMS Forecast: Drug Spending Grows Along with Impossible Hospital and Doctor Spending.

2. Consolidation and Changes in Pharmacy Industry Market Structure

As the overall prescription market grows, we expect the pharmacy industry to continue consolidating and share to become more concentrated. Consolidation and acquisitions, however, generally hurt wholesalers’ margins, because the acquiring companies consolidate their buying power.

Larger chains, which provide much lower profit margins for wholesalers, keep growing faster than other market segments. They are winning the battle for retail prescriptions with new store openings, organic growth from larger and busier pharmacies, and acquisitions of regional chains. See 2014’s Winners and Losers: Prescription Market Share by Dispensing Format.

Significant recent transactions include:
Independent drugstores, physician offices and other smaller customers are crucial customers for pharmaceutical wholesalers. Wholesalers provide a broad range of services intended to increase the profitability and competitive viability of their smaller, higher-margin customers.

3. New Vertical Relationships with Large Retail Drugstores

Over the past few years, wholesalers have successfully deepened their relationships with large retail chains. Large pharmacy retailers are shifting from self-warehousing to establishing direct-store deliveries from a wholesaler. Here are the two most significant changes:
  • In 2013, AmerisourceBergen took over distribution for the brand-name drugs that had been distributed from Walgreens’ own warehouse network and by another wholesaler. Beginning in 2014, ABC assumed responsibility for generic products that Walgreens had historically self-distributed.
  • In 2014, McKesson took over direct-store delivery of brand-name and generic drugs for Rite Aid, which no longer distributes drugs from its own warehouses.
Wholesalers and retailers have also become more aligned in generic purchasing. Over the past three years, the big three wholesalers have established novel generic relationships with their largest customers. See New Cardinal and McKesson Customer Deals Show A Changing Generic Channel.
  • Walgreens Boots Alliance (with AmerisourceBergen)
  • The Red Oak joint venture between Cardinal Health and CVS Health
  • McKesson’s OneStop generic program, which is now utilized by Rite Aid. In 2015, McKesson established McKesson Global Procurement & Sourcing Limited, a London-based subsidiary focused on manufacturer negotiations.
The reduced acquisition costs from these retail-wholesale purchasing relationships are encouraging other pharmacies to shift generic purchasing to wholesalers. Examples include Albertsons, Fred’s, Omnicare and OptumRx. These deals increase wholesalers’ influence, by shifting generic volume to the wholesale channel.

In addition, new vertical ownership relationships are also developing. Walgreens Boots Alliance can own up to 30% of AmerisourceBergen’s equity and will have two board positions. See Why Walgreens Boots Alliance is Triggering a Huge AmerisourceBergen Stock Buyback.

4. The Promise and Peril of Specialty Drugs

Revenues in the pharmaceutical industry will shift from traditional brand-name drugs to specialty drugs over the next few years. (See Pharma’s Bright Future: Meet The Top 10 Drugs of 2020.) To compete for the specialty drug opportunity, each wholesaler operates subsidiaries that focus on specialty drug distribution and related services.

Payer strategies, however, create profitability risks for the pharmacy-dispensed specialty drugs that wholesalers sell. That’s because these specialty product sales are being shifted into the largest specialty pharmacies (and wholesalers’ largest customers) with the smallest margins for wholesalers. See Why Blockbuster Hepatitis C Drugs Are Squeezing McKesson’s Profits.

5. The Changing Generic Marketplace

Generic drugs now dominate U.S. prescription activity. Wholesalers benefit from this trend, since a majority of their gross profits comes from generic drugs.

Wholesalers have benefited from the unexpected and somewhat unprecedented increase in the prices of some generic drugs. (See Winners and Losers from Generic Drug Inflation.) However, our analyses of pharmacy acquisition costs indicate that generic inflation was greatest in 2013 and 2014, and appears to have eased in 2015. See The Retail Generic Drug Inflation Slowdown: It’s Real.

Pressure on pharmacy profits from generic drugs is increasing, which will indirectly affect wholesalers that supply pharmacies. These challenges include a retail generic price war, the growth of narrow pharmacy networks, and new pharmacy reimbursement methods.


In December 2010, former Kinray CEO Stewart Rahr posted an open letter encouraging Donald Trump to run for President. Here's the proof: If Donald Trump Becomes U.S. President...

For more on Mr. Rahr's infamous post-Kinray career, see this classic Drug Channels post: A Tale of Two Wholesaler CEOs.

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