Tuesday, December 01, 2020

Six Crucial Trends Facing U.S. Drug Wholesalers

During 2020, the COVID-19 pandemic disrupted every aspect of the pharmaceutical channel—and our lives. Pharmacy and healthcare provider markets experienced unprecedented volatility. If all goes well, 2021 will begin our return to normalcy, as vaccines roll out across the country.

This year has demonstrated the underlying resilience of U.S. distribution channels for prescription drugs. Pharmaceutical wholesalers have maintained shipments and operational capacity. They are now poised to play a vital role in distributing COVID-19 vaccines and therapeutics as they become available. However, there are substantial uncertainties about the timing and level of financial impact on wholesalers’ economics.

Below, I highlight six trends that will affect the U.S. drug wholesaling industry. I hope you enjoy this summary as we look toward the new year.

Speaking of next year, Drug Channels Institute will host an exclusive live webinar, Drug Channels Outlook 2021, on December 18, 2020, from 12:00 p.m. to 1:15 p.m. ET. Click here to learn more and sign up.

The material in today’s article is adapted from our new 2020-21 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors, now available for download.

Click here to download a free report overview (including the table of contents and a list of exhibits).

1. Big Three Dominance

The Big Three wholesalers—AmerisourceBergen, Cardinal Health, and McKesson—have maintained their overall share of the U.S. drug distribution channel.

We estimate that in calendar year 2019, U.S. revenues from the drug distribution divisions of the Big Three wholesalers reached $486 billion. These wholesalers’ combined share of the channel has grown in recent years, from 87% in 2012 to 95% in 2019. (See table below.) This share growth occurred due to acquisitions of smaller companies and a shift by large retailers to purchasing generic drugs via wholesale distribution. AmerisourceBergen experienced the greatest market share growth, due largely to its relationships with Walgreens Boots Alliance and Express Scripts. None of the Big Three wholesalers has made significant acquisitions during the past two years.

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We project that combined drug distribution revenues at the Big Three wholesalers (excluding the effects of acquisitions) will increase to $621 billion in 2024.

2. Profit Model Evolution

Wholesalers are adapting their businesses to a world of slower growth in brand-name drug list prices—while benefiting from more stable generic drug prices. Wholesalers have also benefited from the generic purchasing consortia they have formed with large pharmacies.

Gross profits from drug distribution grew for the first time in five years. We estimate that wholesalers’ gross margin percentage declined slightly in 2020. Due to revenue growth, however, total gross profit dollars from drug distribution at the Big Three wholesalers grew for the first time in five years. Operating margins at all three wholesalers have stabilized.

For more details, see Chapter 4 and Section 6.1. of our new report.

3. Pharmacy Market Challenges

COVID-19 has not fundamentally altered the negative industry trends facing retail and specialty pharmacies. These trends are generally headwinds for wholesalers’ profitability.

In Chapter 6 of our report, we summarize the key forces of change that will continue to alter the pharmacy industry and affect wholesalers’ profits:
  • Consolidation and concentration among wholesalers’ pharmacy customers
  • Competitive pressure on retail pharmacies
  • Exit of smaller pharmacies
  • Channel control and vertical integration
  • Shift in dispensing formats
Wholesalers benefit from novel, interlocking relationships with the largest pharmacy organizations. Amid this concentration, wholesalers continue to invest significant sums to sustain the businesses of smaller pharmacies. Smaller, pharmacist-owned independent drugstores remain a crucial customer set for drug wholesalers.

4. Buy-and-Bill Resilience

Wholesalers’ position in buy-and-bill channels for provider-administered drugs remains strong. However, the more-profitable physician office market continues to erode.

Specialty distributors and full-line wholesalers are still the main channels for provider-administered drugs. Physician offices and hospital outpatient clinics account for almost one-quarter of full-line wholesalers’ sales and more than 80% of specialty distributors’ sales.

Wholesalers have adapted to the ongoing shift in drug administration from community physician practices to hospital outpatient facilities. This has occurred both in the Medicare Part B program and at commercial health plans. The shift has had generally negative implications for wholesalers’ specialty distribution subsidiaries. The change has been gradual, so wholesalers have offered few public comments about it. The overall market has continued to expand, which has lessened the impact.

Over the past year, vertical integration between hospitals and physician practices has slowed. However, we expect that the COVID-19 pandemic will accelerate vertical integration, due to the financial challenges facing smaller practices.

5. The Biosimilar Boom

Biosimilars—biological drugs that are highly similar to an FDA-approved biological product—now seem poised to deliver financial benefits to wholesalers. The adoption of provider-administered biosimilars is soaring, and their prices are dropping. See The Booming Biosimilar Market of 2020.

Provider-administered biosimilars will become increasingly profitable for wholesalers and specialty distributors. That’s because wholesalers have opportunities to negotiate buy-side discounts from manufacturers that want to reach the physician office and hospital markets.

6. Payer Channel Innovation

Payers and PBMs continue to experiment with distribution models that pose risks to wholesalers’ channel role.

Before the pandemic, specialty pharmacies—via white, brown, and clear bagging—had selectively displaced buy-and-bill distribution channels for a substantial portion of provider-administered specialty drugs. See Specialty Pharmacy Keeps Disrupting Buy-and-Bill—and COVID-19 Will Accelerate It.

We estimate that the coronavirus pandemic has accelerated payers’ attempts to bypass the traditional distribution channel. Some of the changes will likely be transitory, as patients return to their healthcare providers. However, payers will likely try to retain some of these gains—especially if they own a specialty pharmacy.

Third-party payers also continue to launch disruptive distribution and reimbursement channel models for emerging cell and gene therapies. (See Section 6.3.4. of our new report.) These new channel models reduce or eliminate buy-and-bill by providers, enhance the role of the vertically integrated insurer/PBM/pharmacy companies, and limit the role of wholesalers.

OUTLOOK 2021

The wholesale business is healthy and getting stronger. Wholesalers have become crucial business partners for pharmacies, hospitals, and manufacturers. The negative industry trends and structural risks outlined above help explain why the stocks of the largest public wholesalers continue to be valued at steep discounts to the overall stock market average. This reflects a multiyear trend that began in 2015.

The widespread distribution of one or more COVID-19 vaccines and therapeutics will have a positive impact on wholesalers:
  • McKesson was selected to be the centralized distributor of any COVID-19 vaccines and the ancillary supplies needed to administer vaccinations under the government’s Operation Warp Speed (OWS) initiative. (Note that McKesson will not be handling ultra-frozen vaccines such as the Pfizer/BioNTech mRNA vaccine.)
  • AmerisourceBergen is the exclusive distributor for Gilead Sciences’ Veklury (remdesivir) as well as Eli Lilly’s bamlanivimab. (source)
  • The Pharmacy Services Administrative Organizations (PSAOs) owned and operated by AmerisourceBergen and Cardinal Health will be part of the OWS pharmacy program for COVID-19 vaccines.
Pharmaceutical manufacturers should not expect to bypass wholesalers for most products within their portfolios. Pharmacies and providers would not permit a manufacturer to disintermediate their preferred wholesaler relationships—though payers and PBMs will pressure these channel strategies. However, manufacturers should expect wholesalers to demand compensation to offset structural wholesaler profit challenges.

For more, tune in December 18 for our Drug Channels Outlook 2021 live video webinar.

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