Import Battle Heats Up

The Senate held hearings Wednesday titled Policy Implications of Pharmaceutical Importation for U.S. Consumers. Drug Imports Battle Heats Up Again, noted the Associated Press.

IMHO, Billy Tauzin did a very good job laying out the main drawbacks to importation in his testimony before the Senate:

1. Importation opens our borders to drugs from anywhere in the world and there is no plausible way of limiting importation to Canada or Western Europe;
2. Safety testing, inspections, chain of custody requirements and other attempts to “guarantee” safety provide no assurances that imported drugs will be safe;
3. Projections of potential cost-savings from importation are very small and the largest beneficiaries are arbitrageurs;
4. Importation is not free trade, it is price controls which lead to delays and denials in patients’ access to medicines; and
5. There are better, safer alternatives for patients to access needed medicines, including the Partnership for Prescription Assistance (PPA) and Medicare Part D for seniors and the disabled.

Astute readers of my blog will realize that I concur with all of these key points. His testimony is worth reading, especially because the footnotes cite most of the legitimate research on the subject. (Yes, distribution geeks like me always read footnotes!)

Where's the Beef?

Unfortunately, I fear that the legislative decision may be made based on politics rather than facts. Senator Dorgan's post-hearing press release states:

• "I think we need to introduce a little price competition into the marketplace," said Dorgan. "There is no reason American consumers ought to be paying the highest prices in the world for prescription medicines."

Now, see if you can fill-in the blanks behind Senator Dorgan's comments in his Feb. 21 press release, just a scant 2 weeks ago:

• “Recent reports show that Canadian [products] are crossing the border without required health certificates and identification,” said Dorgan. “[Federal agency ending in DA] does not need to be expanding importation of Canadian [product], when it can’t even enforce the current regulations.”

The correct answers:
[products] = cattle; beef
[Federal agency ending in DA] = USDA

'nuff said.

Chips and Fish?

In case you missed the news, Kodak has applied for a patent on a digestible RFID tag. (Read the edible radio patent application.) The IT editor at Industry Week cleverly refers to the tag as the trackable part of your nutritious breakfast.

I'm sure that this invention has many valuable uses in diagnosis and treatment of disease. Personally, I can't help wondering about the new meaning of "end-to-end" security for the pharmaceutical supply chain ...

Pfizer wins again

As expected, the high court in Britain will not stop Pfizer's distribution arrangement with Alliance Unichem.

• Original post: A New Era for Distribution
• News Story: Drug wholesalers fail to block Pfizer deal in UK

Since I won't be attending the HDMA business partner exchange meeting that starts next week, I want to offer a few comments on this outcome then and predict what it might mean for the US.

Drug manufacturers have been trying to regain control over their distribution channel in Europe for some time. Glaxo won some notable legal victories last September that paved the way for Pfizer's UK agreement, as I predicted in A Partial Win for Glaxo Means More Change for EU Drug Channels.

Pfizer has been very active over the past few years in asserting its legitimate commercial interests to engage in strategic channel management. Today's high court decision is the second victory against wholesalers in a week for Pfizer. Recall that Pfizer successfully prevented Danish wholesaler Nomeco from selling a generic version of Lipitor.

For now, these attempts are not needed in the US because manufacturers have much more control over the larger wholesalers. US wholesalers still derive a majority of their gross margin from the buy-side via fee-for-service agreements and payment terms.

In contrast, wholesaler sell-side margins are regulated or fixed in most EU countries. Some countries, such as France, even regulate the maximum discounts to these margins that wholesalers can offer to pharmacy customers. As a result, I estimate that manufacturers only control about 25% of the larger wholesalers' gross margin versus 90%+ in the US.

PREDICTION: The likelihood of EU-style channel management efforts in the US will increase if US wholesalers begin to derive a greater proportion of their buy-side margins from activities that are not controlled or compensated by branded manufacturers. (This is the underlying theme of my Generics=Channel Strife? post).

Check back in 12 months and see if my prediction comes true.

P.S. BTW, I received many emails on Thursday's post (Generics=Channel Strife?), most of which asked for clarification or a customized analyses. If you are not one of my advisory consulting clients, I'd prefer that you post your question as a public blog comment. Naturally, you can also feel free to inquire about the services offered by your friendly neighborhood blogger...

A New Era for Distribution

We seem to be entering a new era for the pharmaceutical distribution channel – one in which the regulatory “rules of the game” become more important than ever for marketplace success.

Back in September, I wrote about Pfizer’s UK drug distribution deal with Alliance UniChem. (See Pfizer's UK Deal: Change is Here!.) As I noted, Pfizer, has two legitimate objectives for this deal:

1. Lower the risk of counterfeit products entering the supply chain
2. Recapture lost revenue from parallel importing

Now, a group of UK distributors is seeking an injunction against this new strategy on the eve of its introduction next Monday. (See Drug wholesalers go to court to block Pfizer deal). I don’t know enough about UK law to handicap the outcome.

But in reading this article, it strikes me that we are seeing more wholesaler-to-wholesaler conflicts playing out in the legal and public policy realm. Last year saw secondary wholesalers successfully block the FDA’s implementation of the PDMA with a Federal injunction. (It's Official: PDMA is Back On Hold). RxUSA, the wholesaler who lead that effort, is simultaneously pursuing legal actions against McKesson, many manufacturers, and the HDMA. There was also friction surrounding Florida’s pedigree law between the large drug wholesalers, secondary drug wholesalers, and med/surg wholesalers. (See H.B. 371 signed by Gov. Bush ).

I’m not ready to draw a firm conclusion about all of this activity yet. But I wonder if we are now at an inflection point for the drug distribution industry.

Generics=Channel Strife?

Will generics be the next battleground between branded drug makers and their wholesalers?

Pay attention to Pfizer’s latest victory against generic Lipitor in Denmark. Here’s the summary:

“Pfizer Inc., the world's largest drugmaker, said Friday a court in Denmark blocked the sale of a generic version of the company's best-selling drug, the cholesterol-reducer Lipitor. The company said the Bailiff's Court in Copenhagen issued a preliminary injunction against the country's largest drug wholesaler Nomeco AS, preventing it from selling a generic version of Lipitor made by Indian drugmaker Ranbaxy Laboratories Ltd.” (Full story: Pfizer gets court injunction against generic Lipitor wholesaler in Denmark)

Note that Pfizer’s victory is against Nomeco (the wholesaler), not Ranbaxy (the manufacturer).

Will this type of conflict spill over to the U.S.? Consider the following three points:

1. The U.S. is moving toward reimportation legislation. There are bills before both the House and Senate. In Europe, wholesalers are big winners from importation because they absorb most of the price differences between countries. (See Importation Illusions.)Thus, importation legislation could be very good for the big wholesalers (AmerisourceBergen (NYSE:ABC), Cardinal Health (NYSE:CAH), and McKesson(NYSW:MCK)) as they would have the opportunity to become a legitimate conduit for imported products.
2. Wholesalers generate more profits from generics than branded drugs. Generic drugs now subsidize the distribution of much more expensive branded pharmaceuticals. (First noted back in May Will unbundling crush pharmacy profits?)
3. Intellectual property protection for pharmaceutical companies is under attack around the world. Keep an eye on a crucial case in India in which Novartis is defending its Gleevec patent. If they lose, then the world will have a new source of generics long before most U.S. patents expire. (See Novartis files suit against India ruling on drug patents.) The New England Journal of Medicine just published an article that argues in favor of India’s attempt to seize the patent. (See Taking TRIPS to India.)

Taken together, these three points suggest the potential for friction in manufacturer-wholesaler relationships due to the potent interaction of generics and importation legislation. I'll be curious to see if any manufacturers address this issue in the next round of wholesaler agreements.

A Sad Tale

I receive a lot of emails as a result of my blog postings, but none that have been as painful to read as this one:

"Dr. Fein: As a college student without insurance benefits I decided to order a much-needed expensive prescription drug (Imitrex 50mg) from the internet. I thought I was ordering from a Canadian company but when the drug arrived, I saw it was shipped from India. I had cause to try it last week when I awoke to an excruciating migraine. Over several hours I took 3 tablets receiving no relief whatsoever. Is there someplace I can send these pills to for a scientific evaluation? I feel for certain I was taken for fraud and certainly will not risk taking any more of these for fear of what it actually in the tablet's chemical makeup. I would however like to report them if they are fraudulent. Do you have any suggestions? Thank you."

I advised him to:

1) Report the incident to the FDA at the following webpage:
http://www.fda.gov/oc/buyonline/buyonlineform.htm

2) Check if he qualifies for a patient assistance program:
http://www.pparx.org

A troubling cautionary tale...

Importation Illusions

Here's another reason to question the value of importation: it may not save any money! Pharmaceutical Manufacturing just published my op-ed outlining why manufacturers and consumers would bear most of the risks and costs of importation, but would get little of the supposed price savings.

Check it out here: Importation Illusions

(I realize that my article requires some understanding of drug distribution channels, so I'd welcome your ideas on how to get the message disseminated more broadly.)

The safety issue remains very significant. Yesterday's International Herald Tribune reports on an "epidemic of counterfeits" in Asia. (See A growing epidemic of fake medications in Asia.)

The scope and sophistication of the fakes is frightening. Here's the latest trend - fakes designed to act like (not just look like) real drugs. The latest fakes "contained drugs apparently chosen to fool patients into thinking the pills were working. Some had acetaminophen, which can temporarily lower malarial fevers but does not kill parasites. Some had chloroquine, an old and now nearly useless anti-malarial. One had a sulfa drug that in allergic people could cause a fatal rash. And some had a little real artemisinin — not enough to cure, but enough to produce a false positive on the common Fast Red dye test for the genuine article."

Apparently, counterfeiting is primarily an export business from China. Criminals and their families get sick, too. See my recent post Importing Chinese Counterfeits for more on the import risk for the US supply chain.

Now that the 2008 Presidential campaign has started (only 622 shopping days left until the election), I'll be very curious to see how the candidates address the realities of the House and Senate importation bills.

Greece is the Word

In case you missed it, the FDA issued a press release last Friday with the following statement:

"The Food and Drug Administration (FDA) has become aware that a number of Americans who placed orders for specific drug products over the Internet (Ambien, Xanax, Lexapro, and Ativan), instead received a product that, according to preliminary analysis, contains haloperidol, a powerful anti-psychotic drug."

Whoops! Note that the packages were postmarked in Greece, which entered the EU in 1981 and is therefore considered a permitted country by both the House and Senate importation bills. As I suggested in Importing Chinese Counterfeits, it would be depressingly easy for counterfeit drugs to pass through Greece on their way to the US.

The PARADE article that I mentioned on Friday (Is Your Medicine Dangerous to Your Health?) was mostly a rehash of previous stories. I was disappointed that it perpetuated the "RFID as magic bullet" solution, although I doubt many of its loyal readers are commercial operations executives. The article also sidestepped the counterfeit risks posed by importation legislation, simply warning people not to buy prescriptions online. The reader comments are scary, especially from two patients who are wondering if they have fake pills.

On the other hand, PARADE did keep me In Step With® Christina Ricci, so the issue wasn't a total loss...

Read PARADE this Sunday

Keep an eye out for PARADE magazine in your Sunday newspaper (Feb 18). The cover story will be “Could Your Medicine Be Fake?”

Read their press release here: Are Counterfeit Drugs Finding Their Way to Your Home?

Shallow education or callow fear-mongering? I’m not sure yet.

This week’s PARADE will also cover “easy and elegant” Oscar party recipes. Don’t forget to email me with your favorite one!

AMPed down

Buried in the President’s FY2008 is a proposal to reduce the Federal Upper Limit for generic drugs from 250 percent of average manufacturers price (AMP) to 150 percent of AMP. (Fellow budget geeks can read it for themselves on page 159 of Major Savings and Reforms in the President's 2008 Budget.)

I’ve been pondering the impact of AMP on the supply chain for some time now. But to be honest, I missed this specific proposal in the budget. Keep in mind that the definition of AMP is not even finalized yet!

As I noted last week in Trouble Ahead for Independent Pharmacies, the Deficit Reduction Act will hammer independent pharmacies by lowering gross margins on generic prescriptions. But the 2008 budget proposal is not a surprise if you recall President Bush’s comment last year: “It’s not immoral to make sure that prescription drug pharmacists don’t overcharge the system.” Needless to say, that sentiment did not endear him to the pharmacy lobby.

I still predict that private payers will be migrating away from AWP to AMP-based pharmacy reimbursement, but I’m skeptical about other proposed metrics such as WAC. Take another look at my popular November post The Attack on Generic Profits in Drug Channels for strategic planning questions to help you figure out the pharmacy supply chain’s future market structure.

Since I don’t charge for this blog, I must also remind you that free advice costs nothing until you act on it. Caveat lector!

Importing Chinese Counterfeits

Today's Wall Street Journal has a fascinating peek into the world of counterfeit drugs in China. (See China Government Cited in China Probe.) The article states:

"For years, China's pharmacies and hospitals have been plagued by low-quality and fake medicines made by local drug companies. Just last fall, an antibiotic made by a pharmaceutical company in Anhui province sickened dozens of people across China and killed at least 10, according to China's state-run Xinhua news agency.

Blame often falls on small drug makers that the government says skirt laws to turn a profit. Now, the man who ran China's State Food and Drug Administration until he stepped down in 2005 is at the center of a widening corruption scandal. The State Council, the country's cabinet, alleges that Zheng Xiaoyu, the agency's former head, accepted bribes from drug companies and abused his power, according to Xinhua."

Scary stuff. It makes me appreciate the relatively secure drug supply chain that we enjoy in America. If you're like me, you'll also wonder why Congress wants to infect our system by creating new gateways for counterfeits with importation legislation.

I suppose we should all be grateful that Senator Dorgan's bill leaves China off the list of approved countries, right? His importation website mildly states: "The bill allows U.S.–licensed pharmacies and drug wholesalers to import FDA–approved medications from Canada, Europe, Australia, New Zealand, and Japan..."

But if you bother to read the actual text of the inaccurately named S.242 Pharmaceutical Market Access and Drug Safety Act of 2007, you'll discover that the list of permitted countries includes any "member country of the European Union."

I get really worried when I look at list of member states, especially those added in the EU's 2004 enlargement. So I'm left wondering: How hard would it be for a drug made in China to pass through Latvia or Slovenia on its way to the US? Let's face it -- probably not too hard at all.

Re-read my post from last November on a scheme that put fake drugs from India into the hands of US consumers. (Of Spammers and Senators). Then ask yourself: why are politicians endangering public health by opening up diversion channels for criminals?

Trouble Ahead for Independent Pharmacies

2007 will go down as a bad year for independent pharmacies -- and they know it. Check out Federal budget plan raising alarms in Drug Store News.

I continue to believe that the Deficit Reduction Act will hammer independent pharmacies by attacking generic profits. Adding insult to injury, Wal-Mart's $4 generic program will hurt supermarkets, independents, and other discounters more than major chains such as CVS or Walgreens. (See Generic Zocor Hits $5 per Month.)

But independents and chains will soon find their paths diverging, with important implications for wholesalers.

Swimming Upstream

The NCPA continues its fear mongering with a prediction (threat?) that "access to life-saving prescription medicines" is at stake. (See Wake Up, Washington.)

I hate to mention it, but there are half as many independent pharmacies today as there were 15 years ago. No crisis yet.

Unfortunately for NCPA and its members, they are waging war with the American shopper. Like it or not, US retailing continues to become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. Consumers are fueling this trend by consolidating their purchases and shopping at fewer, larger stores. Low prices and self-service ("How can you help you?") now dominate.

Check out the floral industry (appropriate since we're coming up on Valentine's Day). Florists now sell less than one-half of all flowers purchased in the United States because supermarkets have added a floral category and Internet florists have captured a small but growing portion of the market. (As it happens, I'll be discussing these trends in a keynote address at the Wholesale Florist & Florist Supplier Association annual convention.)

Fifteen years ago, few of us anticipated a world in which shoppers would learn about new music from our home computer, buy groceries at Wal-Mart, purchase milk and eggs at a pharmacy, bank at the supermarket, and get prescriptions through the mail.

What about Wholesalers?

Drug wholesalers face a shrinking number of potential retail pharmacy or supermarket customers even as the market grows. Drug wholesalers have beaten these odds by using their information systems, logistics, and geographic coverage to stay relevant to large retailers. The current drug pricing system also helps. (See my September 2005 white paper for an analysis that wholesalers would prefer that you did not read.)

Smaller retail customers rely on wholesalers for much more than a chain -- delivery, credit, generic sourcing. The threat of disintermediation is low and the profits are generally higher for the wholesaler.

As a result, drug wholesalers are trying to help small retailers compete against the retail giants with buying programs and retail services. Fred Gebhart at Drug Topics did a nice overview of pharmacy buying groups and franchises, including programs offered by the Big 3 wholesalers. (See Pharmacy franchises: Should you join one?.) His article gives a nice overview from the perspective of an independent pharmacist. BTW, McKesson's new model apparently now has more member pharmacies than Cardinal's Medicine Shoppe franchise. (See McKesson measures Rx for taking the top spot.)

For comparison, check out United Stationers, a well-run company outside pharma that helps independent office supply stores (yes, there are still a few thousand left) compete against Staples et al.

Owning the customer provides even more security, especially if you happen to be a large-cap company with loads of cash and nothing better to do with it than buy back stock and pay down debt. Hmmm...