It is widely recognized that the drug wholesaling business in the United States is highly consolidated, especially in the context of the dozens of firms that have been acquired by the Big 3—McKesson, AmerisourceBergen and Cardinal Health—over the past couple decades. Whether for a large national chain, a mail-order pharmacy or thousands of independent pharmacies, the Big 3 have an offering, and long lists of clients. Now, the company generally regarded as the No. 4 drug wholesaler (by volume)—H. D. Smith—is attempting to peel off a larger portion of the pool of independent pharmacies from the Big 3, by making the pitch that drug stocks supplied by the Big 3 to independents inevitably help independents’ competition—the national chains—more than it helps the independents. The company is launching an advertising campaign (see illustration) in online and print industry publications, as well as its own sales force efforts.
Some context: each of the Big 3 has a “sourcing alliance” with one or more national chains and/or the leading PBMs. AmerisourceBergen started the trend in 2013 with Walgreens Alliance Boots Development, a joint venture between it and Walgreens Boots Alliance (itself a merger of Walgreens, Boots, a major European pharmacy chain, and Alliance, a UK wholesaler); WBA also has a significant shareholder stake in AmerisourceBergen. Cardinal Health followed with CVS Health, forming Red Oak Sourcing, a generics-purchasing venture; McKesson has a similar alignment with WalMart and (although it may soon be part of Walgreens) the Rite Aid pharmacy chain. At the same time, each wholesaler has a substantial business serving independent pharmacies, either as a straight-up wholesaler, as buying groups, or through franchises or franchise-like arrangements (Good Neighbor Pharmacy for ABC; Health Mart for McKesson, and Medicine Shoppe or Medicap for Cardinal Health). To a greater or lesser degree, the volume of drug distribution going through a Big 3 wholesaler positions it as a more powerful purchaser from manufacturers, and thus better able to demand preferential pricing, which also benefits its sourcing partner.
H. D. Smith, by contrast, is 100% independent-pharmacy focused, says Rob Meriweather, VP of sales for the firm. In addition, it is privately held—no shareholders expecting dividends. “The Big 3 wholesalers leverage volume to produce better economics from manufacturers. When this occurs, the national pharmacy chain sourcing partner is the direct beneficiary. So, the Big 3 economics support their sourcing partners and shareholders first. Independent pharmacy owners are further down the line. This creates a dynamic that allows an independent pharmacy owner to get a better price, but makes their largest competitors more profitable at the same time.” Independents need to realize that “they are making it harder for themselves to compete in the market by playing a game where the deck is stacked against them.” Over the long term, the alliance arrangements between the big chains and the big wholesalers will starve the independent pharmacies, he says.
Preferential treatment for big chains carries through in other supplier arrangements of the Big 3, says Meriweather. They, like H. D. Smith, have pharmaceutical services administrative organizations (PSAOs) which consolidate independent pharmacies’ reimbursement arrangement with pharmacy benefit managers (PBMs). H. D. Smith’s, called Arete Pharmacy Network, recently won over an independent pharmacy, Axline, from a Big 3 PSAO; the difference in reimbursements, after operating for several months, was seen to be 200 basis points (2%)—a not insignificant difference in an environment where PBMs sometimes force pharmacies “underwater” by paying less to reimburse for a drug than what the pharmacy paid to acquire that drug.
Each of the Big 3 invest substantially in serving their independent pharmacy clients, providing business consulting, a national brand (if the independent chooses to affiliate with it) and related services. Meriweather says that H. D. Smith’s bundle of services easily matches up against any other wholesalers’, including helping to fund new pharmacy startups or transfers between one independent and another.
According to data from the National Community Pharmacists Assn. (the trade group of independents), there are roughly equal numbers of independent or chain drugstore outlets in the US—around 22,000 each in 2015—but that is down roughly 1,000 from five years ago for independents, and up roughly by the same number for chains. In addition, there are another 8,200 grocery-store pharmacies, and about 8,500 mass-market (big-box store) pharmacies.