Marching up the channel management curve

Financial and business changes are driving an evolution in channel management strategies


Today’s channel management agreements define and measure the forward channel distribution partner’s ability to manage appropriate metrics in return for a negotiated fee for the performance-based services. These agreements include both Distribution Performance Programs (DPP) and “true” Fee-for-Service Programs (FFS) depending on the channel intermediary. Pharmaceutical, biotech and medical device trade channels have evolved, in some cases, dramatically since the inventory “buy & hold” days of the early to mid-1990s.

The ability to drive sales through optimized inventory levels and revenue management starts with effectively using the information received from channel intermediaries. Revenue management, sales forecasting and demand planning are three critical success factors on today’s C-suite agenda. Optimizing the “4 Ps”—Payer, Prescriber, Pharmacy, Patient—by leveraging logistics excellence across multiple dispensing channels is now tightly aligned on the channel management agreement value curve. As a result of this trade modernization and evolution, channel agreements have evolved with a focus on control, transparency and collaboration. To some degree, manufacturers are exerting greater ownership over the channel relationship.

The forces of evolution change emerge from these critical developments:

  • A heightened focus on the marketability of products through dispensing channels
  • Manufacturers adapting to a massively consolidating market as shown by larger and more powerful buyers like CVS Caremark
  • Use of electronic medical records and e-prescribing
  • Greater data visibility to the flow of products
  • Empowered consumers
  • Manufacturers’ own rationalizing of sales & marketing tactics, application of discounts and fees, and operating in a continually tightening regulatory environment.

Retailers such as CVS Caremark and Walgreens are undergoing substantial evolutions in terms of their healthcare programs and offerings. Retail is poised for greater control and coordination across the healthcare continuum. Manufacturers who currently partner with retail are learning and applying their experiences into their evolving channel agreements with a focus on control, transparency and collaboration to maximize the patient experience.

Negotiated service agreements
The inventory “buy and hold” days ended with the advent of Inventory Management Agreements (IMA) in the late 90’s and as a result distributors and manufacturers extracted significant value with predictable inventory levels that reflected true patient demand at retail dispensing outlets. In the early 2000’s, distributors hit the road calling on the top manufacturers to introduce the concept of Fee-for-Service (FFS) as a way to show their value beyond the traditional pick, pack and ship model in servicing over 140,000 dispensing outlets in the US.

Fee-for-Service as defined by CMS is a fee paid by a manufacturer to an entity, represents fair market value, is a bona fide – itemized service actually performed on behalf of manufacturer, without fees passing in whole or in part to client or customer of entity, whether or not entity takes title to drug. As today’s distributor channel agreements do not pass the bona fide service test, Blue Fin Group defines the agreements as Distribution Performance Agreements (DPP).

Congratulations to those manufacturers in the circle on Fig. 1 as this is where many are today. A mix of Distribution Performance Agreements (DPPs), Specialty Pharmacy Program Agreements (SPPs), Warehousing Chain Performance Agreements (WCPPs), Specialty Distributor Performance Agreements (SDPs) and the new emerging Megachannel Performance Program Agreement (MCPP). If manufacturers are currently still on version 1.0 of any of these agreements, think about evolving into the next version as most have.

If channel management and the associated agreements are not on manufacturer’s radar screen, it should be. If the attitude is “if it’s not broken, don’t fix it”…break it! Chances are version 1.0 of the agreement itself, manufacturer trade policy, manufacturer chargeback processing policy and/or manufacturer authorized distributor-of-record language is not aligned with the original agreement. Or if negotiating version 1.0 was so painfully miserable and even the thought of negotiating version 2.0 brings about suicidal thoughts…get over it! So much is being left on the table.

Manage the metrics
Creating a channel strategy, aligning objectives, developing tactics to support the strategy including the channel management structure/agreement and ensuring the people, process, data/technology loops are tight around the strategy—these are the keys to success through the negotiating process with channel intermediaries. Manufacturers should apply the lessons learned, whether good, bad and/or ugly, into evolving agreements. In many cases, version 1.0 of DPPs held distributors accountable for too many metrics and neither the distributor nor the manufacturer could measure, monitor or take action to operationalize the agreements.

Today, evolving agreements include those metrics that are most critical to the organization. For DPPs with distributors, inventory levels, service levels and demand variability metrics are emerging as the top performance metrics in these agreements. For providers like Specialty Distributor (SDP 2.0) and Specialty Pharmacy (SPP 2.0), evolving agreements include “true” Fee-for-Service metrics and manufacturers account for these fees as operating expenses vs. price concessions. There are many emerging examples of Specialty Distributors and Specialty Pharmacy Providers acting as exclusive distributors for manufacturers for both physician-direct and patient-direct suppliers of products.
Megachannels like CVS Caremark, Wal-Mart and Walgreens are emerging as enablers of measurement and maximization of patient outcomes and in the not-to-distant future, marketing and outcomes engines for manufacturers. Evolution to MCPP 2.0 will account for including services to meet these enabler’s offerings.

In many cases, manufacturer leaders have already left the gates and are well beyond the circle in Fig. 1. “True” Fee-for-Service is in the market today. Active discussions with the Mega Channels are occurring and will lead to MCPP 2.0 in the short term and the evolution to Direct to Patient (DTP) longer-term. Then, the manufacturer has become the dispenser and achieves the control, transparency and collaboration with the physician, payer and patient. Successfully encompassing the 4 P’s could be here before you know it. PC

ABOUT THE AUTHOR
John A. Cervione is Managing Partner at Blue Fin Group.