US wholesaler-distributor network saves manufacturers $42 billion annually, says HDMA research center

The 3rd edition (coming out roughly every three years) of The Role of Distributors in the U.S. Healthcare Industry uses analysis by Booz & Co. to measure the overall economic impact of the current system of drug distribution. At the same time, the Center for Healthcare Supply Chain Research, the research foundation of HDMA, published its survey and analysis, “2011 Specialty Pharmaceuticals: Facts, Figures and Trends,” updating a year-earlier edition. Together, the two present an overview of the distribution industry for pharmaceuticals.

The Center has a specific agenda for the Role of Distributors report—to compare the cost of current wholesale-distribution practices to that of direct distribution by manufacturers. Direct distribution is practiced in a number of limited cases, and by a few companies, but generally is fading as a method of moving products to market. One general conclusion is that 87% of all prescription drug sales revenue was handled by distributors in 2010, up from 82% in 2007. Booz draws a new distinction between “specialty” and “traditional” distributors for specialty products. The former has a customer base of physician practices and clinics, independent specialty pharmacies and home healthcare; the latter includes hospitals, retail and specialty pharmacies and home healthcare providers. Of the $59 billion in specialty pharmaceuticals distributed in 2010, $33 billion was handled by traditional distributors, while $26 billion was handled by specialty distributors.

The waterfall chart (Fig. 1) is the “base case” of the cost of distribution and supporting services for all pharmaceuticals—essentially, how the industry operates today. Booz calculates that the current system costs $13.8 billion annually (2011 numbers), representing 5.7% of manufacturer sales through distributors, to deliver drugs daily to retail and hospital outlets. “Ship to” locations number 197,000 currently. In the 2007 study, this cost was estimated at $13.4 billion—but represented 6.5% of sales revenue. The "cost to serve,” according to Booz, has thus dropped by 0.8 percentage points, “due to improvements in efficiency driven by investments in technology and operational excellence practices.”

Booz then calculates two alternatives to the base case: the “direct daily” case; and the “direct weekly” case, which would be overseen by the top 15 manufacturers themselves, keeping the same 99% service level claimed for the base case. A direct daily scenario would cost $55.4 billion annually; reduced to a weekly delivery schedule, the cost is $19.2 billion. The essential difference of these scenarios from the base case is that manufacturers would mostly lack the capability to consolidate shipments going to individual locations. Also, manufacturers outside the top 15 would use 3PLs for their shipping and handling needs; the cost of these services is included in the direct daily and direct weekly cases. Booz also says that the order-processing costs would be higher, by $1.5 billion annually, to manage credit approval, electronic transaction processing and reconciliation.

Booz also highlights three evolving regulatory burdens specific to drug distribution: Risk Evaluation and Mitigation Strategies (REMS), which occasionally involve the direct participation of distributors as well as pharmacies; suspicious-order monitoring systems, which are a responsibility of distributors handling DEA-regulated controlled substances; and e-pedigree rules, which involve serial-number identification of pharmaceutical packages and the IT resources to track them through supply chains.

“Despite many significant industry changes that have developed since the last Role of Distributors study, the nation’s primary healthcare distributors continue to improve operations, invest in technology and create efficiencies that enhance their value in the US healthcare system,” said HDMA President and CEO John Gray.

Specialty trends

The Specialty Pharmaceuticals report is based on a survey of distributors and manufacturers conducted by the Center during early 2011, with data based on 2010. There are 40,000 ship-to points; of these independent physician offices constitute 64%, hospitals 10%, and a variety of other locations including specialty pharmacies, other distributors and patients directly. Fig. 2 shows the flows of these products through the existing distribution channels. Oncology products represent 46% of the therapy types followed by supportive care (blood modifiers, 14%) and anti-inflammatories (13%); all others were less than 10% each.

Group purchasing organizations (GPOs) handle 60% of sales (as opposed to the physical delivery). This is further broken down as 32% of specialty sales are handled by hospital GPOs; 23% by physician-office GPOs; and 5% by retail GPOs.

One of the hallmarks of a specialty pharmaceutical is that it requires special handling—dosage compounding in some cases, kits or other types of packaging and, most of all temperature-controlled storage and shipping, since many of the products are temperature-sensitive biologics. On average, 63% of product shipments require cold chain handling, according to distributor responses. Meanwhile, manufacturer responses indicate that 56% of them require in-transit monitoring of these shipments.

Fig. 3 shows the responses to the question, “Please identify the transportation carriers used by your company to deliver specialty pharmaceutical product to the marketplace (check all that apply), comparing 2010 and 2011 results. While some of this year-over-year data might represent a market trend, it is also affected by the changed mix of respondents to the survey (this year’s survey did not include distributors with less than $1-billion revenue).

The Specialty Pharmaceuticals report was supported by CuraScript Specialty Distribution (an Express Scripts Company); Johnson & Johnson Health Care Systems, Inc.; McKesson Specialty Health; and SpecialtyFirst. Both reports are available for purchase at the HDMA Center website (www.hcsupplychainresearch.org); an online webinar of the Booz study results can also be accessed here. PC