The pharmaceutical supply chain is in danger

News & Events 2008-07-11

Inhabitants of the developed countries of the world are lucky. They have access to all kinds of medicine and medical support. Most times a specific medicine is available in a safe, reliable and efficient manner at any spot in their country within hours of being ordered. However, the accessibility of these medicines could now be in danger. Recent market influences and continuous pressure on healthcare costs could have an unprecedented effect on some of the most basic human requirements.

Pharmaceutical wholesalers have traditionally reacted well to the pressure of the industry by improving their logistics and automation capabilities and by optimized purchasing and delivery. But they are now being squeezed into a corner and the whole pharmaceutical supply chain is in real peril.

The main driving forces behind this danger are the distribution of medicines directly from the manufacturers to the pharmacy, GP or hospital, creating a single channel distribution in some countries. Value in the industry has been reduced as a result of the strong growth of low cost generic products, as well as price and margin control by governments. Healthcare insurers have also influenced costs, as well as extended competition between pharmaceutical wholesalers, the parallel trade of drugs and distribution of medicines by retailers and supermarket food chains.

Prices for the same products vary greatly from country to country. This is due to the national income, the costs of handling, Government regulation or the availability and usage of generic products. Shortline wholesalers are benefiting from these price differences, which may be up to 30 percent for some medicines. They purchase the products in a low price country and, after gaining government approval, repacking and re-labeling that medicine, sell it in a high price country, sharing the margin with the distribution channel. In some countries Governments support this trade because of the lower cost of medicine and because it is still the safe original product.

Pharmaceutical manufacturers have been fighting for many years against this parallel trade, but without any real success. More recently it has led to more distribution of products directly from the manufacturer to the pharmacies and hospitals, with the argument that this secures the safe distribution of medicines and gives them full control of the pharmaceutical supply chain.

In Europe this has led to dual pricing in Spain, and the latest development has been in the UK, where Pfizer decided to control the distribution by using only one distributor to distribute their medicines. Other wholesalers had no more access to the products and could only deliver the remaining medicines. Following the Pfizer example other major pharmaceutical  manufacturers decided to use a limited number of pharmaceutical  distributors to deliver their products.

The medicines on the direct delivery list are usually those with high prices and high margins. That means that the margins for the remaining products delivered by the other pharmaceutical wholesalers have shrunk drastically. The result is that more and more pharmaceutical distributors go out of business or buy the same products by using the parallel trade channel.

At the same time many licensed medicines reached the end of their protected shelf life and other pharmaceutical manufacturers, such as Teva and Sandoz were legally allowed to “copy” the medicines and produce and deliver these generic products for a tiny part of the original product price. This reduces the income of the pharmaceutical manufacturers even further and therefore the margin for the whole pharmaceutical supply chain.

Today the margin that pharmaceutical wholesalers can gain from some generics does not even cover the costs. Pharmaceutical  wholesalers, e.g. in the Netherlands, have informed pharmacies and hospitals that they might be forced to withdraw distribution of those products if no other way of covering the costs can be found.

In some countries healthcare insurers have started recently to sign volume agreements with pharmaceutical manufacturers, mainly for generics, to reduce the price of the products. Patients will then only be reimbursed for medicines from that brand.

In countries where pharmacies are free to decide from which pharmaceutical wholesalers to purchase their medicines, the price war has increased. Even if not permitted by Governments there were always ways to reduce the costs for pharmacies or hospitals. In some cases the net margins of pharmaceutical  wholesalers have become as low as 0.1 percent of the revenue.

This competition has put such pressure on Pharmaceutical wholesalers, they need to agree a way to change pricing. One idea is to start with a ‘fee for service’ model, where a fixed percentage is put on top of the ex factory price as a fee for the service given to pharmacies or hospitals. This fee may differ depending on the services requested. For example, an order received by phone will be more costly than an order received electronically. This model has already been introduced successfully in Switzerland.

Even though the net margin of pharmacies may still be between 5 percent and 12 percent of the revenue, they have started to change their service model and are now offering added value services, such as measuring blood pressure, making blood tests and selling medical equipments.

The pharmaceutical market remains attractive when looking on the overall margin from manufacturer to patient. This is why new players are still trying to enter the market, such as drugstore chains and food chains. As far as they are permitted, they want to start selling OTC (over the counter) products and prescribed products by mail order, using the shops as pick-up points. As those chains already have high performance distribution logistics, they have calculated that adapting their logistics processes to deliver medicines can improve their business margins.

A good logistics software solution can help the pharmaceutical supply chain participants to reduce their costs but cannot cover the major problems described in this article. However, IBS Pharma software can help to reduce costs in the area of purchase planning and purchasing, reduce the capital bound in stocks, improve the goods reception, picking and delivery process and optimize electronic communication with all business partners.

It is down to the EU and individual Governments to find a solution for who should pay for the safe, reliable and efficient distribution of medicines to all European citizens. Otherwise we could face shortages in availability of medicines, especially important vaccines and low costs generics.

By Andre Grigjanis, Vice President Pharmaceutical, IBS

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