Demystifying the Pharmaceutical Supply ChainJune 27, 2017
Healthcare Growth Partners (HGP) is demystifying the operations of the complex maze known as the pharmaceutical supply chain. In addition to the unnecessary complexity of the key industry players’ roles, their confounding dealings and the lack of price transparency make the pharmaceutical supply chain one of the most difficult to comprehend in healthcare. In order to understand the entire process of the supply chain, let’s take a look at the four major players in the pharmaceutical supply chain who have varied, sometimes multiple, functions.
1. Pharmaceutical Manufacturers are the big companies that are involved in developing drugs. Within the manufacturing industry, there are two primary business models:
- Branded Drug Manufacturers: Companies like Pfizer, Roche, Novartis, and Amgen invest in R&D of new drugs. Although R&D of new drugs targeting human diseases is a lengthy and expensive process and requires FDA approval, a successful drug can earn billions under patent protection.
- Generic Drug Manufacturers: Companies like Roxane and Barr do not develop new drugs, but manufacture drugs that are no longer under patent protection.
From manufacturers, drugs go to the next upstream player, wholesale distributors. Although wholesale distributors are the largest purchasers of drugs, manufacturers can also distribute drugs directly through retail pharmacies and non-retail pharmacies.
2. Wholesale Distributors purchase drugs from manufacturers. They are involved in warehousing drugs, managing inventory, and distributing drugs among customers through various channels. Their major customers are retail pharmacies, including chain pharmacies, independent pharmacies, and mail-order pharmacies, as well as non-retail pharmacies, including hospital chains, community clinics, and diagnostic labs.
Wholesale distribution has consolidated from 50 to three major distributors in the last two decades. Currently these top three distributors, AmerisourceBergen, Cardinal Health, and McKesson, account for 85% of the wholesale market, or about $380 billion. In response to the evolving nature of the pharmaceutical market, wholesale distributors now provide additional services other than the traditional distribution explained above. These specialized services include drug packaging, drug repackaging, electronic ordering services, drug buy-back programs, and reverse logistics.
3. Pharmacy Benefits Managers (PBMs) generally do not interact with end customers, but they play a major role in the pharmaceutical supply chain through their involvement with other key players. Approximately two-thirds of the drugs prescribed in the U.S. are processed by PBMs. They are involved in resolving economic channel conflict, reducing drug costs, and integrating medical-pharmacy benefits, and thus serve as the vital link between insurance companies, manufacturers, distributors, and customers. Other than basic services like claims processing and recordkeeping, PBMs also account for disease management and drug utilization services for customers. CVS Caremark, Optum, and Express Scripts, the top three PBMs, currently hold 73% market share. However, a recent strategic alliance between Walgreens and Prime Therapeutics could have a strong impact on the market-share equation in the coming future.
4. Pharmacies are next in the pharmaceutical supply chain and serve as the interface between the supply chain and customers. Most people are only familiar with this part of the supply chain: where we deposit our prescriptions from doctors and pick up our medicine. Pharmacies are responsible for safe storage and distribution of drugs to the customers. In 2015, U.S. pharmaceutical sales reached $430 billion and are expected to grow at a substantial rate in coming years.
Other than using retail pharmacy chains and independent pharmacies, over the last decade customers have become inclined toward mail-order pharmacies. Sales by mail-order pharmacies have shown a year-over-year growth rate of 18%. Mail-order pharmacies now account for $103 billion in sales in recent years. Retail chain pharmacies still record the bulk of sales, with $167 billion, while independent pharmacies represent $48 billion in sales.
The drug distribution and payment model is complex and highlights the unique interests of the handful of stakeholders who dominate this segment of the healthcare delivery system. In 2015, prescription drugs accounted for 10 percent of total healthcare spend, increasing at an annual rate of 9.0% (down from 12.4% in 2014). Spending on prescription drugs is the fastest growing healthcare segment, a fact that underscores the importance of cost containment and transparency, but most importantly, the need to align stakeholder interests with those who are underwriting the healthcare spend.
~Sayantan Mitra - Data Analyst, Healthcare Growth Partners