The 3PL vs. Wholesale battle heats up

Some big news yesterday should make drug makers and their wholesalers sit up and take notice.

OTN just announced that UPS Supply Chain Solutions will be handling distribution for their oncology network. This is a MAJOR win for UPS, which opened a new facility for this purpose last year.

I think the UPS agreement also signals some broader risks for wholesalers. As forward-buying profits and other forms of indirect compensation fade away, drug wholesalers will increasingly find themselves on a collision course with logistics companies and large retail chains for control of the pharmaceutical supply chain. Logistics companies offer manufacturers much more control versus a traditional wholesale channel.

This move highlights the further integration of oncology care and specialty products distribution. Wholesalers either have to own their customer or risk disintermediation. Take a look at the intertwined channel arrangements at the top five community oncology GPOs:

• ION, the largest community oncology GPO, has an exclusive distribution arrangement with Oncology Supply. Both organizations are part of AmerisourceBergen’s Specialty Group.
• Onmark switched its business from McKesson to CAH in April. Onmark is part of OTN, the oncology distribution business owned by Bristol until last year. Three weeks later, Onmark’s parent company OTN acquired 80% ownership in Cardinal Health’s oncology distribution business.
• US Oncology ended its distribution agreements with Cardinal last year in favor of self-distribution.
• Matrix Oncology, a smaller GPO, is supplied by CuraScript. Both companies are part of PBM Express Scripts.
• In April, McKesson acquired National Oncology Alliance, one of the smaller GPOs in the market.

Self-distribution, whether by a large chain pharmacy or an oncology GPO, provides greater control along with new opportunities for supply chain integration. (See my September 2005 white paper for a deeper analysis of retail chains.)

Two big unknowns for this channel:

1. Genentech has narrowed the distribution channel for its blockbuster drugs Avastin, Rituxan, and Herceptin. Will other biotech manufacturers follow?
2. What will payors do now that specialty drug costs are going up more than 3 times the rate of overall spend?