Meanwhile in Europe...

The US wholesaler market has been fairly quiet with the exception of regulatory/legal battles over pedigree.

Meanwhile, the European wholesaler market is now undergoing the massive structural changes that I predicted in September. Here's a quick update on three key developments.

LBO Time
The battle for Boots continues, with a rival bidder now challenging KKR’s initial bid. (For background, see Wholesaler LBO Time.) The Sunday Times has a fascinating peek inside the deal called Wrestling over Boots. It also includes a brief history of both Boots and Alliance Unichem.

The Times' business editor is skeptical about the prices being offered (me, too) while noting that Stefano Pessina "...has long-term ambitions to create a global pharmaceutical wholesaler." Hmm....

Consolidation
Meanwhile, Celesio apparently wants to acquire the drug distribution business of Alliance Boots from the winning private equity firm. (See Germans to pounce if Boots is broken up.) Guy Hands, the rival bidder to KKR, is rumored to be planning a break-up of the wholesale and retail units if he wins.

If a break-up were to occur (a BIG if, IMHO), then a combined Alliance/Celesio wholesaler would have more than 60% of wholesaler market share in key countries such as France and the UK. FYI, Europe represents 30% of global pharmaceutical sales versus 48% in the U.S. according to IMS.

AZ's New Distribution Strategy
To add to the excitement, AstraZeneca announced that it is following Pfizer’s model and will limit product distribution to only two wholesalers in the UK. AZ chose the drug distribution arms of Alliance Boots and Celesio, which is ironic given the given the rumors surrounding the Boots deal. Needless to say, the other UK wholesalers are not too happy. (See Wholesaler fury at AstraZeneca drug distribution deal.)

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While I will refrain from specifics, let me suggest that future changes in global wholesaler market structure should not come as a surprise to readers of this blog . . .

P.S. Last Friday's post (RFID Un-Hype) generated record traffic for Drug Channels. Check out the thoughtful comments posted by Kevin Leininger, CEO of Integrichain, and Nick Basta, editor of Pharmaceutical Commerce.

RFID Un-Hype

More bad news for RFID, while e-pedigree looks more like the real deal

Health Industry Insights (HII) just released a very eye-opening survey of RFID adoption of pharmaceutical manufacturers. Eric Newmark, the report’s author, was kind enough to share the full report with me. Unless you are a customer of HII, I’m afraid you will have to pay to read it. Order it here.

Based on a survey of 143 "industry leaders" ("95% manufacturers," Eric tells me), the study found:

• Only one in five (16%) pharmaceutical companies are currently evaluating the benefits of RFID technology
• Only (15%) companies are adopting RFID in some capacity

So, what’s the hold-up? Three reasons averaged more than 7 on a 1-10 scale:

1. Tag cost/Lack of demonstrated ROI
2. Lack of frequency standard
3. Security/privacy concerns

The report indicates average life science company spend on RFID technology is a surprisingly low $25,000! Perhaps the average reflects a few big spenders combined with the majority who are just evaluating RFID.

Reality Bites

To date, the benefits of RFID appear to be greatest when used within a single company on specific projects. For example, independent research by professors at the University of Arkansas found that RFID reduced stock outs in Wal-Mart stores by 30% by improving shelf replenishment from the backroom to store shelves. (I discuss RFID in wholesale distribution in my new Facing the Forces of Change study.)

I encourage you to read The RFID Revolution Starts... Soon?, a nice overview article from Industry Week with a sober look at the real-world benefits from RFID. Key quotes:

• “RFID remains a niche technology, whose broader deployment has been stymied by the usual suspects: high equipment costs, low return-on-investment and a workforce skills shortage.”
• “RFID remains a finicky technology that can behave differently based on any number of factors, such as the orientation of the RFID tag on the box, carton or pallet; the type of products being tagged; and the environment in which the tagged product is stored.”
• “The bottom line for RFID is that it's all about process change and the business case. In the end, business owners, and not the IT department, will be the decision-makers when it comes to adopting RFID.”

IMHO, technology vendors successfully bamboozled the FDA in 2004 into endorsing (but not mandating) RFID as the magic bullet against counterfeits. The FDA’s June 2006 follow-up report contained this classic bit of nonsense: “The technology vendors uniformly told us that their RFID and e-pedigree solutions and technologies are ready to go, but manufacturers, wholesalers, and retailers are slow to implement them.”

Vendors really said that? How ... shocking. Check out An Odd RFID-Importation Connection to read how technology vendors will now be delivering the hype unfiltered to Senators now looking to push importation legislation.

Ready for Pedigree

Given the FDA’s statement above, I want to contrast RFID with e-pedigree, which is a functional technology/process that is ready to go.

California has set the pace for the pharmaceutical industry adoption by explicitly stating that pedigree must be "...in electronic form…" (See for yourself by perusing the fascinating Business and Professions Code – page down to section 4034.) Barring any unexpected delays, California’s pedigree law will take effect in 2009.

Note that RFID will not be required or mandatory to comply with CA code. The only requirement is electronic track-and-trace using a “standardized nonproprietary data format and architecture.”

At the Federal level, some people still think RFID and e-pedigree are synonymous, but that’s simply not true. The Prescription Drug Marketing Act is completely technology agnostic. The FDA was unambiguous on this point Last November: “Both paper and electronic documents and signatures may be used to meet the pedigree requirement of the Act, provided that the requirements of 21 CFR 203.60 are met.” (Neither the FDA nor CA have addressed retail pharmacists' desire or willingness to authenticate inbound product at the point of dispensation -- our demand-side problem.)

Like Norma Desmond, RFID may be ready for its close-up, but e-pedigree will turn out to be the real deal for technology-enhanced supply chain security.

P.S. See me at the TRAX Summit to hear more. You may also get to see RFID vendors throw tomatoes during my keynote...

Damned if they do…

A headline in The Independent reads: Drug giants accused of ignoring fake medicines that kill millions based on a new documentary called Africa: The Malaria Parasites. From the documentary’s web site:

“Given the dangers that fake drugs pose, questions are being asked about why the problem wasn’t tackled earlier. ‘The drugs companies wanted the problem kept hidden so that it doesn’t affect their legitimate business’, alleges Dr Akunyili.”

Huh?? Don’t drug companies lose sales and brand reputation because of counterfeits?!?

Although the filmmakers apparently don’t want to be bothered with the facts, I must point out the following inconvenient truths:

• The industry tells Congress about the dangers of counterfeits entering the legitimate supply chain due to illegal diversion. Senator Dorgan accuses the industry of simply trying to maintain pricing power and blithely disregards the FDA’s factual presentation about safety concerns. (See Import Battle Heats Up.)
• The FDA tries to lift the stay on implementation of the pedigree requirements of the PDMA. Wholesalers operating in the secondary market, who I believe should reasonably expect a higher level of scrutiny, successfully get a court injunction to block the FDA. (See The Impact of the PDMA Injunction.)
• Pfizer overhauls its UK distribution system following repeated incidents of counterfeit drugs. The company is promptly sued by wholesalers and subject to an investigation by UK’s Office of Fair Trading. (See Pfizer wins again.)
• PhRMA operates BuySafeDrugs.info to educate consumers about the dangers of counterfeit drugs. PhRMA is also a North American partner in Safemedicines.org. No cover-up here.
• The introduction of Inventory Management Agreements (IMAs) and Fee-for-Service agreements now limit product leakage into the grey market, closing a significant entry point for counterfeiters. Drug makers literally pay for greater product security by purchasing data from wholesalers to monitor orders, inventories, and product movement in real-time. Yet the critics can’t bring themselves to give credit for the industry’s progress with supply chain security.

I could go on, but you get the idea.

Drug makers are damned if they do, damned if they don’t.

Tony Soprano and Drug Diversion

A court injunction against an online Canadian drug seller highlights a fundamental problem with importation – and also lets me give you a peek into the interconnected world of pharma industry blogs.

Walk with me through the blogosphere

The New Jersey State Attorney General just shut down www.Medications4less.com, a reseller of Canadian drugs. See State Sues Mercer County Business Offering Canadian Prescription Drugs Over the Internet.

I picked up the story from Ed Silverman’s Pharmalot blog post. Ed apparently has a T-1 connection plugged into his arm because he published an amazing 33 posts yesterday, putting guys like me to shame. (Ed provides a real service to the industry by posting real news throughout the day, every day.)

I posted a comment on Ed’s blog with a link to this glowing newspaper profile about Medications4less. Very amusing in hindsight!

The mystery blogger at Pharm-Aid picked up my comment in New Jersey Vetoes Drug Importer. (BTW, I like many posts on Pharma-Aid but do not provide a link on my Industry Blogs list because the blogger remains anonymous.) Mr. Mystery pointed to a post by John Mack on Pharma Marketing Blog in which John contends that the risk of counterfeits via importation is nothing more than a “negative scare tactic.”

My point, and I do have one…

The problem with importation is not that all drugs from Canada are counterfeit. Instead, the problem is that importation is diversion – selling products intended for one market into another market. In the case of importation, diversion is an opportunity to arbitrage price differences between products sold at different prices in different countries.

Unfortunately, while diverted or resold products are not necessarily counterfeits, all counterfeits enter via diversion in the secondary market. Let me be clear: Drug diversion is the entry point for every case investigated by the FDA involving counterfeit drugs going into legitimate pharmacies. Even Tony Soprano has finally figured out that diversion of adulterated drugs could be a sweet deal. (Thanks again, Ed!)

This brings me back to Medications4less. I wrote about the risks of internet pharmacies in February after getting a troubling email from a college student. (See A Sad Tale.)

Unfortunately, the proposed importation bill (S.242) before the U.S. Senate would enable copycat websites by legalizing diversion from countries with very low scores on the Corruption Perceptions Index. You heard me right – S.242 will make importation legal from Bulgaria (#57) and Romania (#84)! (See my recent posts for some real-world examples of the dangers: Importation Illusions; Greece is the Word; Importing Chinese Counterfeits .)

Bottom line: (a) Don't buy Fosamax from Tony Soprano, and (b) Read pharma blogs.

Trends for Wholesale Distribution

Want to know about the big strategic and economic issues facing U.S. wholesalers? Then check out my new report Facing the Forces of Change®: Lead the Way in the Supply Chain. Major trends covered include private labels, demand-driven channels, and fee-for-service, price deflation, and many other topics.

The National Association of Wholesaler-Distributors (NAW) commissioned me to write this trend report. NAW encompasses more than 80 industry-specific associations, including the Healthcare Distribution Management Association (HDMA) and the Health Industry Distributors Association (HIDA).

The report took me a year to write and includes survey data from 1,300 wholesaler-distributors and manufacturers. It covers B2B distribution trends in almost every sector of the economy (not just healthcare), so there is stuff about construction, industrial, MRO, and retailing, to name just a few. Nonetheless, I believe that readers of Drug Channels will benefit from benchmarking the healthcare supply chain against other industries.

Please note that my work with healthcare and pharmaceutical manufacturers precludes me from any business consulting assignments with wholesalers of healthcare or pharmaceutical products.

Thanks for reading this small bit of self-promotion. We now return to our regularly scheduled programming…

Will US logistics deals be illegal?

Yesterday, the UK’s Office of Fair Trading (OFT) announced its intention to study the pharmaceutical wholesaling market in light of Pfizer’s new distribution arrangement with Alliance Unichem. (See OFT's statement on Distribution of medicines in the UK.)

However, you probably don't realize that a similar arrangement in the U.S. between a manufacturer and a wholesaler would probably be illegal if the proposed importation bill (S.242) before the U.S. Senate becomes law. Trade relations and commercial relations executives should pay attention because importation legislation explicitly limits the way a manufacturer can structure its U.S. distribution agreements. (CYA Notice: I'm not a lawyer. Read the disclaimer at the bottom of this page!)

I have been following international drug channels for some time, most recently in A New Era for Distribution. OFT's statement explaining the rationale behind the study states:

“The pharmaceutical wholesaling sector is undergoing significant change, the competition implications of which are unclear. As of 5 March 2007 Unichem Limited has become the sole logistics service provider to Pfizer Limited. This represents a fundamental change to the workings of this sector and has prompted widespread concern among pharmacists, dispensing doctors and competing wholesalers. Other pharmaceutical manufacturers are also considering similar changes to their distribution arrangements.”

In my opinion, Pfizer has at least two legitimate objectives for their deal with Unichem:

1. Lower the risk of counterfeit products entering the supply chain
2. Recapture lost revenue from parallel importing

Given these reasons, I believe that the proposed importation legislation would make it illegal for Pfizer to set up a sole logistics provider relationship in the U.S.

In particular, the actions listed as “Unfair and Discriminatory Acts and Practices” in S.242 are clearly modeled upon manufacturers' strategies for managing parallel trade in the EU. (See the section beginning on line 13 of page 74 of S.242 Pharmaceutical Market Access and Drug Safety Act of 2007.) IOW, manufacturers will also have little choice about whether to do business with known US importers or non-US exporters.

Keep in mind that the importation bill is co-sponsored by all three Presidential candidates from the Senate – McCain, Clinton, and Obama. Iraq and the Medicare “direct negotiations” movement will keep the Senate busy this term, but look for action on importation in late 2007 and 2008.