- Growing share of 'Big Three' gets federal attention (Main Story)
Big drug wholesalers may get bigger, with FDA help
Wholesalers' trade group loses half its members
Spitzer pact could expand Big Three's market clout
A plethora of purchases in wholesalers' history
Conflict in the channel
The articles accurately portray the channel conflict that I predicted in October. Nevertheless, Russ paints a surprisingly favorable portrait of the secondary wholesale market, based in part on ample quotes from familiar companies such as RxUSA and QK Healthcare. (‘nuff said.)
Given the checkered history of secondary wholesalers (especially in Florida), honest secondary wholesalers should expect additional scrutiny and be willing to clearly and unequivocally demonstrate how they differ from the unsavory wholesalers that traffic in potentially counterfeit product. Smaller wholesalers seem strangely bothered by this idea.
I was quite puzzled by many other statements, too. For example, the articles imply that the FDA wants to help the Big Three at the expense of smaller wholesalers, although I find this notion a bit far-fetched based on my own research. Sentences such as “the average price of a prescription drug has nearly tripled since 1990, as the number of major wholesalers has dropped” imply a cause-and-effect relationship at odds with the historical evidence.
Three Clarifications
I want to clarify three factual points from the main story.
1. “[D]rugmakers prefer to deal with the Big Three.” More accurately, manufacturers prefer to deal with a relatively small number of customers. Contrary to popular belief, most pharma companies have many authorized distributors beyond the big 3. The largest eight manufacturers had an average of 79 authorized distributors prior to the PDMA injunction on December 1. Like manufacturers in other industries, drug makers can and do legitimately limit the number of intermediaries that are authorized to sell their products. (See The Impact of the PDMA Injunction for more.)
2. “Anecdotal evidence suggests these wholesalers could add as much as 25% to the price of drugs.” False. The big 3 added $6.4 billion (2.3%) to 2006’s total prescription drug spending of $275 billion. This figure represents the total wholesaler gross profit (mark-up), computed using wholesaler gross margins for drug distribution (about 3%) on $213 billion in total big 3 drug revenues.
3. “Recent efforts to quash the reimportation of drugs probably have strengthened the position of the Big Three.” Not necessarily. Widespread importation would give secondary wholesalers access to products and, under S.242, the legitimacy of FDA registration. Pharmacy customers will likely embrace importers as a legitimate source of supply. Don’t forget that wholesalers are the prime beneficiaries of parallel trade in Europe. The big 3 will then face a tough strategic choice: If they remain loyal to suppliers and refuse to import, then they will be at a competitive disadvantage and will lose market share. I note that the HDMA officially opposes importation.
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Regular readers of my blog know that I often put forth strong opinions on the business practices and strategies of the big 3 wholesalers. However, I must refrain from posting any further public comments on these stories.
I’ll be at the HDMA DMC meeting in Boston starting on June 11. If you see me there, I’d be happy to share some further thoughts.
