Tuesday, January 20, 2009

Why the UPS-Merck Deal Won’t Hurt Wholesalers

Merck recently announced a new outsourcing deal in which UPS will be taking over Merck’s U.S. distribution operations. See UPS to Manage Most of Merck's United States Distribution.

Will this disrupt the U.S. distribution channel and impact drug wholesalers?

Nope.

As I see it, Merck has made a pretty a straightforward outsourcing deal. Merck will use UPS’ supply chain solutions group to run its pick/pack/ship warehouse operations and outbound distribution. UPS will eventually convert the two Merck facilities in Reno and Atlanta to multi-client operations.

In the Wall Street Journal article about the deal (UPS Gets Merck Contract), I said: “Wholesalers will remain the preferred channel because of the pricing dynamics in the pharmaceutical industry.”

Why? As many of you may know, large pharmacy buyers purchase through drug wholesalers as a way to get additional discounts on brand drugs. Since UPS does not take title (ownership) to Merck products under this outsourcing arrangement, product flow in the supply chain won’t change.

Drug wholesalers have many things to worry about – but logistical outsourcing deals are not even on my top 10 list for them.

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4 comments:

  1. AnonymousJanuary 20, 2009

    Adam,

    This is the second major Pharma Mfg (Novartis outsourced Distribution to Exel 2008) who has gone this route. With that said, do you forsee the possibility of Exel or UPS getting into the Wholesale business if and when they get the volume to support such a move???

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  2. AnonymousJanuary 21, 2009

    Could you explain how large pharmacy buyers get additional discounts on brand drugs by purchasing through wholesalers?

    Thanks

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  3. Adam J. Fein, Ph.D.January 22, 2009

    Re: discounts

    Although its a bit dated, see pages 11-12 in my Sept. 2005 paper Preparing for the Future Retail Pharmacy Supply Chain.

    Adam

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  4. AnonymousJanuary 22, 2009

    Adam,

    Shocking as it may seem, but would you believe that 1 of the big 3 PBM's also contracts out their "distribution" to a Fedex type co.

    We're not talking distribution of mail order drugs, but simply the reimbursement checks to pharmacies. Since this PBM refuses to offer electronic payments to its providers (...could it be due to the lessening of the cash float?), it contracted with such a distributor because up to 5% of all checks we're mishandled by the PBM before being mailed out.

    And actually, on 3 occasions within a 6 month period, our small chain rec'd providers' checks... totaling over $45,000.

    I guess that's pocket change for them.

    The real pity is that even 12 months later, EFT payments are still not an option with the big 3 PBM's, while most mid-sized offer it.

    Take care.

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