On June 15, I’ll be releasing an all-new report called The 2010-11 Economic Report on Pharmaceutical Wholesalers. I want to share a sneak peek at one intriguing analysis of wholesaler profitability.Although wholesaler revenues are linked most closely to sales of brand-name drugs, the majority of wholesaler profits come from generic drugs. As you can see in the chart below, I estimate that in 2009 generic drugs contributed $1.7 billion more in gross profits for the Big Three wholesalers than did brand drugs. The superior profits from generic drugs make it more challenging to align the economic interests of wholesalers and brand-name manufacturers.
On a related note, I’ll be attending HDMA’s Business & Leadership Conference in Orlando on Monday and Tuesday. Drop me a line if you’d like to meet in person and chat about what's going on. If you prefer, just introduce yourself during the conference and share your kudos (or complaints?) about Drug Channels.
Below is one of the 31 exhibits from my forthcoming report. Generics represent about 9% of revenues but 56% of gross profits. Note that these figures represent an industry average model. Any individual wholesaler's performance will vary based on sales mix, customer mix, and other factors. To facilitate comparisons, the data are on a calendar-year basis even though each of the three large wholesalers reports financial results on different fiscal-year schedules.
What’s going here? Well, generic drugs are more profitable for wholesalers because of the channel’s enhanced bargaining position with generic manufacturers compared to manufacturers of brand-name drugs. Generic-drug makers must offer significant price concessions to win supply contracts with large wholesalers.The chart above reflects a customer mix issue, too. A wholesaler's generic drug profits come from a sub-set of the market, whereas brand profits come from sales to the whole market.
- Pharmaceutical wholesalers are the primary channel for generic drugs sold to smaller customers—independents, supermarkets, regional chain pharmacies, healthcare providers, and mass merchants without self-warehousing capabilities.
- In contrast, the largest chain and mail-order pharmacies—including CVS Caremark, Walgreens, Medco Health Solutions, Rite-Aid, Wal-Mart, and Express Scripts—use their negotiating power and in-house warehousing capabilities to bypass wholesale intermediaries and buy directly from generic manufacturers. However, the largest pharmacy customers still purchase brand-name drugs via wholesalers—a little-understood state of affairs that I explain in the new report.
I’ll tell you more when the report in launched on June 15. Stay tuned!
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GO FLYERS!!!
