Independent Pharmacy Cooperative Sues McKesson

Independent Pharmacy Cooperative, a large group purchasing organization (GPO) for independent pharmacies, recently filed a lawsuit against McKesson (NYSE:MCK), its prime vendor wholesaler. According to this Courthouse News Service article, IPC “claims McKesson Corp. is striking side deals to steal its members, and using a punitive, $100 million early termination penalty to keep the group tied to McKesson.”

IPC member pharmacies collectively make up one of McKesson’s largest customers. This Wall Street Journal article attributed last Thursday's drop in McKesson’s stock price in part to “investors worried about the potential loss of business from a key customer that sued the pharmaceutical supplier for breach of contract.” However, McKesson's stock price bounced back by Friday.

I have no opinion on the merits of the case because the facts are not known. However, I want to share my general perspective on pharmacy buying groups because some readers may not be aware of their role in the supply chain for independent pharmacies. The excerpt below comes from The 2010-11 Economic Report on Pharmaceutical Wholesalers.

Wholesaler Relationships with Pharmacy Buying Groups

More than 80% of independent pharmacies participate in a pharmacy buying group—an organization that leverages the purchasing power of a group of pharmacies to obtain discounts and rebates from preferred suppliers of drugs and other products.

Pharmacy buying groups typically establish a relationship with one or more “preferred” wholesaler suppliers. The table below lists six large pharmacy buying groups and the primary or preferred wholesaler relationship.

The members of a buying group agree to focus their purchases with the group’s preferred wholesaler. In turn, the wholesaler agrees to provide a discount on consolidated purchases by the buying group’s members. The wholesaler also tracks purchases made under the buying group contract for the purposes of computing rebates.

These discounts are reflected either as a reduced product acquisition cost for a pharmacy or as an annual or quarterly rebate payment based on a pharmacy’s aggregate purchases of qualifying products. A portion of the total discounts/rebates is used to fund the operations of the buying group.

The functions of a pharmacy buying group are distinct from those of a Pharmacy Services Administrative Organization (PSAO). A PSAO focuses on a pharmacy’s revenues from third-party reimbursement, while a buying group emphasizes the cost savings from collective purchasing power. Some large independent PSAOs also offer buying group services. Examples include United Drugs (part of American Associated Pharmacies) and EPIC Pharmacy Network.