Regardless of Walgreen’s stated distribution strategy goals, shifting responsibility for controversial product shipments sure makes it looks like wholesalers still provide value in the channel.
Read on for more details and possible implications for the Walgreens-Cardinal contract renewal.
Two important disclosure reminders:
- I only discuss publicly available information on Drug Channels.
- Pembroke’s consulting clients are pharmaceutical manufacturers. We do not provide business consulting to wholesalers or pharmacies.
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In this morning’s research note, Mr. Gallucci writes:
“We recently learned that WAG has stopped shipping controlled substances from its Perrysburg, OH distribution center and transitioned responsibility for related business at least in part to CAH. While it is unclear why WAG made this decision (could be DEA-related, could be a strategic decision), it does suggest that CAH/independent distribution models offer a certain degree of value — and that such value is recognized by WAG.”My early morning Googling turned up this related discussion thread: Perrysburg CII shut down?
I presume that the Drug Enforcement Administration (DEA) was somehow involved in this move, although I wonder if DEA agents are chuckling at the deep irony here. As you may recall, Walgreen’s Jupiter, FL, distribution center was hit with a suspension order for shipments to six of its own pharmacies. Meanwhile, Cardinal has had a few conversations with the DEA, too.
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As background, Cardinal’s contract with CVS Caremark expires in June 2013, and its contract with Walgreens expires in August 2013. These two retail chains account for about half of Cardinal’s total drug distribution revenues. Cardinal Health has the greatest customer concentration among the Big Three drug wholesalers. See Cardinal Health's Big Customers: Mo Money, Mo Problems, which remains the only Drug Channels article with a rap music theme.
In August 2012, Walgreen’s issued a Request for Proposal (RFP) for pharmaceutical distribution services, as disclosed on page 4 of Cardinal’s 2012 10-K filing.
Oddly, seven months later, Walgreens has somehow still not announced the conclusion of this RFP.
A Cleveland Research report publicly broke the story that Walgreens is looking to bypass wholesalers entirely and in-source its distribution activities. Due to my consulting work with many pharmaceutical manufacturers, I can’t say any more on this topic. (Sorry, Drug Channels readers!)
However, I note Mr. Gallucci’s comments from his 3/8/13 research report:
“WAG’s acquisition of Alliance added an element of uncertainty for some regarding CAH’s potential to renew the business. While Alliance is a distributor, it has no presence in the U.S. Although the company can certainly lend operating experience to WAG’s existing operations, we: 1) do not believe WAG could replicate CAH’s services at a materially lower cost (if at all); and 2) believe that WAG should have higher priorities in the relative near term on the heels of its acquisition versus working to take its drug distribution needs (largely branded) in-house.”When all is said and done, I wonder if more will have been said than done.
WOW! Does this mean that Walgreens is backing off direct buying?
ReplyDeleteHere is a statement that I received from Walgreens:
ReplyDelete"We are voluntarily discontinuing the distribution of controlled substances from our Perrysburg, Ohio, distribution center. The majority of these drugs are no longer handled at Perrysburg but are instead shipped from other distribution centers and wholesalers. We expect to transition the remaining controlled substances within the next several weeks. This is similar to action we took at our Jupiter, Fla., distribution center last year.
As we continue to work through the Drug Enforcement Administration’s (DEA’s) ongoing investigation, these steps ensure that our pharmacies have adequate supply, while balancing patient access to critical medication.
Both our Perrysburg and Jupiter distribution centers continue to serve the needs of our pharmacies for non-controlled prescription drugs, over-the-counter medications and general merchandise. The vast majority of prescription drugs are non-controlled substances and are not affected by this action."
I find it interesting that chain pharmacies such as Walgreens are allowed to contract with a wholesaler with the intent to ONLY purchase controlled substances and narcotics, something that an independent pharmacy could never expect.
ReplyDelete