During this period of volatility, the core business model of the Big Three public pharmaceutical distribution companies—Cardinal Health, Cencora, and McKesson—remains intact. Put simply: Buy low, sell high, collect early, and pay late.
But as I explain below, wholesalers continue to position themselves as essential intermediaries by expanding their industry position and strengthening their economic fundamentals.
Read on for five key pricing, pharmacy, provider, and manufacturer trends that are driving the U.S. drug wholesaling industry.
For even more, check out DCI's new 2024-25 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors, the fifteenth edition of our deep dive into wholesale distribution channels.Click here to download a free report overview (including key industry trends, the table of contents, and a list of exhibits)
INDUSTRY TRENDS FOR DRUG WHOLESALERS
Here are five significant industry trends that are impacting the drug wholesaling industry. Details and underlying data are available in DCI’s new industry report.
1) Wholesalers’ U.S. drug distribution revenues continue to expand, driven by utilization of anti-obesity medications and overall pharmaceutical demand.
DCI projects that drug distribution revenues for the Big Three wholesalers will reach $776 billion for 2024. The chart below, one of 178 in our new report, highlights the year-over-year changes in the largest companies’ aggregated quarterly U.S. drug distribution revenues.
[Click to Enlarge]
Anti-obesity glucagon-like peptide-1 (GLP-1) agonist drugs have become a significant factor behind this growth. For calendar year 2023, we estimate that GLP-1s contributed 42% of wholesalers’ total revenue growth. For the first half of 2024, GLP-1s contributed 29% of revenue growth. As the GLP-1 shortage winds down, wholesalers’ revenues should start to accelerate.
Note that the GLP-1 products contribute little to wholesalers’ profitability from pharmaceutical distribution. By contrast, wholesalers’ patient reimbursement hub businesses have been profiting from providing services that help patients overcome insurance coverage barriers from these products.
Note that the GLP-1 products contribute little to wholesalers’ profitability from pharmaceutical distribution. By contrast, wholesalers’ patient reimbursement hub businesses have been profiting from providing services that help patients overcome insurance coverage barriers from these products.
2) Brand-name manufacturers are adopting novel pricing strategies that are reducing wholesalers’ revenues and triggering changes in channel compensation models.
Wholesalers’ revenues and fees for brand-name drugs are tied directly to increases in wholesale acquisition cost (WAC) list prices. Many aspects of a wholesaler’s balance sheet and cash management are also tied to brand-name list prices. Changes in manufacturers’ pricing strategies are slowing or reducing wholesalers’ distribution revenues and altering these dynamics.
Over the past five years, wholesalers have adapted to a world of slower growth in brand-name drug list prices. In addition, manufacturers of such highly-rebated, brand-name drugs as insulins have reduced list prices, while biosimilars under the pharmacy benefit are increasingly launching with significantly lower list prices compared with their reference products.
Consequently, wholesalers have been evolving their compensation to account for the moderation in brand-name drug inflation and lower list prices. These tactics include negotiating higher buy-side fees and discounts to offset price reductions and lower-priced biosimilar versions of brand-name biological drugs. Wholesalers have also been adjusting sell-side discounts for such lower-profit brand-name products as the GLP-1s.
Over the past five years, wholesalers have adapted to a world of slower growth in brand-name drug list prices. In addition, manufacturers of such highly-rebated, brand-name drugs as insulins have reduced list prices, while biosimilars under the pharmacy benefit are increasingly launching with significantly lower list prices compared with their reference products.
Consequently, wholesalers have been evolving their compensation to account for the moderation in brand-name drug inflation and lower list prices. These tactics include negotiating higher buy-side fees and discounts to offset price reductions and lower-priced biosimilar versions of brand-name biological drugs. Wholesalers have also been adjusting sell-side discounts for such lower-profit brand-name products as the GLP-1s.
3) Wholesalers have strengthened their position in buy-and-bill channels for provider-administered drugs through vertical integration with their downstream customers and with services for the remaining independent practices.
Hospitals and physician practices continue to rely on specialty distributors and full-line wholesalers as their primary sources of supply for provider-administered drugs. However, the activities of both private equity firms and large, vertically integrated healthcare organizations are transforming the physician market.
There has been a shift in drug administration from community physician practices to hospital outpatient facilities, because hospital and health systems have been acquiring physician practices. This vertical integration has eroded specialty distributors’ business with community-based physician practices.
In recent years, private equity firms have displaced hospitals and health systems as the major acquirers of community practices. These transactions are further consolidating wholesalers’ physician customers, while also offering wholesalers new opportunities to directly own their downstream customers. Over the past two years, each of the Big Three wholesalers have acquired new ownership stakes in private equity-backed oncology practice management companies.
Amid this acquisition activity, wholesalers continue to invest significant sums to sustain the businesses of their physician practice customers. DCI’s latest report updates our market data on key wholesaler services, including practice management services, group purchasing organizations for physician practices, support of medically integrated dispensing solutions, and expanding pharmacy services administrative organizations (PSAOs) to physician practices.
There has been a shift in drug administration from community physician practices to hospital outpatient facilities, because hospital and health systems have been acquiring physician practices. This vertical integration has eroded specialty distributors’ business with community-based physician practices.
In recent years, private equity firms have displaced hospitals and health systems as the major acquirers of community practices. These transactions are further consolidating wholesalers’ physician customers, while also offering wholesalers new opportunities to directly own their downstream customers. Over the past two years, each of the Big Three wholesalers have acquired new ownership stakes in private equity-backed oncology practice management companies.
Amid this acquisition activity, wholesalers continue to invest significant sums to sustain the businesses of their physician practice customers. DCI’s latest report updates our market data on key wholesaler services, including practice management services, group purchasing organizations for physician practices, support of medically integrated dispensing solutions, and expanding pharmacy services administrative organizations (PSAOs) to physician practices.
4) Wholesalers’ revenues remain concentrated with a small number of larger pharmacy customers, creating significant revenue risks.
Shakeout and consolidation in the retail pharmacy industry has concentrated wholesalers’ customer base. Competitive pressure on retail pharmacies is further shrinking a core customer base for wholesalers.
Over the past year, there have also been notable developments in the relationships between the largest pharmacies and their wholesale suppliers. These include:
5) The emergence of direct-to-pharmacy models and direct-to-patient channels could challenge wholesalers’ roles, but not until these alternatives gain greater scale.
Over the past year, there have also been notable developments in the relationships between the largest pharmacies and their wholesale suppliers. These include:
- UnitedHealth Group’s Optum Rx business has shifted its primary wholesale relationship from Cardinal Health to McKesson.
- Publix has shifted its primary wholesale relationship from Cencora to Cardinal Health.
- Express Scripts now manages pharmacy benefits for about 20 million Centene beneficiaries. Express Scripts’ mail pharmacies are supplied by Cencora and Cigna’s own CuraScript SD business. CVS Caremark’s mail and specialty pharmacies, which are supplied by McKesson, had previously provided these services to Centene’s pharmacy benefit management business.
- Rite Aid has filed for Chapter 11 bankruptcy protection, completed its restructuring process, and begun operating as a private company. As part of its restructuring process, it has closed more than 1,100 stores and expects revenues to decline. Rite Aid has also negotiated a new supply agreement with McKesson and agreed to pay $300 million to McKesson to settle its outstanding liabilities.
- Elevance Health’s CarelonRx, which is supplied by Cardinal Health, has announced multiple initiatives and acquisitions that will expand its internal dispensing capabilities and reduce its dependence on CVS Health’s Caremark business, which is supplied by McKesson.
- Kroger, which is supplied by Cardinal Health, continues to pursue its merger with Albertsons, which is supplied by McKesson. However, the Federal Trade Commission (FTC) and two states have sued to block this merger. If the merger is finalized, then the combined company’s pharmaceutical purchases will likely be centralized with a single wholesaler.
- Walgreens has announced plans to close a significant (but unspecified) portion of its store locations over the next three years. The impact of these closures on Cencora is unclear. We expect that most of the volume from any closed stores would shift to other Walgreens locations. However, at least some prescriptions will migrate to other dispensing outlets that Cencora may or may not supply.
Over time, the largest wholesalers have continued to gain share of the overall pharmaceutical distribution. However, there are two novel developments that could challenge wholesalers’ channel roles:
- Manufacturers of specialty lite brand-name drugs are experimenting with direct distribution approaches that bypass wholesalers.
- Large manufacturers are experimenting with direct-to-patient (DTP) solutions that bypass certain aspects of the drug channel. These include LillyDirect and PfizerForAll.
For a super deep dive into how wholesalers make money and a look at the latest financial benchmarks, check out DCI’s 2024-25 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.
No comments:
Post a Comment