After the drugs are approved for market, they must be
manufactured.
Drugs can be branded (patented), generic
(off patent) and biosimilars. Generics
can be a “brand name generic.”
Pharmaceutical wholesalers buy and trade in the
manufactured pharmaceuticals
They are distributed by the buyer/retailers – pharmacies,
hospitals and third party payers (TPPs)
The Big Three
Pharmaceutical wholesalers act as middlemen for retail
drugstores. They stock brand-name drugs, generics, over-the-counter drugs and
sundry items to sell to retail, hospital and clinical pharmacies. Primary pharmaceutical
wholesalers can buy directly from the manufacturer. They can also buy from secondary wholesalers.
The three biggest pharmaceutical wholesalers are Cardinal Health, Inc. (NYSE:
CAH), McKesson Corporation (NYSE:MCK) and AmeriSourceBergen.Corporation
(NYSE:ABC). They generate about 85% of all revenues from drug
distribution in the United States.
In addition to these three companies, there are a number of
smaller nationwide wholesalers such as Morris & Dickson, H.D. Smith, Smith
Drug, Curascript Specialty Distribution, NC Mutual Wholesale Drug, Rochester
Drug Cooperative and Anda Distribution.
Regional and specialty wholesalers include Burlington Drug, Dakota Drug,
FFF Enterprises, Florida Infusion, Harvard Drug Group, King Drug, Metro
Medical, Seacoast and Value Drug. There
are thousands of much smaller companies that are licensed as wholesalers. The Big Three often buy out smaller wholesalers.
Additional regional and specialty wholesalers include:
Burlington Drug, Dakota Drug, FFF Enterprises, Florida Infusion, Harvard Drug
Group, King Drug, Metro Medical, Miami-Luken, Seacoast, and Value Drug. There
are also thousands of very small companies that are licensed as wholesalers.
Over the past 10 years, the Big Three companies have acquired many regional and
specialty wholesalers.
Full-line wholesalers purchase inventory and often sell a
manufacturer’s complete pharmaceutical product line. They sell mostly to pharmacies. (Keep in mind that most pharmaceutical pills
cost very little to make and the markup is very high. That is why the pharmaceutical business is so
lucrative.) Specialty distributors sell
specialty pharmaceuticals mostly to physician-owned and operated clinics. Hospitals
and hospital owned outpatient clinics.
These are often intravenous drugs
that must be administered.
The top five dispensing retail pharmacies are CVS Caremark,
Walgreens, Express Scripts, Rite Aid and Walmart. They account for nearly 2/3 of U.S.
prescription dispensing revenues.
Pricing Basics
The price at which brand manufacturers sell to
wholesalers and chain warehouses is generally the Wholesale Acquisition Cost
(WAC). This is generally a published
list price minus a small discount for prompt payment and other incentives. In
turn, wholesalers sell branded small molecules to retail and mail order
pharmacies a few percent above their WAC, and at a 15-20% or larger discount
off what is known as the Average Wholesale Price (AWP).
Providers include
retail and mail order pharmacies, various wholesalers, hospitals, and physician
offices that administer medicines (typically by intravenous, infusion or
injection). In comparison, payers include
health care plans, pharmaceutical benefit managers (PBMs), most group
purchasing organizations (GPOs) and employers which do not handle drugs
directly. These reimburse providers for
purchases of their beneficiaries.
Types of Drugs
Brand manufacturers (the pharmaceutical company) of patented, small molecule drugs (branded drugs) sell primarily to wholesalers
and chain warehouses. In theory, they have
relatively limited direct sales to
hospitals, retail, mail order pharmacies and physician offices. However, as we learned in my last post, Big
pharma does use indirect means to encourage
sales to hospitals and physicians under the guise of educational seminars and
meetings, through the media and literature and various other sales incentives.
Generics and “branded”
generics. A prescription generic
must contain the same active ingredients as the original patented formulation. They may not be identical to the original
drug, however. A branded generic
is simply a drug that is bioequivalent to the original product, but is now
marketed under another company's brand name
Biosimilars
These are distinct from the small molecule drugs. They are larger and more complex molecules and
are more costly and challenging to manufacture.
Their surfaces may fold in different ways and not block receptor sites
as uniformly as synthesized small molecules. Prior to 2010 there was no
procedure for generic entry of biologics.
The Patient Protection and Affordable Care Act established a license
procedure for biosimilars. Original biologics
are granted 12 years of market exclusivity.
Wholesalers face different markets for branded and
generic drugs. They can purchase branded drugs only from a single manufacturer,
whereas they can purchase most generic drugs from many manufacturers. As a
result, they can create price competition among the various generic
manufacturers of a particular small molecule – that is, the expired patented
drugs.
Large retail chains also buy directly from generic
manufacturers and shop for the best prices.
Gross profit margins for both wholesalers and large retail chains are larger
for generic than branded, patented small molecule drugs.
Many biologics are
administered via injection or infusion by
health care providers (i.e., physicians and nurses), rather than being patient
self-administered oral tablets or capsules purchased from retail or mail order
pharmacies. As a result, manufacturers of branded biologics sometimes sell
directly to hospitals and physician offices rather than to the wholesalers to
which the branded small molecule manufacturers usually sell.
Firms known as “specialty
pharmaceuticals,” however, often provide wholesaler-type intermediary
services between biologic manufacturers and providers. Biologic manufacturers
generally sell products to the specialty pharmaceutical firms at a slightly
discounted WAC, and often at slightly higher prices to the providers who are buying
directly.
Intermediary Services
Over the years a variety of intermediary services for all
drugs have increasingly been provided by pharmaceutical
benefit managers (“PBMs”). Services provided by PBMs include contracting
with manufacturers for third party
payers (insurers, employers, governments aka TPPs). They underwrite
benefit plans, process claims, regulate formularies, operate mail order
pharmacies, negotiate for rebates with manufacturers and so forth. Obviously the PBMs are a big business and
they are the administrative middleman for most consumer’s drugs.
Pharmacies can contract with TPPs. Both TPPs and GPOs can negotiate a TPP/GPO
price with wholesalers. The chargeback
is the difference between the manufacturer’s price charged to the wholesaler
and the manufacturer’s contract price with the TPP/GPO. Manufacturers under contract with TPPs
provide financial incentives (rebates) for them to meet certain sales targets. We already know that there is big money in
pushing pills and it seems that everyone but the patient is handsomely rewarded
along this drug chain.
Patients pay more than ever for health insurance, managed
by third party payers, group purchasing organizations and pharmaceutical
benefit managers. Insurers may pay a
copay or coinsurance rate – a fixed dollar amount or fixed percentage of the
total cost for drugs that are purchased.
Formularies have been established.
These are lists of drugs covered by the third party payer. Formularies can be open or closed. Open formularies cover all drugs approved by
the FDA. Closed formularies cover a
subset of FDA approved drugs and the insured must pay full pharmacy price for
the drugs that are not covered.
The Red Book was one of several directory or catalog
publications that provided guidelines for wholesale and retail prices of
drugs. Pharmacists used these as a
reference. The books listed a “manufacturer’s
suggested retail price”. “Trade list
prices” were what the retail druggist paid for the drugs. The pharmacy could calculate their profits
based on this information.
Next, a competitive price catalog publication called the
American Druggist Blue Book began publishing a similar informational
guide. However, rather than calling them
“trade list prices”, they were now called “average wholesale price” (AWP) or
Direct Net Price. They also added a “suggested
wholesale price.” The terms were
misleading since the public was not receiving a wholesale price at all.
First DataBank (FDB) - the unit of Hearst Corporation publishing
the Blue Book - decided to increase
the AWP to WAC markup from 1.20 to 1.25 for over 400 hundred drugs in a secret
agreement with drug wholesaler McKesson. Third party payers and groups
representing the uninsured sued FDB and McKesson. McKesson and First Databank were accused of engaging in a racketeering
enterprise to fraudulently increase the published AWP of over four hundred
branded drugs during 2001 – 2005.
According to the settlement provisions, the price of the drugs was
lowered 4%. However, small pharmacies
were hurt by the loss of this profit margin.
The Prescription
Drug Insurance Market
In the U.S. prescription drug insurance benefit services
are typically purchased from a pharmacy benefits manager (PBM). The employer
may offer medical insurance plans from multiple health insurers but require all
of them to use one PBM. The PBM acts as the middleman between the employer and
the health insurers and of course, will want to pay what is most economical to
their bottom line.
The American PBM industry has become increasingly
concentrated. At the beginning of 2010 it
was dominated by three large firms (Caremark/CVS; ExpressScripts; Medco) who
had a combined market share of just under 50 percent. The three large PBMs have
substantial bargaining power with manufacturers. Obviously, they too, want to buy low and “sell”
high.
WalMart Pharmacy
In September 2006 mass merchandiser giant retailer
Wal-Mart announced it was offering a number of 30-day generic drugs for a price
of $4 per prescription. About a year later Wal-Mart expanded the list of
available generic drugs and simultaneously added a new 90-day prescription for
a price of $9 per prescription, implying a dime per day cost of that
prescription. A Wal-Mart spokesperson called this the “commoditization” of
generic drugs, made possible in part by its buying directly from generic
manufacturers and bypassing wholesalers.
By doing this, they not only beat their competition but they increase
customer traffic in their one-stop-shopping environment. Within months, a number of other mass
merchandisers and food stores, such as Target, Kroger, Safeway and Giant Food,
followed Wal-Mart and began offering very low priced generics, aimed
particularly at cash customers.
Other retail pharmacies responded and set up their own
prescription savings clubs. In 2008, Wal-Mart entered into an agreement with the
Illinois based Caterpillar. WM would
charge a zero copay for Caterpillar’s 70,000 beneficiaries on 2,500 generic
drugs. Caterpillar’s PBM agreed to
reimburse Wal-Mart based on Wal-Mart’s actual invoice prices on drugs. Caterpillar added Walgreens to its network in
2010. Other pharmacies still have
generic copayments where customers pay cash, then fill out forms for
reimbursement. Walmart streamlined the
process, benefiting both the patient and their business.
Vulnerability of the Drug Supply Chain
American consumers have purchased counterfeit Adderall,
Vicodin, Viagra, Xanax, flu medication and even cancer drugs that have made
their way into the established pharmaceutical supply chain. Online pharmacies that peddle drugs without a
doctor’s visit are not included in these statistics – that is an entirely
different subject.
Public outcry, brought together a large group of drug
supply line stakeholders to try and find solutions to the problems of fake and
adulterated drugs and theft of drug shipments along the supply chain. The
technology existed to effectively operate a federal electronic traceability
system, but the FDA lacked the authority to implement the federal standards.
The Drug Supply Chain Security Act (2013-2014 Congress) passed and is now in
effect.
Now the drug supply chain can implement nationwide
standards. Numerous companies have sprung up to provide this “security.” Tracking and tracing programs have been created
and put into operation but are they unified?
How can they be when the state laws regarding interstate commerce vary
so greatly?
One state requires all medication to have a serial number
and electronic records detailing every instance where the product changed
hands. Only half of the states have
similar track and trace laws and their implementation and enforcement vary
widely. Some states use paper – other computers. Some start tracing and tracking with the
primary distributor and others, the secondary wholesaler. Compliance with the new systems will cost
billions of dollars overall and be passed on to all those along the drug supply
chain including the consumer.
The idea and the new law sound good on paper but for the
unethical, laws are meant to be broken. This
is the bare bones framework of the drug supply chain. I plan to add more pieces of the structure in
future posts.
Reference and
Further Reading
Contract Pharma for pharmaceutical and biopharmaceutical
contract services and outsourcing
Pricing and reimbursement in U.S. pharmaceuticalmarkets. Faculty research working paper
series. Ernst R. Berndt. Joseph P.
Newhouse. Working Paper 16297 MIT Sloan School of Management and NBER and
Harvard School of Public Health.
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