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Global changes to Pharmacy Distributor Business Models from disruption
The primary global changes that can potentially disrupt the pharmaceutical distribution sector are increasing parallel importation and the proliferation of online wholesale platforms. Traditional pharmaceutical distributors need to adapt to these disruptions by offering value-added service innovations and investing in technological solutions that will augment their distribution channels. Pharmaceutical distribution in global markets is handled by importers and wholesalers regardless of geographical location and portfolio of medicine required. Publicly and privately funded medicines are distributed through one supply chain in developed countries. In contrast, medicines can be distributed through public, private and non-governmental supply chains in developing countries.
INTRODUCTION
Developed country pharmaceutical distributorships are categorized as either Full-line Wholesalers or Specialty Distributors. In the United States (US), Full-line wholesalers handle complete product lines and supply outpatient outlets and institutional, non-retail healthcare facilities. Seventy-five percent of their revenue is generated from retail, mail and specialty pharmacies. Specialty distributors on the other hand, mainly supply specialty pharmaceuticals to physician-owned/operated clinics, hospitals and hospital-owned outpatient clinics. Their largest customers are privately owned independent physician offices and community based outpatient clinics.
SCOPE OF DISTRIBUTION
Pharmaceutical distribution in global markets is handled by importers and wholesalers regardless of geographical location and portfolio of medicine required. Where the importer and local wholesaler are separate entities, importers also have to attend to the logistics of getting the medicine to the wholesaler after it arrives in the country. Wholesalers may further engage sub-wholesalers to reach rural areas.
Publicly and privately funded medicines are distributed through one supply chain in developed countries. In contrast, medicines can be distributed through public, private and non-governmental supply chains in developing countries.
MARKET SIZE OF PHARMACEUTICAL DISTRIBUTION
Gross revenue estimates for private pharmaceutical distribution were approximately US$1.1T with gross operating margins of $103B in 2015. Estimated revenues for the global private retail pharmacy market were US$680B with US$280B of that figure attributed to markets outside of the US, Europe and Japan. Retail profit estimates stood at US$68B with US$28B of that attributable to markets outside of the US, Europe and Japan.
REGIONAL MARKET SHARES
Based on 2015 gross operating margins, the US has the single largest market share of pharmaceutical distribution at 18%, followed by the Big Five European economies at 13%, China at 11% and Japan at 6%. Brazil, India and Russia share 7%, other major emerging markets make up 11%, other major developed nations 1.6% while the rest of the world shares the remaining 33%. Retail profit estimates for 2015 showed that Europe had the biggest share of the retail pharmacy market (32%), followed by the US (19%), Japan (8%) and the rest of the world (41%).
REGIONAL MARKET STRUCTURES
In developed countries, market leaders generate the bulk of pharmaceutical distribution revenue. The Big Three US wholesalers, namely AmerisourceBergen Corp. (NYSE: ABC), Cardinal Health Inc. (NYSE: CAH) and McKesson Corp. (NYSE: MCK), generate 90% of all drug distribution revenue in the US. Their estimated revenues for 2016 are US$406.3B, up 7% from 2015. GIRP, the European Healthcare Distribution Association reports that 65% (€92B) of the total turnover of € 141B generated in 2015 by full-line drug wholesalers was attributable to just 15% of the total number of wholesalers.
Emerging markets like China on the other are more fragmented. China's Big Three pharmaceutical distributors for instance, accounted for just 18% of total Chinese market revenues (US$110B) in 2010. The largest Sinopharm, contributed 9%, followed by Shanghai Pharmaceuticals at 5% and China Resources at 4%.
PHARMACEUTICAL DISTRIBUTION MARK-UPS
Mark-ups average 4% for pharmaceutical wholesalers in the US. In Europe wholesale mark-ups range from 3% in Sweden to 13% in Luxemburg. Wholesale mark-ups are regulated in the majority of European countries. Wholesalers' remuneration models include fixed percentage, regressive percentage, mixed fee and percentage, as well as fee for service models. Chinese wholesalers set their mark-ups at 8%. Similar to China, India caps wholesaler mark-ups at 8%. In developing countries like Kenya, mark-ups can reach 22%. Net margins for US wholesalers average 0.5% while Chinese wholesalers earn a pre-tax profit of 1%.
CHALLENGING TRENDS IN THE PHARMACEUTICAL INDUSTRY
Globally, digitalization of healthcare and decreasing pharmaceutical revenues due to increasing generic drug production are forcing the pharmaceutical industry to rethink the way it does business. Overstretched customers, increasing regulation and global markets with tremendous opportunity but with equally tremendous challenges, present additional complexities. Finally, counterfeit medicines make the situation even more difficult.
DISRUPTIONS SPECIFIC TO PHARMACEUTICAL DISTRIBUTORS
Market over concentration in the Big Three US wholesalers has resulted in unusually low operating margins for pharmaceutical distribution in the US. Globally, parallel importation and an increase in online pharmacy operators can potentially disrupt traditional distribution channels. Parallel importation allows some countries to import original drugs at lower prices resulting in the proliferation of new distributors. Online wholesalers such as MailMyPrescriptions in the US, the Swiss Pharmacy in Switzerland and IndianPharmaDropShipping in India may force pharmaceutical manufacturers may be forced to adjust their traditional sales distribution models.
Other trends impacting pharmaceutical distributors are increasing prescription volumes, rising requirements for cold chain logistics and slowing mergers and acquisitions. Finally, drug suppliers will be required to implement serialization (global track and trace regulations to protect patient safety and ensure product integrity) by the end of the decade.
PHARMACEUTICAL DISTRIBUTOR RESPONSES TO DISRUPTIONS In response to online pharmacy operators and parallel importation, Southeast Asian distributors are offering more value-added services such as analytics support, patient assistance program execution, training, and product/device monitoring. Elsewhere, Pfizer and countries like Turkey have pioneered the use of 2-D bar codes and radio frequency identification to combat counterfeit drugs. Firms are also investing in Healthcare Digitalization, Artificial Intelligence, Big Data and Cloud solutions to enhance their supply chain efficiency.
CONCLUSION
The primary global changes that can potentially disrupt the pharmaceutical distribution sector are increasing parallel importation and the proliferation of online wholesale platforms. Traditional pharmaceutical distributors need to adapt to these disruptions by offering value-added service innovations and investing in technological solutions that will augment their distribution channels.