Overview of Pharmaceutical Company Relationships with Distributors
The relationship between a pharmaceutical company and a distributor allows the distributor to profit from the sale of the medications and prevents the requirement that the manufacturer divert resources to logistics and marketing that could better be devoted elsewhere. The first stage resembles a courtship, with the distribution company inviting the pharmaceutical manufacturer to learn about their values and methods. Next, the two companies devise a service agreement, which details shipping arrangements, delivery orders, guidelines for recalls, and other issues. Last, the distributor utilizes an electronic ordering system to purchase orders from the pharmaceutical manufacturers, which the latter company fills and ships to the distributor.
Below you will find our full overview of the relationship between distributors and pharmaceutical manufacturers.
Pharmaceutical manufacturers produce prescription medications and other medical products which are then purchased by distribution companies, then stored in warehouses and distribution centers throughout the United States until they are eventually shipped to retailers to be sold to the public. According to HealthCareDistribution.org, this exchange ensures patients receive the medications they need at the appropriate time. Furthermore, it allows the manufacturer to remain focused on their work rather than divert resources to create and maintain departments to manage logistics, marketing, and sales.
According to Cardinal Health, the first stage of the relationship between these two businesses is a period of introduction where the pharmaceutical manufacturer learns about the distribution company. One might wonder why the education is so one-sided, but this lopsided informational exchange makes sense in light of one fact. In the United States, three distribution companies account for approximately 85% to 90% of all drug distribution revenue. These three companies, Cardinal Health, McKesson Corporation, and AmeriSourceBergen Corporation, received a total revenue of $378.4 billion in 2015.
After the initial learning period, a manufacturer chooses the distributor that they believe suits their business best. Prior to the exchange of goods or the receipt of any payment, however, the two entities must come to terms regarding the service agreement which will govern their future interactions. Cardinal Health's guide on this subject lists some points this agreement covers, including order delivery and guidelines for the return of goods and product recalls. The agreement also outlines the processes between the two parties to ensure scalability and maximize customer service. It also includes a commitment to collaborate in the implementation of the requirements of the Drug Supply Chain Security Act (DSCSA).
This bill, enacted by Congress in 2013, requires the creation of an electronic system to identify and trace certain prescription drugs. It has led to several advancements within the pharmaceutical industry, including serialization solutions. This improvement not only aligns with government mandates, it improved efficiency by allowing for greater automation of the shipping process.
The last stage of the creation of a relationship between a manufacturer and a distributor is order placement and fulfillment. The companies come to one last agreement concerning Data and Inventory Management, and then the distributor places orders for products through an electronic ordering system.
The relationship between pharmaceutical manufacturers and distributors begins with a learning period, followed by a time when the two companies agree on the way their future business will be conducted, followed by the initiation of that business with the purchase of the first orders.