Faiz Kermani

Together, Europe and the US account for more than 70% of the global pharmaceutical market, and the growth of these markets is heavily dependent on distribution systems. At present, major changes are taking place in the European and US drug distribution systems, which will have important consequences for everyone in the pharmaceutical sector.

The players

To understand the implications of the dynamics in the distribution system, it is important to take a look at those that play a key role. In this respect, there are important distinctions between the European and US systems.^1,2 Generally, most attention is focused on pharmaceutical manufacturers, wholesalers and pharmacists as it is the interaction between these that dictates the pharmaceutical distribution process.

In the traditional structure of the supply chain, pharmaceuticals are manufactured by pharmaceutical companies and transferred by wholesalers through to pharmacies. From a US perspective, Pharmacy Benefit Managers (PBMs) are also of great importance to the distribution network as their role is to achieve savings for customers by negotiating discounts and through cost-containment programmes. It has been estimated that approximately two-thirds of all prescriptions written in the US are processed by a PBM.

The pharmaceutical supply chain represents a high-value business, and manufacturers, wholesalers and pharmacists are constantly scrutinizing how the supply chain operates to achieve the maximum advantage for themselves. As with all buyer/supplier relationships, there is some degree of conflict between supply chain participants because of the varying objectives of the players involved. However, there are signs that the opinions of the different parties have diverged to such an extent that the make-up of the European and US supply chains are certain to change. Mistrust between manufacturers and wholesalers appears to be a growing feature of many European markets, while in the US changes are being driven by the most powerful wholesalers, who wish to achieve maximum dominance over the system through acquisitions.

Changes in the European market

Traditionally, manufacturers sell their products to wholesalers that then compete among themselves to become the main suppliers to pharmacies. However, the traditional model of pharmaceutical distribution is under threat because of major changes that have taken place in the UK.¹

The main change is the adoption of a direct-to-pharmacy (DTP) model where pharmaceutical manufacturers sell their products directly to pharmacies and appoint a limited number of logistics service providers to deliver the medicines on their behalf. Pfizer's establishment of a DTP system in the UK involving Alliance UniChem signifies a new trend towards manufacturers establishing similar arrangements in other European countries and a number of other pharmaceutical companies are already setting up similar agreements.³ For pharmaceutical manufacturers, this model is ideal as it allows greater control over the supply chain.

The author says...

With European governments limiting profits through cost-containment measures and companies facing gaps in revenue because of patent expiries, many believe that changing distribution arrangements makes commercial sense. IBM has calculated that supply chain operations can cost companies more than a third of revenues, including cost of goods, inventory and assets, while also consuming approximately half of their headcount.⁴ In addition, pharmaceutical companies have become increasingly irritated by parallel trade and are determined to gain control over the supply chain.

As wholesaler turnover in the EU exceeds €135 billion each year, the move is unpopular as it has the potential to drive certain wholesalers out of business if they do not become a preferred option for major manufacturers.⁵ A number of wholesaler associations are lobbying at the highest levels within the EU to prevent manufacturers implementing changes in the supply chain. However, if the UK experience is representative, they are unlikely to succeed. An official inquiry by the Office of Fair Trading highlighted concerns that DTP could lead to rising costs for the UK's healthcare system and diminished distribution service,⁶ but no concrete action has been taken.