Consider this scenario: a potentially curative multiple sclerosis therapy is awaiting FDA approval. The pharmaceutical manufacturer has a lot at stake with this product—the company has spent decades discovering, researching and developing this medicine and put tremendous investment behind it. A million people in the U.S. are waiting anxiously for this drug to transform their lives and rid them of their disease.1
While the market is awaiting the product’s approval, it is likely that the manufacturer has determined a channel strategy, had payer conversations and selected a distribution partner. If the manufacturer has been disciplined
with commercialization planning, a complex pharmaceutical supply chain is ready to be activated.
Within 24 hours of approval, that therapy could be in thousands of sites of care and ready for patient access. What’s more, the manufacturer can recognize revenue for that newly approved therapy right away.
This scenario may seem a little too good to be true … but the truth is, it is routine. When you consider the dozens of life-changing therapies that are launched every year, it’s a meaningful and impactful process for society. Having the right partners in place prior to FDA approval is key to a successful launch, and a critical partner is the pharmaceutical distributor.
Pharmaceutical distributors are well known for enabling access to medications by being highly effective and efficient logistics partners. Distributors purchase products from manufacturers, bring those products into inventory and quickly supply pharmacies and provider customers with innovative therapies. Beyond Logistics, distributors enable access through the financial services they provide.
AmerisourceBergen associates fulfill orders in the drug picking area. Image: AmerisourceBergen
The financial services that distributors provide to manufacturers are part of fee-for-service arrangements. In these arrangements, distributors take financial ownership—or title—to a manufacturer’s product and become responsible for collecting payment from provider customers.
Because providers have a tight cash flow and reimbursement is constantly in flux, distributors also provide them with short-term financing to help cover the cost of carrying inventory between dispense and reimbursement.
Because of this system, patients can feel confident that their provider will have the product they need when they need it. And through this system, manufacturers don’t have to worry about getting paid. As one might expect, the fee for this service is based on a percentage of the product list price paid by the distributor and how much product the distributor purchases.
For example, if a distributor takes title to a $100 therapy and charges the manufacturer 5 percent for that medication, the manufacturer would pay the distributor a fee of $5. Distributors are taking title to pharmaceutical products that range in price from $5 to $50,000, and soon it could be as high as a million dollars.
The fee-for-service arrangement fairly compensates the distributor for assuming the economic risk of carrying a manufacturer’s product, selling their product and collecting payment from providers. A fee-for-service arrangement is similar in concept to an interest payment: you pay the lender a percent of the principal for the use of its money, and the principle increases with the size of the loan. Global financial markets compensate for risk in this same way.
Product moves along conveyer belt in AmerisourceBergen distribution center. Image: AmerisourceBergen
As pharmaceutical prices increase, it may still appear that distributors are benefiting disproportionally. It’s true that revenues will inherently increase, but that doesn’t reflect true profit margin. In reality, distributors have a history of operating lean profit margins.
At AmerisourceBergen, for example, we operate at about 1 percent. As a comparison, top players in the courier and delivery services industry operate between 5 and 10 percent, according to latest earnings reports. It’s also lower than the transportation and logistics industry overall, which is approximately 6.5 percent as of the third quarter 2018.2
To understand the benefit of our current system, consider for a minute the impact of a world without distributors, title and fee-for-service arrangements. Healthcare costs would increase by nearly $42 billion per year if manufacturers were to take on the delivery of drugs directly to providers.3 The specialty drug supply chain would generate incremental distribution costs of $8.6 billion.4
Lastly, it is estimated that providers would incur 6.5 percent in financing costs for specialty drugs—drastically impacting their bottom line and jeopardizing the legacy of independent practitioners.4
We’re in an era where modern pharmacotherapy is curing devastating diseases, stabilizing chronic conditions and preventing serious conditions every day. On top of that, the delivery and use of pharmaceuticals continues to be the most efficient form of healthcare, accounting for just 10 percent of total healthcare spending in 2016.5
Despite all off the success, we cannot neglect the fact that patients across the country are struggling to afford these medications.
The supply chain’s collective ability to get a novel therapy in the hands of patients within 24 hours of launch is remarkable. And, while we believe in the model that exists today since it enables cost-effective access, we must continually strive to create value and support affordability.
As cost constraints continue to put pressure on all aspects of the healthcare supply chain, distributors remain dedicated to working with our partners to address these market challenges head on. As new and more complex therapies come to market, we understand that we need to take a creative and collaborative approach to the logistical and financial models we deploy. We are here to be a part of the solution and ensure that patients can access the latest developments in pharmaceutical care.
About the Author: Akin Odutola is President of Strategic Global Sourcing for AmerisourceBergen.
References
1. http://www.clevelandclinicmeded.com/medicalpubs/diseasemanagement/neurology/multiple_sclerosis/#bib5
2. https://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=1101
3. The Role of Distributors in the U.S. Healthcare Industry. Center for Healthcare Supply Chain Research. 2011. Accessed November 2018.
4. The Role of Distributors in the U.S. Specialty Pharmaceuticals Value Chain. Center for Healthcare Supply Chain Research. December 2015. Accessed August 2018. Available online at https://www.healthcaredistribution.org/resources/role-of-the-specialty-distributor-in-thepharmaceutical-value-chain
5. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/highlights.pdf
