The supply of pharmaceuticals involves a chain of wholesalers who help distribute drugs to pharmacies before they reach the patient. The business model for wholesalers is based on the ability to buy large orders of pharmaceuticals from manufacturers and sell them to pharmacies at a higher price. Distributors manage a complex supply chain, leveraging innovative technologies to ensure safe and efficient delivery every time. The industry purchases prescription drugs and other medical products directly from pharmaceutical manufacturers for storage in warehouses and distribution centers across the country.
State and federal licensed pharmacies, hospitals, and healthcare providers place orders from distributors for the drugs and products they need, and distributors process and deliver orders daily. Manufacturers create drugs and sell them in bulk to wholesalers, who in turn sell drugs to pharmacies. In this process, wholesalers use complex logistics and packaging methods to receive and deliver medicines on time and in good condition. When a covered payee fills a prescription at a retail pharmacy, the pharmacy collects the payee's copayment or coinsurance and dispenses the drug from inventory. The pharmacy passes the copayment to the PBM and the PBM pays the pharmacy the negotiated reimbursement.
To replenish inventory, the pharmacy buys drugs from the wholesaler, who buys them from manufacturers. Quarterly), the PBM reconciles drug claims and the manufacturer pays the PBM any rebates, incentive payments, or charges due based on its negotiated contracts to the PBM. The PBM may transfer some of these funds to the plan sponsors, according to the contracts negotiated with each plan. Wholesale distributors are an essential part of the pharmaceutical supply chain. They purchase drugs from manufacturers for distribution to a variety of different locations, such as pharmacies, hospitals, clinics, doctors' offices, and laboratories.
Some distributors sell a variety of products, including medicines and medical equipment, while others specialize in types of products sold or types of customers sold to. Full-line wholesalers ensure a safe and secure drug supply chain by implementing a wide range of measures to achieve this goal. The PBM also negotiates contracts with pharmacies, including those in its network, to set reimbursements for drugs dispensed by the pharmacy. These prices are largely determined by the market, and it's not uncommon for manufacturers, distributors, and pharmacies to talk to each other to determine how much to pay for how much product, based on a host of factors such as regional demand, store brand labeling, negotiations, public opinion, and more. Specialty drugs administered by doctors often add another player to the distribution system, the group purchasing organization, which negotiates volume discounts on behalf of hospitals and physicians.
Full-line pharmaceutical wholesalers purchase drugs from manufacturers and own the products. Gross margins for generic drugs are lower for manufacturers (50%) and much higher for pharmacies (43%). From larger entities taking on multiple roles in the drug supply chain, as seen with Express Scripts, benefit purchasing manager for insurance company Cigna, to tech startups simplifying drug distribution, this is how the complex pharmaceutical market is changing. Patients no longer have to go to a doctor, payer, PBM, wholesaler and pharmacy to receive these generic drugs but can use a single application to receive and complete a subscription. Figure 4 compares the net margins of players in the pharmaceutical distribution system with those of similar industries, based on published estimates of average net margins for more than 100 industries. If the pending Aetna acquisition goes ahead, CVS will be present at all levels of the supply chain, excluding wholesale.
Pharma IQ met with Monika Derecque-Pois, CEO of the European Association of Full-Line Pharmaceutical Wholesalers (GIRP), to talk about how the role of the wholesaler has evolved in recent years. The estimated net margins for other segments of the distribution system except pharmacies are comparable to those of similar non-pharmaceutical industries. The views expressed in this document are those of the authors and do not represent the views of funders; sponsors had no role in this research. Much attention has been focused on average wholesale price or “list price” set by manufacturers prior to discounts. For all combination drugs gross margins are higher for manufacturers at 71.1%, followed by insurers (22.2%), pharmacies (20.1%), PBMs (6.3%) and wholesalers (3.7%). The difference between what patients pay and what manufacturers receive is allocated among other stakeholders in drug distribution chain including insurers, pharmacy benefit managers (PBMs), pharmacies and wholesalers.
