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 Distribution
services are becoming an important part of the pharmaceutical
contract services business. Their emergence is not so
much the result of new players entering the industry,
but rather of the transformation of the traditional
wholesaling business model.
The new supply-chain structure was described by Cardinal
Health CEO Robert Walter in his October 2003 quarterly
earnings teleconference. According to Walter, the distribution
business is moving away from its traditional model,
in which a wholesaler such as Cardinal Health (Dublin,
OH) or AmerisourceBergen (Chesterbrook, PA) buys products
from the drug companies and resells them to pharmacies,
making a profit on the markup between the purchase price
and the sale price.
The major wholesalers have profited handsomely from
this model by using their working capital to buy a large
inventory of a drug just before a price increase and
then selling off the inventory at the higher price.
However, major pharmaceutical companies are finding
that this model is an obstacle to their efforts to bring
their supply-chain costs under control because it isolates
manufacturers from the end-user demand for their products.
Modern supply-chain management practices emphasize manufacturing
to demand--rather than to forecast--with the aim of
reducing the manufacturer's investment in inventories
and forcing continuous improvement in manufacturing
reliability and performance. Large wholesaler inventories
represent a buffer that separates the pharmaceutical
companies from actual product demand and frustrates
efforts to make the supply chain more efficient.
Major pharmaceutical companies have been willing to
take strong medicine to bring wholesaler inventories
under control. The day before Walter's presentation,
Merck (Whitehouse Station, NJ) announced that it would
take a $700-million revenue hit in the fourth quarter
of 2003 to reduce the amount of product inventory in
its downstream supply chain and "moderate the fluctuations
in sales currently caused by wholesaler investment buying"
Pfizer (New York, NY) took a $300-million revenue hit
in the second quarter of 2003 to bring down inventories
of Pharmacia products from their preacquisition level
of 2.1 months of sales to the Pfizer norm of one-half
month of sales.
The new distribution business model will emphasize
a fee-for-service relationship between the pharmaceutical
company and the distributor. Distributors will receive
a negotiated fee for storing the product, handling and
fulfilling orders from pharmacies, and shipping the
drug to the pharmacies. They expect to receive premium
fees for higher-value services such as handling drugs
that require maintenance of a cold chain or controlled
substances requiring extra security.
The current major distributors, including AmerisourceBergen,
Cardinal Health, and McKesson (San Francisco, CA), have
invested in highly efficient, automated distribution
networks and are confident that their role in the supply
chain is secure. They also see themselves as central
players in the efforts to keep counterfeit and illegally
imported drugs out of the supply chain. Still, the transition
to a fee-for-service model may open the door to new
players, especially companies such as UPS, Federal Express,
and DHL that already play a role in the distribution
of clinical-trial supplies and have built highly efficient
global distribution networks that serve a variety of
industries.
Another consequence of these developments in the pharmaceutical
supply chain is that it will require contract manufacturers
and packagers to develop new skills and capabilities
to meet the demands of their clients. Contract manufacturers
are accustomed to manufacturing to forecast, and manufacturing
agreements typically include roiling forecasts that
look forward as much as a year and lock in production
volume on a quarterly basis. Major pharmaceutical companies
may no longer be willing to guarantee use levels and
are likely to expect contractors to respond quickly
to real-time sales trends. Contract manufacturing organizations
will need to invest in "just-in-time" manufacturing
skills and infrastructure, including costly sophisticated
enterprise resource planning systems and continuous
improvement programs. Contract manufacturers and packagers
also may have to offer capabilities that support sophisticated
supply-chain practices, including product bar coding
and radio frequency identification.
An interesting effect of the change in the distribution
model is that it will enable wholesalers to free up
billions of dollars of working capital that was tied
up in product inventories. What wholesalers do with
all that cash could significantly change the contractor
landscape. Cardinal Health has been investing in the
contract services and drug delivery sectors for some
time and will continue to do so. The plans of AmerisourceBergen
and McKesson are less clear, although AmerisourceBergen
made its first foray into contract manufacturing and
packaging earlier this year with its acquisition of
Anderson Packaging (Rockford, IL). The changes in pharmaceutical
product distribution will trigger changes throughout
the pharmaceutical supply-chain industry.
POMA's 2004 Annual Meeting
The Pharmaceutical Outsourcing Management Association
(POMA) will hold its 2004 Annual Meeting in Charleston,
South Carolina, 9-12 February. This year's program offers
a look at where the industry is heading, results of
recent studies by Standard & Poor's and the Tufts
Center for the Study of Drug Development, and first-hand
analyses of outsourcing problems and opportunities in
Europe and Asia. A preconference program will offer
training in "Facilitative Leadership" by Beth
Yates of Interaction Associates. As usual, the schedule
will include multiple opportunities for POMA members
(who must be employees of pharmaceutical companies)
to network with each other and with representatives
of contract research and manufacturing companies that
support POMA as patrons.
More program and registration information about the
2004 POMA Annual Meeting can be found at www.pomasite.com
or by calling 908.301.1236.
FYI
Entries sought for activated carbon and packaging awards
The International Activated Carbon Conference (IACC)
is seeking nominations for the Hall of Fame Award to
be given at the 12th IACC in Mexico City, Mexico, on
1-2 March 2004 and at the 14th IACC in Pittsburg h,
Pennsylvania, on 8-9 October 2004.
The Hall of Fame Award honors individuals who have
made outstanding contributions to the advancement and
development of the field of activated carbon in any
of the following areas: new products, R&D, development,
new test methods, teaching, implementation, and public
awareness.
For more information about nomination procedures, contact
Dr. Henry Nowicki, PACS Testing and Consulting Services,409
Meade Dr., Coraopolis, PA 15108, tel. 724.457.6576,
hnpacs@aol.com. www.pacslabs.com.
The Healthcare Compliance Packaging Council (HCPC)
is seeking entries for the 2003 HPCP Compliance Package
of the Year awards.
Qualifying packages must be in a unit-dose format;
have at least one compliance-enhancing feature; have
been commercially available in 2003; and not require
drug products to be repackaged by patients. A panel
of lodges will score each entry on the basis of innovative
design, unique features, and ability to increase pharmaceutical
compliance.
The winning entrance will be asked to designate a school
of packaging to receive $6000 in scholarship funds provided
by Canon Communications and HCPC. Second and third place
winners will each designate a school to receive $3000
in scholarship funds. Complete competition guidelines
can be obtained online at www.unitdose.org or by calling
the HCPC offices at 703.538.4030.
Jim Miller is president of PharmSource Information
Services, Inc., and publisher of Bio/Pharmaceutical
Outsourcing Report, tel. 703.914.1203, fax 703.914.1205,
jim.miller@pharmsource. com.www.pharmsource. com.
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