Is wholesale distribution the best option for drug manufacturers?
In today’s market, customer mergers and consolidations leave drug manufacturers few options in establishing a distribution strategy to make their products available and remain profitable. The popular choice is often wholesale distribution; however, it’s riddled with complexity in both its costs and high-touch, ongoing management.
The main cost associated with a wholesale distribution strategy is a chargeback, which is a credit that drug manufacturers pay back to wholesalers when a product is sold at its Wholesale Acquisition Cost (WAC). Chargebacks often represent the single largest deduction from gross sales for a manufacturer.
Additional costs and credits associated with wholesale distribution such as distribution fees (a percentage of contract price paid to the wholesaler), prompt pay discounts (a percent discount for the wholesaler of the WAC price), and negative chargebacks/reversals (credits from a wholesaler to the manufacturer following retail product returns) add further complexity to wholesaler relationships. If all fees and credits are not carefully tracked and managed over time, drug manufacturers run the risk of significant revenue leakage.
ADVANTAGE OF WHOLESALE DISTRIBUTION
Despite the costs and processing workload, wholesale distribution can have high strategic value for manufacturers wanting to reach a large supply of consumers, drive high volume and mitigate expiration risk. The top three pharmaceutical wholesalers represent an overwhelming majority of market share to consumers. A key driver in a wholesaler’s significant market share is its engagement in collective buying groups with some of the largest domestic retail chains—including Walgreens, Walmart, and CVS. These buying groups make it nearly impossible to do business with large retailers without a wholesale relationship. Furthermore, the volume opportunity wholesalers provide through their vast distribution networks can also be valuable in reducing time on shelves for drugs that are short-dated and/or have a high risk of expiration.
In summary, is avoiding a wholesale distribution strategy a viable option for pharmaceutical manufacturers? Typically, No. Even though sales through other distribution channels may be more profitable and/or less complicated to manage, without a wholesale partnership, manufacturers risk limiting their growth and profitability, without access to the broadest distribution and volume channels available in the United States.
Dan Piergies
Chief Analytic Officer