Where is Distribution Going in the UK? Donald Macarthur Pharmaceutical Business Issues

Where is Distribution Going in the UK?
GHP Procurement and Distribution
Interest Group, 7 June 2007, Coventry
Donald Macarthur
Industry Consultant on International
Pharmaceutical Business Issues
Unchanged since many decades , but tomorrow…?
The classic distribution chain with the wholesaler
as ‘the vital link’
manufacturer’s
warehouse/
prewholesaler
full line
wholesaler
High volume/low margin business, but
efficient route from manufacturer to patient
and one-stop supplier to pharmacies
community
pharmacy
patient
235,000 UK deliveries/week
by BAPW wholesalers
2 billion items distributed/year
UK distribution to retail pharmacies 2005
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Number of full-line wholesalers
Market share of full-line wholesalers
Market share of short-line wholesalers
Market share of self-distributing pharmacy chains
Direct distribution
11
71%
13%
13%
3%
Breakdown of distribution to pharmacy market,
2004 (source: GIRP)
Most wholesaling efficiencies have already been
realised in UK (2004 vs 1995)
country
Pop
(millions)
Full-line
wholesale
companies
Wholesale
warehouses
Community
pharmacies
France
59
10 (16)
187 (210)
23,000
(22,300)
Germany
82
16 (19)
106 (104)
21,350
(21,000)
Italy
58
136 (215)
254 (312)
16,800
(15,500)
Spain
43
49 (106)
190 (202)
20,400
(18,400)
UK
59
11 (21)
59 (63)
12,200
(12,300)
Examples of services offered to UK pharmacies by
full-line wholesalers
• Twice daily scheduled delivery
• High service levels
• No minimum order/delivery
charge
• Sales-related discounts
• Automated order processing
• 30-days credit
• IT solutions
• Emergency supplies
• Product recalls
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Financial services
Stock management
Own brands
Collection of out-of-date
products
Special handling
Collection of packaging waste
Merchandising support
Promotional literature
Education and staff training
Factors favouring wholesaling
• Wide product range
• Customers have limited inventory capacity
• Customers have cash flow difficulties
• High order frequency
• Need for immediate delivery
Threats to wholesaling
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Falling sales value with price cuts
Margin erosion
Higher costs (e.g. staff, fuel, IT, automation)
Manufacturers’ views of wholesalers as
– margin stealers rather than distribution partners
– barrier to closer relationship with pharmacists (and patients)
• Stock shortages
• Continuing parallel trade
• Entry of counterfeit medicines and diversion of genuine
products
• Retail market liberalisation/growth in self-distributing
pharmacy chains
• Increasing unit prices favouring the economics of direct
distribution
What is the UK distribution margin for Rx brands?
• PPRS: ‘After appropriate consultation, the Department
will from time to time indicate the level of margin
normally allowable in published NHS prices of supplies
distributed through wholesalers.’
• No record of what this margin actually is since 1983
when reduced from 15% of value of goods at NHS prices
to 12.5%. By custom and practice, 12.5% has been
retained.
• Almost 10% of gross margin given away to pharmacy
customers as discounts on brand purchases.
• Pharmacies in turn have an average 9.5% of
reimbursement withheld by NHS through clawback.
Effect of pressure on margins
• Wholesalers are:
• consolidating (acquiring local/regional wholesalers) for economies of scale but limited by EU competition
law
• internationalising - to spread risk of market regulation
but no single EU market
• offering additional services (e.g. pre-wholesaling,
marketing)
• integrating forwards into retail - for higher profits and
to secure customer base but limited by national laws
on pharmacy ownership
• diversifying (e.g. manufacturing, homecare)
Leading pharma wholesalers, 2003
country
No 1
No 2
No 3
Austria
Herba/Celesio
Phoenix
Kwizda
Belgium
Febelco
Celesio
CERP
France
OCP/Celesio
Alliance Sante/AU
CERP
Germany
Phoenix
Celesio
Anzag
Ireland
United Drug
Uniphar
CMR/Celesio
Italy
Comifar/Phoenix
Alleanza/AU
Farmintesa
Netherlands
OPG
InterPharma/AU
Brocacef/Phoenix
Norway
NMD/Celesio
Apokjeden
Holtung/AU
Portugal
AllianceUniChem OCP/Celesio
Codifar
Spain
Cofares
SAFA/AU
Hefame
Switzerland
Galenica
Amedis/Phoenix
Voigt
UK
AAH/Celesio
UniChem/AU
Phoenix
Wholesaling market share (%) of ‘big three’, 2005
(Source: Booz Allen Hamilton)
France
68
Germany
47
Italy
43
UK
73
EU-15
43
Forwards integration into retailing
• Total European pharmacy numbers steady, but ownership in some countries
has changed dramatically:
• 3 wholesalers own all Norwegian pharmacies
• Independent pharmacies in UK are a dying breed
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Lloyds (Celesio) 1,625; Boots (Alliance Boots) 1,500; Co-op 429; Rowland
(Phoenix) 384, Superdrug 226; Tesco 197; Sainsbury 143, Day Lewis 100
• Remaining independents have formed buying groups to compete with the
chains, but the biggest of these – Numark – acquired by Phoenix.
• ‘Big three’ also own pharmacies in Belgium, Czech Republic, Estonia,
Ireland, Italy, Latvia, Lithuania, Netherlands, Norway & Switzerland
• Pharmacies owned in countries allowing pharmacy chains:
Celesio 2,090; Phoenix 800; Alliance Boots 2,700
• Pharmacies financially dependent on wholesalers in countries that do not
allow pharmacy chains: numerous
Europe’s No 1 mail order pharmacy –
now owned by Celesio
Parallel trade: wholesalers act like Jekyll and Hyde
• Publicly
– Highly critical attitude to PIs
• Privately
– Wholesalers are both the main suppliers of PIs in the
source countries and the main customers for them in
the countries of destination
– Some have even entered the PI business directly (e.g
Alliance Boots has parallel trading subsidiaries in the
Netherlands (Stephar), Spain (SAFA) and the UK
(Cordia, Beachcourse, OTC Direct); its UK retail
operation dispenses 600,000 PI packs/month)
Market growth increasingly comes from speciality
products
• US spending on biotech products in 2006 was $54 billion
(+21% on 2005 versus 6% market growth with
traditional pharmaceuticals) – it is expected to rise to
$99 billion by 2010.
• 23% of all marketing authorisation applications made to
EMEA in 2006 were for EU-designated orphan drugs.
Manufacturers’ views of wholesalers
with high-cost speciality products
• Fixed margin structure provides disproportionate reward
for handling high cost/low volume products.
• Do not deliver to hospitals at all in number of EU
countries (e.g. A, B, F, D, GR, I, P & ES).
• Exclusively national operation, so being by-passed as
more manufacturers seek pan-European distribution
solutions.
• Increasingly distrusted by manufacturers due to vertical
and horizontal integration, support for generics and
parallel trade.
Manufacturers seek more control over distribution
 direct distribution
 supply quotas
 relegating wholesalers to agents/logistic providers
 investigating new distribution models
to ensure:
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product availability at point of dispensing
minimal parallel trade/stock diversion
cost effective distribution
secure supply integrity/traceability
closer relationship with pharmacies and patients
GSK’s agency distribution scheme in UK
‘Moving closer to our customers’
• Introduced by Glaxo in 1991-02, continued by Glaxo Wellcome and
now by GSK.
• Hospital products added in 1997.
• Rationale:
• Curtail use of generics & PIs?
• Curtail power of big wholesalers?
• Glaxo provided wholesalers with £50 million as margin and preferred to use this to
build its own business rather than go to enhance that of wholesalers?
• Obtain more detailed and faster sales data than from IMS?
• All then 30 full-line wholesalers signed up as agents to receive a
management fee for distribution and data provision.
• Glaxo retained stock ownership and assigned discounts to customers.
• Failed attempt to extend to the Netherlands.
Original concerns voiced on Glaxo’s agency scheme
• By wholesalers
– Fears that management fee would be progressively reduced
• in 1991, the average fee was 5% of value at NHS prices of Glaxo products
handled
• by April 2005 this % had been cut by almost half
• from 2007 it changed from % to a fee-for-service basis
– Added costs, responsibility for bad debts
– Fears that other manufacturers would follow
• they didn’t – for 15 years anyway!
• By pharmacies
– Lose wholesaler discount
• Glaxo brands separated from non-Glaxo brands in discount inquiries
– More paperwork
• By Department of Health
– Lose clawback
Pfizer’s agency distribution scheme in UK
(‘Delivering directly to our customers’)
• UniChem (Alliance Boots) sole logistics partner for all Pfizer Rx
products from 5 March 2007. 18-month contract. Fee-for-service.
• Stated aims of change:
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improve supply management
more responsive to stock shortages
reduce risk of counterfeit entry
improved visibility over supply chain
better able to trace and recall
not to save money
• All pharmacies and dispensing doctors had to open UniChem
account to obtain Pfizer products. 99% have already done so.
• PSNC satisfied with pharmacy discount structure (<£0.25 mil/yr
8.5%; £0.25-1 mil/yr 9.5%; £1-5 mil/yr 10.5%, >£5 mil/yr 11.5%).
No minimum order. Current twice-daily deliveries maintained.
• Other full-line wholesalers and all shortliners no longer supplied.
• Pfizer does not rule out having more than one distributor in future.
Concerns voiced on Pfizer’s agency scheme
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Anticompetitive? Decreased customer choice?
Nail in coffin for regional wholesalers?
Can single channel provide continuity of supply?
Increased ordering workload and difficulties for pharmacies and dispensing doctors,
e.g. opening new accounts, uncertain ordering cut-off & delivery times, time spent
reconciling invoices
Renders pharmacy buying groups redundant?
Reports of quota application at contractor level.
Loss of procurement discounts? Hidden added costs for NHS?
Wholesaler added-value services to pharmacies put at risk.
Preferential treatment of Boots?
Damaging to environment.
Potential for manufacturers who follow to make different arrangements (e.g. oncedaily delivery) or for DoH to implement central procurement.
Risks customer backlash that could hit market share.
‘The pharmaceutical distribution system in the UK isn’t broke, so why try
to fix it?
Who is next?
• Astra Zeneca appoints AAH and UniChem as fee-forservice distribution agents. Scheme to start Q3 2007.
• Novartis launches tender and to decide by late summer
on whether to change to direct-to-pharmacy.
• Sanofi-Aventis and Lilly also reported to be
considering their options.
• Last year, Roche said it had no plan to change.
…66% of pharmaceutical companies were considering
changes to their channel-to-market structures, according
to May 2005 survey of European and global supply chain
directors by Accenture.
DoH not content to be interested observer
• PPRS encourages ‘efficient and competitive supply of medicines’.
• Joint DoH/ABPI review of distribution margin called for as part of
2005 PPRS.
• DoH already recipient of annual cycles of financial data from brand
companies under PPRS and quarterly sales and price data on
generics from manufacturers and wholesalers (categories M & W).
• £500 million/year of purchase profits can be retained by pharmacies
in England & Wales under pharmacy contract.
• Moves by GSK and Ivax to stop discounts on some products =
burgeoning ZD list.
• ‘Voluntary’ request to PPRS-member manufacturers for quarterly
gross and net sales data on brands by customer group (community
pharmacies, hospitals, dispensing doctors).
• OFT market study into medicines distribution in UK announced.
Distribution changes by Pfizer in Europe:
Two years advance warning were given
Speaking at the International Federation of
Pharmaceutical Wholesaler Associations’ general
membership meeting in Shanghai in September 2004 Per
Troein (VP Industry Relations, IMS Europe) forecast that
Pfizer would move to direct distribution in the EU-5
(Germany, France, UK, Italy & Spain) citing patient
safety as justification.
Distribution changes by Pfizer Spain
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‘Dual pricing’ scheme introduced in 2001
Since 2004 a mixed distribution system has evolved:
- direct sales to pharmacies using LSPs
- supply contracts with 16 wholesalers out of almost 100 and differential pricing.
Proof that sales within Spain required before refund made between initial price and
price for NHS (difference can be >100%)
based on
(a) Article 90(2) of Medicines Act (price intervention
only applies to products dispensed in Spain)
(b) Royal Decree 725/2003 which obliges wholesalers
to have batch tracking controls and inform authorities
of sales destination. Details can be requested on their
own products by manufacturers
More distribution changes soon by Pfizer?
‘Pfizer, the US drugs group, is planning to extend
proposed reforms of its UK supply chain across Europe.
The US-style reforms – which would force every chemist,
dispensing doctor and hospital to buy Pfizer medicines
from Pfizer rather than wholesalers, giving the group
more control of pricing – could be extended initially to
Germany and Poland.’
Source: The Times, February 16th, 2007
Single agent akin to single channel distribution
• Born out of the wishes of manufacturers
• Each manufacturer makes an exclusive, fixed-term
distribution agreement with one wholesaler, which alone
is responsible for meeting all demands in the country for
that manufacturer’s products.
• Only distribution model found in two EU countries,
Finland and Sweden.
• Each country has only two pharmaceutical wholesalers
today
– Market shares: Finland - Tamro (Phoenix) 60%, Oriola (Oriola-KD) 40%
Sweden - Tamro (Phoenix) 57%, KD (Oriola-KD) 43%
• Wholesale margin in both countries unregulated (but
estimated at ~4%) – government only controls
pharmacy purchase prices and pharmacy margins
Pros and cons of single channel distribution
• Advantages
• Disadvantages
 For manufacturer
 One wholesaler carries the sole
responsibility for stocking and
delivering a product throughout
country
 Antitrust concerns – pharmacies
are unable to select suppliers
 M&A between manufacturers can
produce big shift in wholesaler
market shares
 Service levels to pharmacies may
be less because of a lack of
competition for their business
from wholesalers.
Lower wholesale margin
Lower administrative costs
Only one drop-off point
Lower credit risk
Better inventory control
Access to real-time data on
realised sales
 Improved communication and cooperation with wholesaler
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 Wholesalers do not need to
compete with discounts
 Recalls are easier
 No reports of counterfeit entry
into either Finnish or Swedish
markets
Many other features of UK pharma landscape are
changing/poised to change
• Regional split of UK/devolution of NHS budget to HAs and trusts
• OFT recommendation to replace PPRS with ‘value-based pricing’
• NICE: new STA process/Health Select Committee inquiry/legal challenge
• Review of value for money of primary care prescribing by NAO
• Review of wholesale margin by DoH
• Review of prescription charge/exemptions by Health Select Committee
• Implementation of new pharmacy contracts
• Volatility with generic reimbursement
• DoH proposal to remove branded generics from PPRS
• Curtailment of ZD list
• Private equity takeover of Alliance Boots
Thoughts on the future
• Wholesaling will never be the same.
• Future single agency schemes unlikely in short term.
• Current UK geographical coverage of even largest wholesalers not
perfect….
– top 2: 85-95%
– top 3: 90-95%
– top 5: >97% (Source: Taylor Nelson Sofres/AT Kearney)
…..but there will be more consolidation.
• PSNC will insist that pharmacies in England & Wales collectively
retain £500 million purchase discounts – DoH forced to adjust
dispensing fee, clawback scale or Cat M generic prices?
• Onus will be on manufacturers introducing direct-to-pharmacy
schemes to ensure via contract that their LSPs maintain high service
levels to pharmacies and to provide value-added themselves.
Any questions?
Tel: 01444 811888
don.macarthur@btinternet.com