How Does the Pharmaceutical Supply Chain Work?

Learn the basics about the current pharmaceutical supply chain
With the debate about U.S. healthcare about to heat up again on the news and social media, it is time to take a look at the pharmaceutical supply chain.  The pharma marketplace is evolving quickly.  The advent and acceptance of costlier, more condition-sensitive medications and drug therapies, the growing, disparate range of product types and therapies which have shorter product lifecycles and other factors has produced new complexities for a pharma supply chain that is in the process of shifting from the established version to a digital supply chain.

A variety of forces are pushing the pharma and healthcare industries into new directions, dictating the need for a different supply chain model.  Here are a few examples.  The ways that medicines are assessed, approved and monitored continues to evolve.  New technologies have emerged that enable greater efficiency to manufacturing and distribution operations, speeding up the interface to the patient.

As the cost of U.S. healthcare and prescription drugs has increased, so has public scrutiny, impacting how risk management efforts and compliance are managed.  Today, there is more focus on patient outcomes and access to information on patients is becoming as critical as the drug products.  As the United States has added more stringent regulations and environmental controls, pharmaceutical companies are struggling to comply.  While these factors affect different aspects of the pharma and healthcare realms, companies are evaluating their options and taking a strategic look at their current supply chain approach.

Although considerable effort and expense has been expended to innovate, develop and market medications more efficiently, there has been only minimal effort to reconfigure manufacturing and distribution operations or adjust the pharmaceutical supply chain network.  Industry experts report that most pharmaceutical companies have complicated supply chains that are inefficient, under-utilized and ill-equipped to deal with the products that are being introduced.

Changes are coming to the pharmaceutical supply chain.  What is root cause for these changes?  Before we examine the likely changes, let’s look at how today’s pharmaceutical supply chain network operates.  First, what is a supply chain?  A supply chain starts with product development and ends at the end consumer.

A company develops products and transfers them to the marketplace for sale to generate profits.   Included in a supply chain are all the organizational, operational and value-adding activities required to manufacture the goods and facilitate them to the customer.

 

How Does the Pharmaceutical Supply Chain Work?

In general, here is basically how the pharmaceutical supply chain works.  The major components of the pharma supply chain network are manufacturers, wholesale distributors, pharmacies and Pharmacy Benefit Managers.

Pharmaceutical Prescription Drug Manufacturers

Generally speaking, drug manufacturers fall into the following categories of those that produce:

  • Patented (brand name) products (e.g. Pfizer, Merck, Novartis)
  • Generic products (Mylan, Roxane, Barr)
  • Biologic products
  • Biosimilar products (biologically similar versions of biologic products)

Brand name drug manufacturers devote a portion of their expenses to the research and development of new drug therapies while generic drug manufacturers typically do not.  Manufacturers of generic drug products are focused on manufacturing generic compounds that compete directly with the originally patented version of the drug product once the respective patent has expired.

Pharmaceutical manufacturers manage the distribution of drug products from the point of production to the drug wholesalers and in some instances, directly to retain pharmacy chains, specialty pharmacies, hospital chains as well as to some health plans. While wholesale distributors are the manufacturers’ largest purchasers, in some cases, drug manufacturers also distribute products directly to government purchasers including the AIDS Drug Assistance Program (ADaPs), Veterans Administration and Vaccines for Children (VFC) program.  Only rarely are drug products distributed directly to consumers or to a self-insured employer with an on-site pharmacy.

Prescription drug manufacturers have the greatest amount of influence over prescription drug pricing.  They analyze the anticipated demand and future competition and forecast marketing costs to produce the wholesale acquisition cost (WAC).  WAC is the “list price” of a brand medicine before any discounts, rebates or other price reductions are applied.  This is the baseline price at which wholesale distributors purchase prescription drug products.  Manufacturers can choose to issue discounts and rebates based on factors including market share, volume and prompt payment. Wholesale distributors are paid a distribution service fee for their services.  Usually based on a percentage of WAC, the distribution service fee is paid in exchange for services including financial management, distribution service, inventory management and data processing.  Contractual agreements between wholesalers and manufacturers may include discounts for prompt payment and bulk purchasing.

 NEW BLOG ALERT: Introduction to Specialty Pharmaceutical Distribution

Pharma Wholesale Distributors (Wholesalers)

The role of the wholesaler in the life sciences supply chain management is to make the process of purchasing drug products from pharmaceutical manufacturers more efficient.  Wholesale distributors connect 60,000 U.S. pharmacies and outpatient dispensing outlets.  This enables manufacturers to ship bulk quantities of medications to a comparatively small number of wholesaler warehouses versus shipping to thousands of pharmacy and outpatient dispensing outlets.  Some wholesalers specialize in dealing with a particular range of products, such as biologics or to specific types of customers, such as nursing care facilities.

Today wholesale distributors provide a range of specialized services such as specialty drug distribution, pharmaceutical repackaging, electronic order services, drug product buy-back programs and reimbursement support, specialty pharmacy and disease management services.

By combining their purchasing power, wholesalers can help smaller pharmacies better negotiate with manufacturers of generic drugs.  A tightly concentrated industry, in 2013, three wholesalers (Cardinal Health, McKesson and AmerisourceBergen) generated approximately 85-90% of the total revenues from drug distribution in the United States.  Revenues for pharmaceutical wholesalers are typically calculated based on the difference between what they anticipate having to pay to manufacturers for life sciences products and the amount they receive in payments for selling the drugs to the retail and non-retail customers.   Discounts, such as for prompt payment and fees on services provided to their customers can also be earned.

The wholesale distribution industry has continued to consolidate over the past 30 years.  With nearly 200 wholesale distributors in 1975 to less than 50 in 2000, the industry has been forced to alter its revenue model.  Because of pressure to reduce costs, wholesale distributors now focus on evolving what was a traditional distribution model into a low-margin enterprise.  This is done by maximizing the economies of scale, optimizing physical efficiencies within the distribution model and recognizing financial efficiencies such as prompt payment discounts.

Learn more about industry-specific software for your pharmaceutical business: 

WAREHOUSE / DISTRIBUTOR

Real-time warehouse management software for the pharma supply chain.

THIRD PARTY LOGISTICS

Third Party WMS manages inventory of multiple pharmaceutical companies.

MANUFACTURER

Pharmaceutical Companies Use Datex WMS for Quality Control.

HEALTHCARE

Datex Healthcare WMS will reduce costs, boost labor productivity and ensure regulatory compliance.

CONTRACT MANUFACTURER

Multi-client inventory management WMS for contract manufacturing companies.

CONTRACT PACKAGER

Multi-client inventory management WMS for contract packaging companies.

Pharmacies

The pharmacy category can include independent and chain pharmacies, food stores or big box stores with pharmacies and mail-order pharmacies.  Specialty pharmacies focus on providing higher cost biotechnology drug products.  Internet/Mail order pharmacies have dramatically increased in use, partially due to mandated use by major PBMs in the specialty pharmacy industry.  Due to the pending shift in demographics, it is anticipated that mail order pharmacy use will continue to increase significantly.

Pharmacies account for approximately 75% of the prescription drug market.  Non-retail providers such as hospitals, some HMOs, clinics, nursing homes and federal facilities comprise the remaining 25% of the prescription drug market.  Over the past twenty years, the pharmacy industry has experienced considerable consolidation.  As of 2017, the top 5 pharmacies accounted for over 60% of the total pharmacy industry prescription revenues.

Serving as a critical interface between manufacturers, PBMs and wholesalers, pharmacies facilitate consumer billing and payments for those who participate in group health benefit plans.  Manufacturers of multiple-source drug products compete to sell drugs to pharmacies.  Because pharmacies keep a wide range of drugs in stock so that they can be prepared to meet demand immediately, they have less leverage to negotiate rebates or discounts with manufacturers of single-source brand name prescription drugs. 

Typically, pharmacies purchase prescription drugs from wholesalers at a contracted discount off the WAC.  The rate varies based upon the size and purchasing power of the pharmacy.  Pharmacies contract with wholesalers to stock their facilities with prescription medicines and use agreements with facilitate full, timely payment for drug product purchases and fulfillment of other obligations in exchange for a discount.

Pharmacy Benefit Managers (PBMs)

The role of Pharmacy Benefit Managers in the pharma supply chain is designed to provide an entity which focuses on improving cost savings, access, convenience and safety for consumers, employers, unions and government programs. Pharmacy Benefit Managers originated as basic claims administrators and have evolved to become complicated organizations that provide a variety of services including:

  • Claims processing and adjudication
  • Reporting
  • Developing formularies
  • Manufacturer rebate negotiation
  • Determine generic and therapeutic substitution
  • Developing pharmacy networks
  • Disease management
  • Develop quality-focused programs for compliance strategies and clinical expertise which promotes the safe, informed use of prescription drugs
  • Consultative services such as helping clients establish their benefit structure
  • Providing mail order pharmacy service and prescription drug order fulfillment
  • Drug utilization review
  • Record Keeping
PBMs are typically not considered to be a direct link in the physical pharmaceutical supply chain as they usually do not assume possession or control of prescription drugs, however they may do so if they provide mail order fulfillment services. As of 2017, approximately 70% of all U.S. prescription claims were processed by 3 PBMs.

Within the life sciences supply chain, PBMs tend to have the most significant leverage in obtaining brand-name medications that have close substitutes.  This is because manufacturers typically provide rebates in exchange for placement on a formulary or based on the market share that the manufacturer’s drug receives.  Prescription drugs that do not have competition are unlikely to receive rebates or discounts unless the PBM is able to realistically exclude these products from coverage.

Why is the Pharmaceutical Supply Chain Projected to Change?

 

Here are 5 factors forcing change in life sciences supply chains:

 

1. New Product Types with shorter product lifecycles are dictating the need for more complicated manufacturing and distribution processes. In addition, this is the impetus for the development of different supply chains for different product types.

2. Greater Public Scrutiny due to increased regulation as well as the increased incidence for more robust risk assessment and risk management capabilities is needed across the extended pharmaceutical supply chain.

3. New Modes of Healthcare Delivery are creating indistinct boundaries between primary and acute care due to the Patient Protection and Affordable Care Act (PPACA). PPACA provides incentives to develop, test and evaluate new healthcare delivery systems.  The regulation focuses on the promotion of health and disease prevention and is anticipated to decrease the cost of health care over the next ten years.  This will require development of a wider distribution network as well as of demand-driven manufacturing and distribution processes.

4. Increased Emphasis on Patient Outcomes. Pharma companies are increasingly shifting their focus from brand to disease.  In changing their focus, pharma companies must find new means of collaborating with payers, providers and patient as well as with IT and technology companies.  This will require expansion into health care management service.  Pharmaceutical supply chains will need to continue to conserve cost through lean operations.  Alterations also need to focus on creating a lean, flexible cost structure to preserve gross margins at each stage of the product lifecycle.

5. Live Licensing is poised to alter the dynamics of the pharma industry. A market disruptor, live licensing alters clinical stages into separate, controlled launches. This will revise the processes of market research, early asset development and relationships with stakeholders as well as other factors.  Using this new model would facilitate the incremental launch of new medicines as well as enabling step-side changes in the revenue cycle.  Because of the increased adaptability of the live licensing process would require the ability to scale up and down rapidly, impacting the pharmaceutical supply chain significantly. 

Conclusion

From drug development to healthcare providers, the pharma industry is undergoing dramatic changes.  In case you are unaware, the digital transformation of the healthcare industry and pharmaceutical supply chain has already begun.  Yes, a digital supply chain is coming.  As a result of DSCSA, trading partners across the life sciences supply chain will be able to identify and eliminate counterfeit drugs.  Pharmaceutical companies are evaluating their existing supply chain strategies to improve efficiency and ensure optimum product quality.  This has become a special issue of concern for temperature-sensitive and temperature-controlled drug products such as biologics as they often require refrigeration and specialized handling and monitoring across the cold chain.

Pharmaceutical supply chains will be undergoing massive changes to meet tomorrow’s needs.  Factors forcing these changes include new drug product types, live licensing, increased focus on outcomes, new modes of healthcare delivery and greater public scrutiny.

About the Author:

Laura Olson

Director of Sales and Marketing, Datex

IMportant DSCSA Update

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