How Does the Pharmaceutical Supply Chain Work?

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.

• 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.

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.

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:

• 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

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.

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.