Attachment G: Profile of the Prescription Drug Wholesaling Industry

Prescription Drug Marketing Act Report to Congress: Back to Table of Contents 

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Profile of the Prescription Drug Wholesaling Industry
Examination of Entities Defining Supply and Demand in Drug Distribution

Final Report

Prepared for:
Economics Staff
Office of Policy, Planning, and Legislation
Food and Drug Administration
Department of Health and Human Services
Rockville, MD 20857

Prepared by:
Eastern Research Group
110 Hartwell Avenue
Lexington, MA 02421

 

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EXECUTIVE SUMMARY

The U.S. Food and Drug Administration (FDA) is examining the drug wholesaling and distribution industry as it reviews policies applying to the distribution of prescription drugs. This study profiles drug wholesalers and drug distribution patterns. It also characterizes the pharmaceutical purchasing organizations and their impact on prescription drug prices and distribution.

Drug wholesalers consist of the Big Five full-line wholesalers (including McKesson HBOC, Inc., Bergen Brunswig Drug Company, and Cardinal Health, Inc.), regional wholesalers, and numerous smaller sub-regional/specialty wholesalers. In addition, there are "secondary wholesalers" that take advantage of manufacturers' sales on drugs to purchase discounted products and then resell these products throughout the distribution chain.

ERG identified several models that apply to the distribution of pharmaceuticals. In the most common model, covering a majority of drugs, manufacturers sell drugs to the Big Five drug wholesalers, who then sell them to dispensing organizations, such as retail chain stores, independent drug stores, and health care facilities. These drugs reach the ultimate consumer with a minimum number of transactions or physical shipments. In some cases, manufacturers sell directly to health care facilities or drug stores, eliminating any role for wholesalers. According to a compilation by PhRMA, 20 percent of all pharmaceutical drug sales went directly to dispensing organizations.

A more complex model of distribution is initiated, however, when manufacturers offer price discounts on various prescription drugs. Frequently, manufacturers hold short-term sales for individual drugs in order to reduce inventories or to meet quarterly sales targets. Large distributors, and especially secondary wholesalers, who are willing to risk substantial capital to acquire the discounted goods, purchase these sale drugs. These purchasers then turn the product over quickly by selling it to their networks of customers, which might include both larger and smaller distributors, and some drug dispensing organizations. In this model of drug dispersion, however, the sale drugs might change hands more than one-half dozen times before reaching a drug dispenser (i.e., a retail pharmacy or a hospital).