1.6 Topics Related to the Functioning of the Distribution Models
Industry contacts indicated that the distribution patterns for drugs of almost all types are unaffected by the nature of the drug. Thus, the distribution models described are applicable to virtually any form of pharmaceutical. There are two areas, however, where there is some variation away from the distribution patterns described above.
First, generic drugs are less often offered in promotional sales at discounted terms. Generic drugs are substantially less expensive than brand name drugs and, thus, already represent a substantial discount from competing products. In any case, distributors mentioned that generic drugs are handled less frequently through secondary wholesalers. ERG did not identify quantitative data on this point.
Second, some products, such as many parenteral products, must be consumed within a relatively short period after manufacturing. Many parenteral products, due to their water content, are relatively bulky to handle and costly to distribute. As a result, these products are poor candidates for repeated reselling through the wholesaling industry. Most of these products are sold using routine distribution channels and generally would not be handled by secondary wholesalers.
Drug distributors must participate with manufacturers and retailers in efforts to retrieve recalled drugs. ERG contacted several distributors about their approach to accomplishing recalls.
An estimated 10 percent of distributors can track products by lot number (Casteuble, 2000b). The large majority of distributors must rely on date of shipment information received from the manufacturer to determine when and whether they received the recalled materials. Using this information, wholesalers indicated that they can generally determine whether they still have the material and/or who among their customers might have received the product. Wholesalers store incoming products in their warehouses on shelves but, in most cases, do not track the flow of products through the warehouse on a lot-by-lot basis. Wholesalers also do periodic (e.g., monthly) inventories of the products on their shelves.
Some large wholesalers contacted for this study stated that their firms would use the lot and date information from manufacturer invoices to determine if and when they received the recalled product. One wholesaler also stated that the firms' employees perform a monthly inventory of the cases on their shelf. Thus, the wholesaler can determine in which month they shipped a recalled product, but cannot determine which of the customers (among those purchasing that product during the month) received the recalled lots.
Wholesalers reported that it was standard operating procedure to notify all customers of all recalls. Customers are then required to make their own checks to determine if they still have the recalled products and to notify their customers, as may be appropriate.
Some secondary wholesalers appear to have greater ability to track information by lot number than other wholesalers. For example, testimony at a recent FDA hearing indicated that secondary wholesalers are able to use lot numbers to identify the exact destination of shipments passing through their warehouses (FDA, 2000).
The first three models above describe fairly conventional models of distribution while the fourth model, distribution via secondary wholesalers, describes the use of unique sale-by-sale channels for distributing discounted products. This fourth channel provides an outlet for promotional or occasional inventory-reducing sales by drug manufacturers.
Many industries have both routine distribution channels which handle the bulk of product sales and "spot" markets that equilibrate supply and demand of product lots that are not distributed through contractual agreements. The spot market allows manufacturers to sell excess production, thereby avoiding inventory charges, product waste, or other costs. It also allows manufacturers to discriminate between buyers that require a guaranteed, predictable, supply of product for distribution and buyers (e.g., secondary wholesalers) that do not. This spot market, like spot markets in any industry, help equilibrate supply and demand and create a more efficient, smoothly functioning market. The spot market provides additional flexibility, through immediate price fluctuations, to both buyers and sellers of products.