PHARMA: Fee-based distribution

Pharma wholesalers used to make their mark-up on tiny price changes. Like a Walmart, they’d buy now, sell later and pay their suppliers even later. As the suppliers were the hugely profitable pharma companies who made huge margins on each product, they weren’t too bothered about their downstream distributors making money by financial manipulation.  Add to the equation that prices were going up 10% a year, distributors were making even more just by holding inventory. But it was always a low margin business. The big three (Cardinal, McKesson, and AmerisourceBergen) have vast revenues but relatively tiny profits.  In 2003 Cardinal made $1.5 billion in profit, on $51bn in revenues. Not bad, but its biggest upstream supplier, Pfizer, made $11bn on $32bn in revenue.

Now distributors are having problems with their old model (in part because drug prices aren’t going up as fast). They are now trying to move to a fee-for-service model for distribution.  Here’s an interesting report as to whether that’s going to work. The answer seems to be, maybe.

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