The U.S. Wholesaler Market: Past, Present and Future 2012 H. D. Smith National Sales & Management Conference August 8, 2012 John M. Gray President and CEO HDMA
The History of HDMA 1876 2012
Exchange Hall, Indianapolis, March 15, 1876 The meeting began in dissatisfaction and amid an atmosphere of mutual distrust. 95 companies, representing 16 cities and 11 states from Cleveland to St. Louis, were present. Committees addressed: Proprietary medicines Credit system Circulars and pricelists Commercial travelers Adulteration Legislation
Statement of Purpose 1876 To remedy the existing evils in the wholesale drug business and to enable the merchants to carry on business on a more profitable basis, and not merely receive a dollar for a dollar, which is about the extent of their present profit.
Healthcare Distribution in 1876 There were 300 wholesale, 100 pharmaceutical and 500 patent medicine manufacturers selling product to 25,000 dealers in drugs and medicine. Proprietary medicines accounted for 1/3 of wholesaler volume on a gross margin of 2 3 percent.
Healthcare Distribution in 1876 They meet again in the fall of 1876 and never missed a year after that. The group changed its name to NWDA in 1882, and to HDMA in 2000. While much has changed in the industry, much also has stayed the same.
Healthcare Distribution Today HDMA s 33 members offer value added services that help ensure safe and timely delivery of healthcare products to nearly 200,000 healthcare settings. HDMA members operate 157 distribution centers serving all 50 states. Nearly 90 percent of all U.S. pharmaceutical sales go through distributors or $268 billion. Distributors save the healthcare system nearly $42 billion each year. Sources: 2011 2012 HDMA Factbook: The Facts, Figures & Trends in Healthcare (2011) The Role of Distributors in the U.S. Healthcare Industry (2011) HDMA member database
The Vital Link in a Sophisticated Supply Chain Primary Distributors
Healthcare Distributors Typical companies inventory nearly 56,000 healthcare products from an average of 1,100 different manufacturers. The average distribution center picks more than 95,000 items each day to fulfill nearly 2,000 customer orders. Distributors deliver consolidated products on a next day basis in low units of measure. The typical distribution center serves nearly 1,200 customers and nearly 1,300 ship to locations. Source: 2011 2012 HDMA Factbook: The Facts, Figures & Trends in Healthcare (2011)
79% of Rx Sales Flow Through Traditional Distributors Flow of US Prescription Sales ($B) and Contribution by Channel (%) in 2010 Total= $307 B 1 Distributors Total = 268 B (87%) Manufacturers $26 B; 8% Specialty Distributors 3 $39 B 13% $242 B; 79% 2 Traditional Distributors $26 B Direct Shipments $50 B 21% $59 B 24% $61 B 25% $38 B 16% $33 B 13% $2 B 1% Multiple Provider Types 4 Chain Warehouses 5 Chain Pharmacies 5 Hospitals, HMOs, Clinics and Nursing Homes Independent Pharmacies Mail Order Others Multiple Provider Types 6 1) Total value of goods flowing through the supply chain as per IMS National Sales Perspectives. Percentages represent contribution by channel towards the total flow of $307.4 B 2) Total value of goods flowing through traditional distributors, 2011-12 Center for Healthcare Supply Chain Research Factbook (Tables 4, 5) excludes all non prescription products, and sales to other distributors 3) Specialty distributors defined as per the Specialty Pharmaceuticals and Role of the Specialty Distributor report published by the Center for the Healthcare Supply Chain Research in April 2011 4) Manufacturers ship directly to Multiple provider types, including those served primarily by pharmaceutical distributors 5) Chain pharmacies include national and regional drug store chains, mass merchandisers and food stores. Chain warehouses represent centralized warehouses for chain pharmacies 6) Specialty distributors provide services to many provider types, including physicians offices and clinics, home care providers, hospital pharmacies and specialty pharmacies Source: 2011-12 Center for Healthcare Supply Chain Research Factbook (Tables 4, 5 and 121), IMS Health, Booz & Company analysis
Distributors Continue to Gain Market Share US Healthcare Distributor Rx Pharmaceutical Sales Revenue by Category ($ B) 217 17 7 192 CAGR +5% 268 21 26 33 188 Generic Revenue Growth Rates (%) by Category Specialty via Specialty Dist. Specialty via Traditional Dist. Branded 2006-2010 5% 69% -0.6% Discussion Growth in pharmaceutical sales revenue through US healthcare distributors increased by 5% from 2006 to 2010. Growth in low cost generics has accelerated, while growth in branded pharmaceuticals has slowed. Specialty remains the fastest growing category, albeit off a small base. % Sales Revenue Through: US Healthcare Distributors US Traditional Healthcare Distributors 2006 2010 78% 87% 79% Distributors handle 87% of overall industry sales revenue, a ~9% absolute increase since 2006, and Traditional Distributors manage 79% of revenue. Distributors are gaining share from other alternatives (e.g. 3PLs, direct to customer). Source: Booz & Company Analysis 2007-08, 2011-12 Center for Healthcare Supply Chain Research Factbook; Specialty distributors defined as per the Specialty Pharmaceuticals and Role of the Specialty Distributor report published by the Center for the Healthcare Supply Chain Research in April 2011 Note: CAGR Compounded Annual Growth Rate
Sales Shift from Independents and Food Stores to Chains, Mass Merchandisers and Mail Order Manufacturer Sales at Trade Price 1 : Contribution by Provider Channel (% Value) 2006 2010 13.6% 16.0% 8.2% 1.3% 5.7% 11.1% 34.3% 9.8% Chain Stores and Mass Merchandisers Non Federal Hospitals Clinics Long Term Care and Home Health Mail Order Independents Food Stores Others (incl HMO s) 12.5% 17.3% 5.7% 7.0% 0.7% 11.9% 9.2% 35.6% Provider Dynamics Providers remain fragmented, with the largest chain stores and mass merchandisers, representing only 35% of the overall market this bodes well for the role of the distributor, as most of these other providers have limited direct access to manufacturers. There is an increasing trend toward mail order, clinics, chains and mass merchandisers and a slight decline in independents. Large chains and mass merchandisers manage large volumes, and will continue to be strong negotiators, placing pressure on distributor margins. 1) All channel shares are estimated based on trade pricing - reported at wholesaler invoice prices excluding off-invoice discounts and rebates Note: Federal Hospitals are reported separately by IMS and may not capture full portfolio of federal purchases Source: IMS Health, Booz & Company analysis 13
Generics Comprise 78% of Sales Volume; Represent Only 25% of Sales Revenue U.S. Generics Market Share and Sales Rx Script Volume (% of total Rx mkt) 80 Sales Revenue (% of total Rx mkt) 30 70 60 50 20.0% 21.0% 22.0% 23.0% 25.0% 25 20 40 30 63.0% 67.0% 72.0% 75.0% 78.0% 15 10 20 10 5 0 2006 2007 2008 2009 2010 0 Share of Revenue (% of total Rx market) Share of Prescription Script Volume (% of total Rx market) Source: 2011 12 Center for Healthcare Supply Chain Research Factbook (Table 89), IMS National Prescription Audit, MAT December 2010; Booz & Company interviews and analysis
Specialty Sales Expected To Continue To Grow Specialty sales in the US $B 2 64 4 Other Channels Discussion Specialty is expected to continue to grow rapidly, with 100% growth expected in 2011, and strong growth rates thereafter. 1 26 34 2010 Specialty Distributors Traditional Distributors Specialty pharmaceuticals are typically very expensive, and often require a cold chain infrastructure and have complex manufacturing, handling and treatment protocols. For specialty products, traditional distributors primarily serve hospitals and pharmacies, while specialty distributors primarily serve clinics and specialty pharmacies. Higher prices and somewhat higher margins for specialty products are offset by higher handling costs and a fragmented customer base. 1) IMS Health, Walgreens Analyst Day Report, Nov 2010 2) Specialty sales is defined as biologically derived products that have complex treatment regimens which require special handling storage and delivery and cost more than $ 600 per month 2) Other channels refers to direct sales by manufacturers to specialty pharmacies, clinics and hospital pharmacies 3) 2009 Specialty Pharmaceuticals Report published by the Center for Healthcare Supply Chain Research (Figure 3) Source: Specialty Pharmaceuticals and Role of the Specialty Distributor report published by the Center for the Healthcare Supply Chain Research in April 2011 (Page 10)
Current Issues in Distribution
Fake Pharmacies Profiting on Scarce Drugs? Pharmacies Swept Into Drug Wars Drug Shortages Lead to Price Gouging US May Lose Chance to Pass National Drug Trace Plan W.Va. AG Sues 14 Pain Drug Distributors Fake Avastin Took Murky Path to U.S. War on Drugs Moves to Pharmacy from Jungle American Pain: The Largest U.S. Pill Mill s Rise and Fall
Prescription Drug Abuse and Diversion CDC has indicated that prescription drug abuse has reached epidemic proportions. DEA has identified the issue as a top priority for the agency. ONDCP: More than 70% of those abusing these drugs obtain them from friends or family. The solution must strike a careful balance between legitimate need versus those who would abuse them. Source: Policy Impact: Prescription Painkiller Overdoses, CDC National Survey Shows Friends and Family Are Primary Sources of Abused Painkillers, ONDCP
Prescription Drug Abuse and Diversion This is a complex issue, calling for collaboration between industry stakeholders and federal/state authorities. HDMA members invest heavily in suspicious order monitoring technologies and other measures to enhance supply chain security. Congressional and state interest is high; litigation was recently announced by the West Virginia AG. HDMA is partnering with national organizations to educate the public and raise awareness.
2012 HDMA Map of State Pedigree Legislative/Regulations As of March 8, 2012
Federal Pedigree Goals 1. Uniformity 2. Preservation of safety, efficiency and costeffectiveness 3. Solution calls for serialization at the unit level. 4. Flexibility to allow for technology development 5. Practicality from an operations perspective 6. Congressional and state support 7. Stakeholder consensus
Drug Shortages 221 shortages were reported by ASHP and University of Utah as of July 2012. The amount of shortages has tripled since 2005. These are high profile incidents, impacting patient care. Major categories of product shortages include oncology, antibiotics and nutrition drugs. Emergence of Gray Market has made headlines.
Key Drivers of Shortages 5%
Drug Shortages: Possible Solutions Legislators have identified uniform federal pedigree as a way to mitigate shortages, but this does not address why they occur in first place. Distributors play a critical role to respond to these events to exchange and coordinate information with various stakeholders. Voluntary HDMA guidelines on product availability were released earlier this year.
Medicare and Medicaid Reimbursement CMS is expected to issue final rules on AMP and Sunshine this year; will go into effect in 2013. CMS is moving forward on their efforts to publish the National Average Drug Acquisition Cost (or NADAC) survey. In June, the agency sent 2,500 surveys to independent and chain pharmacies across the country.
Looking to the Future
2009 Future of Healthcare Study: Seven Issues and Trends to Shape the Distribution Industry Product Mix & Base Volume Branded decline and generic growth Specialty evolution Coverage Coverage and volume increase Federal and state driven coverage initiatives Consumerism Changing choices as a result of increased final decision making role Distributors Revenue, Growth Profitability Consolidation New services/capabilities Reimbursement AMP implementation ASP scrutiny Repeal of non interference e-pedigree Timing for implementation Federal or state driven Care Delivery Structural Changes Outcomes based formulary Disintermediation by 3PL and by manufacturers Pharmacy and manufacturer consolidation design New locations of care Source: Booz & Company, 2009 Future of Healthcare Study
Looking to the Future: The Role of Distributors in 2015 1. Pedigree/track and trace 2. LIFO 3. Reimbursement 4. Biosimilars/specialty 5. Evolving role of 3PLs 6. Expansion of services (e.g., excess warehouse capacity and financing of new businesses) Source: Breakout session discussions, HDMA Annual Board & Membership Meeting, October 20122
HDMA: Your Partner in the Distribution Industry
Thank You John M. Gray jgray@hdmanet.org (703) 787 0000 www.healthcaredistribution.org