4 Things You Didn’t Know About the Pharmaceutical Supply Chain

I’m interested in how goods and services flow from the source to the customer. In an earlier post, we traced the supply chain of the White Truffle, and we also looked at how Domino’s Pizza tracks their pizza orders. Today, we’ll see what the supply chain looks like for pharmaceutical drugs.

The pharmaceutical supply chain in the United States is complex, but only involving a few players. As we’ll see shortly, even though the number of key players are low in comparison to other supply chain networks in the consumer packaged goods space, the pharmaceutical supply chain is unnecessarily complex.

1. Big Pharma is Big Money

Pharmaceutical Manufacturing, based on 2004 numbers from the Kaiser Family Foundation, estimates sales for that year to be over $450 Billion in worldwide sales. That study estimates that sales will grow 9% Year over Year.

But, as we’ll see, pharmaceutical manufacturing is only one player in this supply chain, The size of the pharmaceutical market is much larger than the $450 Billion indicated by the Kaiser Family Foundation.

2. The Key Players in Pharmaceutical Supply Chain

But Pharmaceutical Manufacturing is only one player in the supply chain. There are 4 major players:

• Pharmaceutical Manufacturing: These are the Eli Lilly, Merck, Pfizer, Johnson & Johnson’s of the world. They primarily conduct scientific research and develop new drug therapies that address diseases that affect humans. Within pharmaceutical manufacturing, there are two distinct types: generic drugs and brand name drugs.
• Wholesale Distributors: The next upstream player in the pharmaceutical supply chain are the wholesale distributors, who purchase drugs from pharmaceutical manufacturers. Wholesale Distributors are primarily in the business of inventory management, warehousing, and fulfillment and distribution of drugs. The key value they add to the supply chain is the ability to have efficiencies by geography and the ability for storage of pharmaceutical drugs.Wholesale Distributors primarily sell to Hospitals, other Medical Facilities, Pharmacies, and the like. Key players in the wholesale distribution of pharmaceutical drugs are McKesson, Cardinal Health, and AmerisourceBergen. Wholesale Distribution of pharmaceutical drugs is estimated to be a $202 Billion dollar business in the United States.Other value added services provided by Wholesale Distributors in the pharmaceutical supply chain are drug packaging, drug repackaging, drug buy back programs, reimbursement support, and reverse logistics.

  At bottom, economies of scale is the largest value added service provided by pharmaceutical wholesale distributors.

• Pharmacy Benefits Managers: A Pharmacy Benefit Manager is not visible to the end customer, but plays an important role in the pharma supply chain. It is estimated that 2/3 of drugs dispensed in the United States are through the PBM network.The Pharmacy Benefits Manager is the primary interface between the Health Insurance Plan, the customer, and the pharmaceutical manufacturer or the wholesale distributor. They handle things like claims and disease management services.

  The relationship between the Pharmacy Benefits Manager and the Pharmaceutical Drug Manufacturer centers on the question: Should your drug be included in the health plan’s benefit formulary? Because of this relationship, there is an effort for sales agents from the pharma manufacturer to sell to pharmacy benefits managers. And it makes sense: the more plans a manufacturer’s drug is in, the higher market share the manufacturer will have.

  The Pharmacy Benefits Manager and the Pharmacy relationship is around cost and quantity discounts, reimbursement, and dispensing. Often, a Pharmacy will want to be part of a PBM, to take advantage of the value added services the PBM provides.

• Pharmacies: The pharmacy is what the end customer is very familiar with – this is the place where we submit our prescriptions from the doctor and the place where we pick up our prescriptions when they’re ready. Pharmacies receive the drugs they sell from wholesale distributors and, sometimes, from the pharmaceutical manufacturer themselves.

The pharmaceutical supply chain can be visualized by the following process map, showing the flow of drugs, flow of money, and flow of drug rebates:

3. Stealing Pharmaceutical Drugs is Big Business

According to a recent Fortune Magazine article, in 2010 pharmaceutical drug theft account for 15% of total theft value, or roughly $4 Billion dollars. Second in terms of the value of the stolen goods is Tobacco, then Electronics coming in at third.

4. Traceability is an Issue in the Pharmaceutical Supply Chain

Because the pharmaceutical supply chain is unnecessary complex, it opens up the opportunity for mistakes, such as drug theft.

According to the same Fortune article, pharmaceutical drugs have been stolen from wholesale distributor’s warehouses or from the manufacturer’s facility. The stolen drugs are then sold to other wholesale distributors, which then get sold to other wholesale distributors, and finally to a pharmacy. At the end of this supply chain is the patient or customer.

And tracking stolen pharmaceutical drugs is difficult. The only way to do so today is to track by lot number. Which means that if 300 pills were stolen from Lot #989 which has 2000 pills, the manufacturer has to recall the entire lot of 2000. This method is costly, but is the only method pharmaceutical drug manufacturer’s have in stopping the flow of stolen pharmaceutical drugs.