The 2016-17 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors

By Adam J. Fein, Ph.D.
(downloadable PDF file; Released September 2016.)

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In 2016, pharmaceutical wholesalers face a challenging business environment. The 2016–17 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors—our seventh edition—will help you understand this turbulent environment. It remains the most comprehensive tool for analyzing the economic and business realities of U.S. pharmaceutical distribution. Click here to download a free overview of the 2016-17 report.

The report is researched and written by Adam. J. Fein, Ph.D., one of the world’s leading experts on the industry and the author of the influential Drug Channels website. Dr. Fein has synthesized a wealth of statistical data (including more than 100 data-packed exhibits), research studies, financial information, and his own unique business consulting experience into a definitive, nonpartisan resource.

That’s what makes this report essential reading for pharmaceutical manufacturers, wholesalers, pharmacists, pharmacy owners, hospital executives, buyers, benefit managers, managed care executives, healthcare policy analysts, investors, consultants—anyone who wants to understand and benefit from this ever-changing industry.

This year’s report has been updated, revised, and expanded. This 2016-17 edition contains the latest financial data and market positions of the largest public companies: AmerisourceBergen, Cardinal Health, and McKesson. It updates our analysis of each wholesaler’s business segments and underlying business profitability, based upon our proprietary economic models. This information allows you to assess differences among the public wholesalers’ business organizations, strategies, and financial performance.

No other report on the market today offers the depth, insight and analysis of the 2016–17 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

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The 2016–17 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors is protected by copyright law. Unauthorized reproduction or distribution of this report, or any portion of it, may result in severe civil and criminal penalties, and will be prosecuted to the maximum extent of the law. This report may be cited in commercial documents with full and appropriate attribution. Nothing in this license is intended to reduce, limit, or restrict any rights arising from fair use under copyright law or other applicable laws.

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TABLE OF CONTENTS

Introduction and Guide to This Report

PREFACE: INDUSTRY TRENDS AND KEY REPORT THEMES

SECTION I: WHOLESALER AND CUSTOMER INDUSTRY ANALYSIS

Chapter 1: Industry Overview

  • 1.1. Defining Drug Wholesaling
    • 1.1.1. The Products That Wholesalers Sell
    • 1.1.2. Full-Line Wholesaling
    • 1.1.3. Specialty Distribution
    • 1.1.4. Regulation and Supply Chain Security
  • 1.2. Overview of Wholesalers’ Channel Role
    • 1.2.1. Physical Distribution
    • 1.2.2. Financial Intermediation
    • 1.2.3. Impact on Pharmacy and Provider Reimbursement
  • 1.3. Industry Participants
    • 1.3.1. Big Three Wholesalers: Revenues and Growth Trends
    • 1.3.2. Other Wholesale Market Participants
    • 1.3.3. Specialty Product Distribution Market Share

Chapter 2: Channel Role for Retail, Mail, and Specialty Pharmacies

  • 2.1. The Pharmacy Market
    • 2.1.1. Outpatient Dispensing Formats
    • 2.1.2. Differences Among Outpatient Dispensing Formats
    • 2.1.3. Pharmacy Market Size and Structure
    • 2.1.4. Recent Changes in Pharmacy Market Structure
    • 2.1.5. Wholesale Suppliers to Largest U.S. Pharmacies
  • 2.2. Independent Pharmacies
    • 2.2.1. Industry Position and Wholesaler Market Shares
    • 2.2.2. Wholesaler Services for Independent Pharmacies
    • 2.2.3. PSAOs and the Wholesalers’ Role in the Pharmacy-Payer Relationship
    • 2.2.4. Wholesaler Relationships with Pharmacy Buying Groups
    • 2.2.5. Wholesaler Generic Source Programs for Smaller Pharmacies
  • 2.3. Retail Chains
    • 2.3.1. Brand Distribution Relationships Between Wholesalers and Retail Chains
    • 2.3.2. Generic Sourcing Relationships Between Wholesalers and Large Pharmacies
  • 2.4 Specialty Pharmacies
    • 2.4.1. Specialty Pharmacy Market Participants
    • 2.4.2. Wholesalers’ Specialty Pharmacies
    • 2.4.3. Wholesalers’ Role in Manufacturer-Defined Limited Specialty Networks

Chapter 3: Channel Role for Physician Offices/Clinics and Hospitals

  • 3.1. The Provider-Administered Drug Market
    • 3.1.1. Spending and Sites of Care
    • 3.1.2. The Buy-and-Bill System
    • 3.1.3. Provider Reimbursement in Buy-and-Bill System
    • 3.1.4. Group Purchasing Organizations (GPOs)
    • 3.1.5. Contract Management and Chargebacks
  • 3.2. Physician Offices
    • 3.2.1. Distributors’ Services for Physician Offices
    • 3.2.2. GPOs for Physician Practices
    • 3.2.3. Physician Dispensing
  • 3.3. Hospitals
    • 3.3.1. Wholesalers’ Services for Hospitals
    • 3.3.2. Hospital GPOs
    • 3.3.3. Specialty Pharmacies at Hospitals and Health Systems
    • 3.3.4. Wholesalers and the 340B Drug Pricing Program

SECTION II: BUSINESS ECONOMICS AND INDUSTRY TRENDS

Chapter 4: Wholesaler Profitability

  • 4.1. Sources of Wholesaler Profits
    • 4.1.1. Gross Profit and Gross Margin
    • 4.1.2. Operating Profit and Operating Margin
  • 4.2. Components of Buy-Side Gross Margin
    • 4.2.1. Distribution Service Agreements
    • 4.2.2. Specialty Distribution Service Agreements
    • 4.2.3. Prompt Payment Discounts
    • 4.2.3. Generic Sourcing Formularies
  • 4.3. Sell-Side Margins
    • 4.3.1. Cost-Minus Discounts
    • 4.3.2. Sell-Side Margin Trends for Specialty Drugs
  • 4.4. Estimates of Overall Buy-Side and Sell-Side Gross Margins
  • 4.5. Gross Profits of Brand vs. Generic Drugs
    • 4.5.1. Lifecycle Profits for Traditional Generic Drugs
    • 4.5.2. Lifecycle Profits for Provider-Administered Generic Drugs
    • 4.5.3. Private Label Generic Drugs
  • 4.6. The Profit Impact of Drug Price Inflation
    • 4.6.1. Brand-Name Drugs
    • 4.6.2. Inventory Appreciation and Revaluation
    • 4.6.3. Generic Drugs
  • 4.7. Operating Profit

Chapter 5: Financial Stability and Cash Management

  • 5.1. Debt, Coverage, and Liquidity Ratios
  • 5.2. Balance Sheet Assets
  • 5.3. Cash Conversion Cycle
    • 5.3.1. Inventory Levels and Days Inventory Outstanding
    • 5.3.2. Accounts Receivable and Days Sales Outstanding
    • 5.3.3. Accounts Payable and Days Payable Outstanding
  • 5.4. Uses of Cash
  • 5.5. Return on Invested Capital
  • 5.6. Stock Market Performance

Chapter 6: Forces of Change for Drug Distribution

  • 6.1. General Trends
    • 6.1.1. Growth in U.S. Pharmaceutical Spending
    • 6.1.2. Wholesaler Compensation and the ACA’s Bona Fide Service Fees
    • 6.1.3. The Challenge of Gross-to-Net Pricing
  • 6.2. Retail, Mail, and Specialty Pharmacies
    • 6.2.1. Competitive Pressure in the Pharmacy Industry
    • 6.2.2. The Risks and Rewards of Consolidation and Market Share Concentration
    • 6.2.3. Profit Challenges from Payer-Defined Narrow Pharmacy Networks
    • 6.2.4. The Outlook for Pharmacy-Dispensed Biosimilars
  • 6.3. Physician Offices and Hospitals
    • 6.3.1. Hospital Acquisition of Physician Practices and Shifting Sites of Drug Administration
    • 6.3.2. Specialty Pharmacy Displacement of Buy-and-Bill Channels
    • 6.3.3. New Buy-and-Bill Reimbursement Models
    • 6.3.4. The Impact of Biosimilars Under the Medical Benefit

SECTION III: BIG THREE WHOLESALER COMPANY PROFILES

Chapter 7: AmerisourceBergen Corporation

  • 7.1. Business Overview
    • 7.1.1. Company Information
    • 7.1.2. Company History
    • 7.1.3. Recent Acquisitions and Divestitures
    • 7.1.4. Business Segments
  • 7.2. Profitability
    • 7.2.1. Overall Pharmaceutical Distribution
    • 7.2.2. Profitability by Business Sub-Segment
  • 7.3. Customers
    • 7.3.1. Top 10 Largest Customers
    • 7.3.2. Walgreens Boots Alliance
    • 7.3.3. Express Scripts
  • 7.4. Growth Trends
    • 7.4.1. Distribution Company Growth Trends
    • 7.4.2. Specialty Group Trends
    • 7.4.3. MWI Veterinary Supply and Expansion Into Animal Health

Chapter 8: Cardinal Health

  • 8.1. Business Overview
    • 8.1.1. Company Information
    • 8.1.2. Company History
    • 8.1.3. Recent Acquisitions
    • 8.1.4. Business Segments
  • 8.2. Profitability
    • 8.2.1. Overall Pharmaceutical Distribution
    • 8.2.2. Profitability by Business Sub-Segment
  • 8.3. Customers
    • 8.3.1. Top 10 Largest Customers
    • 8.3.2. CVS Health
  • 8.4. Growth Trends
    • 8.4.1. U.S. Distribution Growth Trends
    • 8.4.2. Specialty Solutions
    • 8.4.3. Cardinal Health China and Chinese Pharmaceutical Distribution

Chapter 9: McKesson Corporation

  • 9.1. Business Overview
    • 9.1.1. Company Information
    • 9.1.2. Company History
    • 9.1.3. Recent Acquisitions and Divestitures
    • 9.1.4. Business Segments
  • 9.2 Profitability
    • 9.2.1. Overall Distribution
    • 9.2.2. Profitability by Business Sub-Segment
  • 9.3. Customers
    • 9.3.1. Top 10 Largest Customers
    • 9.3.2. CVS Health
    • 9.3.3. Rite Aid
  • 9.4. Growth Trends
    • 9.4.1. U.S. Drug Distribution Growth Trends
    • 9.4.2. McKesson Specialty Health
    • 9.4.3. Celesio and International Pharmaceutical Businesses

Acronyms and Abbreviations

Endnotes

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LIST OF EXHIBITS

Exhibit 1: Unbranded Generics, Share of U.S. Prescriptions, 2005-2020E
Exhibit 2: Full-Line Wholesale Revenues, by Type of Customer, 2014
Exhibit 3: Full-Line Wholesalers, Inventory Levels vs. Product Sales, by Product Type, 2014
Exhibit 4: Specialty Distributor Revenues, by Type of Customer, 2014
Exhibit 5: Specialty Distributor Sales, by Therapeutic Area, 2014
Exhibit 6: Timeline of DSCSA Requirements for Wholesale Distributors, 2013-2023
Exhibit 7: U.S. Drug Distribution and Related Revenues at Big Three Wholesalers, Calendar Year 2015
Exhibit 8: U.S. Revenues and Growth, Big Three Wholesalers, 2012-2016E
Exhibit 9: Specialty Product Distribution Revenues, by Division and Parent Company, 2015
Exhibit 10: Average Annual Number of Prescriptions per Pharmacy, by Retail Dispensing Format, 2015
Exhibit 11: Average Annual Prescription Revenue per Retail Pharmacy Outlet, 2015
Exhibit 12: Total U.S. Pharmacy Industry Revenues, Prescriptions, and Locations, by Dispensing Format, 2015
Exhibit 13: Largest U.S. Pharmacies and Their Primary Wholesale Suppliers, 2016
Exhibit 14: Number of Independent Pharmacies, 1990-2015
Exhibit 15: Estimated Drug Sales and Market Share with Independent Pharmacies, by Wholesaler, 2015
Exhibit 16: U.S. Pharmacy Franchise and Marketing Programs of Large Drug Wholesalers, 2016
Exhibit 17: Consumer Satisfaction with Wholesalers’ Pharmacy Group vs. Other Dispensing Formats, 2016
Exhibit 18: Wholesaler-Owned Pharmacy Services Administration Organizations, by Members and Ownership, 2016
Exhibit 19: Pharmacy Buying Groups and Primary/Preferred Wholesaler Relationships, by Total Purchases, 2016
Exhibit 20: Full-Line Wholesaler Sales to Retail Chain Warehouses, 2008 to 2014
Exhibit 21: Share of U.S. Generic Purchasing Volume, by Organization, 2016
Exhibit 22: Specialty Drug Purchases, by Dispensing Format, 2015
Exhibit 23: Pharmacy Revenues and Market Share from Specialty Pharmaceuticals, by Company, 2015
Exhibit 24: Alternative Channels to Specialty Pharmacies in Limited Networks
Exhibit 25: Medical Benefit Spending on Provider-Administered Drugs, by Drug Category and Payer, 2014
Exhibit 26: Medicare Part B Spending on Provider-Administered Drugs, by Location of Service, 2005-2014
Exhibit 27: Commercial Medical Benefit Spending and Claims for Outpatient Provider-Administered Drugs, by Site of Care, 2014
Exhibit 28: Buy-and-Bill System for Distribution and Reimbursement of Provider-Administered Outpatient Drugs
Exhibit 29: Reimbursement Method for Provider-Administered Drugs Paid Under the Commercial Medical Benefit, by Site of Care, 2015
Exhibit 30: Ratio of Unit Cost for Top 10 Provider-Administered Drugs, Hospital Outpatient vs. Physician Office, by Payer, 2014
Exhibit 31: Wholesaler Chargebacks As a Percentage of Net Sales, 2009-2014
Exhibit 32: Revenue Mix at Oncology Practices, by Category, 2014
Exhibit 33: Most Important Services Offered by Community Practice GPOs
Exhibit 34: Community Practice GPOs and Wholesaler Ownership, 2016
Exhibit 35: Patient-Administered Oncology Volume, by Dispensing Channel, 2015
Exhibit 36: Number of Community Hospitals, by Affiliation, 1999-2014
Exhibit 37: Hospital Costs, by Type of Expense, 2014
Exhibit 38: Hospital Pharmacy Expenses per Staffed Bed, by Surgical Volume, 2014
Exhibit 39: Largest Group Purchasing Organizations, by Acute Care Members, 2016
Exhibit 40: Hospital GPO Fees Earned, by Product Category, 2012
Exhibit 41: Oncology Drug Profits, 340B-Covered Entities vs. Noncovered Entities, 2013
Exhibit 42: Hospitals’ 340B Drug Purchases As a Percentage of Total Hospital Drug Purchases, 2007-2015
Exhibit 43: Key Elements on a Wholesaler Income Statement
Exhibit 44: Sources of Full-Line Wholesalers’ Gross Margin from Brand-Name Drugs
Exhibit 45: Estimated Buy-Side and Sell-Side Contributions to Gross Margin, 2016
Exhibit 46: Big Three Wholesalers, Revenues and Gross Profits, Brand vs. Generic Drugs, 2016
Exhibit 47: Summary of Factors Affecting Brand-Name vs. Generic Drug Profitability for Wholesalers
Exhibit 48: Typical Path of Wholesaler Gross Profits, Brand vs. Multi-Source Generic Drug
Exhibit 49: Example of Channel Profits from Provider-Administered Generic Drug
Exhibit 50: Average Year-Over-Year Change in List Price, Top Best-Selling Brand-Name Drugs, 2002-2016
Exhibit 51: Illustrative Value of a Wholesaler’s Fees with Brand-Name Pharmaceutical Price Inflation
Exhibit 52: Illustrative Effect of Inventory Revaluation on a Wholesaler’s Gross Margin
Exhibit 53: Average Year-Over-Year Change in Pricing of Mature Generic Drugs, 2014-2016
Exhibit 54: Big Three Wholesalers, Gross Profit Contribution from Generic Drug Price Inflation, 2012-2016
Exhibit 55: Big Three Wholesalers, Drug Distribution Operating Margin As a Percentage of Revenues, 2012-2016
Exhibit 56: Big Three Wholesalers, Distribution Operating Profits As a Percentage of Gross Profits, 2012 vs. 2016
Exhibit 57: Big Three Wholesalers, Total Short-Term and Long-Term Debt, 2016
Exhibit 58: Big Three Wholesalers, Debt-to-EBITDA Ratio, FY2014-FY2016
Exhibit 59: Big Three Wholesalers, Liquidity Ratios, FY2016
Exhibit 60: Big Three Wholesalers, Composition of Current Assets, 2016
Exhibit 61: Illustrative Wholesaler Cash Conversion Cycle for Brand-Name Drugs Sold to an Independent Retail Pharmacy
Exhibit 62: Big Three Wholesalers, Cash Conversion Cycle, 2016
Exhibit 63: Big Three Wholesalers, Days of Sales in Inventory, 2012-2016
Exhibit 64: Percentage of Wholesalers’ Trade Accounts Receivable and DSO for Largest Customers, 2015-2016
Exhibit 65: Big Three Wholesalers, Days Payable Outstanding, 2012-2016
Exhibit 66: Big Three Wholesalers, Dividends and Share Repurchases As Percentage of Operating Cash Flow, FY2014-FY2016
Exhibit 67: Big Three Wholesalers, Return on Invested Capital, 2012-2016
Exhibit 68: Forward Price-to-Earnings Ratio, Big Three Wholesalers vs. S&P 500, 2011-2016
Exhibit 69: One- and Five-Stock Price Performance, Big Three Wholesalers vs. Manufacturers and Overall Market, 2016
Exhibit 70: Projected Growth in National Health and Net Outpatient Prescription Drug Expenditures, 2012-2025
Exhibit 71: Total U.S. Drug Purchases and Sources of Growth, 2015 vs. 2020
Exhibit 72: Pharmacy Industry Revenues, Traditional vs. Specialty Drugs, 2010-2020
Exhibit 73: Price Increases for Brand-Name Drugs, Invoice vs. Net Price Growth, 2011-2015
Exhibit 74: Change in Prescriptions Dispensed and Revenues, by Pharmacy Format, 2011-2015
Exhibit 75: Alignment Between the Big Three Wholesalers and Top Five Pharmacies
Exhibit 76: Volume of Chemotherapy Infusion Claims, Medicare vs. Commercial, by Site of Service, 2004 vs. 2014
Exhibit 77: Medical Benefit Administration for the Top 3 Outpatient Specialty Drugs, by Site of Care, 2010 vs. 2014
Exhibit 78: Health Plans’ Perceived Pricing Competitiveness for Specialty Medications, by Site of Care, 2016
Exhibit 79: Oncology Drug Sourcing for In-Practice Administration, by Practice Type and Channel, 2014
Exhibit 80: AmerisourceBergen, Pharmaceutical Distribution, Profitability Metrics, 2012-2016
Exhibit 81: AmerisourceBergen, Estimated Revenues and Operating Profit by Segment, FY2016E
Exhibit 82: AmerisourceBergen, Top 10 U.S. Drug Distribution Customers, FY2016
Exhibit 83: AmerisourceBergen, Revenues from Express Scripts vs. Express Scripts Pharmacy Revenues, 2012-2016
Exhibit 84: AmerisourceBergen, Revenues by Major Business Segment and Customer, FY2006 vs. FY2016E
Exhibit 85: AmerisourceBergen Distribution Company, Revenues and Growth, 2012-2016:Q2
Exhibit 86: AmerisourceBergen Specialty Group, Revenues and Growth, 2004-2016E
Exhibit 87: Cardinal Health, Profitability Metrics, 2012-2016
Exhibit 88: Cardinal Health, Estimated Revenues and Operating Profit, by Segment, FY 2016
Exhibit 89: Cardinal Health, Top 10 U.S. Drug Distribution Customers, FY 2016
Exhibit 90: Cardinal Health, Revenues from CVS Health, 2012-2016
Exhibit 91: Cardinal Health, U.S. Pharmaceutical Distribution, Revenues and Growth, 2012-2016:Q2
Exhibit 92: Cardinal Health China, Revenues, 2011-2015
Exhibit 93: McKesson, Distribution Solutions, Gross and Segment Operating Profitability Metrics, 2012-2016
Exhibit 94: McKesson, Estimated Revenues and Operating Profit, by Segment, FY 2016
Exhibit 95: McKesson, Top 10 U.S. Drug Distribution Customers, FY2016
Exhibit 96: McKesson, Proforma Revenues from CVS Health, 2011-2016
Exhibit 97: Rite Aid, Days Sales in Inventory, 2013 to 2016
Exhibit 98: McKesson, U.S. Distribution, Revenues and Growth, 2012-2016:Q2
Exhibit 99: McKesson Health Mart Store Count, 2006 to 2016
Exhibit 100: McKesson’s OneStop Generic Program, Revenue Growth Rate, 2010-2016
Exhibit 101: Celesio, Revenues and Gross Profit, by Operating Segment, 2015
Exhibit 102: Number of Pharmacies, Major European Countries, 2015

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