Select Committee on Health Written Evidence


Memorandum by the British Association of Pharmaceutical Wholesalers (PI 24)


  1.  Full-line pharmaceutical wholesalers are an essential link in the medicines supply chain. They act as a one stop shop for almost all pharmaceutical products and services, playing a key role in the cost effective and safe distribution of a diverse and comprehensive range of healthcare products.

  2.  They deliver to the front line of health services—pharmacists, doctors, hospitals, sometimes even to individual patients across the whole country. In some countries, elements of full-line pharmaceutical wholesaling are viewed as a public service and receive state subsidies, although in the UK this is not the case. Wholesalers buy most of the medicines they supply direct from manufacturers to meet the demands of the customer—the NHS. In essence, the industry carries all the risk and investment involved in distribution of medicines with no specific investment or subsidy from, or cost to, the NHS.

  As an industry, pharmaceutical wholesale:

    —  Employs almost 9,000 staff.

    —  Makes more than 235,000 deliveries per week.

    —  Carries and supplies around 20,000 essential drugs, medicines and services.

    —  Delivers over 85% by value of the medicines dispensed in pharmacies, as well as around half of the medicines used in secondary care.

    —  Picks and delivers more than two billion items per year, with a combined value of over

    15 billion.

    —  Achieves service levels touching 99%.

    —  Operates over 50 depots nationwide.

    —  Provides 50% of the computer equipment used by pharmacies.

    —  Provides a round the clock, on demand service to pharmacies and hospitals, 365 days a year.

    —  Offers very short lead times on orders and deliveries—typically less than half a day.


  3.  Typically, wholesalers run at net margins of less than 2%. Some wholesalers take advantage of the fact that there are bigger margins to be made on certain products and concentrate wholly on them—these are known as short-liners. However, the British Association of Pharmaceutical Wholesalers represents only full-line wholesalers, who offer the entire range of licensed medicines needed by patients, not merely the most profitable ones. As an industry, wholesaling is under continuous pressure to meet the needs of its customers in what is currently a highly uncertain market. The prices of both generic and patented drugs are currently under negotiation, whilst the role of our principal customers is also likely to change significantly once the pharmacy contract is agreed. The danger of these pressures to our customers (ultimately the NHS) is that full line wholesalers could eventually be required to reduce their ranges, making the least profitable medicines difficult to source for the pharmacists, hospitals and doctors.


  4.  Pharmaceutical wholesaling is a lean industry, operating at low profit levels in a highly competitive market. And, like any part of an efficient supply chain, an onus exists on wholesalers to offer ever more competitive prices for products. One way pharmaceutical wholesalers can meet this demand for good value is by buying products sourced from markets with lower prices. This practice is sometimes known as parallel importing and, whilst this is a perfectly legitimate and legal activity, practiced in markets across the world, it is understandably a source of irritation to some domestic manufacturers, many of whom would like to see an end brought to the practice. Medicines made and sold by UK manufacturers and identical in make-up to those sold direct to the UK, can be re-imported from foreign markets, repackaged in English and sold safely here, all at a lower cost than the same medicine sold directly to wholesalers from the manufacturer. The savings made are passed on to pharmacists, allowing them to subsidise some of their loss-making activities and also benefit the Department of Health's coffers by means of a greater clawback (the process of recovering discounts offered by wholesalers to pharmacists).

  5.  Similarly, in common with wholesalers in other markets, the margins made on lines will differ. Typically, a wholesaler will discount many hundreds of the lines offered in order to attract custom. Many products are also offered at prices that derive no profit when other costs (eg delivery) are taken into account. At the other end of the scale, and to offset these no-profit lines, higher margins are set on other products, typically generic medicines. Operating in such a competitive market, with overall margins of just 2%, wholesalers rely upon these higher margin lines to remain profitable. Without them, it is uncertain whether wholesalers could continue to provide their efficient, effective service.

  6.  On the supply side, pharmaceutical companies are always attempting to maximise the prices they receive for their products and typically offer branded ethicals to all wholesalers at the same price. However, in a model of supply used by one manufacturer, wholesalers are used as an agency and are paid a fee for distributing its products. However, it is only because wholesalers have the necessary delivery infrastructure already in place that they can afford to cede to this manufacturer's demands. If other manufacturers were to follow suit, this valuable medicines supply infrastructure would become unsustainable and the twice daily deliveries which the industry's customers currently enjoy would almost certainly disappear. This, of course, would seriously damage the ability of pharmacies, hospitals and dispensing doctors to meet the needs of patients. In contrast to the service wholesalers offer—twice a day deliveries with half-day lead times—manufacturers can typically only offer weekly deliveries with three day lead times.


  7.  Pharmaceutical wholesaling is subject to a variety of very strict regulations to maintain the safety and efficacy of drugs. Some products are subject to specific temperature controls, whilst others are controlled under the Misuse of Drugs Act and require secure storage and are subject to burdensome administrative procedures. (Indeed, the manner in which the wholesale industry manages controlled drugs was praised in the most recent report of the Shipman Inquiry.) The Department of Health has recognised that these drugs incur greater costs of storage and distribution and because of the importance of observing the appropriate regulations, these products are generally not discounted and are known as ZDs or zero discount products). However, market demands are already putting pressure on wholesalers to begin to discount these medicines in order to undercut competitors.

  8.  Pharmaceutical wholesalers have long provided a valuable role in the supply chain for medicines. In many countries, wholesaling is a public service obligation which receives government subsidy, such is its importance in delivering medicines to patients in a timely, safe and efficient manner. The industry's twice daily deliveries across the UK, its contribution to the success of pharmacy in extending and deepening professional competencies and its potential for meeting the demands of pharmacists in light of the new pharmacy contract all mean that the pharmaceutical wholesaling business can continue to play an essential part of the UK's health services. However, like its regulatory and economic environment, its role remains uncertain. The industry cannot sustain continued pressure on its profitability without cutting its cloth accordingly. In reality, this could mean the reduction of its delivery capabilities to front line NHS services or a scaling back of its contribution to pharmaceutical services at a critical time for the profession.

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Prepared 26 April 2005