APPENDIX 45
Memorandum by the British Association
of Pharmaceutical Wholesalers (PI 24)
PHARMACEUTICAL WHOLESALING—THE
INDUSTRY'S
ROLE
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.
PHARMACEUTICAL WHOLESALING—A
COMPETITIVE INDUSTRY
UNDER PRESSURE
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.
PHARMACEUTICAL WHOLESALING—SECURING
VALUE FROM
THE SUPPLY
CHAIN
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.
PHARMACEUTICAL WHOLESALING—A
PROVEN PERFORMER
IN THE
PRIVATE SECTOR
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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