Baxter

Kenneth Campbell

Pharmaceutical wholesalers are essential to the American pharmaceutical supply chain and distribute most prescription drugs.

Pharma wholesalers procure drugs from manufacturers, store them, and then distribute them to hospitals, clinics, nursing homes, and mail-order pharmacies. AmerisourceBergen, Cardinal Health, and McKesson Corporation account for over 90 percent of all wholesale drug distribution in the U.S. About 92 percent of prescription drugs are distributed through wholesalers.

However, despite little attention from policymakers, wholesalers play a critical and lucrative role in the supply chain. U.S. pharmaceutical wholesalers retained $18 billion in revenue in 2016 or about 4 percent of total retained revenue.

A wholesaler's business practices impact the drugs that are ultimately distributed to patients. Generic drugs are the primary revenue source for wholesalers, who compete with one another for contracts with providers and pharmacies. Also, they make money in ways that don't make sense to policymakers, such as by forward-buying, which involves buying extra inventory at today's prices and selling it at higher prices later.

The role of wholesalers in the prescription drug industry

Brand-Name Drugs

A wholesale acquisition cost (WAC) is the list price set by manufacturers for each drug. Wholesalers purchase drugs at WAC less a negotiated discount, which is kept confidential. Additionally, wholesalers sell brand-name drugs to pharmacies at WAC minus a negotiated discount, which is also confidential. Many wholesalers who sell branded drugs act as price takers, often selling at the same discount they buy from, typically WAC minus five percent. A wholesaler may generate some revenue by selling branded-drug products at a higher price than the price at which they bought them, such as buying at WAC minus 5 percent and selling at WAC minus 3 percent in markets where wholesalers do not have much influence over prices, as in limited distribution drug markets.

The difference between what wholesalers pay for brand-name drugs and what pharmacies pay can generate significant revenue for wholesalers. Brand-name drugs still account for only a small portion of overall spending.

Generic Drugs

Generic

drug distribution and pricing are increasingly entrusted to pharmaceutical wholesalers. Manufacturers compete with wholesalers for contracts, leaving wholesalers in the position of setting generic drugs' prices and their markets. In generic price negotiations, wholesalers have considerable leverage if generic manufacturers do not secure contracts with one of the big wholesalers.

Wholesalers have even acquired their generic production sources through vertical integration. 

Alternatively, they may contract with generic drug manufacturers on a preferred basis. A wholesaler may guarantee the distribution of a specified volume of generic drugs to a manufacturer in exchange for a lower price. For-profit, the wholesaler sells generics at a higher price than the manufacturer.

Pharmacies can increase generic sales by purchasing a specified volume of generic drugs from wholesalers. Generic markups generally range from 10 percent to 15 percent. Still, confidentiality agreements make it difficult to verify the accuracy of these estimates or determine the levels at which wholesalers mark up specific drugs.

While wholesalers mark up generic prices by a greater percentage, they derive more significant revenue per unit from brand prices (where they are price takers). The average generic wholesaler revenue for a month's supply of $30 is $4.56 based on a 15 percent markup. Wholesalers make $11.33 from brand-name drugs with a 2 percent markup on a $ 566-month supply average. Generic medications make up 90 percent of retail prescriptions, so wholesalers make more money than brands.

A price increase for all drugs benefits wholesalers

Generic drugs in the U.S. are generally very inexpensive, but there are some areas where manufacturers can raise prices substantially due to a lack of competition. Approximately 6 percent of generic drugs in Medicaid saw price increases greater than 100 percent in 2017. Generally, wholesalers would benefit from purchasing before the price hike and charging the new, higher price.

Wholesalers also profit from brand drug price increases by purchasing drugs at old, lower prices and holding on to them until manufacturers raise prices. In 2020, manufacturers increased prices by an average of 5 percent for 860 drugs. Wholesalers may profit substantially from small percentage price increases on expensive brand-name drugs. Wholesalers' revenues from 2002 to 2004 were estimated to be dominated by forward-buying at 40 percent. Reports suggest that wholesalers have lost revenue from forward-buying in the past five years because manufacturers have slowed some price increases.

Wholesalers play an essential role in the American pharmaceutical industry. Wholesalers have also undergone vertical and horizontal integration in the health care system. Generic drug manufacturers play a more active role in setting the price of generics than distributing brand-name drugs.

Chain pharmacies are becoming more powerful, specialty drug distributors are becoming more competitive, and the public is becoming more skeptical about drug price increases. Diversifying their business lines, ensuring stable supply chains, and ensuring vaccine distribution during the COVID-19 pandemic have helped wholesalers adapt and evolve in the changing healthcare system.