Pharma Takes Control Of Distribution Chains

The pharmaceutical supply chain is a high-value business, with all those involved constantly scrutinising how the chain operates and what implications it will have on commercial activities. As with all buyer/supplier relationships, there has always been some degree of conflict between European supply chain participants, but this has intensified since 2006.¹

Faiz Kermani

Traditionally, manufacturers sold their products to wholesalers, who then competed among themselves to become the main suppliers to pharmacies. A more recent trend established in the UK, however, is for companies to use a directtopharmacy (DTP) model, where companies sell their products directly to pharmacies and appoint a limited number of logistic service providers (LSP) to deliver the medicines on their behalf. Pfizer implemented such a model in 2007 and a number of other pharma companies have also set up similar agreements in the UK.²

A 2009 survey of pharmacists, however, revealed that 74% of respondents were unhappy with the UK DTP system.^1,3 In general, these critics believe that the distribution system will deteriorate because of DTP.^1,3,4 For instance, some pharmacists say Pfizer's DTP system has led to problems with accessing Pfizer drugs for customers, while others claim they have received letters restricting the number of drugs they can order. Pfizer has disputed these comments and denied placing any restrictions on order sizes, and, despite the criticisms, has renewed its DTP agreement for 2010.^5,6

The implications of change

With profits being limited by government costcontainment measures and expiring patents, many pharma companies believe that changing their distribution arrangements makes commercial sense. In addition, companies have become increasingly irritated by parallel trade and are determined to gain control over the supply chain, which DTP will enable.

DTP has huge implications for those distributing pharmaceuticals and because of this, wholesalers in the UK have attempted to fight back and have placed their hopes in the British government to do so (wholesalers hoped that the government would support the notion that DTP was anticompetitive after earlier findings by the UK Office of Fair Trading showed that DTP could have some detrimental effects e.g., an increase in costs of medicines for the National Health Service). In May 2008, however, the UK government announced that there had been no change in the services offered to patients caused by Pfizer's DTP arrangement and that a decline in standards was unlikely in the foreseeable future. It ruled out taking any legal steps to prevent DTP, but did state that it would keep the matter under review.⁷ The pharma industry, on the other hand, seems confident that the major legal hurdles have been overcome as companies continue to take steps to modify their distribution arrangements in the UK.

While some pharmaceutical companies have adopted the DTP model, others have decided to simply reduce the numbers of wholesalers they conduct business with.³ In April 2009, Bayer Schering Pharma announced it would be distributing some of its UK products under a new reduced wholesaler model. BristolMyers Squibb adopted a similar arrangement in August 2009; two distributors now supply most of the company's products, but a number of lines are only be available from BristolMyers Squibb directly. Some observers believe that this type of arrangement is much quicker to implement than the DTP model.^8,9 Reducing the number of wholesalers also helps reduce internal costs for manufacturers and, by only dealing with a few wholesalers, may create more manageable business relationships.

In the early days of DTP, associations representing wholesalers were at the heart of the battle to defend the traditional supply change system, but they have now started to back away from this position. This was the case for Groupement International de la Répartition Pharmaceutique (GIRP), which is the European Association of Pharmaceutical Full-line Wholesalers. GIRP sent a letter to the UK's Health Ministry suggesting that DTP arrangements might harm public health and was subsequently taken to court by Alliance Boots, an international distributor based in Switzerland that is involved in DTP arrangements. Eventually the two parties came to an understanding, with GIRP taking the position that specific contracts, signed by a particular member, would not be considered to be proper matters for action or opinion by the organisation.¹⁰ The adoption of a neutral position by trade organisations appears to remove a major obstacle for the future expansion of DTP.

DTP expands across Europe

Following the developments in the UK, DTP models are now beginning to make their way into Poland. Since 2009, AstraZeneca has been the main driver in trying to introduce DTP into the Polish pharmaceutical market, and has selected Polska Grupa Farmaceutyczna, Torfarm and Farmacol to be its exclusive distribution partners. Up to seven other companies are also believed to be selecting distribution partners in Poland as part of DTP agreements.¹ The changes are predicted to reshape the Polish wholesale market, which has already experienced a wave of consolidation, and further pressurise smaller wholesalers. According to media interviews with the President of AstraZeneca Poland, Jerzy Garlicki, the launch of a DTP scheme has been a success.¹¹ He stated that more than 80% of Poland's 1300 pharmacies omitted wholesalers when buying at least one of the company's products during the first 2 months of the scheme.

However, AstraZeneca's DTP model has run into opposition from Poland's Main Pharmaceutical Inspectorate, which states it may be breaking the country's Pharmaceutical Law and the Law on Health Benefits,^11,12 which are designed to ensure access to pharmaceuticals and requires their delivery on equal terms to all parties in the distribution chain. In addition, in May 2009, Poland's Office of Competition and Consumer Protection summarised its findings concerning contracts between distributors and several major pharmaceutical companies including GlaxoSmithKline, SanofiAventis, Servier, Novartis, AstraZeneca, Novo Nordisk, Pfizer, Eli Lilly, Roche and Bayer.

If DTP is to succeed then AstraZeneca will need to be prepared for legal battles with the authorities, in a similar manner to what happened in the UK. If DTP does manage to gain a foothold in Poland, however, then it is highly probable that pharma companies will attempt to introduce the model elsewhere in the EU.

Outlook

At present, European wholesalers have been unable to resist the moves by pharmaceutical companies to tighten their grip over distribution systems. One of the reasons for this is the inability of wholesalers to present a united front against the pharmaceutical industry. Essentially, for those wholesalers who become preferred partners for pharmaceutical companies, the new distribution models guarantee business and will help them dominate the wholesaling market. As such, these companies become less inclined to oppose the supply chain changes, leaving the resistance up to the companies who lost out.

The establishment of new relationships with select wholesalers, however, will lead to a new type of distributor, formed through the consolidation of bigger wholesalers with DTP deals with major pharma companies, instead of lots of smaller wholesalers. As they gain power in these relationships and expand their portfolio of business interests across Europe and beyond, they may not let pharmaceutical companies have everything their own way.

Partly in response to complaints from smaller wholesalers, there are also likely to be further official investigations into the merits of DTP models. As long as pharmaceutical companies can demonstrate that such moves improve distribution efficiency and do not result in visible increases in healthcare costs for European governments and anti-competitive practices, however, they will probably continue to take bolder steps in this direction.

References

1. F. Kermani, The Future of Pharmaceutical Distribution in Europe (Urch Publishing, UK, 2010).

2. "Other companies consider distribution shake-up" in The Pharmaceutical Journal , 277(7431), 725 (2006).

3. Pharmaceutical Services Negotiating Committ, "Distribution of Medicines" (2009). www.psnc.org.uk

4. D. Andalo, "Wholesale: ripples made by Pfizer" in The Pharmaceutical Journal , 279(7468), 259–262 (2007).

5. Pfizer, The New Distribution Arrangement (2010). www.pfizerdtp.co.uk

6. C. Chapman, Chemist and Druggist News (October, 2009). www.chemistanddruggist.co.uk

7. Dispensing Doctors Association, "Government Responds to OFT Medicines Distribution" (2008). www.dispensingdoctor.org

8. Dispensing Doctors Association, "DTP & RWM Schemes updated again" (2010). www.dispensingdoctor.org

9. Bristol-Myers Squibb Pharmaceuticals (BMS) announces change in distribution arrangements (Pharmaceutical Services Negotiating Committee, June 2009). www.psnc.org.uk

10. Alliance Boots, "GIRP and Alliance Boots announce settlement agreement and withdrawal of claims" (2009). www.allianceboots.com

11. Business Monitor International, "AstraZeneca's DTP Scheme Shows Strong Uptake" (2009).

12. PharmaPoland.com, "More pharma firms to adopt DTP in Poland" (2008). www.pharmapoland.com