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Executive Summary

Drug whslr. penetration of the hospital market now accounts for two thirds of all hospital pharmaceutical purchases, according to the 1985 edition of the Lilly Hospital Pharmacy Survey. The survey, of 1,964 hospitals, states that in 1984, whslrs. supplied 66% of all hospital pharmaceutical product purchases, up from 57% in the prior year. In the last two years, the percent of supplies purchased by hospitals from whslrs. has risen by almost 20%, according to the survey. "It is interesting to note that the percentage of pharmaceutical purchases through whslrs. increased across all bed ranges during 1984," the survey stated. "Goods bought from whslrs. during 1984 by both general and specialized hospitals with fewer than 200 beds exceeded 70% of total pharmaceutical purchases, whereas institutions having between 200 and 500 beds obtained 60% of their drugs and related items from whslrs." Lilly's results, based on sampling of hospital pharmacies, mirror those reported by the whlse. drug industry in an earlier study. In its most recent annual "Operating Survey," the National Wholesale Druggists Association reported a 20% increase in hospital sales by its members during 1984, which followed a 30% jump the previous year ("The Pink Sheet" Sept. 2, p. 8). While the survey data show an inverse relationship between hospital size and purchases from whslrs., the largest percentage gains over 1983 nevertheless occurred in larger hospitals. Institutions in the 400-499 bed range, increased their percentage of whslr. purchases by 11% to 58%, and 200-299 bed hospitals moved from 55% to 65% during the year. These increases are indicative of the growing importance of whslrs. to the larger institutions. Wholesalers continued to expand their role in the operation of for-profit hospital pharmacies as well. "Survey data show that profit hospitals order 81% of their pharmacy goods through a whslr. -- an increase of 12% from the previous year," Lilly reported. "Private, nonprofit institutions buy 68% of their pharmacy merchandise from wholesalers (up from 59% reported for 1983). Government hospitals purchase 60% of their pharmacy stock from whslrs. -- 7% more than last year, whereas federal facilities obtain just 7% from whslrs. -- the same percentage as in the preceding year." Lilly's survey data indicate that the expanded use of whslrs. by hospital pharmacies has had a concomitant positive effect on annual inventory turnover rates. To evaluate the effect of whslr. purchasing on inventory, Lilly compared operating figures for two groups of specialized hospitals with more than 500 beds, one purchasing 39% of its pharmaceuticals or less from whslrs. and the other purchasing more than 39%. Between 1983 and 1984, average inventory for the first group rose from $498,771 to $582,801, as did average annual purchases, from $4.1 mil. to $4.2 mil. This resulted in a reduction in the inventory rate one full turn, from 8.2 times to 7.2 times. The second hospital group, those purchasing more than 39% of pharmaceutical products from whslrs., showed virtually no change in inventory investment from one year to the other, while annual pharmacy purchases rose over 14%, from $3 mil. to $3.5 mil. The resulting average inventory turnover in 1984 was 9.8 times compared to 8.6 times in 1983. The comparison also shows that the median wholesaler purchase percentage increased from 60% to 75% in the second or "whslr.-oriented" group. "This increased reliance on whslr. distribution suggests that large specialized institutions find the cash flow benefits of rapid stock turnover to be valuable," Lilly stated.

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