Wholesaler Distribution Fee Rates May Be Lower Than Planned, Study Says
Executive Summary
Drug wholesaler distribution fees may provide lower revenues than expected, a study by Accenture and Goldman Sachs says
Drug wholesaler distribution fees may provide lower revenues than expected, a study by Accenture and Goldman Sachs says. The "shift toward non-contingent distribution agreements will likely occur in 2005 but at lower rates than wholesalers are targeting," the study says. The three major wholesalers - AmerisourceBergen, Cardinal and McKesson - want manufacturers to pay directly for distribution services since they can no longer rely on product price increases to provide revenue. Cardinal expects fees to bring distribution operating margins back up to about 2.5% (1 (Also see "Cardinal Fee-For-Service Ultimatum Is Serious, CEO Says" - Pink Sheet, 1 Nov, 2004.), p. 3). "Based on our survey, there appears to be a critical mass of major drug companies that are planning to move to fee-for-service agreements with drug wholesalers sometime in 2005 or 2006." The study notes that over 50% of pharmaceutical and biotech companies interviewed expected to enter into fee-for-service contracts in the next six to 18 months. "However, wide gaps in terms of the fee structures remain," the report adds. Manufacturers are "uncomfortable" with cost increases that would occur as a result of the new contracts, the study says; manufacturers also said they could accept a reduced service offering to maintain a fee level consistent with what they pay under current inventory management agreements. Many manufacturers fail to see additional value in what wholesalers are offering as "value-added" services, the report says. "Few found these offerings to be particularly innovative when compared to wholesalers' existing offerings." Services that manufacturers cited as "potentially additive" were special product handling, promotional marketing, recalls management and launch support. Cardinal and McKesson have set April 1 as a deadline for converting to fee-for-service agreements. However, the study notes that the effective deadline is the renewal date of the inventory management agreements. Because 75% of wholesalers' volume is governed by inventory management deals, which expire throughout 2005, "the immediacy of the April 1 deadline may not be significant." The report was written by Accenture Partner-Health & Life Sciences James Hintlian and Goldman Sachs Managing Director Christopher McFadden based on surveys of firms representing over 35% of the U.S. pharmaceutical market. |