The pharmaceutical industry in the US is one the most dynamic and important segments of the national economy. Due to advances in medical sciences, prescription drugs have become an essential element of modern health system. For example, in 2000, over $125 billion dollars worth of prescriptions drugs were dispensed in the US. Over the last twenty years, there was a continuous growth followed by merger and acquisitions in the industry. Major players have also begun to integrate vertically by acquiring businesses related to the distribution of drugs and related health care products.
Only handful wholesalers, included FoxMeyer, were able to provide national coverage through a network of distribution centers. The pressure to reduce cost in the industry as a whole has led wholesalers to use economy of scale. Over two decades, wholesalers have increasingly lowered their price and pro? t margin in order to compete. For example, from 1980 to 1996, wholesalers’ margins declined from 5. 5% to 0. 35%, while the retailers’ margin increased from 5. 35% to 5. 5%. This re? ected the increase bargaining power of the retailers.
The competition at the wholesaling level, where FoxMeyer operated become very strong. 2. 1 COMPETITION FoxMeyer faced competition from traditional competitors such as distributors and manufacturers, as well as from new competitors such as mail order and self-warehousing chains. As of 1999 a large number of companies started to conduct both retail and wholesale on the web. WHOLESALES: Wholesalers like FoxMeyer act as intermediaries between manufacturers and retailers (dispensers). They provide fast and cost effective mean for the purchase and sales of prescription drugs.
Wholesalers also have a broad range of value added services such as storage facilities and large varieties of drugs that they can provide to their dispensers and other customers. These value-added services are often not provided by the manufacturer and would be dif? cult and costly for dispensers to replicate. In additional, wholesalers have sophisticated ordering systems that allow retailers (or other customers) to electronically place and con? rm orders instantly. Because of these systems, customers were able to reduce their inventory-carrying costs while maintaining minimum inventory to meet their customers’ need.
In the early 1990’s, 40 major wholesales competed in the market, but the following wholesalers dominated over 80% of the drug business. (Figures are US$ annual sales) McKesson $20. 8 Billion Bergen’s $11. 6 Billion Cardinal $11. 5 Billion Amerisouce $7. 8 Billion Foxmeyer $5. 5 Billion W140 MANUFACTURER DIRECT: Manufacturers may sell directly to dispensers, bypassing any intermediaries. The distribution of prescription drugs from the manufacturer to the dispenser is not an easy task. It involves not only quick and ef?
cient transportation of drugs on a daily basis but also maintains large storage facilities to keep a constant inventory of over 18,000 brands of drugs. Therefore, dispensers and pharmacies have signi? cantly decreased the percentage of pharmaceutical purchased directly from the manufacturers in term of the total dollars. MAIL AND INTERNET ORDERS: End customers (patients) can receive their prescription drugs by mail e. g. , ordering by phone or online, without going to a retail pharmacy or an hospital. As a result, mail order operation can save overhead on inventory cost and storage cost.
HMO’s and insurance companies encourage end users to buy by mail. The dispensing of drugs by mail order from pharmacies of HMO’s centers, is the fastest growing segment of the industry. From 1990 to 1996, the sales in this segment increased from 5. 1% to 9. 7% and the 2001 estimated ? gure is over 12%, of the total industry sales. Yet, mail order operators frequently do manufacture the drugs. These companies operate warehouses buying directly from manufacturers, or use the services of another distributor.
SELF-WAREHOUSING: Self-warehousing occurs when retail or institutional dispensers take on the task of distribution themselves. Instead of relying upon an outside distributors, the retailers or health care institutions buy direct from the manufacturers; store the drugs in one or more of its own warehouse and then delivers the drugs to its retail stores and hospitals as needed. This method places pressure on the wholesalers since more HMOs and medical centers are increasingly use this approach, which enable thus also to dispense directly to patients via the mail (Internet).
2. 2 CUSTOMERS Basically, there are three major types of customers: independent pharmacies, institutions, and retail chains. INDEPENDENT PHARMACIES: Mom and pop stores which amount 27,000 in US (2001 data) purchase 95. 4% of their prescription through wholesalers. Over the year, most independent pharmacies have joined the group purchasing organization (“GPO”) to aggregate their purchasing power to negotiate favorable contracts with wholesalers. This action added signi? cant pressure to wholesalers to reduce selling price in order to maintain sales volume. INSTITUTIONS:
Institutions include HMOs, hospitals, clinics, nursing homes, home health care etc, which account to about 70% purchase of the wholesalers business. Over the years, HMOs and hospital consolidated to form integrated delivery network (“IDN”) in order to enhance their bargaining power. For example, in 1996, the period that FoxMeyer was in trouble, 35 IDNs posted gross revenues in excess of one billion dollars. In the late 1990’s, a number of institutional GPOs have combined to increase their purchase power even further. These changes also further weaken wholesalers’ bargaining power.
RETAIL CHAINS: While they rely on wholesales to deliver certain percentage of their drugs, they also maintain contact with self-warehousing chain and manufacturers to provide popular drugs in bulk, storing the drugs in their own W141 warehouses, for distribution to their retail outlet. Manufacturers also agree to sell drugs directly to large retail chains, which also affect wholesalers’ sales. During last several years, retail chains have increased the purchase percentage of their pharmaceutical drugs direct from manufacturers from 60% to 66%. Most pharmacies can ?
ll a prescription on the spot, or guarantee next day delivery. These dispensers of prescription drugs include the neighbourhood pharmacies, chain pharmacies such as CVS and Rite-Aid, hospitals, nursing homes, and care sites. Unfortunately, most of these retail outlets and institutions that dispense prescription drugs do not have the ability to store the large number and variety of drugs that they need to sell. Due to the improved logistic system, most of the above competitors can reduce delivery time. Customers seem to choose suppliers who can offer lower price.