A broken chain: pharmacy’s supply crisis


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The damaged pharmacy supply chain is creating the current (and future) spate of out of stock medicines, says Bruce Annabel

Price disclosure has damaged all supply chain participants including wholesalers, distributors, manufacturers, generic suppliers and innovator sector, but less so pharmacy. 

That’s because a significant portion of pharmacy supplier discounts stripped out have been replaced by fee increases ie: script dispensing remains very profitable.

However, a trail of wreckage has been left further up the supply chain that you should be aware of because it’s this that is causing the out of stocks, particularly generics and private label. And it’s unlikely to improve in the near future.

  1. Manufacturers

 Brand originators – the innovators

Brand originator manufacturers endure a price cut (currently 16%, rising to 25% effective 1 October 2018) when a drug loses exclusivity dropping both market share and profits immediately.

The result is rapidly reducing profitability precipitating I understand twelve manufacturers such as Pfizer, Amgen and Astra Zeneca to utilise exclusive direct supply aimed at reducing distribution costs and raising margin. The rationale was succinctly portrayed by Liz Chatwin Country President Astra Zeneca, Australia and New Zealand in PharmaDispatch on 8 March 2018. ‘Our business is about one-third the size that it was. I need to make the best decisions for our business with the portfolio that we have and under the current financial position’.

Another margin tactic is imposing Brand Price Premiums (BPPs) that may offer pharmacy some more opportunity to garner more premium free incentives, presently $1.78, by dispensing the generic in a class that didn’t have a BPP previously.

On another positive note originator manufacturers have more control with their own plants hence provide a more reliable supply chain and fewer stock outs.

Generic suppliers

Generic manufacturers are operating very thin margins, some insufficient to recover full cost of the product, lean supply logistics and holding less stock inevitably resulting in stock outs.

A major supply issue can originate from the limited number of manufacturing plants available and pressure sourcing the Active Pharmaceutical Ingredient (API) from a small number of specialist manufacturers.  A very real consequence of price disclosure is, net of pharmacy discounts, many ex-manufacturer product prices have sunk so low to be almost unviable. Therefore, a manufacturer might seek to divert stock elsewhere in search of slightly better price and/or volume. I don’t know this, but it’s a thought.

  1. Wholesalers

 Wholesalers are the meat in the sandwich between pharmacy and manufacturers. Pharmacy wants a reliable supply and lowest cost into store and manufacturers want to pay them less to distribute. There’s little doubt the CSO is holding the pharmacy distribution model together because, unlike pharmacy’s increased fee structure, price disclosure has decimated their mark-up base, their profit. They too have reacted by cutting overheads, tightening trading terms including payment deadlines, curbing pharmacy discounts, which are now almost non-existent, plus reducing services.

Furthermore, exclusive direct supply removes profitable volume putting further pressure on costs, trading terms, range (particularly OTC) and stock levels. Competition is also increasing with emergence of CH2 a CSO short line wholesaler and even LinFox recently licenced to handle pharmaceuticals. It’s ugly.

Price disclosure was originally introduced about ten years ago. It directly and indirectly caused many of the supply issues and financial problems detailed above. The taxpayer and the health consumer benefited while all supply chain participants, pharmacy to a lesser extent, paid for it.

  1. Forthcoming price cuts

And there’s more to come. In February 2018, the law was passed enabling implementation of a raft of F1 drug price cuts totalling $1.8bn over five years included in the May 2017 federal budget that will impact brand originator manufacturers. The cuts have various commencement dates which kicked off this month that will have a significant impact on their finances and those of the wholesalers who depend a great deal on F1 originator drugs. Expect further tightening, more BPPs and supply issues as supply chain profitability pressures continue.

Summary

Such a complex and pressured supply chain inevitably has knock on effects including supply reliability, trading terms, complexity, profitability and increased administration. It is becoming pharmacy’s number one issue. So, what to do?

  1. Stay in stock. Carry more stock of the bigger volume generics and originators
  2. Second line. Have a strong second line generic supplier and wholesaler
  3. Customer first. Dispense the brand originator if a generic isn’t available
  4. Identify expected shortages each week and source what you can
  5. Have friends. Work closely with your generic supplier and wholesaler
  6. Keep an eye on the TGA Medicine shortages web site https://apps.tga.gov.au/prod/MSI/search/

Remember, your customer will be delighted if you offer them a solution as long as you are in stock and they get to choose. Out of stock either at your peril.   

Bruce Annabel is a pharmacy business consultant and Adjunct Professor of Pharmacy Management, QUT

Click here to see a related article on the damage done by price cuts 


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