Getting direct about exclusive supply


delivery van wholesaler

There’s a growing trend for pharmaceutical manufacturers to exit the CSO wholesaler distribution system for their products… Why is this important? Jarrod McMaugh explains

You may not be aware of this yet, but there’s a growing trend for pharmaceutical manufacturers to exit the CSO Wholesaler distribution system for their products. Have you noticed? It’s sort of a big deal…

In all seriousness, why is it such a big deal? Why is it that there is a lot of concern, a lot of strong opinions (on both sides) about whether this the end of the world or the birth of a brave new one? There is a bit of complexity to the issue, so stick with me while I run through it.

‘Straya Mate

Australia is part of the problem. That’s a pretty blunt statement, but there is logic behind the brusqueness.

Australia is a big place – roughly the size of the continental United States, with a population smaller than many US cities. The Australian population also tends to hug on to those green parts of the map where beaches, rivers, and metropolitan infrastructure make for a pretty easy-going life.

In other words, we have a small number of people all clustered in to a small space, and an even smaller number of people spread out over the rest of the country.

This distribution of the population led to the original Community Service Obligation. Companies that provide warehousing and distribution services to the PBS are paid an allowance to ensure that all PBS medications are available to all pharmacies within 24 hours. This is really important in a country where there is diffuse population of people who expect the same level of basic access to healthcare as everyone else.

There has been a lot of discussion around the CSO. Some believe it to be rent-seeking; that is, the creation of a way of doing things that requires money to stay viable, that inhibits competition. The concept of competition is going to be important later, so keep that in mind.

My opinion of the CSO is that it is a necessary inconvenience. We want to ensure that all people can get their medication within one working day of presenting a prescription. To achieve this, we need to have a distribution model that is effective, and we need to have stock available in every warehouse ready to react to an order.

This means that every warehouse of a CSO-compliant company needs to not only keep at least one brand of every strength of every molecule on the PBS… they have to do it with a reasonable volume to meet potential demand. Any person who has managed a dispensary should understand the challenge involved here.

My pharmacy doesn’t keep every strength of every molecule subsidised by the PBS; it’s too much risk for my pharmacy to carry every single molecule in every strength in the hopes that someone presents a script for everything at least every now and then before expiry. It’s unreasonable to expect a pharmacy to carry everything. It’s also unreasonable to expect all wholesalers to carry everything in order to meet government policy without some way of mitigating their risks. This is what the CSO achieves.

The Direct Supply Offer

This brings us to direct supply – this model involves the manufacturer dealing with a distributor directly; essentially cutting out the “middle man” of the wholesalers. Ostensibly, this minimises risks for everyone involved, because the wholesaler doesn’t have to hold something that might go out of date before it is used; the pharmacy also avoids the need to keep excess stock on hand, and the manufacturer ensures timely supply to every pharmacy in the country.

Sounds like a win-win-win situation… So that’s the end of this opinion piece… Or we can look at how it works in reality.

Choice

In my opinion, this is the biggest issue with the new direct supply models. At the moment, if I want to purchase a product from Amgen, a range of products from Astra Zeneca, or anything at all from Pfizer, I only have one option for the supply route. For the majority of Pfizer lines, I have the option of purchasing an alternative brand, but this is not the case for some of their lines, and all of the lines available via direct supply from the other two companies mentioned above.

This is important due to competition law in Australia. Specifically, there may be a misuse of market power when a company enters into an exclusive arrangement that minimises competition in a substantial way. Let’s see the wording that the Australian Competition & Consumer Commission uses:

A business with a substantial degree of power in a market is not allowed to engage in conduct that has the purpose, effect or likely effect of substantially lessening competition in a market. This behaviour is referred to as ‘misuse of market power’. It is not illegal to have, or to seek to obtain market power by offering the best products and services.

So, a few important things to note – you’re allowed to have exclusive rights to sell a product. This is covered in patent law. You’re allowed to dominate the market by having the best product available. You’re allowed to have a preferred supplier of your product as well. This is seen with many consumer electronic products where a brand has their own stores or preferred outlets via a contract.

What could be a problem is when competition is reduced in a market by denying access to products that had previously been available to a larger number of competitors.

Changes in terms

Whether competition has been restricted or not, there can be some evaluation of the benefit of an arrangement in the market. If access is improved, prices drop, and restrictions on supply are lessened by an arrangement, then exclusive supply may be approved.

At this point, it would be hard to find evidence that this is the case. Prices have not changed, although trading terms have been affected in some cases. Where a pharmacy business may have had a set number of days within which to pay for stock after receiving it, some of the direct supply models require up-front payment via credit card. This requirement isn’t wrong per se, but it is not an improvement.

Ordering arrangements have also become less favourable. Where the CSO wholesalers provide delivery of PBS items within 24 hours, this has not always been the case under direct-supply models. To be fair, there are plenty of anecdotes on either side of the discussion about the speed and accuracy of orders.

The number of orders per week has significantly changed for exclusive direct supply models, as has the quantity that must be ordered. Extra delivery fees are applied when a quota has been reached, and in some cases, you must order a significant quantity of product. Overall, this is not an improvement in access, terms, or timeliness.

Alternative models

There has been some discussion of a model that would make more sense with direct supply arrangements – that of consignment stock for all dispensaries in Australia. This would involve a dispensary carrying the entire PBS (or at least, those expected to be required on any particular day), but these items are still owned by the manufacturer until such time as they are dispensed. Once this occurs, the manufacturer invoices the dispensary for the items sold.

How such a model would be implemented is yet to be seen. Some proponents of this model are quite thoughtful in their discussion on the matter, while others don’t seem to comprehend the significant investment in time and money required to roll out such a model across an entire country (with noted population distribution issues).

There has been discussion about the development of a software infrastructure that seamlessly tracks stock in every pharmacy in the country. This seems to ignore the fact that Amgen’s reasons for moving Prolia to exclusive direct supply was because they could not track stock levels in three mainline wholesalers. Expanding this to 5000 dispensaries shouldn’t hold any problems then.

This model also fails to address who pays for distribution costs; how expired stock and out-of-stock situations are handled and paid for; how recalls are handled and paid for; how a dispensary obtains stock of new lines when presented with a prescription for something not currently warehoused in the dispensary; and how manufacturers redistribute “dead stock” and pay for this.

Consignment is an interesting proposal, yet we can see it in action now via NDSS. This model requires the pharmacy to pre-purchase supplies for patients with diabetes, and then receive a nominal fee from NDSS whenever a transaction is processed. NDSS then replaces the stock, and if you’re lucky, unused product is exchanged for other lines twice a year. I’m not sure there are many pharmacies that would be interested in seeing this model applied to their entire dispensary range. This isn’t true consignment, but this is the likely model once wholesalers are closed out of the loop.

Where to next?

At this point, many pharmacists have resigned themselves to the idea of dealing with direct supply, despite this creating more work for pharmacists – currently I place a daily order with one wholesaler; a secondary order occasionally with my second-line wholesaler if the primary has no stock, and then I place three different orders via DHL. I can’t even place one single order through DHL for the ranges that they distribute, so it definitely isn’t more efficient for pharmacies.

For those pharmacists who are happy with the arrangement, there is little that you need to do. For those who are not, there are a few options.

You can have a discussion with these companies and ask them if they can ensure that your preferred distribution method can be utilised. You can also have a discussion with ACCC and ask them if they would like to look in to these arrangements further. If you are going to have this discussion, you will need to be able to give examples of where competition has been reduced.

This would include documents that show that your previously-used distribution method is no longer able to access these products; changes in access such as reduced delivery options; increases in quotas for quantities ordered; and changes in trading terms such as having to pay upfront or in a shorter period of time than you were able to negotiate with your previous supplier.

The measure of whether an exclusive direct supply arrangement is equitable or not comes down to your experience. If you are worse off, AND you have no choice of supplier with whom to find a better deal, then you have to ask if this has been the result of a misuse of market power.

In my opinion, this is exactly what has occurred. This is why ACCC currently has at least one complaint to investigate. Maybe you want to talk to them too.

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5 Comments

  1. Irene Polka
    20/12/2017

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  2. Andrew
    21/12/2017

    The value of the sales data to the manufacturer is too valuable – the CSO is doomed. The landscape was different then. Pharmacies as business did not anticipate the market changing and made no defensive plans. It’s all too late.

    • Jarrod McMaugh
      22/12/2017

      The issue is about choice and competition Andrew. Perhaps the CSO is doomed if everyone chooses to have their dispensary filled via direct supply…. the fact that we don’t have an option, and that competition in the marketplace has been reduced due to the market power of the manufacturers that means that the CSO is being undermined inappropriately.

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