Chapter 13

Channels of Distribution

Norman V. Carroll, PhD

Professor of Pharmacy Administration
Virginia Commonwealth University School
of Pharmacy

Chapter 13 slides for

Marketing for Pharmacists,
2nd edition
 Learning Objectives
Define and give examples of a
channel of distribution for pharmacy
products and services.
Define and give examples of
members of channels of distribution
for pharmacy products and services.
Define the term intermediary, give
examples of intermediaries, and list
and describe the functions
intermediaries fulfill in channels of
distribution.
 Learning Objectives
(continued)
Discuss the effects of customer,
product, and manufacturer
characteristics on channel structure
and explain why different types of
pharmacy products and services
require different channel structures.
Define and give examples of channel
conflict and cooperation.
List and explain the types of vertical
marketing systems and discuss the
need for them.
 Learning Objectives
(continued)
Explain the functions and services
offered by pharmacy benefit managers
and the effects these organizations
have had on community pharmacy.
Explain how the growth of managed
care has led to increasing cooperation
and consolidation among pharmacy
retailers and increasing conflict between
retailers and other channel members.
Traditional Channels
MANUFACTURER

WHOLESALER

PHARMACY (Retailer)

CONSUMER
 Why have intermediaries?

MANF
RETAILER

MANF RETAILER

MANF RETAILER
 Efficiency

MANF
RETAILER

MANF WHLSER RETAILER

MANF RETAILER
 Additional functions of
intermediaries
 Product information - safe, effective use
 Convenience - place and time
 Variety / assortment
 Services
 Repackaging
 Reimbursement
 Repair
 Credit
Traditional Channels
MANUFACTURER

WHOLESALER

PHARMACY (Retailer)

CONSUMER
 Why long channels for
pharmaceuticals?
 Customer characteristics
 Product characteristics
 Manufacturer characteristics
 Legal restrictions
 What about new types of medicines?
Channel conflict
- Discriminatory pricing
- Limited distribution

Channel cooperation
- Buying groups
- Prime vendors
- Charge-back system
 NO CHARGE-BACK

MANUFACTURER

AWP - 20%

WHOLESALER

AWP - 15%

PHARMACY RETAIL
 CHARGE-BACK SYSTEM

MANUFACTURER

AWP - 20% AWP x 25%

WHOLESALER

AWP - 40%

HMO PHARMACY
Vertical Marketing Systems
 Administered - based on
power

 Corporate - based on
ownership

 Contractual - license /
franchise
- wholesaler voluntary chains
 MANF Merck

WHOLESALER Cardinal

RETAILER Medco / Medicine

PAID Shoppe

CONSUMER
PHYSICIANS

Staff Model HMO

HOSPITAL

PHARMACY

CONSUMER
 Number of Community
Pharmacies
60000 Total
Indeps
Chains
50000

40000

30000

20000

10000

0
1990 1992 1994 1996 1998 2001 2003 2005

Source: IMS DDD Class of Trade Analysis

 Managed Care Enrollment (000)
250000

200000

150000
PPOs
HMOs
100000

50000

0
1990 1995 2000 2003 2004

Aventis MCD
Source: Managed Care Digest HMO-PPO
 3rd Party Payment for Rx Drugs

100 Govt
Priv3PP
80
% of Rxs

60
40
20
0
90

92

94

96

98

00

02

04
19

19

19

19

19

20

20

20
IMS DDD Class of Trade Analysis
 Sales of Mail Order Pharmacies

45000 43929
40000
35000
30000
Sales in 25000
Millions 20000 18512
15000
10000
6053
5000 2113
100 750
0
1981 1986 1990 1995 2000 2005

Source: IMS DDD Class of Trade Analysis

Growth of PBMs
 PLAN SPONSOR Commonwealth
of Virginia

PBM Medco

PHARMACY Rite Aid

COVERED LIFE/BENEFICIARY D. Holdford

 Why PBMs?
Growth of third-party payment
Increase efficiency of payment
and information flows
Intermediary for payment and
info
 Plan Sponsors
General BCBS Aetna
Motors
Teamsters

PBM Pharmacy Benefit Manager

Buford Rd. Wal-Mart

Pharmacy
Eckerd
Rite Aid
 PBM Services - early
Claims processing
Retail pharmacy network
Drug cards for beneficiaries
DUR and use management
Utilization reports to sponsors
Electronic processing
On-line adjudication
 PBM Services - later -
“managing the drug benefit”
 Why – control drug costs
 What –
Discount pharmacy reimbursement
Mail order – the three big PBMs each
own one
Drug benefit design – co-pay, quantity
limits, exclusions, three-tier designs
Formulary
Drug product rebates
 What is a rebate?
Payment made by a manufacturer to a
PBM or other entity that does NOT TAKE
PHYSICAL POSSESSION OF THE DRUG
Usually on patented branded products
Based on use of the manufacturer’s drug
Given to encourage greater use
Substantial
 Rebate
Manf

Goods
Wholesaler
PBM
Payment

Pharmacy
Plan Sponsor

Patient Rebates
 PBM revenue sources
Administrative fees - per claim
Clear to sponsor, specified in
contract
Competitive
Easy audit by sponsor
Services - like disease
management
Relatively small revenues
 PBM revenue sources
Rebates – old
Somewhat hidden from sponsor
Not clear in contract
Difficult for sponsor to audit
Mail order generics – new
Retail – MAC
Mail – AWP – 50%
For generics AWP-50% >> MAC
 Effects of PBM rebates
PBM incentive - maximize rebates
Which products do they
favor?
Low cost or high rebate?
Help consumer?
Help plan sponsor?
Pharmacists’ image?
Major Pharmacy Benefit Managers

PBM Rx volume

(millions)

Caremark 432
Medco 397
Express 300

Total top-3 PBMs 1,129

Total retail rx volume 3,175
 Major Pharmacy Benefit Managers
PBM Owner

Caremark McKesson (PCS)  Lilly (PCS)

Rite Aid (PCS)  Advance Paradigm 
Advance/ PCS

Baxter  Indep Caremark 

PCS/Caremark  CVS Caremark

Medco IndependentMerck
Independent

Express Independent
 Consolidation and Alliances
Corporate chains
- Consolidation (horizontal integration)
- Market power
- Efficiency
- Vertical integration - PBM

Voluntary chains (small chains and indeps)

- Wholesalers
- PBM functions
 Consolidation in Chain Pharmacy
1990 1995 2005
Walgreens 1,525 2,085 4,962

Rite Aid 2,352 2,759 3,331

Thrifty 1,065 1,040 (Rite Aid)

CVS 801 1,366 5,400

Revco 1,870 2,169 (CVS)
Hook-SuperX 1,110 (Rev) (CVS)
Eckerd 1,632 1,716 (CVS/ Coutu)
Thrift Drug 472 640 (CVS/ Coutu)

Jean Coutu 192 470 2,243

Totals 11,019 12,245 15,936
 Wholesaler-Sponsored Voluntary
Cooperatives
Name Sponsor No. Pharmacies
Health Mart McKesson 3,000
Valu-rite McKesson ?
AccessHealth McKesson 3,000+

Family Pcys Amerisource- 2,500

Bergen (ABC)
Good Neighbor ABC 2,500
Performance + ABC 3500+

Leader Cardinal 3,300

Retail Pharmacies - Efficiency

Higher-volume outlets
Economies of scale
Technology
Phone systems
Electronic links with prescribers
Robotics and automated dispensing
Centralized dispensing (fill) and
adjudication
Web and phone-based refill services
 Summary - Trends
Increasing third-party payment /
managed care
Increasing mail order sales
Increasing importance of PBMs
Consolidation:
PBMs
Chain pharmacies
Sort of – community pharmacies
Increased efficiency