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R. David Yost, New economics of the pharmaceutical supply chain, American Journal of Health-System Pharmacy, Volume 62, Issue 5, 1 March 2005, Pages 525–526, https://doi.org/10.1093/ajhp/62.5.525
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During the last 10 years, the landscape of the pharmaceutical supply chain has changed tremendously and evolved into a mature and thriving industry. The transformation is essentially complete, with over 100 distributors narrowed down to three national, professionally managed public companies (the “big three”) responsible for the distribution of roughly 90% of wholesale pharmaceutical products. All of the large mergers have been accomplished, and nearly all of the integration cost savings have been realized, as have the advantages of scale in dealing with large quantities of products. Now, new industry economics are driving additional efficiencies in the supply chain as the distributor–manufacturer relationship evolves to a fee-for-service model. In this model, pharmaceutical manufacturers pay wholesalers for the services they provide in moving products from the manufacturers to customers.
Through the consolidation decade, the industry has remained intensely competitive. Competitive and economic pressures have pushed the average industry gross margins below 4.5%. The big three distributors (AmerisourceBergen, Cardinal Health, and McKesson) have historically been able to offset declining gross margins by reducing expenses and inefficiencies in their businesses and through buy-side or buy-and-hold opportunities (i.e., holding products purchased at one price until the manufacturer raises the price, thereby creating an additional margin for the wholesaler when the products are sold to pharmacies at a higher price). But as the large distributors have completed the construction of automated distribution centers with multibillion-dollar annual throughput, buy-side opportunities have dissipated, challenging distributors as never before.
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