Exploring alternative distribution models for pharma supply chains

The pharmaceutical landscape has an established distribution pipeline: manufacturer partners with wholesaler, wholesaler navigates regional complexities through sales to pharmacy chains. At last count, wholesalers were responsible for distributing about 92% of prescription drugs in the U.S.

In practice, however, this seemingly straightforward approach often complicates control for the manufacturer, as seen in cases where the wholesaler’s operational inefficiencies or inflated costs affect the manufacturer’s target patient, plus financial needs.

Between 2002-2004, wholesalers made 40% of reported revenue from forward-buying, where extra inventory is purchased, stored and sold only after manufacturers raise prices. In an attempt to combat that practice, fee-for-service contracts were introduced in 2004. These contracts dramatically impacted supply chain design, imposing an inventory cap to limit hoarding by distributors, while requiring information sharing to keep manufacturers in the loop throughout the distribution chain.

But challenges still persist, which has led to a search for alternative distribution models (ADMs), where manufacturers can take charge of supply channels to increase efficiency and promote flexibility without affecting patient needs. 

The ADM strategy

ADMs are emerging strategies with the potential to disrupt set distribution channels in the supply chain. Within the traditional pharma landscape, a manufacturer set to launch a new product to market will partner with the three top players: Cencora (formerly Amerisource Bergen), Cardinal Health, and McKesson, using a distributor service agreement (DSA).  In 2024, the pharma wholesale and distribution market value stands at an estimated $844.2 billion, and is projected to grow at a CAGR of 8.7% between 2024-2034.

Combined, these three players have an influence that spans a 90% control over the distribution market in the U.S. In many cases, this has forced competition between manufacturers who contest for an opportunity to partner with these stakeholders or risk reduced market reach.

ADMs provide a radical transition away from unfavorable supply chains, helping to recreate a distribution model where manufacturers exercise more autonomy in distribution operations.

Types of ADMs

ADMs are revolutionizing pharma distribution channels by streamlining intermediaries between manufacturers, pharmacies and end users for a leaner supply channel. These models may link the manufacturer directly to the patient or pharmacy stocking medication options.

Direct-to-patient ADMs
Direct-to-patient care is a simplified approach to pharmaceutical logistics. By minimizing interference from go-betweens, this model connects manufacturers straight to users in need, ensuring a patient-centric approach to care delivery. A 2017 survey carried out on health care industry professionals revealed 30% of respondents considered DTP for improving patient retention during clinical trials.

Direct-to-patient ADMs are transforming several health fields, revolutionizing clinical trial approaches by permitting direct drug delivery to participants at home, which reduces barrier to entry, promoting diversity in trial participation.

There are different types of DTP models, including:

• Depot to site to patient: Here, participants may receive investigational products from the site of a clinical trial. This medication is transported by the site or a local pharmacy, and delivery may be completed in coordination with contracted providers.
• Depot to patient: In this model, medication is delivered directly from a central warehouse to the patient. This approach may be adopted to distribute specialized pharmaceuticals.

Medicinal products may also be delivered from a depot or central pharmacy to a home nurse who handles administration to the patient.

Direct-to-pharmacy ADMs
Under a direct-to-pharmacy channel, manufacturers would transact directly with pharmacies to connect with the final consumer. To achieve this, however, manufacturers do not simply bypass wholesalers to take over the supply reins. Instead, they would partner with third-party logistics providers (3PL) to ensure that pharmaceutical products are safely and efficiently distributed.

Since 2011, 6 of the top 10 pharma manufacturers have outsourced a portion of their U.S. distribution to 3PLs, with Pfizer using these intermediaries as far back as 2007 in the UK.

The current pharma supply chain climate

The growing popularity of ADMs could signal pharma’s exit from a landscape dominated by asset-based resell methods. Relevant stakeholders under this model observe a buy-and-hold system where wholesalers bulk purchase pharmaceutical products from manufacturers, holding them in inventory until they are sold to players like pharmacies, specialty clinics, etc.

Asset-based resell has been a mainstay of the supply chain, leaving the heavy lifting of pharma distribution to the wholesaler who pick up close to 10.5 million shipments per day. This simplifies distribution for the manufacturer who commutes to only 300 locations to connect with these wholesale vendors. While convenient, a manufacturer will often move blind, with limited input to how the inventory is handled and distributed across players.

Reflecting manufacturer disengagement in the supply chain, a 2020 ParkourSC survey of 200 pharma manufacturers and distributors showed that more than a quarter of firms have experienced damaged, or missing inventory. Around 90% relayed a lack of trust in the supply chain. 

ABMs also discourage unfair practices like forward or investment buying, which can result in lost manufacturer revenue.

In 2004, inventory management agreements were introduced to counter unsuitable distribution structures. These agreements streamline control by clarifying individual duties and responsibilities throughout the supply chain.

In keeping up with the changing pharma climate and needs, however, supply chain practices are again evolving to accommodate alternative distribution models.

Selecting an ADM

ADMs are the logical next phase for an industry focused on prioritizing value-based care. To ensure efficiency and direct connectivity with patient end users, manufacturers must keep certain factors in mind when making a distribution choice:

• Guaranteed visibility into every stage of the supply process i.e. movement, inventory, and distribution to pharmacies and patients
• The model chosen must accommodate patient’s needs by delivering therapies to desired locations whether at home, pharmacies, hospitals or clinics
•  These ADMs must take product specifications into account. For instance, provisions must be made for temperature-controlled environments when storing or transporting delicate inventory
•  Manufacturers should employ channels that can guarantee efficient product delivery and tracking

Manufacturers can now take advantage of a democratized pharmaceutical supply chain. When utilized correctly, ADMs can provide the needed balance of an efficient operation geared towards maximizing distribution efficiency, while minimizing the risk usually attributed to established supply channels.

However, while ADMs offer a suitable alternative, these models are still at a low adoption rate across manufacturers. But with many promising benefits, these models are poised to expand as channels become more refined across the health ecosystem.