Wholesalers adapt to a world that is rapidly, radically changing

Drug Store News, Nov 17, 1997 by Al Heller

To listen to the nation's largest drug wholesalers, rapid changes are occurring in the industries that affect them most: Pharmaceutical manufacturers, retail drug chains, hospitals and managed care groups are all consolidating within their industries. As the managed care environment grows increasingly restrictive, everyone is scrambling for new efficiencies and marketplace leverage in order to drive profitability and share gains.

The prize these businesses are pursuing is clear. "There's a robust future as the graying of America accelerates the consumption of pharmaceuticals," said Mark Pulido, president and chief executive officer of McKesson Corp. "Used properly, the cost-effectiveness of prescriptions is such a compelling part of reducing the nation's healthcare cost. Retail pharmacy, as the leader in that charge, has a very strong position and outlook."

Wholesalers are smack in the middle of this megatrend.

As health care realigns to suit an aging nation--particularly the swell of baby boomers who will create a population of 85 million people over the age of 50 between now and 2005, according to the U.S. Census Bureau--wholesalers are continuing to adapt to provide an essential underpinning to all the industries they serve.

Historically, wholesalers have played a pivotal role in the nation's streamlining of healthcare delivery costs, and they have a proven track record of consistently passing some savings onto their customers--many of which are retail drug chains.

Indeed, as the nation's four biggest wholesalers--McKesson and AmeriSource Health, Bergen Brunswig and Cardinal Health--anticipate their double wedding, they contend they'll make the industry far more efficient by shuttering redundant distribution centers within geographic areas and keeping the best of their combined operations. They project $225 million in merger synergies to be realized within the next three years and say savings will flow to their customers--including retail pharmacy--if the Federal Trade Commission gives its blessing to the mega-mergers. (See related story in Chain Pharmacy.)

As wholesalers adapt to a healthcare world that is changing more rapidly and extensively than ever, they've become positively surgical in their operating precision, slicing costs to the bone; they've committed to maintain their edge in state-of-the-art technology; they've created innovative merchandising programs for retailers; and they are developing authoritative programs for pharmaceutical care.

"The wave of the future for pharmacy is not counting and pouring. It's counseling and being the pharmaceutical patient manager," said Robert E. McHugh, vice president of industry affairs and investor relations for AmeriSource Health. "That will result in lower overall healthcare costs by reducing emergency room visits and increasing compliance so everyone benefits--the PBM, the patient, the manufacturer and the pharmacy."

Brent Martini, president of Bergen Brunswig Drug Co., agreed. "Retail pharmacists must focus on persistency," he said. "It's an opportunity for all of us to improve the size of the market by having patients follow through on pharmaceutical regimens. That's a win-win [situation] for everyone."

Wholesalers are focusing more on what they do best. And, retail pharmacy is the primary beneficiary--even as their customer mix changes.

According to a report by the National Wholesale Druggists Association, independents and chain drug stores account for a combined 50.4 percent of wholesaler sales volume hospitals account for 32 percent and mass merchandisers and food chains account for 9.7 percent, followed by other institutional business. Independents are responsible for 34.4 percent of wholesalers' volumes; drug chains are responsible for 16 percent.

"We see our customer base getting bigger, and we feel that we've got to grow to effectively meet their needs. There is no question that cost is a huge consideration anyplace in health care today, and anything we can do to help curtail those costs makes us more valuable to our customers," said John Kane, president and chief executive officer of Cardinal Health.

The power of remaining chains

For the past two years, wholesalers' historic base of independent pharmacies has made a strong showing, raising, their percentage of wholesaler sales from 33.7 percent in 1994 to 34.2 percent in 1995 and 34.4 percent in 1996. Sources generally agreed that these volume gains are an outcome of increasingly savvy voluntary programs run by the wholesalers, as well as a shakeout of the industry's weakest independents. Those who remain are fairly sophisticated, well managed and adept at differentiating themselves in their local markets through pharmaceutical care and disease-state management.

At the same time, many of the leading drug retailers have merged, creating massive store networks with clout, while the remaining regional and local chains have become increasingly vulnerable to takeover. One of the wholesalers' greatest challenges will be motivating retail chains to do more types of business with them in new ways--and retain some profit in the process. For all the consolidations in the retail pharmacy sector, the chains left standing have enormous leverage in the marketplace and aren't afraid to wield it.