CORRECT:=Drug Middlemen May Feel Pharma Consolidation Pressure
March 09 2009 - 6:03PM
Dow Jones News
Merck & Co.'s (MRK) planned purchase of Schering-Plough
Corp. (SGP) may not in itself spell trouble for pharmaceutical
industry middlemen, but the deal - along with others in the
industry - could add pressure for distributors as yet another key
supplier gets bigger.
Drug distributors didn't appear fazed by the deal between Merck
and Schering-Plough, valued at $32.6 billion based on Merck's
Friday closing price, noting their good relationships with both
drug manufacturers. However, because of the recent industry
consolidation, including Pfizer Inc.'s (PFE) planned acquisition of
Wyeth (WYE), drug makers are seen gaining more leverage over
wholesalers.
"In general, the consolidation of manufacturers is bad for
wholesalers because it's giving the drug makers much more leverage
in their fee-for-service negotiations," said Adam Fein, president
of Pembroke Consulting in Philadelphia, a pharmaceutical supply
chain consultancy. Fein, though, didn't see significant differences
between Merck and Schering-Plough in their current relationships
with distributors.
"This deal is not a game changer for the wholesalers, but it's
one more pressure point on their business," Fein said.
To some, brand-name prescription drug makers already had more
leverage because of monopolies on their patent-protected products -
a fact that consolidation doesn't change.
AmerisourceBergen Corp. (ABC), Cardinal Health Inc. (CAH) and
McKesson Corp. (MCK) act as wholesalers of prescription drugs, and
are paid, partly, by manufacturers to package and otherwise add
value to the products, which they distribute to pharmacies and
hospitals.
In recent years, the drug wholesaler industry shifted from a
largely buy-and-hold compensation model based on drug-price
inflation to a fee-for-service model in which manufacturers pay
them to package and otherwise add value to the products.
"We have a great relationship with both companies and see little
or no impact to AmerisourceBergen," company spokesman Michael
Kilpatric said.
Cardinal Health spokesman Troy Kirkpatrick said, "It is too
premature to determine any potential impact to Cardinal Health, but
we have great relationships with both of these partners and look
forward to working with them both individually until the merger
occurs and then beyond post-merger."
A McKesson spokesman said the company doesn't comment on its
suppliers.
The recently announced Pfizer-Wyeth deal, meanwhile, might have
more of a direct effect on the wholesalers because Pfizer is just
now adopting fee-for-service contracts with the distributors, and
its terms could differ from those of Wyeth, Pembroke Consulting's
Fein said.
The larger a manufacturer, the more sales volume it controls,
and therefore the more power it wields in negotiations, Fein
said.
And while the Merck deal probably won't create a huge movement
toward manufacturers having direct relationships with buyers such
as drugstore chains, major mail-order pharmacies and Wal-Mart
Stores Inc. (WMT), Fein said it is one more step in that
direction.
The chain drugstores, Wal-Mart and pharmacy benefit managers'
mail-order pharmacies account for more than half of all
prescription volume in the U.S., he said.
Fein didn't expect much of an effect from the deal on pharmacy
benefit managers as their contracts with manufacturers tend to be
based on individual products.
A spokeswoman for pharmacy benefits manager Express Scripts Inc.
(ESRX) said the company doesn't comment on such announcements.
Medco Health Solutions Inc. (MHS), another pharmacy benefits
manager, had no immediate comment. PBMs arrange prescription-drug
benefits for employers and their employees, and also operate
mail-order pharmacies.
- By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285;
dinah.brin@dowjones.com