Collaborative sourcing: Leveraging massive generic discounts

Recent strategic business initiatives are granting wholesalers more generic drug purchasing power than ever before.

Over the last few years, some major deals in the world of drug wholesaling have taken shape. While the business arrangements among the three top wholesalers differ slightly in terms of ownership, benefits and risks, one thing is for certain: all of the agreements will translate into growth opportunities for the companies involved and will help them improve their generic drug sourcing practices.

McKesson, Cardinal and AmerisourceBergen, also known as the “Big Three,” reportedly distribute more than 80% of all of the drugs in the United States. Below, DSN takes a look at the structure of their recent financial agreements and how the terms of the deals affect both wholesalers and pharmaceutical distribution. All of the deals appear to be centered on the tenet that the higher the purchasing volume, the better the price concessions.

Walgreens Boots Alliance Development (WBAD) with AmerisourceBergen (ABC)

Walgreens entered into an internationally advantageous partnership in 2012 with Alliance Boots and AmerisourceBergen. As a result of the deal, Walgreens earned a 7% stake in ABC, with the option to own up to 30% in the next few years, and can help ABC score lower drug prices from generic manufacturers. Typically, large pharmacies buy brand-name drugs directly from manufacturers, but get their generics from wholesalers. If ABC and Walgreens are combined, both may enjoy lower generic pricing and better contract savings.

The partnership will help all of the groups involved focus more on proprietary generics. In addition, ABC will be granted a 10-year contract and will get the opportunity to expand its specialty business both in Europe through Alliance and in the United States through Walgreens. ABC will be well-positioned on a number of fronts — adding Walgreens distribution will provide opportunities in the coming years.

One major caveat with the WBAD-ABC agreement is that ABC risks potentially alienating its other customer. Although the lower generic pricing points obtained through stronger contracting deals may appeal to ABC’s smaller pharmacy clients, some may feel uncomfortable with the idea that by supporting ABC, they are indirectly financially supporting a competitor, Walgreens.

McKesson and Celesio

Whereas ABC and Walgreens are buying into a transaction, McKesson is gaining full control of drug company Celesio, which operates a wholesaling business in 13 European countries and Brazil. The arrangement would allow McKesson to benefit through international generic expansion, while Celesio would benefit from the sales of McKesson’s proprietary generic brand, NorthStarRx.

Cardinal and CVS Caremark

Unlike the other two deals, Cardinal and CVS Caremark have an equal level of control within their agreement, which was signed in December 2013. Cardinal will pay a fixed fee — $100 million per year — to CVS, and in return will receive the same absolute drug prices. Although Cardinal’s presence overseas in China is steadily growing on its own, the partnership with CVS Caremark also will allow Cardinal to enjoy an enhanced focus on U.S.-based purchasing. Through one buyer, Cardinal believes they can more efficiently negotiate generic prices for both companies.

So, aren’t lower prices better for everyone? Not necessarily. Over time, margin compression could be a potential consequence of these business deals. The better these wholesalers are able to buy, the more they will drive the average manufacturer price down. This makes it harder for independent pharmacy members to compete with the Big Three, and could have perverse market effects.