Stricter regulation combined with increased levels of competition means that business conditions for pharmaceutical distributors are about to get a whole lot worse. That’s particularly bad for Cardinal Health. It’s already operating on razor-thin profit margins.
Wall Street is making the fatal assumption that everything will continue as is forever. Disruption is something only to consider when it’s right in your face... when it’s too late. Three hundred of the nation’s largest hospitals, and possibly the U.S. Department of Veterans Affairs, are setting up their own non-profit, FDA-approved generic-drug manufacturing company. This is happening now . The cost of generics at hospitals is out of control. Once this jointly owned company is up and running, there will be less need to purchase generics wholesale through distributors like Cardinal Health. These threats are real . Incredibly, Cardinal isn’t worried. According to Chief Financial Officer Jorge Gomez, the Competition is fierce. And margins are slim. But it’s about to get worse... A new competitor is getting ready to enter the business. also serves to regulate the overall supply. The manufacturer knows it needs to make more medicine based on the rate distributors run through it. But pharmaceutical distributors must adhere to strict regulations around their products. They must keep the medicine under optimal and secure conditions. It’s a huge logistics operation.
Now let’s take a look at the rest of the distribution industry and see why the competition is so threatening...
THE PHARMACEUTICAL DISTRIBUTION INDUSTRY Pharmaceutical distributors act as middlemen between drug manufacturers and health care providers. Their role is limited. They buy medicine from drug manufacturers and resell the medicine to health care providers. Most pharmacies, hospitals, long-term- care facilities, clinics, and other health care providers purchase medicine wholesale through a pharmaceutical distributor. Health care providers then resell it to patients at a markup. Distributors don’t deal with insurance companies, patients, or coverage. They simply house and transport medications. So when a prescription is filled at a local pharmacy, the pharmacy would reorder drugs from the distributor. Typically, pharmaceutical distributors maintain large supplies of medicine at various locations around the country. The medicine waits in these hubs until it’s needed to fulfill an order. Having large amounts of medicine in storage
52 September 2018
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