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Drug wholesalers: Change in distribution of medicines

Dr Richard West, chairman of the DDA, looks at the OFT report on the wholesale drug market.

In the UK there are now over 12,000 different formulations of drugs available, some used regularly, others very occasionally.

It is impractical for a single pharmacy to hold all the formulations that could be prescribed, but for each patient, it is vital that their particular medication is available when they need it.

So, for more than 50 years, full- (or first-) line drug wholesalers have kept stocks of the majority of pharmaceutical products, delivering twice daily to most dispensing outlets.

In this way, a drug ordered will arrive either later the same day, or early the next day, thus ensuring the timely supply to patients. This is indeed a fantastic level of service.

When drug wholesaling started, it was a relatively expensive system, and the manufacturers traditionally gave wholesalers a 12.5 per cent reduction on the cost of the drug to distribute it. As time has gone on, the cost of distribution has fallen, so the wholesalers have passed on this discount to their customers.

The average discount passed on to customers on branded ethical drugs is 10.5 per cent; there are different lower amounts for fridge line and generics and none for controlled and zero-discount drugs. Once this practice became commonplace, the NHS decided to claw back the 'excess' profits that dispensing doctors or pharmacies, received.

This clawback is now between 0 and 11.5 per cent depending on the volume of dispensing.

Wholesale market
The wholesale market has consisted of 11 full-line wholesalers across the UK, of which only three are truly national (AAH, Phoenix and Unichem cover about 90 per cent of the market). Competition between wholesalers has driven prices down and service levels upwards.

In 2007, Pfizer changed its distribution to a direct-to-pharmacy (DTP) model, cutting out the wholesaler. The manufacturer appointed Unichem as its sole logistics service provider, meaning that Unichem would now deliver to every dispensing outlet, effectively becoming the only truly full-line wholesaler.

Following many complaints about this model, suggesting that it might have created a monopoly, the Office of Fair Trading (OFT) instigated a market study into medicine distribution in the UK.

As a result the OFT has suggested two models to protect the NHS against increased costs.

The first is that the government should use the pharmaceutical pricing regulation scheme (PPRS) to remove the wholesale discount from the marketplace and retain it for the NHS and at the same time look at removing the clawback taken from the dispensing outlets. The second is to insist on a minimum discount to all contractors.

While the DDA welcomes the report, we have concerns that there will be a real decrease in the level of service that small dispensaries receive from the company that delivers drugs to them.

The OFT report appears to be worried about safeguarding the cost to the NHS, but does not address the issue of decreased income for small dispensaries.

This could lead to a number of dispensaries becoming unviable, particularly in very rural and remote areas of the country.

Cross-subsidisation of medical services by dispensing still exists and there is a risk that a loss of dispensing profitability will lead to practice closure.

Dr West is a dispensing GP in Bury St Edmunds, Suffolk, and chairman of the DDA

Contact Jacki Buist at GPdispensing@haymarket.com or (020) 8267 4865

What the OFT says about medicine distribution in the UK
We recognise that there may be efficiency benefits to the direct-to-pharmacy (DTP) model and take the view that manufacturers should be free to choose the distribution method they consider to be most efficient when delivering medicines to pharmacies.

However, we consider there is a significant risk that DTP schemes will result in increased costs for the NHS, which could amount to hundreds of millions of pounds a year.

Although the OFT has not attempted to determine whether the traditional wholesale model is the most efficient way of providing patients with satisfactory service standards or whether the service standards that result from this model are in any sense optimal, we consider that manufacturers have an incentive to reduce service standards under DTP schemes. Reducing service levels could enable manufacturers to cut their distribution costs given that this will not result in lost sales.

There would be benefits from having greater clarity about the service level the NHS is paying for when agreeing prices under the PPRS. If the NHS is concerned that service levels might fall below satisfactory levels, we recommend that the government seek manufacturers' agreement on minimum service standards and, if lower service standards are introduced, cost savings should be shared with the NHS.

Where a manufacturer appoints an exclusive distributor, that distributor has little incentive to excel in service provision because pharmacies have no alternative source of supply.

In addition, the administrative burden on pharmacies is likely to increase if they have to deal with multiple suppliers.

Finally, in the longer term, the appointment of exclusive distributors may lead to the creation of a wholesaler with significant market power.

We believe that our recommendations will safeguard against increased costs to the NHS and will ensure that satisfactory service standards to pharmacists and patients are obtained, while allowing manufacturers the commercial freedom to choose the distribution arrangements they consider to be most efficient and best suited to their portfolio of medicines.

Expcerpts from OFT key facts, findings and recommendations of OFT market study of medicines distribution, published December 2007 (www.oft.gov.uk)



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