Generic Drug Sector Study - Chapter 3: Independent Pharmacy Distributors

Independent pharmacy distributors (IPDs) are third party companies which acquire generic and brand drugs, as well as other products to distribute to retail pharmacies and hospitals. IPD play an increasingly important role in the supply and management of prescription pharmaceuticals. Well over 50% of all prescribed pharmaceuticals are distributed to pharmacies through IPD with this share increasing.

This section outlines the Canadian IPD sector and discusses its role in generic drug competition in Canada.

3.1 The Canadian IPD Sector

As independent intermediaries between the manufacturers and suppliers of drug store products, and pharmacies, IPD stock and supply a wide range of prescribed pharmaceutical products as well as typical retail pharmacy products. These include over the counter (OTC) medicines, health and beauty aids, and confectionery items.

They may provide a variety of services including the following:

• Daily delivery or sometimes twice a day delivery, depending on the location of the pharmacy
• Consolidation of purchases, reception and payments of products by the pharmacy, including the management of expired products and their return to the manufacturers
• Serving as a back-up source of supply for other wholesalers' customers or for a self-distributing chain, when the chain's warehouse runs out of stock or closes for weekends
• Inventory management with continuous replenishment through a linked information system
• Electronic access to a product catalogue, product orders, billing and information research
• Controlled storage and temperature control of a variety of pharmaceutical products
• Refrigeration systems for specialty products
• Inventory of high-value-low-turnover products.

Because of these services, distributors' costs include major expenses for warehousing, transportation, human resources and information systems. They may also help finance customers' inventory by providing them with lines of credit.

McKesson Canada is the largest pharmacy distributor in the country. It carries more than 35,000 products, in 16 distribution centers. It provides logistics and distribution to over 800 manufacturers delivering their products to 6,800 retail pharmacies, and 1,350 hospitals, long-term care centres, clinics and institutions all over Canada. AmerisourceBergen Canada is the second largest distributor in the country. It has 12 distribution centers and services independent retail pharmacies, national and regional chains, and hospitals. Kohl & Frisch Limited has 5 distribution centers across Canada. Other distributors, such as Unipharm Wholesale Drugs Ltd, UPE Group of Companies and McMahon Distributeur Pharmaceutique Inc., tend to be more regionally focused. ⁴¹

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3.2 Role of IPD in the Generic Drug Competitive Framework

IPD are one of three means by which generic drug manufacturers can distribute their products. The others are through drugstore group self-distribution, and direct distribution by manufacturers.

Under self-distribution, distribution centres are maintained by pharmacy chain, banner and franchise groups, for supply to pharmacies within the group. Self-distribution involves similar roles and activities to those of IPD, but within a group of pharmacies.

Major self-distributors include, Shoppers Drug Mart, Groupe Jean Coutu (PJC), Familiprix Inc., Lawton's Drugstore, and London Drugs.

In direct distribution, as the name implies, manufacturers ship directly to drugstores.

IPD are becoming an increasingly important means for distributing pharmaceuticals in Canada. In 2006, they accounted for 57% of pharmaceuticals distributed in Canada, other than to Wal-Mart. This is 6% more than in 2002. Self-distribution also increased over this period from 30 to 34%. In contrast, direct distribution fell by more than half, to 9% from 19%.

Table 4. Share of Pharmaceuticals ($) by Distribution Channel (DC)

	Distributor (%)	Chain DC (%)	Direct (%)	Total (%)
2002	51	30	19	100
2003	54	30	16	100
2004	56	32	12	100
2005	57	33	10	100
2006	57	34	9	100

Source: Canadian Association for Pharmacy Distribution Management (CAPDM) Industry Trends Report, December 2006.

According to those contacted for the study, the increased use of IPD is due principally to their ability to provide their customers with one-stop shopping. While they play an important intermediary role in the sector, IPD' impact on the competitive framework and pricing of generic drugs appears to be limited. According to interviews, IPD do not enter into or maintain restrictive supply agreements or contracts with drug manufacturers. They purchase pharmaceuticals from all manufacturers as required to meet their pharmacy customers' needs. Once a relationship is established, purchases from manufacturers to distributors may be automated to deliver inventory on time. The warehouse information system can be connected to that of the manufacturer. When a product is needed, it can be ordered electronically.

While ancillary terms may vary, such as discounts for prompt payment, the price paid by wholesalers for pharmaceuticals is based on the provincial formulary or manufacturers' list price. In the case of generic drugs, the price to distributors is discounted by the distribution fee (or mark-up) allowing the drugs to be distributed to pharmacies at their invoice price. According to sources, these fees are typically in the range of 5% of the value of the generic drugs distributed. This is not the case with branded products, where distribution fees are typically paid by the pharmacy and are in addition to the drug invoice price.

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⁴¹ Sources: interviews with sector participants, company web sites and other public sources.