Wholesalers of Pharmaceutical Products: A Vibrant Industry

by Clérance Kimanyi*

Introduction

Pharmaceutical wholesalers are the intermediaries who bridge the gap between foreign and domestic prescription drug manufacturers on one hand and clients such as pharmacies, hospitals and other independent buyers or wholesalers. Since 1999,¹ they have tightened their grip on the pharmaceuticals and pharmacy supplies distribution market, as the demand for prescription drugs has exploded. They are also seeing a change in the composition of the products they market and in their operating methods. Although the pharmaceuticals and pharmacy supplies wholesaler-distributor industry is growing, with nearly $26.5 billion in annual gross revenue, it is still relatively unknown. This article profiles the industry, examining its performance in comparison with the entire wholesale sector. It will provide an overview of the demand for prescription drugs, the operating revenue and workforce in the wholesale industry, its operating cost structure and the importance it attaches to advertising expenditures.

Drug Consumption

The fact that consumers are devoting an increasing proportion of their expenditures to health care products and services is what makes the future of these industries so interesting. The only essential² component of household consumption that has increased relative to disposable income in recent years is health care products and services, led by prescription drugs and pharmaceuticals.

In fact, the upward trend began well before 1999. From 1993 to the present, total spending on health care has largely exceeded spending on energy (electricity, natural gas and other), another essential component of personal expenditures. Every year since 1999, sales of health care products and services have grown by almost $2.5 billion, including $1 billion in prescription drugs alone. Health care products and services swallowed about 5% of households’ after-tax income in 2004. Prescription drugs alone took about 2% of households’ disposable income.

Between 1999 and 2004, prescription drugs and pharmacy items posted the largest gain in the health care expenditures group, up 53.3%.³ By way of comparison, the ratio of drug expenditures to food expenditures was 21% in 2004, up from 17% in 1999.

Figure 1

Growth was driven by the volume of prescription drug sales. In 2002, pharmacies filled more than 335 million prescriptions, up 23.2% from 1999⁴. In addition, the average price of those prescriptions was $42.09, 18.6% more than in 1999.

The demographic factors, treatment practices and changes in medical technology that contributed to this trend are well established. The population is aging so quickly that in the five years from 1999 to 2004, the proportion of people aged 55 and over rose from 21.4% to 23.5% of the total population. Since 2002, the population of that age group has increased by half a percentage point a year, a rate that is expected to remain steady for another 15 years.

And while the older population has been growing rapidly, so has life expectancy. In 2001, it was 82.1 for people aged 55, up nearly one full year from 1997.

To go along with these trends, treatment practices are changing: home treatment is being encouraged in order to keep hospitalization costs down; new drug discoveries are on the rise thanks to more effective equipment; and the approval process for new drugs is shorter.⁵

Wholesalers Have Diversified

Wholesale drug customers are retail establishments, hospitals and independent buyers or wholesalers. Retailers are the main source of their $26.5 billion revenue, accounting for 63% of their sales in 2003. Transactions between wholesalers were the second-largest revenue source, at 23%. Public institutions provided about 8% of their revenue. All these markets are essentially domestic, as exports account for only a small percentage. Canada remains a net importer of pharmaceutical products. In 2003, the value of imports was $7.3 billion, compared with $2.7 billion for exports.

Figure 2 shows how wholesale sales have grown far more quickly than retail sales. Two clients in particular – hospitals and other wholesalers – contributed heavily to the boom in wholesale sales. Sales to other wholesalers tripled during the period under study, partly because of a sharp increase in imports. Sales to hospitals more than doubled.

Figure 2

The revenue explosion is attributable not only to growth in demand but also to a structural change in the type of products being sold. According to the results of Pharmacy Post‘s survey of pharmacy owners and managers, wholesaler-distributors of pharmaceuticals and pharmacy supplies captured 71% of the prescription products market in 2003, compared with only 56% in 1999. This domination extends to all types of pharmacies except franchises, which get their supplies from exclusive distribution centres.

Wholesalers are also expanding their operations in the pharmaceutical business. For example, many of them are divisions of corporations involved in manufacturing or research and development, or Canadian subsidiaries of foreign manufacturers distributing their products in Canada. Wholesalers are also playing a greater role in support services such as developing retail sales programs, marketing strategies and computerized inventory management systems. They coordinate the activities of procurement units, organize joint advertising programs and even carry out market analysis activities on behalf of their clients. Some of them have acquired pharmacy chains.

The change in the industry’s operating revenue relative to other industries in the wholesale sector clearly illustrates the rapid growth of demand in recent years. Between 1999 and 2003, the operating revenue of pharmaceuticals and pharmacy supplies wholesaler-distributors doubled from $13.3 billion to $26.5 billion, a higher growth rate than in any other wholesale trade group. During the same period, the total wholesale sector’s operating revenue rose 25.1% to $535 billion.

Table 1: Operating Revenues

The operating revenue of pharmaceuticals and pharmacy supplies wholesaler-distributors was concentrated in Ontario. Between 1999 and 2003, the province accounted for more than half of the industry’s total revenue each year, averaging 51.6% for the period. Quebec was second, with an average of 26.5%. While Ontario had the bulk of the wholesale operating revenue, the drug manufacturing industry was more evenly spread between the two provinces, as Ontario’s market share for the period averaged 49.0%, and Quebec’s averaged 44.3%.

The pharmaceuticals and pharmacy supplies wholesale industry is clearly dominated by large establishments. Since 1999, establishments with annual operating revenue greater than or equal to $100 million have accounted for more than 80% of the industry’s total revenue. The proportion rose from 87.9% in 1999 to 90.3% in 2003, though it dipped to 83.7% in 2000.

Another performance measure that illustrates the rapid growth of pharmaceutical wholesalers is employment in the pharmaceutical and perfume products group. Between 1999 and 2003, employment in total wholesale increased by 16.2%, while the number of employees in the pharmaceutical and perfume products group jumped 46.3% from 25,304 to 37,023, more than in any other industry group. Workers in that group are also better paid. In 2003, they were earning $888 a week, the second-highest weekly salary after workers in the machinery, equipment and supplies wholesalers group ($942). In the rest of the wholesale sector, the average salary was $774. The discrepancy may be due to the difference in level of education⁶, which is rising for technical specialists in the pharmaceuticals business.

The Financial Structure of the Industry

Operating profits for the pharmaceuticals and pharmacy supply wholesale industry averaged 5.4% of operating revenues between 1999 and 2003. This suggests that wholesalers have not turned their growth in sales into higher profits.

Looking at the structure of their costs shows an upward trend compared with other wholesalers. From 1999 to 2003, pharmaceutical wholesalers operating expenses as a percentage of operating revenues are higher than for other wholesalers. Over the same period wholesale pharmaceutical firms spent 15.7% of their revenues on operating expenses versus 13.9% for all wholesalers.

Advertising and promotion is what distinguishes pharmaceuticals spending the most from other wholesalers. This industry spends more on advertising than any other wholesale industry except household and personal supplies.

In 2003, pharmaceutical wholesalers spent 80.8% of their operating revenues on the purchase of new and used goods for resale, 5.2% on wages and 2.9% on advertising: this compares with 80.5%, 6.6% and 1.0% respectively for all wholesalers.

Conclusion

The pharmaceutical and pharmacy supplies wholesale industry benefited from changes in the market for prescriptions drugs between 1999 and 2003. With the population continuing to age rapidly, this industry is well-positioned to continue to grow rapidly.

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Notes