Pharmaceutical Distribution

In a changing world, a decisive opportunity

for margin improvement.
Ever greater quantities of medicines are now dispensed or sold through large pharmacy chains and
grocery multiples. This profoundly influences the distribution dynamics for pharmaceutical companies.
Proactively responding to the new distribution situation is an opportunity for pharmaceutical companies
to improve margins by an estimated 3 to 5 percent. Plus, responding to the new bulk distribution
opportunities will help prevent distraction from profitable new opportunities for more individualized,
premium treatments.
Large pharmacy and grocery chains use some of the most sophisticated distribution systems on earth.
If pharmaceutical suppliers fail to rise to the challenge to mesh with these systems, they may find
themselves at a disadvantage to competitors.

Living with price and margin

pressure
Accenture High Performance Business
research shows that scale and diversified
portfolios are no longer a guarantee of
high performance in the pharmaceutical
sector. Factors such as the expiration of
major patents and rapid uptake of generics
mean that pharmaceutical companies need
now to adopt a laserlike focus on the
factors that differentiate them and on
areas where process changes can deliver
cost reductions and greater efficiency.
Distribution is one such area. The
traditional pharmaceutical distribution
methodology whereby products are
distributed via wholesalers grew up in
response to conditions that prevailed
in most markets throughout the second
half of the 20th century. For some
medicines the appropriateness of this
model will not change any time soon
but, for a growing quantity of others, it
already has.
Liberalization of over the counter (OTC)
sales in large international retail chains
and online pharmacies is giving rise to a
smaller number of larger buying companies
(which represent a large number of outlets).
The trend to OTC is firmly established: sales
across the world in 2014 are expected to
exceed $145 billion1, a 68 percent increase
on the 2000 total.
In most countries, OTC sales are moving up
towards half of all sales. In Asia Pacific
region and the United Kingdom, for example,
OTC now accounts for around 40 percent of
sales. In some countries however the
Netherlands is a prime examplealmost all
medication goes OTC.
OTC liberalization is just one of a number
of factors that, in combination, are
resulting in pressure on pharmaceutical
companies margins. For example, the fact
that public health authorities and insurance
companies continually press for price
reductions inevitably results in physicians
and hospitals prescribing generics whenever
possible. And yet, countering this pressure
by developing new chemical entities,
including future blockbusters, is made
harder by stricter registration rules and
higher costs than obtained in the past.
Overlaying these pressures on
pharmaceutical companies margins is the
ascendency of the customer. The emerging
digital world empowers billions of people
and issues of personal health and well
1
2

Figure 1: Distribution health check

Yes

No

1. Is your companys OTC volume increasing?

2. Is your companys share of business via wholesalers decreasing?
3. Are your companys margins under pressure?
4. Historically, has operational excellence and efficiency received less focus
than marketing and R&D?
5. Does your company have, or plan to have, direct business with online
pharmacies or large retailers?

If your answer to any of these questions is Yes, then you will find it potentially valuable to
explore changes to your distribution model.
being are, naturally, of great interest to
them. The group dynamic thus created
means that the pressure towards reduced
costs is irreversible. In turn, the massive
demand inevitably encourages those who
would use or abuse the situation for short
term gain: parallel importers and
counterfeiters. Recent statistics suggest
that counterfeit drug sales exceeded $70
billion globally in 2010; an increase of more
than 90 percent since 20052.

The broader context

As always, new situations create both
challenges and opportunities. Accenture
sees two key potential opportunities:
1. Redesigning distribution to suit the
large pharmacy chains and grocery
multiples has the potential to improve
pharmaceutical companies margins by
an estimated 3 to 5 percent.
2. A newly emerging dimension of
pharmaceutical developments is the
increasing promise of more individualized,
premium treatments.
This point of view focuses exclusively on
the first of these two opportunities. The
reason for mentioning both, however, is
that success will depend upon dealing with
each of them. It is, therefore, important to
redesign and realign the distribution for all
goods that go, or will go, via large
pharmacies and retailers.
What changes in distribution organization
and practice will best contribute to improved
results? To investigate this, it is first useful
to remind ourselves where revenue comes
from and goes to in a typical pharmaceutical
transaction. Revenue from the sale of a
pharmaceutical product has typically to be
divided between a manufacturer, a

distributor, a pharmacy and a jurisdiction

(in the form of taxes and discounts). Self
evidently, to stay profitable pharmaceutical
companies need to retain as much as
possible of the sales prices. But in some
European countries less than 60 percent of
the sales price goes to the manufacturer.
So, are there areas where savings can
be made? Yes, but it is important to
know where to look. Traditionally in
pharmaceuticals, commercial operational
matters have not been accorded the same
degree of attention as R&D or Marketing
and Sales. In the present circumstances,
however, operational areas hold out the
prospect of worthwhile improvements to
help mitigate eroding margins.
Among the operational areas, logistics
merits attention. The science of logistics
has come a long way in recent years.
Todays advanced modeling tools are
powerful means to help improve the
efficiency and quality of product delivery,
eliminate waste from supply chain and
environments, stabilize delivery lead times,
and reduce total operating costs. The new
modeling tools use advanced computing
power and the strength of multiple
modeling techniques to deliver network
optimization and simulation with dynamic
demand and supply data. These enable
improved company performance and
profitability in terms of:
Minimizing transport and warehousing
costs for pharmaceutical distribution.
Optimizing inventory levels at
pharmaceutical manufacturers and
other stock keeping points in the
distribution network (e.g. regional
distribution centers and points of sale)
Ensuring product availability in a
volatile demand environment

Datamonitor OTC market value 20002014 across Europe, the Americas, Asia Pacific, Africa and the Middle East
Counterfeit Drugs and National Security, Brian D. Finlay, Stimson, February 2011

Rethinking distribution to large

customers
Accenture used these kinds of analytical
methods to help a major European
pharmaceutical company to rethink its
distribution practices. Up until the time
of the engagement, the client operated
a classic local market distribution model,
with more than 20 distribution centers
across a block of western European
countriesa model suited to servicing
a high number of small sales and
dispensing outlets.
By analyzing and mapping the distribution
needs, the company was able to redesign
its logistics and distribution operations to
suit the changed and changing marketplace
dynamics. As a result, there is a new pan
European model and management structure
with just five distribution centers.
The new structure has enabled the
company to reduce its logistics costs by
more than 15 percent while, at the same
time, improving customer service, and
building a stable and scalable platform
using outsourced services.
OTC business holds out the promise of
relatively high margins for large retail
and pharmacy chains. It is growing and
will continue to do so. This is part of a
fundamental rebalancing of pharmacy
distribution whereby large volume products
will increasingly go OTC via large outlets
while more personalized, high priced items
will go direct to patients.

Efficiently supplying bulk OTC products to

large retailers and pharmacies is more akin
to the practices developed and perfected
by fastmoving consumer goods suppliers,
including the establishment of direct
relationships with selected large customers,
vertically integrating distribution across
borders, and using sophisticated data
systems to provide excellent demand and
supply planning.

Distribution improvements
The example mentioned earlier produced
savings of more than 15 percent of logistics
costs for the client company. Whether or
not this level of attainment is available in
other situations will of course depend upon
specific circumstances. That said, certain
minimum returns are normally available.
Benchmarks show that distribution
accounts for 23 percent of sales. Given
the fact that pharmaceutical companies
often operate with margins of 50 percent
and above it is reasonable to assume that
46 percent of the total cost of goods and
services (COGS) is a valid assumption. In
face of squeezed margins, any reduction
in this percentage will make a real and
welcome additional contribution to
operations.
It is not within the scope of this point of
view to go into detail about the levers
available to pharmaceutical companies to
respond to the challenges and opportunities
in distribution. However, Figure 2 provides
a summary overview.

Figure 2: The relationship between distribution levers and challenges and opportunities
the ticks indicate areas of positive response
Distribution Levers
Challenges
Generics versus
blockbusters
Counterfeiters

New Distribution Safe & Secure

Channels
Supply Chain

New Forms Of
Collaboration

Improved Supply
Chain Planning

For improved business performance

and growth, life sciences companies
need to counter these challenges and
take advantage of the opportunities.
The responses will variously include
optimization of portfolios, and where
appropriate, mergers and acquisitions.
However, some of the most accessible
means to sustain cost reductions and
transform in the face of todays new
economic realities are available by
adjusting operating models and processes.
So it is with distribution.

Conclusion
Pharmaceutical companies face a number
of unprecedented challenges, the responses
to which mean the difference between
decline or high performance. Accenture
High Performance Business research
showsthat delivering better health
outcomes to ever more savvy and tech
enabled customers is a complex matter.
Part of this complexity is the polarization
that is happening whereby an increasing
number and quantity of general
pharmaceutical products are joining the
mainstream distribution channels that
deliver the general commodities that
everyone buys all of the time. But, on the
other hand, there is an emerging direct
topatient distribution channela channel
that recognizes the extraordinary value
of specific treatments for specific patients.
Because these contrasting forces are
encouraging new market players and new
customerstogether with parallel importers
and counterfeitersthere is a need for life
sciences companies to transform how they
distribute their products to bring life
enhancing health solutions to people.
This paper has focused on the first of
the two changes where the redesign of
distribution to serve large pharmacies
and retailers holds out the potential for
significant financial returns. It is Accentures
view that distribution should be reviewed
as a matter of urgency. New distribution
thinking represents a decisive opportunity
for margin improvement.

Parallel imports

Opportunities
Open up new markets
Rethink distribution
to large customers
Counter rising costs

About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with more than
223,000 people serving clients in more
than 120 countries. Combining unparalleled
experience, comprehensive capabilities
across all industries and business functions,
and extensive research on the worlds
most successful companies, Accenture
collaborates with clients to help them
become highperformance businesses and
governments. The company generated net
revenues of US$21.6billion for the fiscal
year ended Aug. 31, 2010. Its home page is
www.accenture.com.

Copyright 2011 Accenture

All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.

About Accentures Life Sciences

Practice
Our Life Sciences industry group works
with pharmaceuticals, biotechnology,
medical products, medical technology,
regulators, distributors, wholesalers
and other companies to help bring life
enhancing health solutions to people
around the globe. We provide consulting,
technology and outsourcing services across
the entire life sciences value chain, from
largescale business and technology
transformation to post merger integration.
Our key offerings include: Research and
Development, including pharmacovigilance
and regulatory outsourcing; Supply Chain
and Manufacturing Optimization; and
Marketing and Sales, including commercial
services, analytics and digital marketing.

For more information about increasing

profit potential by adjusting distribution
models, please contact:
North America
Eugene Jones
eugene.m.jones@accenture.com
Europe, Africa and Latin America
Michael Dittrich
michael.dittrich@accenture.com
Asia Pacific
Jonathan Wright
jonathan.wright@accenture.com