Wholesaler look to programs, services to sharpen relationships at retail - Special Report: Generic Drugs.

It isn't only such giant wholesale distributors as McKesson, Cardinal Health and Amerisource-Bergen that offer generic specialty services to retail customers. There also are smaller regional and single-market wholesalers that sometimes band together to develop their own cooperative generic source programs.

Retailers say these wholesaler generic programs, whether large or small, can help them boost their gross margins by a crucial percentage point or so, which can make a big difference at the end of the year with pharmacy margins hovering around 21 percent. They also can help ensure higher service levels and a consistency in product quality and availability.

"For most of us in the retail drug business, 1 or 2 percent makes a lot of difference in our overall business margins," said Don Ritter, owner of five community pharmacies in Oklahoma. "All of us are locked in on the price we can charge for a product. Since the majority of us have 80 percent of our prescription in third party programs, the only way we can actually make more money off of that is through the buy side."On the buy side, wholesaler generic programs like McKesson's OneStop Generics, Cardinal's CardinalSource and AmerisourceBergen's ProGenerics closely monitor the marketplace to make sure that the products they're offering to customers remain competitive.

But wholesalers say that low price is not the only consideration when they select a particular supplier's product as part of their total drug portfolio. Consistency also is a key component. At a time when raw ingredient shortages sometimes have left generic manufacturers scrambling to fill customer orders, wholesalers want to ensure that their suppliers can deliver products without fail. That's what their customers are looking for.

"We strive to make sure we are price competitive, but as important is that we've got good consistent supply of products," said Jeff Herzfeld, senior vice president of pharmaceutical product management at McKesson. About 8,400 stores, from independents to national chains, are part of McKesson's OneStop Generics program, he said.

Herzfeld mentioned the ACE inhibitor lisinopril (Zestril) as an example of a generic product that was in heavy demand after it came to market last year. "This was generally considered a blockbuster brand product and almost immediately ran into supply issues in the marketplace, primarily because of a lack of raw material," he said.

Herzfeld said McKesson met the demand by using multiple manufacturers, which meant that the consistency aspect" of the wholesaler's program took a temporary back seat to making sure that customers were able to get enough product to meet their patients' demands. With manufacturers ramping up production, Herzfeld anticipated that McKesson would be able to meet its customers' needs for generic lisinopril with one supplier by last month.

Selecting single suppliers for particular products can act as powerful carrot (and stick) in drivmg p rice and other concessions, as pharmaceutical buyers f or institutions, government agencies and insurance programs have demonstrated with their drug formularies. Price and consistency are just two of the tests wholesalers apply in choosing to suppliers.

"We're very careful in the supplier selection process," said Dale Brown, senior vice president of marketing at Cardinal Health. In choosing manufacturers for its product portfolio, Cardinal looks closely at financial stability, access to raw material and the company's product pipeline to make sure it has the capacity to deliver down the road.

"We spend a lot of time visiting our manufacturers, as opposed to them just coming here, so we can get at all of these things," Brown said. "Obviously it can't be perfect all the time, but we do have a very high service level because of our selection process."

Cardinal's Source program shoots for a service level in the high 90s, as does other wholesalers, including McKesson OneStop. For McKesson, service level is one of three key components driving its generics program. "Pricing with most customers is a primary driver," Herzfeld said. But "customers also look for consistency in product. The third is service level. We're always trying to create a balance for customers around those three attributes."

To do that, Herzfeld said, "We try to place our business with manufacturers who are able to assure us product availability, who have the capacity to service us and our customers effectively so that we don't have issues around service level," adding that "they still need to be able to move effectively with the marketplace with regard to price.

Wholesalers also want to make sure their customers have timely access to important new generic products when they hit the market. McKesson has a quick delivery program called ASAP that uses overnight carriers to get a limited supply of a key product into customers' pharmacies as soon as it is available. Cardinal maintains a similar program called Rapid Distribution, which is designed, said Brown, to "bring any significant new items, be it brand or generic, to market within as little as 24 to 48 hours after FDA approval." With an important product like generic Prozac, he said, Rapid Distribution is designed to allow "our customers to be among the first in the market" to get it.

Herzfeld said that when Teva received approval for generic Augmentin on a Friday: "We quickly secured enough product and moved it to our fulfillment house and overnighted three bottles to every customer. They had it in their stores by Monday morning."

Smaller wholesalers are also able to remain competitive in the generic supply market, but mainly through alliances. One such alliance of a dozen small wholesalers around the country have a program called OptiSource, which they operate as a limited liability corporation. Rick Meehan is the president.

"We can compete with anybody in today's times," Meehan said. "On any given day anybody could have a better price, including ourselves, but generally speaking, I think manufacturers pretty much put us all somewhat in the same position."

But, he said, "if we didn't belong to a group like OptiSource, we might not be competitive very long, especially when you go against the top three wholesalers in the country."

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RELATED ARTICLE: Eon labs: how one generic maker pursues growth with speed to market.

Generic firms are riding a swelling tide of public demand for lower-cost pharmaceuticals. The demand is coming from individual patients, of course-including millions of seniors on fixed incomes coping with new-drug sticker shock or rising co-pays at the prescription counter. But it's also fed by states looking for solutions to the Medicaid funding crisis, by federal lawmakers concerned about rising budgets and by cost-cutting employee health plan sponsors.

Me-too drug manufacturers are making the most of the new and more supportive climate for generics. One of the most aggressive been Laurelton, N.Y.-based Eon Labs, which last May became a publicly traded company in its 10th year of business. With a quick-to-market but selective approach to pharmaceutical development, a steady stream of abbreviated new drug applications flowing to the FDA, a history of buying its way into new product categories through acquisition and a willingness to ally itself with other drug makers, Eon exemplifies the modern generic industry approach to business.

Eon noted in documents related to its inital public offering that it doesn't depend "on any single drug or therapeutic category for a majority of our sales." Nevertheless, its growth strategy depends on a careful but aggressive policy of picking its shots. That means developing hard-to-replicate generic medicines that the company believes have "high barriers to [market] entry" from competitors.

Eon's generic strategy also involves jumping ahead of its competitors in the FDA review and approval pipeline. To that end, Eon noted it was able to bring nine products to market "on the first day that generic competition commenced or immediately thereafter" during 2000 and 2001.

"Over the past two years, we were the first company to introduce a new generic product to market on 11 different occasions," added a company spokesman. He said the success of that approach is based on "regulatory expertise, which has yielded an average approval time of only 13 months from initial FDA filing [or] five months faster than the industry average of 18 months."