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PROFIT IDEAS
Like Father, Like Son — Part 1 By Dave Wendland, with Bob Wendland Editor’s Note: This column as well as the upcoming Part 2 to be posted in May, originally appeared in Community Pharmacist’s sister publication, HealthCare Distributor. Part 1 focuses on the wholesaler-distributor side of the industry. Part 2 focuses on the retail sector. In this column and my next, I am delighted to welcome a co-author — my hero, mentor and father, Robert Wendland. As many of you may recall, Bob was the only non-Dohmen president and CEO of the F. Dohmen Co. and spent nearly 30 years with them, following tours of duty with both Humiston-Keeling (remember them?) and McKesson Drug. Since his retirement in 1995, you can rest assured that Bob has not sat idle, but rather vicariously, through my experiences and long-term friendships with others, has maintained active interest in the industry. Neither of us saw the other’s answers before going to print, therefore this exchange represents a truly “bi-generational” view on our industry. I am proud to have the opportunity to share my byline and thank HealthCare Distributor for providing me the encouragement to make this “debate” a reality.
Has the role of pharmaceutical distributors changed? Dave: From my perspective and 15 years’ industry experience, I would say yes. They demonstrate far less reliance on profit generated by the traditional pick-pack-ship business and more focus on value-added services and diverse business units. The physical act of moving boxes has become a much more commoditized capability. The fundamental goal of distribution has probably not changed, however: to make sure that product efficiently, accurately and legally flows through the supply chain. Bob: When I joined the industry in 1954, distributors were offering two deliveries per day and a daily motorcycle emergency delivery for most accounts. Operating expenses were well over 15 percent, but who cared? Gross margins were over 17 percent. Each year, margins continued to decrease as distributors began giving additional discounts below AWP, taking for granted their 16 2/3 percent gross margin. It continued each year until margins were in the 8 percent range and operating expenses were near 6 percent. “It is what you make it!” I prefer to say. Distributors have now discovered ways to decrease operating expenses and enhance gross margins with fees for service. What impact does regulation such as the Medicare Modernization Act have on the wholesale business? Dave: A positive one, in that more Rx product will flow through distribution centers to meet the demand of Medicare recipients. With increased volume comes productivity and inventory turnover, bringing a slight boost to the bottom line. The current angst is one that has always been present — desire for fair reimbursement rates and a level playing field. Bob: It’s too soon to predict the ultimate impact of Medicare Part D. Distributors obviously are benefiting because more product is being dispensed. It’s a win for people now receiving reductions on prescriptions, a win for pharmacies that fill prescriptions, a win for manufacturers whose product is used, a win for government which has finally introduced a plan. Has counterfeiting and pedigree of prescription drugs always been an issue Dave: I think this has always been a vital issue for pharmaceutical distributors and one that is taken with the utmost seriousness. My fear is that a bureaucracy focused solely on the cost side of the equation rather than patient safety will overshadow the valuable role of distribution. Bob: This has always been a threat, but with fewer distributors and strict licensing it will be easier to monitor and control. How does the introduction of a third class of drugs (e.g., PSE) impact the distribution channel? Dave: This bodes well for pharmaceutical distributors given that national pharmacy chains may rely more on drug distributors rather than self-warehousing for their “behind the counter” purchases. At the same time, it has created significant challenge at the distributor level as new SKUs are introduced to market while management of the constantly changing slate of previous SKUs is a daunting task. Bob: Manufacturers could be affected with fewer sales from advertisement and impulse buying, but it’s a great opportunity for the pharmacist to recommend sales at higher gross margins. Tip to manufacturers: focus your ads to encourage consumers to “ask your pharmacist!” What effect has consolidation had on the industry? Will it continue? Dave: Larger organizations with multiple management layers means access to key decision makers is more challenging. However, budgets are larger and the ability to invest in new initiatives seems more readily available. Consolidation has further strengthened regional distributors — especially in the area of service. The real question is, must consolidation continue to meet the profit and growth objectives of the remaining pharmaceutical distributors? Bob: Consolidation has encouraged the remaining independent distributors to become proactive, to think retail, and to make things happen. The remaining distributors are always targets for acquisition if the “big three” perceive an economic fit. Ask me again next year – I’ll have a more definitive answer! I look forward to sharing additional views in Part 2 [to be posted in May]. In the meantime, if you have other questions you would like to offer as potential fodder to this father/son debate, please email them to me at dave_wendland@hamacher.com.
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