Direct sales or through distributors: the health sector's dilemma

In Brazil, one of the questions that always come up in the health sector involves the definition of distribution channels. Periodically, the pharmaceutical industries reassess whether they should increase direct sales to the POS, reducing dependence on distributors, which currently represent 70% of sales in the drug industries.

Comparing countries, drug supply channels are not very different from Brazil. In the United States, more than 90% of pharmaceutical industry sales go to distributors, who are responsible for daily delivery to nearly 200 health care points across the country. In countries such as Denmark, Greece, Ireland, Luxembourg, the Netherlands and the United Kingdom, this percentage is just under 90%, while in the Czech Republic, France and Italy it reaches almost 80%.

The expectation for the coming years is that this scenario will undergo some change, with the pharmaceutical industries seeking new ways to increase their margins and increasing direct sales to pharmacies and hospitals. In Europe, the average margins of pharmaceutical distributors are around 5% to 10%, and can reach 23%, as in the case of the Netherlands, while in the United States, the average margin is 6%.

However, increasing direct sales may also mean an increase in the investments needed to guarantee the level of service currently offered in the pharmaceutical chain. In the United States, customers in the healthcare industry (physicians and patients) expect a high level of service, and it is common for pharmacies to place orders daily, with deliveries between 12h and 24h after the order is placed. This expectation is not very different in Brazil, where half of sales by drug distributors are met the day after the order is placed, while another 20% are met on the same day, according to a recent survey carried out by ILOS and which makes up the Panorama ILOS “Supply Chain in the Health Sector”.

Studies carried out in the United States show that the withdrawal of distributors from the pharmaceutical market would increase by almost 12% the total costs of the pharmaceutical industry for it to maintain daily deliveries to pharmacies. If the delivery time increases to one week, which would require a larger stock in pharmacies, the industry's total cost would increase by 4%. This increase in costs is due, in large part, to the need for industries to carry out operations and manage systems that are currently used by distributors.

Despite the greater complexity and the possible increase in costs, more than 30% of the drug industries in Brazil would like to change the configuration of sales channels, increasing the share of direct sales. Visualizing a possible cost reduction, most pharmacy chains (77%) and independent pharmacies (92%) are also interested in buying directly from the industry and even admit the possibility of reducing the frequency of deliveries, with a consequent increase in batches orders and inventory in stores.

Check out more numbers on the drug supply chain in the infographic below:

Bibliographic reference:

Panorama ILOS “Supply Chain in the Health Sector”

OECD – Competition issues in the distribution of pharmaceuticals

Booz Allen – The role of distributors in the US Healthcare Industry