One of the attributes of the burgeoning specialty pharmaceutical market in the US is that many of the products are moving through distribution channels via nontraditional channels. Part of this is due to their very nature—they often require special handling (such as temperature-controlled, refrigerated transportation and storage). Part of this is due to the growth of alternative sites of dispensing—infusion centers, outpatient clinics and most of all specialty pharmacies (SPs), a rapidly growing category of retail pharmacy. But the most fundamental reason, it seems, is the combination of financial and business-relationship arrangements between manufacturers, payers and providers that, in some cases, affords better opportunities to access the market for manufacturers, and cost savings or streamlined operations for payers.
The most notable example of this is direct distribution—going from the manufacturer direct to the practitioner’s office, or even direct to the patient. Products that need to be compounded or customized for patients might stop at an SP along this route, especially in cases where the SP provides additional services to patients to support their care. This has led to the rise of limited or exclusive distribution networks, where a specialty drug is available only through one or a few SPs, who in turn serve local, regional or national markets.
Whichever pathway a specialty drug takes along its route, the key service providers are third-party logistics firms (3PLs). The 3PL business is not unique to specialty drugs, or to pharma generally—it exists for a wide range of businesses and industries. The defining characteristic of 3PLs is that they act as the product owner’s agent, arranging storage and transportation of the product, often including receiving and fulfilling orders, and managing payments—but not taking ownership of the product (except, paradoxically, when they do—more about that later).
Specialty logistics and distribution is a good business to be in these days, simply because of the strong growth of specialty products coming out of pharma labs and factories. IMS Health, in its annual Use of Medicines report, pegged the 2015 specialty market at $150.8 billion and representing 75% of new brand spending growth. That figure is up 21.5% from the previous year (IMS cautions that this invoice price does not include the discounting that occurs with different types of buyers). Specialty drugs tend to be the newer types of biologics, oncology products and the small but lucrative drugs approved for rare diseases.
Nearly all of the major US wholesaler-distributors have a 3PL service offering; it’s fairly straightforward for them to complement their national distribution and transportation services for the products they buy with 3PL services operating alongside the wholesaling business. At Cardinal Health Specialty Solutions, VP/GM Jennifer Fillman notes that the unit is growing at a double-digit rate and is projected to be an $8-billion business within Cardinal, according to its FY2016 results (this includes all specialty services, not just 3PL).
The company has developed a 3PL service that showcases the value of this arrangement for manufacturer clients. Called the Exclusive Pharmaceutical Transportation Network (EPTN), it comprises a central warehouse in La Vergne, TN, with dedicated shipping lanes that can cover 75% of the continental US with ground transportation and 48-hr delivery. Manufacturers deliver pallets to La Vergne; Cardinal Specialty Services combines shipments from diverse manufacturers but going to the same destination and sends the products on their way. All of the shipments are made with refrigerated trucks, ensuring temperature control of cold chain products. Destinations include wholesalers, central pharmacies of hospital networks, and SPs that handle national dispensing.
“By consolidating shipments from multiple clients, we can reduce transportation costs while also eliminating many of the touchpoints of handoffs or transfers of conventional less-than-truckload delivery,” notes Fillman. “This has had a substantial impact on the volume of products that are returned for credit because of damage during shipping.” Fillman says that manufacturers routinely come to Cardinal Health Specialty Solutions with that specific goal in mind.
The journey of a specialty pharmaceutical delivery varies once EPTN has made its deliveries. SPs, shipping to individual doctor’s offices or patient homes, might repack the shipment in its own temperature-controlled container and then use an air carrier like FedEx or UPS to make an overnight delivery. Shipments to hospital central pharmacies move between one healthcare facility or another. Shipments to full-line wholesalers might wind up going to regular local pharmacies (for manufacturers putting the specialty drug in open distribution), or enter the specialty network handled by that wholesaler.
Cardinal Health Specialty Solutions, like other 3PLs, also handles order-to-cash processes for the manufacturer; this is fairly routine, but can entail some complexity when a “drop shipment” occurs. Drop shipping is the term used in logistics to describe a delivery made by one party on behalf of another; in this case, the manufacturer might be drop shipping directly to an SP customer, but lacks a business relationship with that customer. Even though Cardinal Specialty didn’t handle the delivery, it has the business relationship with the customer, and so completes the order once notification is received that the delivery has been made.
Another financial aspect of 3PL services is when they agree to “take title” (effectively, buying) the product. There are reasons to do this, as opposed simply to having the manufacturer sell to wholesalers as in conventional distribution. The manufacturer wants to take advantage of the dedicated specialty services in delivery and handling, but doesn’t have the appropriate licensing in place for national distribution (a growing number of states require drug providers to have a license, and the rules continue to evolve). Many 3PL providers, including Cardinal Health, RxCrossroads and other 3PL providers mentioned in this article, have the necessary licensing, and so can step in to make compliant deliveries. The practice is especially useful for emerging pharma companies who either don’t have all the state licenses in place, or who rely on their 3PL partner for the service.
As a business serving high-volume specialty products, this 3PL activity was pioneered by AmerisourceBergen, which set up its Specialty Group in the early 2000s and maintains some key company brands, such as ICS, Oncology Supply and US Bioservices, to this day. Like Cardinal Health, McKesson has a Specialty Health Solutions business unit; it absorbed a network of community oncology centers, then known as US Oncology, several years ago. H. D. Smith and other full-line wholesaler-distributors also provide 3PL services.
A second tier of 3PL providers are companies not part of a full-line wholesaler, but providing dedicated specialty 3PL services nonetheless. A major player here is RxCrossroads, which, as part of Omnicare, was acquired by CVS Health less than a year ago. Rob Brown, VP of business development, says that the focus for his company’s 3PL services are smaller manufacturers that lack the internal resources to manage a national distribution process (or choose to invest their resources elsewhere) but need the high-touch services RxCrossroads will provide. Generally, clients ship pallets to RxCrossroads two central warehouses in Louisville, KY, and the shipments are either sent direct to wholesalers, or broken down to cartons or individual packages for delivery to hospitals and clinics. RxCrossroads has extensive experience in cold-chain delivery; the company can repack the shipment, per the manufacturer’s requirements, and then pass them on to an express carrier for overnight delivery. “Most of this repackaging is a customized service; some packouts can be very complex, with as many as 10 components specified for each container,” he notes.
RxCrossroads, as it happens, is the leading provider of 3PL services involving collecting blood plasma from donation centers around the country, storing those shipments for up to 60 days (an FDA requirement), and then delivering them to the handful of firms that fractionate blood plasma into albumin, immunoglobulin, coagulation factors and other prescribed products (Pharmaceutical Commerce, March/April, p. 20). Generally, the raw plasma is shipped and stored frozen, and RxCrossroads has a dedicated fleet of refrigerated trucks to handle the collection. Once stored, however, follow-up verification of donors’ suitability can necessitate going into the inventory and removing some donations, to prevent cross-contamination problems when the plasma is later processed. RxCrossroads also handles some of the downstream delivery of these blood products (as it would other specialties).
As to trends in specialty distribution services, Brown says there’s a movement among healthcare providers to set up “buy and bill” arrangements with manufacturers. Buy and bill has been a traditional practice in community oncology; the oncology office purchases (and keeps on hand) a limited amount of oncolytics, and then bills payers for dispensing them to patients. The practice is expanding in recent years to dermatology, hematology and some of the growing number of rare disease therapies.
For the manufacturer, the 3PL services from RxCrossroads enables it to avoid the complexity of order management with diverse, small customers. More generally, many manufacturers are seeing advantages in the specialty 3PL arrangement as part of a larger process of engaging the specialty distributors’ hub or patient support services, as a means of managing the drugs’ commercial distribution better. “Many of our 3PL clients take advantage of the patient support services that RxCrossroads provides,” says Brown.
The CVS Health/Omnicare/RxCrossroads connection will eventually lead to some cross-functional business among the units (CVS Health is a major specialty pharmacy in addition to its retail business), but for now, Brown says, the business is still running its own network. The new corporate parent has committed to a major expansion of the Louisville facilities, with groundbreaking not yet announced.
High-touch 3PL services are also available from other firms, including LifeScience Logistics, BDI Pharma, MD Logistics, and, to a degree, from the major international logistics providers such as UPS, FedEx and DHL. FedEx opened a cold chain center earlier this year to handle its increased volume of temperature-controlled products; the company also has its Custom Critical subsidiary, which handles specialized service deliveries of pharmaceuticals and other products with a dedicated fleet of refrigerator vehicles.
In May, LifeScience Logistics announced that it had received ISO 13485 certification, enabling it to assure medical device manufacturers of the quality controls it maintains. The company is also in the process of expanding its Brownsburg, IN facility.
Other distributors pick up specialty business where they can, when the combination of the client needs and their own capabilities align. At Woodfield Distribution (WDSrx), the company began working with a women’s healthcare product manufacturer in 2012. By leveraging its financial management services, its on-site call center for physician outreach and its core pharmaceutical warehousing and distribution capabilities, WDSrx managed the entire sales and service process for their client from initial online ordering through fulfillment to individual addresses, invoicing and customer service including returns.
According to WDSrx President Adam Runsdorf, “The omni-channel business model originated as a hybrid of several of our core and value-added services. Our experience with pharmaceutical drug products places WDSrx at the center of potentially significant changes that may open a new distribution channel from manufacturer to final destination.”
With some specialty drugs, especially those for rare diseases, it can be difficult to define where clinical trial development leaves off and commercial distribution begins. This blurring has been highlighted by the recent attention FDA has paid to what it calls “expanded access” for drugs under development, whereby patients and their physicians can apply for use of the drug prior to formal approval. For that reason, as well for the inherent capabilities of the clinical trial logistics firms, there is some movement toward using those firms’ networks for specialty distribution.
World Courier, a leading clinical trial logistics provider, is moving in this direction, having expanded the capabilities of its depot in Melbourne, Australia (which was set up originally for clinical trials management in the Southeast Asia region) to include commercial distribution. The arrangement, announced in early 2015, “is progressing nicely; we’re filling up our commercial capacity and proving our hypothesis that this can work for clients,” says Doug Cook, president of Global Specialty Logistics at AmerisourceBergen.
One driver for this business is that it enables World Courier (and its parent, AmerisourceBergen) to move smoothly from clinical trial services through to commercial distribution once a drug is approved. But another reason is simple economics: for firms that are putting a toe in the water to market products globally, it’s a way to start on a smaller scale and build up a market for its drug.
The mechanics of the conversion can be fairly straightforward: the company already has resources in place to handle cold chain products, to perform repackaging or kitting, and has the necessary licenses for commercial distribution (Cook says that the majority of the company’s 13 depots outside the US are already licensed for commercial distribution). “We’re built for the more complex distribution situations; it’s our sweet spot,” he says.
Looking ahead, Cook sees his company’s services being a vital part of the coming era of personalized medicine, especially cell therapy-type drugs that might involve cells from an individual patient, being processed in some manner in a lab, and then returned to the patient for infusion. “We’re already working with more than half of the clinical trials involving gene therapies, and almost half of the companies working on cell therapies,” he says.
World Courier’s arch-rival, Marken, is also active in this area. The company has expanded its global network (most recent openings include Boston, MA and Moscow, Russia), as well as to expand its network of partner logistics providers to enlarge its capacity.