'Not a Box of Nuts and Bolts': Distribution Channels for Specialty Drugs

One of the most important trends in the pharmaceutical industry is the rapid growth of specialty drugs. Specialty drugs, mostly bio-based, tend to be high-risk, high-priced, and more regulated than traditional drugs, resulting in unprecedented challenges in distribution. Such challenges lead to the emergence of specialty distributors (SDs), which, compared with traditional wholesalers (WSs), manage more controlled networks and carry a smaller variety of drugs. Using a unique dataset assembled from multiple proprietary and public data sources on transactions, inventory, and chargebacks for 419 specialty drugs across 11 manufacturers (including 8 of the top 15 pharmaceutical manufacturers),161 distributors, and129,911 POCs (point-of-care) in 2012-2015, we investigate unique factors associated with manufacturers’ SD usage (vs. WSs). We also develop a nested logit model to examine factors that drive manufacturers’ choice of specific SDs if they were to use an SD channel. We find that the restrictive access element of regulations (instead of regulations in general), downstream POC’s required drug variety, and distributors’ experience in providing critical value-added services for manufacturers (i.e., managing chargebacks) are associated with higher SD usage. Moreover, if a manufacturer were to use an SD channel, it is more likely to choose one if it has used this SD or the SD-affiliated WS before, or if this SD has better performance. WSs and SDs represent distinct approaches to balance channel accessibility and channel control. Our results provide important insights and guidance to manufacturers, regulators, and downstream POCs, while contributing to the limited empirical research on B2B distribution decisions.