The U.S. pharmaceutical and
biotech supply chains recently underwent a drastic transformation from the Buy-and-Hold
(BNH) agreement to the Fee-for-Service (FFS) agreement. Manufacturers’
responses are mixed, and the future of the FFS agreement is under debate
among industry observers. Emerging competition from 3rd party logistics
(3PL) service providers offers new options, such as a Direct-to-Pharmacy
(DTP) agreement that transfers the ownership of channel inventory to the
manufacturer. Drug manufacturers face fundamental normative questions about
the optimal go-to-market channels strategy: Which contract (BNH, FFS, or
DTP) would be best for the pharmaceutical supply chain and its individual
My research in this area
focuses on modeling and empirical studies of (1) drug distribution models
and contracts that ensure mutual benefits to manufacturers and wholesalers,
(2) drug pricing – how to predict drug prices based on observable factors.
K., Y. Zhao, A. Fein (2013). Resell versus Direct Models in Brand Drug
Distribution. International Journal
of Pharmaceutical and Healthcare Marketing 7: 324-340 (selected by the editorial team as one of the two
Highly Commended Papers in 2013).
this paper, we present a mathematical model to study the comparative
effectiveness of the BNH, FFS and DTP agreements for the manufacturer, the
wholesaler and the supply chain as a whole. We consider cases where the
aggregated demand is predictable and determine the profit maximizing
production-inventory strategy in a multi-period setting for the
manufacturer and wholesaler under each contractual agreement. We show that
the DTP agreement eliminates the wholesaler's incentive to investment buy
and thus always outperforms BNH and FFS agreements in terms of the total
supply chain profit. Indeed, DTP achieves the global optimality for the
entire supply chain. We also show that under DTP, one has the flexibility
to split the additional profit in an arbitrary way, and thus for any FFS
agreement, one can always find a DTP agreement that improves the
profitability for both the manufacturer and the wholesaler. Based on data
from a leading US pharmaceutical company, we quantify the impact of DTP on
the total supply chain profit relative to FFS and BNH agreements. We
briefly review one global manufacturer's implementation of the DTP
agreement in U.K. and discuss its broader business implications in the U.S.
Martino, K., Y. Zhao, J.
Sawhill (2010). A Multiple Regression Model to
Explain the Cost of Brand-drugs. Socio-Economic
Planning Sciences 47:
Abstract: This paper is motivated by
recent events pertaining to the rising cost of healthcare in the U.S., and
a lack of definitive answers regarding what determines both the initial
cost and markup costs of prescription drugs. We find observable
characteristics of drugs that help outside parties to predict drug pricing.
Observable characteristics are valuable because anyone can observe them at
little cost or time, including (for instance) the therapeutic class,
manufacturer, class type (brand or generic), and dosing levels. Based on
real-world data of the most popular prescription drugs sold in US in 2007,
we develop a regression model that can be used to determine an “expected
price” for a given drug using these characteristics. Through ANOVA, the
results have shown that while therapeutic classes have an impact on the
drug wholesale prices, the manufacturers do not set their price
differently. The results are also showing that the price differential
between generic and brand drugs is not
uniform across therapeutic classes, and competition contributes to it.
The number of dosing levels has a more significant impact on drug prices
than the incremental dosing amount.
Iacocca, K., J, Sawhill, Y. Zhao. 2014. Why Brand Drugs Priced Higher
Than Generic Equivalents. Forthcoming at International
Journal of Pharmaceutical and Healthcare Marketing.
Purpose: This paper
investigates why brand-name drugs are priced higher than their generic
equivalents in the U.S. market. We hypothesize that some consumers have a
preference for brand names which outweighs the cost savings realized by
switching to generics. Consumers may prefer a brand drug because the brand
may have a higher perceived quality due to advertising and other promotional
activities. Additionally, individuals are habitual in their consumption of
prescription drugs, which leads to continued use of the brand in the face of
Design/methodology/approach: We develop a
structural demand model and proceed to estimate it using wholesale price and
demand data from the years 2000 through 2004.
Findings: The results of
our analysis reveal that customers have a strong preference for brand drugs.
In addition, consumers exhibit high switching costs for prescription drugs.
Originality/value: Considering the
price and quantity of prescriptions filled each day, determining why brand
drugs do not lower their prices to compete with their generic equivalents is
an important question. Unfortunately, the existing literature only
acknowledges this counter-intuitive business practice, but does not mathematically
explain it. We address this knowledge gap in literature and provide important
insight for all players in this industry including consumers, pharmaceutical
manufacturers, pharmacies, and health insurance companies.
drugs; generic competition; brand drug prices; consumer utility, nested logit