Resell versus direct models in brand drug distribution

Abstract

Purpose – The purpose of this paper is to compare the effectiveness of the Buy-and-Hold (BNH), Fee-for-Service (FFS), and Direct-to-pharmacy (DTP) agreements for the US pharmaceutical industry and its individual participants. There have been mixed responses to these agreements and the industry is currently under debate as to which contract would be best for the industry and its individual participants. The question is answered by comparing the agreements and settling the industry debate regarding the impact of these distribution agreements. Design/methodology/approach – The model features multi-period production-inventory planning with time varying parameters in a decentralized setting. Under each distribution agreement, mathematical programming models are formulated to determine the profit maximizing production, inventory, and ordering decisions for the manufacturer and the wholesaler in a finite time horizon. The applicability of the model in the US pharmaceutical industry using real-world data is demonstrated. Findings – It is shown that the DTP agreement always outperforms the BNH and FFS agreements. Furthermore, the DTP agreement is flexible because it allows the manufacturer and the wholesaler to split the additional profit in an arbitrary way. The findings reveal that the DTP agreement can improve total profit by about 0.08 - 1 percent (relative to FFS) and 5 percent (relative to BNH). Originality/value – Considering the size of the pharmaceutical industry, efficient distribution agreements are imperative. Unfortunately, the existing literature provides insufficient guidance to help managers make this important decision. This knowledge gap is addressed in literature, and provides important insight for practitioners on what agreement is most beneficial for this industry.