From Merck's discussion of 3rd Qtr.
"Merck also said it plans to implement a new drug distribution program to get a better handle on drug inventories by limiting the amount of medicines wholesalers can buy. The move will hurt revenues by about $650 million to $750 million in the fourth quarter and reduce earnings per share from continuing operations by about 18 cents to 21 cents per share in the period.
"Our sales going forward will more accurately match the actual demand," said a Merck spokesman."
Not sure to what extent but this can't be good for ABC.
So they intend to replace the income which is currently generated from the rebates to some new magical source called.. FEE FOR SERVICE ! I expect the margins to be high enough to justify the process of handling the drugs or BIG PHARMA will be looking to invest BILLIONS to do it on their own... Which we both know ain't going to happen.... So did you see this ? http://biz.yahoo.com/djus/031023/1748001894_2.html So who else is willing to handle and collect 45 bill to make 1% net? You notice that he praised them, My bet is now they will lock in long term FEE's for service which will look great on their balance sheets as gauranteed long term income! The distributors will not take a cut and handle 180 Billion in risk and keep less than the current return!! But whatdoiknow? ABC is going to rock on friday after MCK release! WDIK
From CAH's CEO during this mornings earnings call with investors on the MRK policy.
"Cardinal is adapting to a new model for dealing with drugmakers, said Walter, who praised drugmaker Merck & Co. Inc.'s (NYSE:MRK - News) announcement that it would match drug supplies with prescription demand.
Walter said this will enable wholesalers to make better use of capital by requiring less investment in inventory, but it will limit their ability to stockpile inventory at lower prices."
Walter also talked about changing terms from suppliers from traditional trade discounts to a "fee for service" model that will be different with each MFR.
Should be interesting. FYI.
Thanks, I see we have similar thoughts. I want to see how much impact this new program affects MRKs cash position next QTR as they start holding back the so called excess production.. I still say production now equals true consumption since the channel is mature. If the channel accumulated massive Quantities of ever increasing proportions MRK would have an argument.. But if that were so, MRK would have sustained periods of dropping sales ( MAYBE NON EXISTANT ) while the inventory was fed into the system. Besides, the distributors would have much larger gross operating margins if this were a dominant revenue enhancer. It's apparent from the margins that this has to be minimal activity compared to the overall processes by which drugs get distributed! Overseas Markets are getting killed as I type, looking like we go down for the rest of the year.. I am expecting undervalued issues like ABC to show some strength during this period.. CU later WDIK
Good post! In addition, MRK is so sales oriented that the new policy, if for real, will be modified or eleminated the first or second time they have a challenge meeting their numbers. It is common knowledge that in the last 15 days of a quarter special terms are often offered, such as: extended terms, special discounts, and free products ( 2 free with 10 or 3 or 4 free with 9 or 8 ).
Here's MRKs problem... Bear in mind it's MRks problem.. They can only reduce the channel one of two ways. Assuming they will not sacrifice production margins by becoming less efficient! So it means they could be running pruduction as close to capicity as possible to maximize profits, but limiting production to periodic bursts. This would mean that MRK would have to sit on the temporary oversupply themselves ( not eactly going to help their numbers but won't hurt them either).... Now, the most important thing MRK did not say! I notice they didn't suggest that the market scalps the rebate by not passing it along the channel! Is MRK saying they will never offer discounts to try to capture market share from a rival... I say it's a smoke screen to try to stop the bleeding in their own stock.... Business will go on exactly as it has... with discounts offered to attempt increase share.. If they don't inderstand this concept, they should take Manufacturing 101 for a refresher... The most MRK can gain is a one shot event as the channel is reduced... Not exactly a long term gain ...WDIK
At least this board has come alive.
I believe MRK's primary motivation is leveling the timing in production. They announced a 4400 employee reduction in workforce today and are in need of a way to produce the same quanity of product with less employees. I don't believe that they are attempting to squeeze the wholesaler's margin (at least as thier primary motivation). That would not be in thier best interest. It is up to ABC's management to see that does not happen. ABC as well as the other wholesalers are not MRK's puppet on a string.
You can't possibly think that wholesalers purschase limitless quantities in excess of their demand..I'll suggest that on a monthly basis sales closely match demand, for if they didn't ABC and others would be choking on EXCESS INVENTORY.. Is MRK suggesting that they believe 750 mil is excess in the channel? What do you think will happen when they tighten the channel to much.. Prices will dramatically rise increasing profits for the likes of ABC! Funny how they didn't mind the channel filling up when they were posting record profits... My guess is they are going to try to manipulate the supply so as not to have to offer rebates on occasion...Since ABC works on a % mark up, it shouldn't affect earnings at all... They will make the same profit per sale and likely more when the channel runs short and those who have inventory jack those who are needing supplies. IMHO WDIK
"The pharmaceuticals company said Wednesday that it is implementing a new wholesaler distribution program to moderate fluctuations in sales affected by wholesaler **investment buying** and improve efficiencies in the distribution of its products."
Been watching this board for years and finally off my butt to chime in...especially on this last post. Wholesalers are on razor thin sell margins and their true profits come from managing inventories. Although the purchases aren't limitless as WDIK states, they are far more than normal demand. Excess inventory when purchased at the right time results in shelf appreciation (speculative buying) and more sales on products purchased before the mfr raises the price. The Mercks of the world are cutting the wholesaler access to spec buying as it's cutting too deep into their profits. Earnings will definitely be hit because of this.