In the US, there are three national wholesalers which distribute about 90% of your product ("Top 3").  The remaining 10% of product is distributed through other regional and local wholesalers/distributors.   

As is standard industry practice, ACME has two contracts with the Top 3 wholesalers:
 

1. The Authorized Distributor Agreement ("ADA"):
   • Authorizes the wholesaler to be an authorized distributor of your drugs to their customers;
   • Allows the wholesaler to purchase product from the Company at wholesale acquisition cost ("WAC"); and
   • Extends a 2% prompt pay discount off of WAC.
2. The Distribution Services Agreement ("DSA") specifies certain services you would like the wholesalers to perform for you:
   • One service, for example, requests the wholesaler to have certain levels of inventory of your products on hand at the end of the month in exchange for a fee to provide that service.  

ACME Cost Analysis

• Working with Finance and your distribution team, you analyze ACME's distribution costs.  ACME pays fair market value fees for 5 bona fide services you ask the wholesaler to perform under the DSA.   
• In addition to the service fees, you also extend a 2% product purchase discount off of WAC.  Within the DSA, the discount has its own section and is treated completely separately from the service fees. 
• The amount of the bona fide service fees paid equals 2% of all products purchased by the wholesaler from the Company at the Wholesale Acquisition Cost (WAC) price.   
• Thus, in total between the fees, purchase discount, and prompt pay discount, you pay the wholesaler 6% of all products purchased at WAC.  
• This means for every $100 million of product you sell to the Top 3, you pay them $6 million in expenses.  ACME is projected to sell $10 billion in 2023, thus $600 million to the wholesalers. 
• ACME's Government Price Reporting team reminded you that eliminating the 2% product purchase discount will have an impact on the company's Medicaid rebate obligations, which must be factored into the overall strategy. 

Cost Reduction Strategy

You know that of the 6%, you can only impact the 2% product purchase discount.  In other words, the 2% of services fees have already been calculated to be fair market value, and the 2% prompt pay discount is standard in all industries.  Thus, there is no negotiating room for these line items.  However, there is debate whether you should terminate the ADA as well.  You know your primary strategy is to reduce or eliminate the 2% product purchase discount for now.  Complete elimination of the 2% product purchase discount in the DSA would yield a $200 million savings in 2023. 

You and your team hire a well-known consultant with expertise in wholesaler operations.  He believes the 2% product purchase discount is too high compared what he says he knows other pharmaceutical companies are paying, and recommends eliminating it all together 

You, your team, and the consultant discuss various strategies on how to eliminate the product purchase discount from the Agreement.  You all agree that if you offer an amendment to the DSA eliminating the product discount, the wholesalers will reject the offer and not agree to negotiate.  Thus, you all agree that the best business strategy is to terminate the current DSAs, offer a new DSA at the same time which eliminates the product purchase discount, and give the Top 3 90 days to negotiate.  If a new agreement were not reached in 90 days, the Company would only continue to extend the 2% prompt pay discount to product purchases at WAC and pay the bona fide service fees. 

The consultant claims he has done this with other manufacturers, that the wholesalers will eventually give in and agree to give up the purchase discount.  He believes the wholesalers need the service fees to operate efficiently and thus will forego the purchase discount to preserve the service fees. 

You decide to propose this strategy to Dr. Spring.  

1. In two sentences or less, a statement of your recommendation.
2. Detailed rationale for this recommendation.  Should it include the ADA?Explain
3. Present the estimated change to ACME's Medicaid product liability.
4. Detail any compliance concerns that ACME should consider.