ECONOMIES OF SCALE IN THE WHOLESALE PHARMACEUTICAL INDUSTRY

A THESIS

Presented to

The Faculty of the Department of Economics and Business

The Colorado College

In Partial Fulfillment of the Requirements for the Degree

Bachelor of Arts

By

Jacob Dickson

December/2008

ECONOMIES OF SCALE IN THE WHOLESALE PHARMACEUTICAL INDUSTRY

Jacob Dickson

December, 2008

Economics

Abstract

Economies of Scale can be used as a tool for measuring efficiency. The wholesale pharmaceutical industry recently received regulations mandating pharmaceutical wholesalers provide a pedigree to document the flow of pharmaceutical products through the pharmaceutical supply chain. Each wholesaler had to create a new system for generating these pedigrees. Economies of scale was used to decide which wholesaler was best suited to implement a pedigree program. The largest wholesalers could not move quick enough to match pedigree deadlines while smaller companies struggled financially to afford a new pedigree program. It was found that midsized companies had the appropriate balance between quantity of products sold and overall business size. KEYWORDS: (Economies of Scale, Pharmaceutical, Pedigree)

ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS

TABLE OF CONTENTS

ABSTRACT ii 1 INTRODUCTION

2 ECONOMIES OF SCALE 19

3 CASE STUDY 22

4 ANALYSIS 44

5 CONCLUSION 52

6 SOURCES CONSULTED 56

LIST OF TABLES

l.1 Incidences of Counterfeit Drug Cases opened by FDA Each Year.................. 2

1.2 Brick Production Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

3.1 Morris & Dickson Co. L.L.C. Distribution Hubs................................... 27

3.2 Cardinal Health Distribution Centers................................................. 28-29

3.3 McKesson Facilities........................................................... .......... 30-31

3.4 AmerisourceBergen Distribution Centers............ ....................... .......... 31-32

3.5 Side By Side Comparison of Pharmaceutical Wholesalers.................... ..... 33

5.1 Incidences of Counterfeit Drug Cases opened by FDA Each year...... .. .. . ... 52

LIST OF FIGURES

2.1 Economies of Scale..................................................................... 20

3.1 HDMA Map of State Pedigree Legislation/Regulations........................ ... 23

4.1 Decrease in Long Run Average Cost Due to Technology........................ 46

4.2 Effect of Technology and Cost of Labor on Economies of Scale Model........ 50

CHAPTER 1

INTRODUCTION

Counterfeit drugs have become a real problem and the FDA is increasingly

combating them through its Prescription Drug Marketing Act (PDMA) of 1987, public

law 100-293. '''It's a serious problem, simply because of the potential for health issues,

and the potential for deaths if it is not taken seriously' said Matthew Freidrich, the acting

assistant attorney general for the Justice Department's criminal division. He said

organizations such as the World Health Organization 'put the annual amount of

counterfeit drug sales at something like $35-40 billion per year. So there's no question

that it's a large problem globally. ",1

Along with the World Health Organization, private companies such as

SupplyScape, "a leading force in driving the creation and development of industry

standards such as the EPCglobal Drug Pedigree Messaging Standard,,,2 point out that not

only is this a global problem but one within the United States. "Global counterfeiting and

diversion of pharmaceutical products is estimated at over $38 billion annually. The

OECD identified over 1,700 product security incidents in 2007 alone. Estimates suggest

IPierre Thomas, Ted Winner, and Theresa Cook, "Counterfeit Drugs, Real Problems, Global Black Market, Potential for Health and Safety Issues Concern Officials," ABC News, September 14,2008, http://abcnews.go.comJTheLaw/Story?id=5796287&page=1 [accessed January, 2008].

2 SupplyScape, "Overview," SupplyScape, http://www.supplyscape.comJcompany/ [accessed November, 2008].

roughly 30 million U.S. prescriptions annually contain tainted or counterfeit drugs.,,3

This is why it is important to start with the United States and secure the safety of our

medicines. It is an unfortunate situation and should be fixed. Because of this thought,

the Prescription Drug Marketing Act of 1987 was introduced.

First it is important to understand the problem that the PDMA is designed to

address. Counterfeit drugs are defined as "deliberately and fraudulently mislabeled with

respect to identity and or source.,,4 According to Ilisa B.G. Bernstein, PharmD, JD of the

U.S. Food and Drug Administration, the incidences of counterfeit drugs has increased

significantly in the last decade.

TABLE 1.1

Incidences of Counterfeit Drug Cases Opened by FDA Each Years

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

9 5 11 6 21 27 30 58 32 53

This table describes the number of cases opened by the FDA on counterfeit

pharmaceuticals. It tells us one of two things. Either, the FDA is increasing their

3"Drug Pedigree and ePedigree Overview", SupplyScape, (2008), http://www.supplyscape.com/documents/SupplyScape PedigreeReguirements.pdf [accessed January, 2008].

4Bagozzi, Daniela, "Substandard and counterfeit medicines", World Health Association, (November 2003) 1.

5Ilisa Bernstein, "Impact of the PDMA on the Pharmaceutical Supply Chain," U.S. Food and Drug Administration, NACDS/HDMA RFID Adoption Summit, (November 2006), 1.

2

scrutiny on the problem or there is a higher prevalence of counterfeit drugs reaching the

market. Examples of these include: Procrit and Epogen.6

The businesses in the middle of this problem are the pharmaceutical wholesalers.

Because of the gray market between secondary wholesalers and counterfeit drug dealers,

counterfeit medicines have slipped into our supply of medicine. This gray market exists

where a primary wholesaler such as one of the "Big Three", AmerisourceBergen,

Cardinal Health or McKesson, purchases pharmaceuticals from a secondary wholesaler

who has acquired tainted products from a counterfeit drug dealer rather than from a

manufacturer. This has resulted in less than reputable secondary wholesalers reselling

stolen or counterfeit drugs to a reputable primary wholesaler.

Based upon this, the FDA sought to track where medicines came from and where

they went to. The idea was to eliminate any insertion of counterfeit drugs into the

pharmaceutical supply chain and preserve the quality of our medicines. Thus, the

Prescription Drug Marketing Act of 1987 was created and later, a pedigree law was

proposed to document pharmaceutical product movement through the supply chain.

Considering the implementation and enforcement of a pharmaceutical pedigree

law in the United States and the variety of wholesaler operations in existence, what type

of wholesalers are in the best position to implement adoption and profit from the change

in law? One could argue that due to economies of scale, the largest of wholesalers would

have the upper hand because of their resources, but evidence suggests this does not hold

6 Bettie Hileman, "Counterfeit Drugs, sophisticated technologies and old­fashioned fraud pose risks to the prescription drug supply in the U.S." Chemical and Engineering News 81, no. 45 [Nov. 10,2003], http://pubs.acs.org/cenicoverstory/8145/8145drugs.html [accessed Nov. 2008].

3

4

true for this example. The "Big Three", Cardinal Health, McKesson and

AmerisourceBergen could not produce a pedigree before the Florida pedigree law went

into effect in 2006. However, a smaller player in market, Morris & Dickson Co., LLC.,

was able to successfully implement a pedigree system before any other competitor could.

Returning to the aforementioned Prescription Drug Marketing Act of 1987, it is

important to know that several issues have been raised with it. While the Prescription

Drug Marketing Act does mean well by addressing the problem of counterfeit drugs, it

has inherent flaws. Gary Messplay and Colleen Heisey of FDA Watch highlighted a

problem of authenticating established partnerships associated with the law.

"Unfortunately, PDMA did not define what constitutes an 'ongoing relationship,' a term

that has contributed to the delay in the requirement's implementation.,,7 Since PDMA's

inception in 1987 as a solution for eliminating counterfeit drugs, it has suggested actions

that should be taken rather than mandating laws or regulations. One of the problems

found with manufacturers and wholesalers is highlighted in this quote. The problem

presented here, is that the FDA could not satisfactorily define an ongoing relationship. It

is simply an argument of semantics; a wholesaler can be exempted from pedigree laws if

there is proof of an ongoing history with the manufacturer. The problem arose when the

FDA did not define how much documentation was required to prove prior trade history.

This was an issue with smaller wholesalers purchasing small amounts or irregular

diversities of products from manufacturers.

Whether or not these companies need more time to set up systems or if they are

battling this problem of an "ongoing relationship" with a manufacturer, the evidence

7Gary C. Messplay, J.D., and Colleen Heisey, J.D., "Pharmaceutical Pedigree Requirements," FDA Watch, Hunton & Williams L.L.P. (2006).

5

points to an industry not ready for implementation of a pedigree system. Another part of

the reason for this hesitance to change is the fact that there is, as of yet, no

standardization of technology for a pedigree system. Companies affected by this

pedigree law are forced to choose between 2D barcodes and Radio Frequency

Identification or RFID. "Despite strong recommendations from the FDA and states that

RFID be the standard for ePedigree, neither federal nor state governments have gone so

far as to mandate the technology's use. This leaves companies looking to comply with

ePedigree mandates in a quandary, scrambling to determine not only which technology to

implement - some form of bar code or RFID, but in the case ofRFID, which frequency

standard to adhere to.,,8 Because of this, wholesalers must use both technologies

resulting in unnecessary costs.

Another issue is that has risen is that currently, many different states are

concerned about pedigree laws based upon the Prescription Drug Marketing Act of 1987.

While the Prescription Drug Marketing Act of 1987 has only been a suggestion from the

FDA for securing the safety of our medicines, states have taken the matter into their own

hands to enact product safety. To be exact, the following 23 states are enforcing pedigree

laws: Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa,

Maryland, Mississippi, Nebraska, Nevada, New Jersey, New Mexico, North Dakota,

Oklahoma, Oregon, South Dakota, Texas, Virginia, Wisconsin and Wyoming.9

8Renee Boucher Ferguson, "FDA looks to technology for help", eweek, (June 18, 2007) 30, http://wvvw.eweek.com/c/alMobile-and-Wireless/FDA-Looks-to-Technology­to-Help-Secure-Drug-Supplyl [accessed Nov 2008].

9"Drug Pedigree and ePedigree Overview", SupplyScape, (2008) 1.

6

California is one of the most recent states to pass a new pedigree law. In the

American Journal of Health System Pharmacy a news section contains the following,

"The deadline for full implementation of California's comprehensive electronic pedigree

system for pharmaceuticals has been pushed back two years, to January 1,2011, the state

board of pharmacy decided on March 25. According to a statement from the board of

pharmacy, numerous companies in the pharmaceutical industry had asserted their

inability to be ready by January 1,2009. Nearly all ofthose companies, the board said,

had also offered 'concrete assurances' of being ready for full implementation by the start

of2011.,,10

California's pedigree law is the toughest yet. But in 2006 Florida passed their

pedigree law. "However by last November 2006, 10 states had passed ePedigree

legislation. A Florida law was the first to go into effect in July 2006, and a California

law will go into effect in 2009. Both recommend either bar code or RFID as a

technology choice to enable ePedigree.,,11 Morris & Dickson Co., LLC. was ready for

the Florida pedigree law and was the first manufacturer to provide a pedigree to Florida.

Two companies operating in both Florida and California are CVS and Walgreens.

Traditionally thought of as retailers, they operate a private wholesaler to supply their

stores. They were both cited in an article about a growing resistance to a pedigree law.

California and Florida are preparing to "implement new pedigree laws legislation that

10American Journal of Health-System Pharmacy, (May, 2008).

IIRenee Boucher Ferguson, "FDA looks to technology for help", eweek, (June 18, 2007) 30, http://www.eweek.comlc/a/Mobile-and-WirelesslFDA-Looks-to-Technology­to-Help-Secure-Drug-Supply/ [accessed Nov 2008].

7

requires a paper trail on prescription drugs to thwart counterfeiting.,,12 According to

Denis Blank of Drug Topics, "There are growing signs of resistance and complaints that

it will be very costly to install a uniform tracking system." CVS and Walgreens refuse to

talk about costs related to implementing pedigree systems, instead, they defer to

Healthcare Distribution Management Association, which is in favor of a uniform

electronic tracking program. According to the HDMA, it is expected to take

approximately five years for all companies "to adopt the technology necessary for

tracking drugs and not all of them are willing to share confidential business

information." 13

In a letter written to the FDA, the ApHA voiced their concerns about paper

pedigrees. "APhA's concerns with a paper-based pedigree system and the difficulty

'unauthorized distributors' may have generating or obtaining a pedigree - concerns that

were communicated 0 the Agency in 2000 - still remain.,,14 The ApHA points out

electronic pedigrees would be easier, faster and cheaper than paper pedigrees. This

pedigree documentation was first established as either a paper pedigree or an electronic

pedigree (ePedigree). That all changed after instances like the following. The American

Pharmacists Association (ApHA) also promotes electronic pedigrees over paper

pedigrees. They give several reasons for this, "We are concerned that counterfeiters

12 Dennis Blank, "State pedigree laws running into some barriers", Drug Topics, (2005) [1] http://drugtopics.modemmedicine.comJdrugtopics/Drug+lnformationiState­pedigree-laws-running-into-some-barriersl ArticleStandardl Article/detail1169480 [accessed November, 2008].

13 APhA to FDA, July 14,2006, http://www.fda.gov/ohrms/dockets/dockets/06d0226/06D-0226-EC8-Attach-l.pdf [accessed November, 2008].

14Ibid.

8

capable of reproducing product labels and the medications themselves are likely quite

capable of counterfeiting the accompanying paper pedigree. A paper pedigree system

could negatively impact the security of our drug distribution system by creating a false

sense of security when the mere presence of a paper pedigree could be proof of little.,,15

Gregory Broccoli, a New York resident was in court on May 25. He admitted that

between 2002 and 2004 he was a participant in a conspiracy to make fraudulent paper

pedigrees. He was working with a secondary wholesaler by the name of Providers Plus

of Jersey City and Elizabeth l6 in an effort to sell injectable Somatropin that was stolen.

This pharmaceutical was designed to target Cachexia, also known as "Aids-wasting

syndrome.,,17 Also he sold Imdur and Clarinex after coercing two employees to assist

him in stealing the products from the pharmaceutical manufacturer. Another employee of

the manufacturer obtained Verelen. Nasonex was another product peddled in his

activities. He pleaded guilty to conspiracy on five accounts in his participation with the

secondary wholesaler in New Jersey. Together they had dealt with more than $7.3

million in stolen goods. As a result of this, Broccoli along with his conspirators Daniel

Guarino, Anthony Piesto and Richard Devivo, pleaded guilty of transporting the stolen

drugs, Alain Montes and Fernando Dovale, also pleaded guilty to "conspired to engage in

15 APhA to FDA, July 14,2006, http://www .faa. gov / ohrms/dockets/ dockets/06d0226/06D-0226-EC8-Attac h-l. pdf [accessed November, 2008].

16 The United States Attorney's Office, District of New Jersey, (http://www.usdoj.gov/usao/nj/press/files/broc0525 r.htm May 25, (2006), 1 [Accessed November, 2008].

17Donna Young, American Journal of Health System Pharmacy, Vol 63 July 15, (2006) 1310, 1312.

9

unlicensed wholesaling of prescription drugs" 18 Michael Senatore and Anthony Senatore

who pleaded guilty to "unlicensed wholesaling of prescription drugS.,,19

Shay Reid, a vice president of AmerisourceBergen calls attention to another

dilemma related to standards, specifically, needing a uniform electronic tracking

standard. "'For it all to work,' Reid said of tracking and tracing pharmaceuticals, 'it all

has to be based on standards.",2o 2D barcodes require that products be placed precisely,

which increases time, and that they not be stacked, which slows down the process speed

by increasing read time required for verification. The other option is RFID; however

there are problems with this method as well. '''In selecting an RFID tag,' Reid explained,

'a manufacturer may take into account the speed at which the reader can transmit

information to the tag and also possible interferences from foil or liquid that is part of the

finished prodUCt.",21 Along with the medium of the product and the packaging material

of the product is a problem encountered when two RFID tags are facing each other. "The

more items there are, the higher likelihood there is that two tags are going to be facing

one another, which causes the tags to cancel one another out under current technology," 22

Reid said. Both RFID and 2D barcode technologies have their drawbacks but it is

18The United States Attorney's Office, District of New Jersey, (http://www.usdoj.gov/usao/nilpress/fileslbroc0525 r.htm May 25, (2006), 1 [Accessed November, 2008].

19Ibid.

20Cheryl A Thompson, "Track and Trace Technology slowly progresses" American Journal of Health Systems Pharmacy, Vol 64 Dec 1, (2007) 2420.

21 Ibid.

22Ibid.

10

imperative that one technology be chosen so that wholesalers are not forced to purchase

both technologies to appease manufacturers.

One of the reasons that it is inefficient to ask pharmaceutical wholesalers to

comply with both RFID and two-dimensional bar codes is the fact that RFID technology

is expensive. Here is one example from a company that makes RFID readers. Victor

Vega, a Director of technical marketing for Alien Technology Corporation in California,

a company dealing in RFID scanners, discusses the cost of implementing RFID into the

work place. He noted that a RFID reader capable of gathering the content of tags

designed to operate at 915 MHz, or in the ultrahigh frequency would cost around $1000.

While larger companies can readily afford this, smaller companies, such as

secondary wholesalers, might have more difficulty in affording the technology. "The

new law does not apply to wholesalers who have been designated as 'authorized

distributors' by drug manufacturers, so it will thus be focused largely on secondary

wholesalers, rather than the large primary wholesalers that 'handle most drugs, ",23

reports Medical News Today. Authorized distributors are companies such as Morris &

Dickson Co., LLC. and the "Big Three" that the FDA recognizes as wholesalers that

purchase directly from the manufacturer. Smaller wholesalers and secondary wholesalers

that are not authorized distributors must prove an ongoing relationship with the

manufacturer. These secondary wholesalers usually purchase large quantities of specific

pharmaceuticals for sale at retail stores. Because of the lower diversity of products, one

could argue that they could more easily choose one method of identification than a

primary wholesaler with a greater diversity of goods.

23 "FDA Announces 'Pedigree' Requirements" Medical News Today, (13 lun 2006) 1.

11

This issue with unauthorized distributors is further explained in a letter written to

the FDA by the American Pharmacists Association. The American Pharmacists

Association describes a reticence on the part of manufacturer to give out written

agreements with smaller secondary wholesalers that purchase either small quantities or

select products from the manufacturers. They also point out the fact that manufacturers

may wish to only give out written agreements to select large wholesalers who get a

competitive advantage in the market place by competitive pricing from the manufacturer.

In summation, "manufacturers have the sole discretion to decide which wholesalers will

be 'authorized' and therefore not subject to the pedigree requirements.,,24 Along with

competitive pricing, manufacturers could choose which wholesalers they would like to

give pedigrees to. This could result in unfair competition based upon company size

rather than product safety, the whole reason behind the PMDA.

Furthermore, the American Pharmacists Association points out that until it is

mandatory that the manufacturer generate a pedigree, the wholesalers will be asked for a

pedigree when they have not received a pedigree from the manufacturer themselves. In

their words, "It is unlikely that a manufacturer or authorized distributor would voluntarily

produce a pedigree for a drug product, especially after considering time, manpower, and

cost restraints.,,25 It is possible that a practice such as this would drive a smaller

wholesaler out of business due to regulatory conflicts and this could lead to the

24APhA to FDA, July 14,2006, http://www.fda.gov/ohrms/dockets/dockets/06d0226/06D-0226-EC8-Attach-l.pdf. [accessed November 2008].

25Ibid.

12

diminished flow of pharmaceutical products, hindering the pharmacists' capacity to

obtain medications.

Because of occurrences like this, electronic pedigrees are beginning to be

suggested instead of paper pedigrees. "The California law behind the upcoming track-

and-trace system requires pedigrees in the state to be in electronic form and originate

with the drug product's manufacturer.,,26 Electronic pedigrees can be automated and are

therefore more efficient than paper pedigrees.

Along with the problem of deciding which medium to transfer a pedigree is the

problem of which units a pedigree should use? It could be per batch number, or per

shipment, per case or per product? Daniel W. Engels of MIT has a suggestion for this:

"The strongest pedigrees utilize unique identifiers at the item level. Unique identifiers at

the case level will work provided that there is a way to verify the integrity of the case. In

this way, pedigrees can be maintained on physically encapsulated products; thereby,

reducing the burden in generating appropriate pedigree documentation. ,,27 This would

work well with RFID however barcodes could pose a problem as cases may hide a 2D

barcode at the product level. Also, simply putting a pedigree on a case could prove

unreliable as wholesalers often break up and distribute one case to multiple retailers thus

nullifying the integrity of the pedigree.

26 Cheryl A Thompson, "Track and Trace Technology slowly progresses" American Journal of Health Systems Pharmacy, Vol 64 Dec 1, (2007) 2420.

27 Daniel W. Engels, Ph.D., "On Drug Pedigree and RFID in the Pharmaceutical Supply chains: A Recommendation to the FDA Executive Summary", (February 24, 2006) 2-3.

13

The wholesale phannaceutical industry suggests a trend of consolidation. One

could argue that the largest of wholesalers is the best suited to implement a pedigree

system as the cost of a pedigree system can be supported by greater number of products

moving through the system. "Whether business objectives are tied to improved financial

perfonnance or market expansion, tying the success of the e-pedigree process to

corporate perfonnance will help frame your final implementation strategy. While RFID

solutions have been cost-prohibitive in the past, today there are RFID labeling solutions

that cost a fraction of a cent per unit container to implement, through the economies of

scale offered by volume.,,28 This of course is contingent on the volume; there must be

sufficient quantity to take advantage of economies of scale.

Economies of scale can also be seen in the brick industry as read in Pratten' s book

with each of the twenty four different industries. However for all intensive purpose,

chapter 11, "Bricks" demonstrates one way of seeing economies of scale in an industry?9

Pratten starts with an introduction into the industry first then followed by a brief structure

of costs. Then a lengthy "economies of scale" explanation is given followed by analysis.

According to Pratten, the two important things about the brick industry are its

process operations and its costs of product transportation to customers. He also

highlights the difference between flettons, an economical brick, and non -flettons a more

expensive brick and the difference between facing bricks and non-facing bricks for each.

28 Bikash Chatterjee, "Cracks in the Annor: Securing the Global Supply Chain", Phanna Manufacturing, (August IS, 200S) http://,,,ww.phannamanufacturing.com/artic1es/200SI11 O.html, [accessed November 200S].

29 C.F. Pratten, "Economies of Scale in Manufacturing Industry", Syndics of the Cambridge University Press, (1971) 96.

14

A chart shows where costs are incurred in producing these bricks. Pratten talks about

how technological innovations can change the cost structure of a process then talks about

transportation costs.

TABLE 1.2

Brick Production Costs (a)30

Old Works (b) New Works (b)

% of Total Costs % of Total Costs

Clay Getting 2.6 2.6

Fuel and Power 31.5 28.6

Wages, etc. 41.4 20.1

Repairs 9.6 10.5

Rates 2.6 2.8

Works Office Expenses 5.6 5.6

Depreciation 6.8 30

Total Works Cost 100 100

(a) Total Works costs per unit are approximately the same for the two works.

30 C.F. Pratten, "Economies of Scale in Manufacturing Industry", Syndics of the Cambridge University Press, (1971) 96.

15

(b) The new works has two kilns and a capacity three times that of the old works

which was built some forty years earlier.

There are several similarities between the brick industry and the pharmaceutical

industry. The pharmaceutical industry, like many, consists of a production process and

transportation of the resulting output. Furthermore, this transportation is uniquely similar

to the pharmaceutical industry in that it is conducted by the production company and not

by a third party distributor such as the United States Postal Service (USPS) or the United

Parcel Service of America (UPS).

Pratten breaks down the costs of brick making into categories of clay getting, fuel

and power, wages, repairs, rates, works office expenses and depreciation. The

pharmaceutical business can be broken down similarly, just into slightly different

categories. Pharmaceutical products are purchased from a manufacturer in bulk, unlike

bricks, no raw materials are required. These products can then be broken down into cases

and individual packs. These then are stored until called upon for sale. At which point

they are boxed up with any other items the customer orders and are shipped out

overnight. The pharmaceutical industry typically ships overnight because these items are

both time sensitive and necessary to sustain human life. A pedigree system requires more

scanners (2D barcode, RFID or both) and slows down this process by tracking products

from storage to retrieval for shipment. If too many products are moving through a

company, organization becomes more difficult.

There are also differences between the brick industry and the pharmaceutical

industry. Unlike the brick industry that has four products, the pharmaceutical industry

has far more products. Also, there are different factors of cost in the production process.

16

With each of these products, there are many different prices, some of which the

manufacturer assigns fixed profits of around 2% and some with uncapped profit margins.

Also, transportation is a factor. Products require differing methods of shipment. Some

must be refrigerated or even frozen requiring specialized trucks and packaging materials.

While this is different from the brick industry, it is standard in the pharmaceutical

industry.

Several other writers touch on economies of scale or returns to scale. Samuel B.

Graves and Nan S. Langowitz note, "Another factor which causes larger firms to support

more innovative activity is their greater market power. Large firms with established

product distribution systems may enjoy more rapid market penetration and higher profits.

With this advantage they may profitably undertake R&D ventures which are foreclosed to

smaller competitors. ,,31 The authors suggest that larger businesses might have more

opportunity to expand their technologies and increase innovation in the workplace. This

belief is consistent to the argument that economies of scale allow for greater investments

the larger the company is. That is logical; except that the authors also point out that the

size of the business is inversely related to the creative potential of the business.

Finally, Graves and Langowitz of the Strategic Management Journal address

creativity, "Schmookler has suggested that these disincentives to creativity result in a

higher average technical competence in smaller firms, while in contrast, large firms offer

'a haven for the mediocre in search of the anonymity'. The theory on innovative returns

to scale with respect to firm size leads to our proposition as follows: Proposition:

31Samuel B. Graves, and Nan S. Langowitz, "Innovative Productivity and Returns to Scale in the Pharmaceutical Industry", Strategic Management Journal, Vol. 14, No.8 (1993), [595].

17

Innovative productivity declines with increasing firm size.,,32 Simply put, the ability to

create or innovate diminishes with increased size. Therefore, company size could reflect

the innovative capacity of a company, and thus the time required to create a pedigree

system.

Economies of Scale have been demonstrated in the brick business by virtue of

increased quantity reducing the costs of both production and transportation. The different

elements of costs of production in wholesale pharmaceutical industry have been

discussed as well. The prescription drug marketing act of 1987 introduced new

legislation that changed cost of production for every wholesaler. New hurdles are yet to

be overcome with technological differences. The tried and true 2D barcodes is being

challenged by the newer Radio Frequency Identification technology. Manufacturers and

wholesalers are now collaborating more than they ever have. States are becoming

involved such as California and Florida both suggesting the use of RFID. Manufacturers

must now collaborate with the FDA to say which wholesalers are authorized distributors

of record. For those who are, special accommodations are made to allow for smooth

transitioning into the pedigree process. For those who are not, proof must be provided

that they have an ongoing relationship with the manufacturer. All of these factors have

increased the cost of production for pharmaceutical wholesalers. But it also reveals how

much economies of scale is a part of this industry.

32Samuel B. Graves, and Nan S. Langowitz, "Innovative Productivity and Returns to Scale in the Pharmaceutical Industry", Strategic Management Journal, Vol. 14, No.8 (1993), [595].

CHAPTER 2

ECONOMIES OF SCALE

Three terms are important to understand before discussing any applications of

economies of scale. These are constant returns to scale, decreasing returns to scale (or

diseconomies of scale) and increasing returns to scale (or economies of scale). I First,

consider a perfectly linear system where one product is produced for $1.00. If two

products are produced the cost is simply $2.00. This relationship is referred to as

constant returns to scale. The quantity produced is in a direct relationship with the cost

of production or in other words, the average total cost is constant. This is seen in a graph

of an average cost curve as the horizontal flat portion of the curve.

If the total cost of moving two products is now $2.50 because of an increase in

labor costs. Then, this is referred to as decreasing returns to scale or diseconomies of

scale. It is less efficient to produce more. Here the average total cost is increasing with

the quantity produced. This is seen in the chart of the average cost curve as the upwards

sloping portion of the curve.

Finally, if the total cost of producing two products costs $1.50, it becomes more

efficient to produce two goods instead of simply one. This could be because the cost of

I Dennis W. Carlton, Jeffrey M. Perlof, "Modem Industrial Organization, third edition", Addison-Wessley, (2000) 35.

18

19

operating machinery is minimal once the process has been started. More specifically, it

takes more electricity to start and stop the machine than it does to keep it running. This

relationship is known as increasing returns to scale, or economies of scale. In this

example the average total cost is decreasing as the quantity produced increases, the

average cost curve is downwards sloping. Now that these definitions have been

explained, they can be seen in figure 2.1

FIGURE 2.1

Economies of Scale

p

Long Run Average Cost

Increasing Returns to scale

Constant Returns to Scale

i Minimum Efficiency Scale

Decreasing Returns to Scale

Q

With pharmaceutical wholesalers, increasing the volume is one method of

generating increasing returns to scale. This is limited by warehouse storage capacity and

delivery truck capacity. Fixed costs and variable costs are the two components in a

company's total cost. Examples of fixed costs include the production plant, the property

(if it is owned), and the equipment necessary for production. Examples of variable costs

include electricity, raw materials necessary for production, fuel for vehicles and labor.

Basically, these are costs that increase with increased production. If a company produces

20

enough goods, the cost of producing another good closely reflects the variable costs.

This happens when enough goods are produced to spread the fixed costs out until only a

negligible amount exists that is less than the variable costs.

Another example of how increasing returns to scale can occur is specialized labor,

instead of one laborer doing multiple tasks, multiple laborers can each do one task. This

can result in a faster and higher level of output as well as less labor costs in relation to

output levels. This means the variable cost attributed to labor decreases as output

Increases.

To determine which wholesaler is best suited to implement a new pedigree

system, it is important to see how economies of scale apply to each company. Does a

company have enough resources to cover the cost of a new pedigree system? Does it

have more than enough resources yet become burdened or slowed down by its physical

size? Is the company so large that diseconomies of scale are revealed in the company

design? Ideally, a company should fall either on the flat or downwards sloping part of

the long run average cost curve. This can be seen in mathematical terms as LRAC ~

LRACl.

This would prove that despite the new pedigree legislation, the company is still

being competitive and thus is a candidate for the best suited company to implement a new

pedigree system. Analyzing the company's size, volume of products and costs of

production will show which part of the long run average cost curve the company is on.

CHAPTER 3

Case Study

Wholesale pharmaceutical distributors playa key role in America's healthcare

system. They connect drug manufacturers to every pharmacy and hospital across the

nation, ensuring patients get the medicines they need. There are thousands of wholesale

pharmaceutical distributors in the United States, but three large companies stand out as

the giants of the industry. These are McKesson, Cardinal Health and

AmerisourceBergen. Also, one small company, Morris & Dickson Co., LLC. plays a key

role in leading the industry. This company has been on the cutting edge of technology,

constantly pushing the envelope.

These four companies are leaders in the industry. They are all acutely aware of

the changes that have happened in the industry specific laws. Any more pedigree

restrictions in the current status quo would result in a higher cost per item. In such a

competitive industry there is little freedom to alter prices.

The FDA had previously only issued recommendations for protecting our drug

supply because a national pedigree law would be near impossible to implement or

enforce. When the FDA tried to make it a nationwide law, wholesalers filed for an

injunction and halted the process. Thus, the issue moved to the state level. Starting with

21

22

Florida in 2006' pharmaceutical wholesalers had to comply with the pedigree laws in

fevery state in which they had customers. They each had to make a decision as to how

best adapt to the changing market laws. More importantly, this situation presents itself as

a case study using economies of scale.

FIGURE 3.1

HDMA Map of State Pedigree Legislation/Regulations2

HDMA Map of State Pedigree Legislation/Regu lations

As of August 29, 2007

• NH .VT OMA • RI

• CT

• NJ ODE

• MO

'11 Sf! ti(ll, 0"'_;;)0 ".,' ItIp~.i:f'.l..ru ;,:Jw .. ;~rp~

Gl1'...u"'lCF"~ ~;.:.pro\'.nl by ~·)O.

Enacted ~151.!lon

Enacted 1 Rut.1 r' ~1.latlon. 1 1 I Per>dl~, No Rilles U LeogllllallOn Pending.

Final Ruin r;l ~I'latlon Adopted U VetoeCI

'''RFlO, Epedigree Software to Provide Pharma Security", Global Logistics and Supply Chain and Strategies, (2008) http://www.supplychainbrain.com Icontent/nc/technology-solutions/asset-management/single-article-page/article/rfid-e­pedigree-software-provide-pharma-securityl [accessed November, 2008].

2"HDMA map of state pedigree legislation/regulations", ePedigree Solutions, (2007) http: //www.epedigreesolutions.net/map hdma.gif [accessed November, 2008].

23

This case creates a wonderful example of how economies of scale can be seen in

the wholesale pharmaceutical industry. There are many angles from which to analyze

this. First, is a large wholesaler, such as one of the "Big Three", with vast amounts of

resources to spread the cost of a pedigree law over, better able to adapt to a pedigree

system? Alternatively, is that wholesaler, disadvantaged by its large size and possession

of so many warehouses in the creation of a pedigree system? Does that show

diseconomies of scale instead of increasing returns? Whether it is fiscal size or physical

size, these returns to scale can be explored and explained. First, some of the similarities

and differences amongst the "Big Three" wholesalers and Morris & Dickson Co., LLC.

mentioned previously must be presented.

The smallest of these four companies, Morris & Dickson Co., LLC. is a leader in

its industry. They invest in the newest technologies and are constantly testing the product

movement system. Also, the company prides itself on its customer service. Unlike the

other three wholesalers they are a family owned, privately held pharmaceutical

wholesaler and distributor.

Morris & Dickson Co., LLC. is owned and operated by the Dickson family. It

was started in 1841 and has been continually managed by five generations of Dicksons

for the following 167 years since then. Located in one warehouse in Shreveport,

Louisiana, this small company of around 700 employees makes up only 2% of the

pharmaceutical wholesaler market. 3

3Morris & Dickson, "About us", 2008 http://www.morrisdickson.com ISystem Text.aspx?SystemTextID=9fD7f92b-13 tb-45 84-90c5-tId94ea688c3 [accessed November 2008].

24

Morris & Dickson Co., LLC. is not a national wholesaler like the "Big Three";

instead it operates in the southern region of the United States. The company runs its own

distribution trucks to 11 states: Alabama, Arkansas, Georgia, Illinois, Louisiana,

Mississippi, Missouri, New Mexico, Oklahoma, Tennessee, and Texas. The company

also uses third party distributors such as UPS for some territories, these include: Kansas,

Missouri, Oregon, Ohio, Minnesota and Massachusetts.

This centrally located business has offered an easily adaptable platform with

which to try new, innovative methods of product movement and processing.

Consequently, it is one of the most efficient warehouses designed to handle the large

number of products they carry. Currently the count is at 29,157 different products. Each

of these products is purchased on a monthly basis through inventory management

systems.

Manufacturers mandate the use of product inventory management systems. This

is to prevent hoarding, stockpiling or forward purchasing in the interest of earning more

profit should the price of the product increase after the purchase. This means that the

warehouse is capable of carrying about one month's supplies of over 29,000 products for

each of their customers. This is also true for each of Morris & Dickson Co., LLC.'s

competitors.

Morris & Dickson Co., LLC. has also maintained the strictest error rate in the

industry, ensuring their customers get the right products every time. Currently 99.96% of

orders shipped are correct. Allen Dickson, the oldest living company owner and inventor

of Morris & Dickson Co., LLC.'s accuracy standards states, "We ensure the customer

gets the right product at the right location at the right time." As Chief Operating Officer

Paul Dickson put it, "Without you, our customers, we would not have this business.

Thank you for your business, we owe everything to you."

25

Similar to its competitors, Morris & Dickson Co., LLC. has multiple distribution

hubs. While these are not full distribution warehouses like the "Big Three" use, they are

similar. Generally these distribution hubs carry only a few days worth of supplies but are

refilled by trucks from the primary warehouse in Shreveport, Louisiana which is in

operation seven days per week. The locations of the distribution hubs are listed in table

3.1.

TABLE 3.1

Morris & Dickson Co., LLC. Distribution Hubs4

State City State City

Alabama Birmingham Oklahoma Tulsa

Arkansas Little Rock Tennessee Memphis

Georgia Atlanta Tennessee Nashville

Louisiana Shreveport Texas Dallas

Louisiana Monroe Texas Tyler

Louisiana Lafayette Texas Houston

Louisiana Alexandria Texas Waco

Louisiana New Orleans Texas Winnie

Mississippi Jackson Texas Abilene

Mississippi Oxford Texas San Antonio

Missouri St. Louis Texas Amarillo

Missouri Springfield Texas Victoria

Oklahoma Oklahoma City Texas Harlingen

The "Big Three" however operate differently than Morris & Dickson Co., LLC.

Cardinal Health, AmerisourceBergen, and McKesson are all national pharmaceutical

wholesalers. They operate many warehouses around the United States and a combined

90% of the nation's pharmaceutical products flow through them. A large share of the

4 Earl Garret, Distribution Manager, Morris & Dickson Co., LLC., (2008).

26

27

nation's pharmaceutical security lies in their hands. The FDA and the 22 states with

pedigree laws largely focus on these businesses in their pharmaceutical pedigree efforts.

Cardinal Health is an international wholesaler with its corporate office located in

Dublin, Ohio. Started in 1979, it is a relatively young company in the industry, with only

39 years experience. It has since then it has grown and now employs more than 43,500

people with total revenues at $91 billion.5 It currently operates 40 distribution centers

and serves over 33,000 pharmacy locations in the United States.6 Table 3.2 shows the

distribution center locations.

TABLE 3.2

Cardinal Health Distribution Centers 7

State City State City

Alabama Birmingham Missouri St. Louis

Arizona Phoenix Nebraska Omaha

California Los Angeles New York! New Jersey Buffalo

California San Francisco/Sacramento New YorklNew Jersey New York City West

Colorado Denver New YorklNew Jersey New York City North

Florida Jacksonville North Carolina Charlotte

Florida MiamiIFt. Lauderdale North Carolina Durham

5 "Careers", Cardinal Health, (2008) [1], http://www.cardinal.com/careers /why/index.asp [accessed December, 2008].

6 "Distribution Services, Cardinal Health (2008), http://\\-ww.cardinalhealth.com /us/en/pharn1acies/community/distributionlindex.asp [accessed December, 2008].

7 "Transportation Services", Cardinal Health, (2008), http://www.cardinal.com/ fleet/locations/ [accessed December, 2008].

28

TABLE 3.2 - Continued

State City State City

Florida Tampa Ohio Cincinnati

Georgia Atlanta Ohio Cleveland

Hawaii Honolulu Ohio Columbus

Idaho Boise Oregon Portland

Illinois Chicago Pennsylvania Philadelphia

Indiana Indianapolis Pennsylvania Pittsburg

Kansas Kansas City Tennessee Memphis

Kentucky Louisville Tennessee Nashville

Louisiana Baton Rouge Texas D all aslF ort Worth

Maryland Baltimore Texas Houston

Massachusetts Boston Texas San Antonio

Michigan Detroit Utah Salt Lake City

Minnesota Minneapolis/St. Paul Washington Seattle/Tacoma

McKesson, also an international pharmaceutical wholesaler, bases its corporate

headquarters in San Francisco, California. It was founded 1833, 175 years ago. It is

slightly larger than Cardinal with revenues around $101. 7 billion annually. Like

Cardinal, McKesson delivers 30% of the nation's pharmaceuticals to hospitals and

pharmacies around the nation. McKesson employs 32,000 workers in its company. Each

week, McKesson delivers more than $1 billion in pharmaceuticals. According to Axway,

McKesson's partner in pedigree software, "McKesson handles 8 million boxes and

29

bottles of pharmaceuticals every night."s McKesson distributes 150,000 different

products, to over 250 US locations, of which 31 are pharmaceutical distribution centers,

and 32 are medical/surgical distribution centers. 9 These distribution centers are located

around the United States as described in table 3.3

TABLE 3.3

McKesson Facilities 10

State City State City

Alabama Birmingham Minnesota Minneapolis

Arizona Phoenix Missouri Springfield

California Rancho Cordova North Carolina Charlotte

California Emeryville Oklahoma Tulsa

Colorado Broomfield Pennsylvania Malvern

Florida Lake Mary Pennsylvania Pittsburgh

Georgia Alpharetta South Carolina North Charleston

Georgia Atlanta Tennessee La Vergne

Illinois Wheeling Texas Carrollton

8"McKesson/ Axway e-pedigree software helps meet new rules", Business Network, Health Care Industry, (2006), http://findartic1es.com/p/artic1es /mi m3374lis /ai n26711327 [accessed November 2008].

9 "2008 annual report and letter to shareholders", McKesson, (2008), [4].

10 "Locations" McKesson, (2008), http://www.mckesson.comien us/ McKesson.com/Contact%2BU s/Locations/Locations.html [accessed November 2008].

30

TABLE 3.3 - Continued

State City State City

Iowa Dubuque Texas Lewisville

Kansas Overland Park Texas Westlake

Massachusetts Hadley Virginia Richmond

Massachusetts Newton Washington Seattle

Michigan Livonia

AmerisourceBergen, the smallest of the "Big Three", employs over 11,500

workers. It supplies about 20% of America's pharmaceuticals. This seven year old

company hosts its corporate office in Pennsylvania. Originally it was Amerisource until

a merger with Bergen Brunswig was completed in 2001. The result of that is a company

with $66 billion in annual revenue. AmerisourceBergen operates in North America only.

The majority of its distribution centers are in the United States, shown in table 3.4.

TABLE 3.4

AmerisourceBergen Distribution Centers 11

State J City State I City

Alabama Birmingham Michigan Williamson

Alabama Mobile Minnesota Minneapolis

Alabama Montgomery Mississippi Meridian

Arizona Phoenix Missouri St. Joseph

11 "Locations", AmerisourceBergen, (2008), http://www.amerisourcebergen.com /cp/1/careers/locations.jsp [accessed December, 2008].

31

TABLE 3.4 - Continued

State City State City

California Corona Missouri St. Louis

California Sacramento New Jersey Thorofare

California San Jose New Jersey Pine Brook

California Valencia North Carolina Raleigh

Colorado Denver Ohio Columbus

Florida Orlando (a) Oklahoma Tulsa

Florida Orlando (b) Puerto rice Blanco

Georgia Atlanta Tennessee Johnson City

Hawaii Honolulu Tennessee Nashville

Illinois Chicago Texas Dallas

Indiana Mishawaka Texas Houston

Kansas Kansas City Texas San Antonio

Kentucky Louisville Utah Salt Lake City

Kentucky Paducah Virginia Richmond

Massachusetts Boston (a) Washington Seattle

Massachusetts Boston (b)

32

TABLE 3.5

Side By Side Comparison

AmerisourceBergen Cardinal Health McKesson Morris & Dickson Co. LLC

Ownership Public Public Public Private

Age 8 39 175 167

States 50 50 50 17

Total Revenue $66 Billion $91 Billion $101 Billion $2.4 Billion

AmerisourceBergen is placing the costs of its product upon the small retail stores.

Each customer requiring a pedigree must pay a monthly fee of $5000 to

AmerisourceBergen. Additionally, they are forced to purchase only from its Florida

based warehouse if pedigrees are needed, instead of a closer or more convenient

warehouse location. Also, the customer must endure three to five day shipping. The

industry standard is overnight or two days. While this is available through

AmerisourceBergen, it is done so at an extra expense to the customer. This is not a good

situation because, in the end, consumers are hurt from higher pharmaceutical costs at the

retail stores due to these extra fees.

While customers have reason to be frustrated with the "Big Three," so too do the

smaller wholesalers. From the perspective of the smaller wholesalers, "We have literally

been fighting for our lives," says Robert Drucker, president of Port Washington, NY­

based RxUSA. "The 'Big Three' wholesalers control 97% or more of US. distribution

today, and granting the ADR (authorized distributor of record) exemption would enable

33

them to put the rest of us out of business." The following also shows this, "The plaintiffs

argue that the 'Big Three' drug distributors -- AmerisourceBergen, Cardinal Health, and

McKesson -- are exempted from the requirement (to provide a pedigree) and could

therefore make it impossible for smaller, secondary distributors to comply by withholding

information." The result of this case was an injunction filed by the smaller non-

authorized distributors. 12 The injunction was successful on the national level so now

states independently mandate their own pedigree laws. 13

This situation demonstrates the fragility of the market. The "Big Three" cannot

be shut down, because of national security. "'FDA and state agencies regulating

wholesalers and medications need to consider the drug supply chain as a national security

issue', said Henri R. Manasse Jr., executive vice president of the American Society of

Health-System Pharmacists.,,14 People must have medicine at all times, disrupting the

flow could be disastrous. This could be one reason why the governrnent omits authorized

distributors and allows the "Big Three" as well as Morris & Dickson Co., LLC. from the

"tougher" rules by classifying them as authorized distributors of record. Pedigree laws

have been systematically implemented at the state level which has been successful

because it has not shut down the national supply. Gradual state by state initiation of

12 John Burnell, "Injunction May Slow Momentum for RFID E-Pedigrees", RFID Update, (December 12, 2006), http://www.rfidupdate.com/articleslindex.php?id=1260 [accessed November 2008].

13"The injunction stopping the FDA from enforcing pedigree rules against non­authorized distributors lives on", Pharmaceutical Commerce, (2008), http://www.pharmaceutica1commerce.com/frontEnd/main.php?idSeccion=920 [accessed November 2008].

14 "FDA launches new initiative to battle counterfeit drugs", American Journal of Health System Pharmacy, (2008), [1], http://www.medscape.com/viewarticle/460566 [accessed November 2008].

34

pedigree laws allows pharmaceutical wholesalers to slowly implement and integrate

pedigree systems into their businesses processes.

In August of 2006 the industry was alerted by the FDA about counterfeit

medicine that had been sold out of Canada. This incident and many others resulted in

guidelines being set by the FDA towards eventual state-mandated pedigree laws. "Morris

and Dickson Co., LLC. started construction of their e-Pedigree tracking system in June

2006. The first pedigree was sent in August 2006.,,15 This pedigree was for the state of

Florida and Morris & Dickson Co., LLC. was the first company to provide one.

At the onset, Morris & Dickson Co., LLC. had few choices of pedigree software

creators. The same was also true for the "Big Three." The following article from

pharmaceutical commerce attests to this fact, "On one side, the vendors that have gone

the route of developing software compatible with the EPCglobal Drug Pedigree

Messaging Standard, issued at the beginning of the year by the Princeton, NJ-based

industry organization. Today, there are only three such vendors: Axway, rfXcel, and

SupplyScape.,,16 In June of2006 there were only two companies designed to create a

pedigree system: Raining Data and SupplyScape. Morris & Dickson Co., LLC. chose

Raining Data.

With the help of this small California based company, Raining Data, a software

code was created for Morris & Dickson Co., LLC. that would allow products to be

15 "ePedigree", Morris & Dickson Co., LLC.'s Co. (2008) http://www.morrisdickson.comiSolution ViewDetail.aspx?SolutionID=cce 1 b9b2-dab6-4523-afe8-9aa8c 1 fa193b [accessed November 2008].

16 "Latest News, IT Vendors wrestle over pedigree solutions", Pharmaceutical Commerce (2007), http://phx.corporate-ir.net/phoenix.zhtml?c=l 05735&p=irol­newsArticle&ID=995240&highlight= [accessed November 2008].

35

scanned and stickered as well as a database to store and recall information as needed.

While the system was already up and running Morris & Dickson Co., LLC. set up an in­

house team to create a similar program to eventually replace the Raining Data software in

order to continue maintaining the system. Before going out of business, Raining Data

helped to create a fully customized product suited to fit Morris & Dickson Co., LLC.'s

needs and systems. This resulted in $250,000 paid to Raining Data's for their customized

software package as well as $72,500 in fees for Raining Data's technical help.

Creating track and trace software was only the start. Employees now had to be

trained out to input information into the system and new checking procedures had to be

created to track the time and dates of pedigreed products movements. Fortunately, these

tasks could be handled by the current employees and the current barcode scanners were

used to interpret the new information. New sticker machines however had to be

purchased. The calculated variable costs of labor were $0.25 per item. 17 Extrapolated,

this comes out to around $165,500.00 in annual labor costs. IS In addition to that, an

annual $50,000 is used in system maintenance costS. 19 In total, the pedigree law cost

Morris & Dickson Co., LLC. $537,000.

Raining Data's software and the new equipment was all purchased to allow for

Morris & Dickson Co., LLC.'s entry into Florida. Once entry into Florida was gained,

new hurdles were encountered with verifying pedigrees. Not only was this Morris &

Dickson Co., LLC.'s first time selling in Florida, It was the first time any state required a

17 Alan Bass, Warehouse Supervisor, Morris & Dickson Co., LLC., (2008).

18 Paul Dickson, Chief Operating Officer, Morris & Dickson Co., LLC., (2008).

19 Angie Clarke, Accountant, Morris & Dickson Co., LLC., (2008).

pedigree. The State of Florida did not accept the digital accuracy of the pedigree

information unless it was sent with an accepted digital signature. The one and only

company accepted to do that was SupplyScape. Morris & Dickson Co., LLC. signed a

$10,000 contract for one year in 2008 with SupplyScape to gain access into Florida.

36

They provide a digital signature verifying the electronic pedigree (ePedigree) information

is correct when the customer logs onto the web portal to access the pedigree.

This pedigree process set up by Morris & Dickson Co., LLC. was the first of a

long series of lessons for the company. Morris & Dickson Co., LLC. strove to pedigree

every product but that quickly became too much. The receiving department was backed

up and it was apparent this could not continue. So only the FDA mandated

pharmaceuticals were used for pedigrees. Still, some 3,390 products are pedigreed. Each

product received a sticker in addition to the manufacturer's information that records the

times and dates the product enters and leaves the warehouse. This is added to the

manufacturer's information such as lot number, batch size, quantity, strength, volume,

weight, etc ... and drafted into an .xml or .pdf document and placed online for the

consumer to access upon receiving the package. This is used to verify the product's

integrity by documenting its path through the pharmaceutical supply chain. Not only

does it document the manufacturer, wholesaler and retailer, but the wholesaler must know

where that product is at all times until it is shipped out. This is done for several reasons.

First, if a product is discovered to be counterfeit, a record of its location as well as others

in the same shipment can be located and tested. Also, this allows for quick location of

product in the event that a batch is recalled by a manufacturer.

37

Frustration was certainly felt throughout the industry when ADR's were exempted

from the pedigree process, Morris & Dickson Co., LLC. supplied pedigrees and has

gained the experience of undergoing that process and understanding what works and what

does not. Because of that, Morris & Dickson Co., LLC. has steered clear ofRFID.

While it does have the capability to read it, and currently has automation utilizing that

technology, the company does not agree that RFID is the best solution. Testing of RFID

has shown that it interferes differently with liquids, metals and can even interfere with

other RFID transmissions. This causes reading errors and unreliability in the technology.

The Morris & Dickson Co., LLC. warehouse is far from complete. Currently,

four companies are competing for a new faster automated system to tag and record

pedigreed products. These all have the potential to reduce man hours and speed up

processing times. However, due to the high fixed costs that would take years to recover

in savings, these designs will likely not be implemented. The system is not planned to

change from the current human operated procedure. The only reason this would change

is if the automated system became more cost effective due to higher volumes of products

pedigreed. This could happen from an increase in customer base, customer orders or an

increase in the diversity of required pedigreed products. Once the system was set in place

and all creative aspects were finished it became more efficient to operate than in the first

stages of pedigree system creation.

Several states have notable Pedigree laws. "California requires electronic

pedigree tracking for all drugs sold in the state effective Jan. 1,2007. Pedigrees are now

required for the 34 top-selling drugs in Florida; all other drugs come under that law as of

38

July 2006. Nevada requires pedigrees for all drugs sold in the state.,,20 These are some of

the most stringent in the industry. It is much simpler to pedigree a select list of drugs, to

pedigree every drug is quite a bit more work.

Each wholesaler is required by law to be compliant with the regulations of the

states they sell in. Morris & Dickson Co., LLC. has a limited set of pedigree laws to

comply with because they do not sell in every state. The "Big Three" however sell in

more states. They are currently working with California to be prepared for the most

stringent pedigree laws to date. The following is a synopsis of their efforts to become

compliant with the California pedigree regulations.

Cardinal Health is on the track to full pedigree compliance. It is already

providing pedigrees, but the real hurdle will be California as it is the toughest pedigree to

produce. While other states have been satisfied with looser standards such as pallet level

or case level tracking but, California expects product level tracking. To test its law first,

California and Cardinal Health instituted a pilot program utilizing RFID. "Cardinal

Health shared the results of its RFID pilot program, which was the health-care industry's

first end-to-end test ofRFID in a real-world setting. Data collected from the pilot

confirmed that RFID technology using UHF as a single frequency is a feasible solution to

track and trace the possession of pharmaceuticals at the unit, case and pallet levels.,,21

20"States move to comply with drug pedigree laws", Frank Celia, (2006), http://drugtopics.modernmedicine.com/drugtopics/Drug+lnformationiStates-move-to­comply-with-drug-pedigree%20-lawsl ArticleStandardl Article/detaill163 714? searchString=pedigree%20Iaws%20state [accessed November 2008].

21 "Latest News, IT Vendors wrestle over pedigree solutions", Pharmaceutical Commerce (2007), http://phx.corporate-ir.netlphoenix.zhtml?c=l 05735&p=irol­newsArticle&ID=995240&highlight= [accessed November 2008].

39

Currently, Cardinal is planning on using this RFID, track and trace pedigree program for

California. It is yet to be determined if it will work or not.

McKesson is utilizing Axway's expertise by partnering with them on a pedigree,

"Axway just announced a major commitment from AstraZeneca (Astra Zeneca is based

on collecting serialized data, but not necessarily on providing pedigree), and is

McKesson's contractor for pedigree work.,,22 They have completed their pedigree system

and offer their pedigree program for sale.

Conversely, McKesson has not become compliant in California yet but has plans

to. "California's pedigree requirement is driving our RFID program," says Ted Ng,

director, risk management, of McKesson's Business Technology Solutions. "California

law dictates the use of an interoperable electronic track and trace system that records the

movement of each product, starting with the manufacturer, using a nonproprietary data

structure. The most-efficient solution is RFID.,,23 RFID will give the ability to more

quickly process larger volumes of products as they will now be traced down to the

product unit instead of the case as before. This further complicates the task but is not

impossible. It will likely take some time for McKesson to fully develop their RFID

program.

This willingness to try new programs is not new for McKesson. "McKesson has

participated in a number of pilots, beginning with both JumpStart and EPCglobal's Health

and Life Science Industry Action Group in 2003. The company also has participated in

22 "Latest News, IT Vendors wrestle over pedigree solutions", Pharmaceutical Commerce (2007), http://phx.corporate-ir.net/phoenix.zhtml?c=105735&p=irol­newsArticle&ID=995240&highlight= [accessed November 2008].

23"On Track With RFID?" Pharmaceutical and Medical packaging news, (2007) http://www.devicelink.comipmpniarchive/07 /07/013 .html [accessed November 2008].

40

OnTrack 1 in 2005-2006, which studied Florida's pedigree laws as well as product

authentication and RFID tag frequencies. It is now participating in OnTrack 2, which is

looking at serialization and Gen2 ultrahigh frequency (UHF) RFID.,,24 It is desirable that

the industry leaders be at the forefront of testing new technology for the future of

pedigree systems. Without informed decisions, the state could falter in its enforcement,

the company could falter in its safety and the patients could be at risk.

AmerisourceBergen is focusing on Florida's program by testing its own programs

as well. "As AmerisourceBergen tests its track and trace pilot program, it intends to

continue to supply electronic pedigrees in the state of Florida to those wholesale

customers that require them under the state's current drug safety laws. Under the pedigree

program, customers are charged fees that allow AmerisourceBergen to recover the cost of

generating the pedigrees. ,,25

The "Big Three" are making steps towards pedigree compliance. In doing so,

new technologies are being tested and new methods of securing pharmaceuticals are

being created. As previously discussed in chapter 1, the industry still asks for more time

due to the sensitive nature of the wholesale pharmaceutical market.

The inclusion of the "Big Three" in each state's implementation of pedigree laws

is paramount. Without their help, the wholesale pharmaceutical market will suffer,

smaller wholesalers will be treated unfairly as they have before; being forced to adhere to

24"On Track With RFID?" Pharmaceutical and Medical packaging news, (2007) http://www.devicelink.com/pmpniarchive/07/07/013.html [accessed November 2008].

25 "AmerisourceBergen announces innovative new track and trace program for the pharmaceutical supply channel" AmerisourceBergen, (2008) http://www.amerisourcebergen.comiinvestor/phoenix.zhtml?c=61181 &p=irol­newsArticle&t=Regular&id=930000& [accessed November 2008].

41

standards the "Big Three" do not. Ultimately it is the patients that suffer from situations

such as these. Pharmaceutical wholesalers operate on such a low profit margins (around

2%) coupled with the savings passed on to the retailers, any change in the cost of goods

sold affects the price to retailers and ultimately to the patients.

Human life depends upon the pharmaceutical market and its safety should be

upheld at all costs. Whether it is a small company such as Morris & Dickson Co., LLC.,

or one of the "Big Three", everyone should be included in formulating the best possible

pedigree law that will safeguard both the medicine, and the companies supplying it. With

the help of each company, pedigree laws can be passed that will keep our medicines safer

yet not slow down the wholesalers. By including companies instead of just the FDA or

the state governments, the industry can continue to operate as fast as needed. Also,

allowing the wholesalers, who have safeguarded their products each and every day, give

advice on the creation of these laws, pharmaceutical products will be safer and the

product flow will only be minimally impacted.

Morris & Dickson Co., LLC. has been around since 1841, it has survived by hard

work and good customer relations. Nothing is more important to a customer than the

trust of product efficacy. A new pedigree law has the potential to secure this trust with a

piece of paper, or an electronic form. Morris & Dickson Co., LLC. had its pedigree

program running in August of 2006. Often times, customers were confused by the

pedigree because it wasn't mandated yet.

Instead of RFID, Morris & Dickson Co., LLC. has chosen to use bar-coded

stickers in their pedigree program. This provides more secure in house scanning with

fewer errors at the trade off of slightly slower reading times. This process however can

42

be automated to run just as fast as RFID technology. It also allows for the same track and

trace security that RFID enables. Furthermore, a bar-coded sticker costs much less than

an RFID chip. This levels the market place barriers to entry and allows for smaller

wholesalers to remain competitive with larger wholesalers.

The analysis chapter will utilize the data provided in this chapter. By comparing

the efforts of each pharmaceutical wholesaler with the amount of distribution locations,

geographies, net revenue, and size, a recommendation can be made on what type of

wholesaler is best suited to implement new pedigree laws.

CHAPTER 4

ANALYSIS

In theory, a larger company that can easily afford the cost of implementing new

technologies should be the more likely candidate that is best suited to implement a

pedigree system. Since the pedigree system has a low variable cost, the larger the

quantity of products the company has, the more it can easily offset the cost of a pedigree

system, demonstrating economies of scale. If this were true, the "Big Three" would be

the first to implement a pedigree system. That is not the case as they asked the FDA to

push back mandates until 2011. Moreover, Morris & Dickson Co., LLC. already had an

operational pedigree system in place.

Rather, the more efficiently designed company wins in this situation. So how is

that balanced against the "Big Three's" ability to spread the fixed cost over a larger

quantity? If the question were, who can more easily afford a pedigree system, it would

be easy to say one of the "Big Three". They are the biggest, it is a lower percentage of

their net income. However, fiscal size and physical size do not directly relate to

efficiency. Meaning, its not the biggest that do it the quickest. In this case, Morris &

Dickson Co., LLC. was able to implement its own pedigree system before any of the "Big

Three". This is not because they have more net income than the "Big Three". It is

because they are a smaller, more easily adaptable company. In this case, it is because

43

44

Morris & Dickson Co., LLC. had the right balance of size and quantity of products. It

was not so large that it couldn't easily change. Its system processes to include a new

pedigree process and it wasn't too small that the cost of a pedigree program was too

much of a percentage of its expenditures.

One thing that could easily help wholesalers, both large and small, is a lower

fixed cost to implement a pedigree system. One way to do this is to standardize the

technology. It seems that RFID is slowly pulling ahead as a winner in the war of

standards. While Morris & Dickson Co., LLC. can use RFID it is more costly than

barcodes but it does offer superior read rates at times when 2D barcodes do not.

Scanning each bottle in a case of bottles is one example of this. Regardless, using one

technology is less expensive than using two. According to the FDA, RFID has more

potential for success. "FDA continues to believe that RFID is the 'most' promising

technology for tracking and tracing drugs in the supply chain, said Randall Lutter, FDA's

associate commissioner for policy and planning." I One such reason for this could be the

fact that RFID holds the potential for faster read times and increased load capacity at

higher speeds than 2D barcodes do simply because it is not necessary to maintain line of

sight with RFID chips and that they can be arranged in many different ways and yet still

be readable. Ideally, economies of scale can be demonstrated in a downwards shift in the

long run average cost curve due to technology such as RFID. This is shown in figure 4.1

I Donna Young, American Journal of Health System Pharmacy, Vol 63 July 15, (2006) 1310.

45

FIGURE 4.1

Decrease in Long Run Average Cost Due to Technology

p

LRAC

LRAC1

Q

Finally, which products deserve a pedigree? One could be hard pressed to find a

counterfeit version of a low priced drug such as Ibuprofen. Oftentimes these are high

priced pharmaceuticals. The FDA has suggested that these are ones to watch as they

have been counterfeited before and that a pedigree should be applied to them as well as

drugs that have a short supply or that are "in high demand,,2 Furthermore, without a list

of items, pharmacists, the end of the pedigree chain, will not be expected to guess which

products should come with a pedigree and which should not thus posing obvious

problems in selling products without pedigrees if they are not provided and should be.

The current model of a larger wholesale company should have economies of scale

large enough to address a pedigree system as well as attempt to disprove that with an

2 APhA to FDA, July 14,2006, http://www .fda. gov / ohrms/ dockets/ dockets/06d0226/06D-0226-EC8-Attach-I.pdf [accessed November, 2008].

46

example of a smaller company that was able to successfully implement that. Regardless

of which technology should be chosen, the method of its transfer has been standardized.

"This standard, ratified in January 2007, defines the model for passing full pedigree

information in the supply chain to each party that receives a pharmaceutical product. The

standard addresses two key industry challenges: providing a universal data format to

support the diversity pedigree requirements on the state and federal level and enabling

trading partners to send and receive pedigree data in a secure and interoperable manner

with existing technologies." 3

In addition to the method of delivery, it is important that the manufacturer use an

efficient technology for product identification by the wholesaler. In one case, Pfizer used

the expensive, new, albeit efficient technology RFID for its blockbuster product Viagra.

Pfizer has licensed software from SupplyScape to assign and manage electronic pedigrees

for Viagra and other drugs it manufacturers. The deal indicates that Pfizer is starting to

move beyond the early work it has done with RFID to authenticate packages of Viagra in

the supply chain. This is a good situation for a wholesaler. It takes one scan to capture

all of the information. Sadly this cannot be expected of every manufacturer. If national

enforcement were a possibility, maybe this could work, but until then wholesalers will

have to accept what they are offered. Furthermore, the downside to a situation such as

this has been mentioned before; wholesalers not utilizing RFID scanners would be forced

to then purchase RFID technology to take advantage of it.

3"Drug Pedigree and ePedigree Overview", SupplyScape, (2008) http://www.supplyscape.com/documents/SupplyScape PedigreeRequirements.pdf (accessed January, 2009).

47

Is a small system that is very well organized better off than a larger less organized

system? Economies of scale suggest the largest company can offset the costs of

implementing a system best however, the market shows this is not true. Businesses in the

pharmaceutical industry could not become compliant with California's pedigree laws by

2009 and asked for another 2 year extension. It is possible to surmise then, that it is not

the costs of establishing a pedigree system that is the problem but rather it is a problem of

integrating a pedigree into an already huge system. In the case of the "Big Three",

Cardinal Health, AmerisourceBergen and McKesson, who could afford a pedigree

system, it was not possible to set up that system in the given time frame. This shows that

economies of scale can be proven true on a fiscal basis. But, on a physical basis, this

shows possible evidence of diminishing returns to scale.

There are two ways to set up a pedigree process; the integrated approach and the

added approach. If the process were simply changed to involve new security checks for a

pedigree system, there would be a modest increase in costs, around 10%. However, if a

pedigree system were not integrated but rather added onto an existing supply chain, costs

could increase beyond 10%. Adding a new process to an existing process, i.e. adding

more check stations to process the products and store their locations for a pedigree,

means using two processes for one product. This requires more work to be done and can

even result in conflicting processes. On a simplistic level, two laborers checking one

product at the same time could interfere with one another. It slows the overall production

cycle and is inefficient. However it does allow for a simple installation as it would not

involve the existing process, it just costs more to do in the long run as it is fundamentally

less efficient. What they wisely point out is that along with the fixed cost of purchasing

48

and installing new RFID or barcode scanners also comes the increased labor cost of either

hiring new workers or paying existing workers for more work. Either way, implementing

more security checks translates into increased man hours spent per product processed

which hits the company with both increased fixed costs and increased variable costs.

Graves and Langowitz also point out the other side of the coin, "Large firms also

suffer disadvantages. For one thing, there is evidence that smaller firms may be more

cost conscious, so that the same project could be conducted with less waste in a smaller

firm. Large firms are also generally burdened with more bureaucracy and red tape, so

that communication and coordination are more complex. All of these factors discourage

creativity.,,4 This point is a very integral part of this paper. Morris & Dickson Co., LLC.

is a smaller wholesaler and operations are more easily changed or created for the simple

fact that the "Big Three" have a less efficient system as demonstrated by diseconomies of

scale.

All of these examples explore theoretical situations that effect returns to scale. A

pedigree is slightly different and more complex to implement than the good movement

process previously explained, but the principles still hold true for economies of scale.

What happens if a pedigree system is implemented in a company? First, there is the fixed

cost of hardware, as well as software and the stickers or raw materials required to

pedigree products that must be accounted for. Then there are the variable costs of

additional safety checks to track the product movements, this slows down production. So

with costs increasing and quantity decreasing, decreasing returns to scale starts to occur.

4 "Innovative Productivity and Returns to Scale in the Pharmaceutical Industry", Samuel B. Graves, and Nan S. Langowitz, Strategic Management Journal, Vol. 14, No.8 (1993), [595].

49

Basically, labor costs increase as more pedigree products flow through the system. In

addition, raw material costs increase. This combined effect, coupled with the various

fees required to transfer the pedigree information, result in diseconomies of scale.

Technology has lowered the long run average cost curve but increased labor costs

due to increased time has flattened the curve. This can be seen in figure 4.2.

FIGURE 4.2

Effect of Technology and Cost of Labor on Economies of Scale Model

p

LRAC 1

LRAC

QI a

In this situation, quantity is a very important factor in determining economies of

scale. If the quantity of products sold becomes too high, the company now has a higher

long run average cost than previously resulting in diseconomies of scale as compared to

before the pedigree law. If the company produces QI or less then they are experiencing

increasing returns to scale as compared to before the pedigree law. The "Big Three" fall

to the right of QI and Morris & Dickson Co., LLC. falls to the left of QI.

With the data presented, evidence of economies of scale can be found in the

different models of companies. The "Big Three" can be viewed as experiencing physical

diseconomies of scale while experiencing fiscal economies of scale. Morris & Dickson

Co., LLC., much smaller company demonstrates physical economies of scale, but at

much lower volumes. This suggests that with the introduction of a pedigree law, Morris

50

& Dickson Co., LLC. is better suited to cope with the change so long as it does not strain

the company's financial capabilities.

CHAPTER 5

CONCLUSION

In chapter 1, the Prescription Drug Marketing Act of 1987 was introduced. This

was the start of drug pedigrees. Pedigrees became required by law in 2006 to increase

pharmaceutical safety. As the chart from chapter one shows, counterfeit drugs were

increasingly being investigated by the FDA.

TABLE 5.1

Incidences of Counterfeit Drug Cases Opened by FDA Each Year!

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

9 5 11 6 21 27 30 58 32 53

Wholesalers found their supply chain had leaks in it and needed to be monitored

closer. This was because of secondary wholesalers introducing counterfeit

pharmaceuticals into the supply chain. 2 Undoubtedly, companies resisted the increased

restrictions on product movement. Nevertheless, the industry changed and accepted

pedigree laws as states begin to enforce them. The states currently implementing

! Ilisa Bernstein, "Impact of the PDMA on the Pharmaceutical Supply Chain," u.s. Food and Drug Administration NACDS/HDMA RFID Adoption Summit (November 2006) 1.

2 "New FDA Initiative To Combat Counterfeit Drugs", FDA, http://www.fda.gov /oc/initiatives/counterfeitibackgrounder.html [accessed January 2009].

51

52

pedigree laws are: Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois,

Indiana, Iowa, Maryland, Mississippi, Nebraska, Nevada, New Jersey, New Mexico,

North Dakota, Oklahoma, Oregon, South Dakota, Texas, Virginia, Wisconsin and

Wyoming.3

Differing technologies are being argued about as to which are the best for

implementing with pedigree systems. 2D barcodes have been in the industry for around

30 years and wholesalers have commonly utilized them as pharmaceutical products all

come with UPC barcodes. A competing technology, radio frequency identification

(RFID), gave the potential to read large amounts of information without the need for

proper position or optical scanners like the barcode did. Instead, a reader simply had to

be within a certain distance from the RFID chip attached to the product container. The

"Big Three" preferred the new RFID chip and several ran tests on it. AmerisourceBergen

completed one testing pedigree laws in the State of Florida. Cardinal Health did a similar

test on the State of California.

Another challenge of standardization with pedigrees was if they should be paper

or if they should be electronic. Technological companies wanted electronic, small

pharmacies wanted paper. Eventually it fell to the state level and several lawsuits arose

as a result of forged paper pedigrees. Currently most states mandate an electronic

pedigree.

The first pedigree to become required was from the State of Florida. Morris &

Dickson Co., LLC. was the first company to provide a pedigree. Economies of scale on a

3SupplyScape, "Overview," SupplyScape, http://www.supplyscape.com/company/ [accessed November, 2008].

53

fiscal basis would suggest the "Big Three" would have more resources to put towards a

pedigree system. Economies of scale on a physical basis would suggest the "Big Three"

experience diseconomies of scale because they are too large to quickly implement a

pedigree system and explains why Morris & Dickson Co., LLC. could create the program

faster than competitors 30 times larger.

Arguments began to rise as pedigree were mandated. Who was responsible for

starting the pedigree? Should it fall on the shoulders of the manufacturers or on the

wholesalers? Manufacturers were asked to provide pedigrees to authorized distributors

of record (ADR). This then caused issues with non authorized distributors such as

secondary wholesalers. At this point an injunction was filed on the national pedigree law

and the states took the matter over.

When the states took over, issues arose on how specific a pedigree should be.

Florida allowed cases to be pedigreed while California wanted pedigrees at the product

level. States will most likely have their own mandates. These could be subject to change

but the industry should expect states to disagree over this matter and hold different

standards.

There is a difference in the manner in which a pedigree is created. The process of

creating a pedigree can either be integrated into the company's current processes or it can

be added on. If it is integrated it requires more initial costs to change the product

movement process but in the long run it reduces long term costs. If it is added onto the

current process it disrupts product flow minimally and has low initial costs, however

labor costs could exceed that of an integrated pedigree system.

54

Finally, economies of scale were discussed in comparison to company size. One

argument was that a larger company can spend more on R&D than a smaller company.

Another argument was made that a smaller company is more efficient than a larger

company and that smaller firms have "higher average technical competence,,4 the

argument is concluded with "innovative productivity declines with increasing firm size."s

Essentially, diseconomies of scale are found in creating new product processes as the

firm gets larger; indicating Morris & Dickson Co., LLC. is potentially best suited to

implementing a pedigree process.

In chapter 3, four pharmaceutical wholesalers were introduced, Morris & Dickson

Co., LLC., Cardinal Health, McKesson, and AmerisourceBergen. The latter three are

known as the "Big Three" as they constitute a majority of the market. Morris & Dickson

Co., LLC. is much smaller than any of the "Big Three". The company sells in 15 states:

Alabama, Arkansas, Georgia, Illinois, Kansas, Louisiana, Massachusetts, Minnesota,

Mississippi, Missouri, New Mexico, Ohio, Oklahoma, Oregon, Tennessee and Texas

While the "Big Three" sell in 50 states and Puerto Rico.

Florida chose to use an electronic pedigree, this forced Morris & Dickson Co.,

LLC. as well as the rest of the industry to use SupplyScape's digital signature service.

California chose a different path than Florida, mandating product level pedigrees instead

of Florida. Currently these are the most stringent of pedigree laws.

4 "Innovative Productivity and Returns to Scale in the Pharmaceutical Industry", "Samuel B. Graves, and Nan S. Langowitz, Strategic Management Journal, Vol. 14, No. 8 (1993), [595].

5 Ibid.

55

Chapter 4 analyzed the factors of a pedigree law and how they impacted

pharmaceutical wholesalers. Considering the implementation of and enforcement of a

pharmaceutical pedigree law in the United States and the variety of wholesaler operations

in existence, what type of wholesalers are in the best position to implement adoption and

profit from the change in law? The evidence of Morris & Dickson Co., LLC. being the

first to produce a pedigree supports the claim that Morris & Dickson Co., LLC. is better

suited to take new processes and implement them into the current system. However,

Morris & Dickson Co., LLC. sells in roughly 25% of the states the "Big Three" sell in.

To say that Morris & Dickson Co., LLC. is better suited to implement a pedigree law in

any given state would be unfounded as there is no proof for this. But, from the

performance shown it is likely that Morris & Dickson Co., LLC. could be more efficient

in doing this. Furthermore, Morris & Dickson Co., LLC. has reached its capacity limits

for pedigreed products. If they were to expand to Nevada and be required to pedigree

every product, additions to the warehouse and labor for the receiving department would

be required to categorize and process the increased load of pedigreed products. The "Big

Three" have more resources to put towards the pedigree process and would have the

capability to pedigree every product as they already do for the State of Nevada. While

Morris & Dickson Co., LLC. would struggle to pedigree every product, they could move

quicker and adapt faster than the "Big Three" to new laws such as a pedigree law.

Therefore, Morris & Dickson Co. LLC. is best suited to implement a new pedigree law.

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