Eisai is the first pharmaceutical company to be dropped by Cardinal after failing to accept new terms of payment for the wholesaler.

Eisai notified the trade Jan. 13 that "Cardinal Health will no longer serve as an Eisai Inc. distributor of record in the U.S., as the companies did not reach agreement regarding distribution services." Eisai distributes three products in the U.S.: the Alzheimer's drug Aricept (marketed in partnership with Pfizer), the proton pump inhibitor Aciphex (marketed with J&J) and the anti-seizure medicine Zonegran .

Cardinal said that it still has inventories of the Eisai products on hand, but that as of Jan. 13 it would no longer be purchasing new quantities from the company. Eisai said it will still offer products to Cardinal at its usual and customary terms.

Cardinal added that it still hopes to reach an agreement with Eisai; the wholesaler said it believes the terms it offered the company reflect a fair value for its services based on an analysis of the costs of alternative distribution models.

Eisai said it "will work with Cardinal Health to continue to process contract chargebacks," and that returns will continue to be processed for the company by Universal Solutions, Inc.

Eisai notes that its products will still be available through its other distributors of record, including AmerisourceBergen, McKesson and 30 smaller wholesalers. Eisai stressed that ample supplies of its products are available through approved distributors.

The Eisai announcement marks the first public rejection of the "fee-for-service" distribution model by a U.S. manufacturer.

Cardinal has set an April 1 deadline for manufacturers to agree to the new model or find alternative routes of distribution (¹ Also see "Cardinal Fee-For-Service Ultimatum Is Serious, CEO Says" - Pink Sheet, 1 November, 2004., p. 3).

Although Eisai is a relatively small company in the U.S., its relationships with Pfizer and J&J mean that its decision not to work with Cardinal is likely to be closely watched.

Some manufacturers have suggested that they do not understand why they should pay a service fee to a distributor. One ominous sign for the wholesalers came in November, when Pfizer announced the expansion of its internal distribution facilities.

The day before the Eisai announcement, Cardinal CEO Robert Walter emphasized his continued confidence that the fee-for-service transition will be successful - and that there will not be a difficult confrontation with manufacturers around the April 1 deadline.

Cardinal expects to announce more fee-for-service contracts by mid-February, Walter told the J.P. Morgan health care conference in San Francisco.

"You should expect additional announcements from us in the next couple of weeks about new contracts with major manufacturers," he said. "I am very pleased with the progress we are making" with "both large and small manufacturers."

Cardinal has disclosed fee-for-service agreements with Lilly, Merck and Gilead, and says it has many other undisclosed agreements in place.

"Our goal is to have the majority of the branded vendor margin converted to a non-contingent fee by April 1," Walter said. "I am quite optimistic that...we'll be done when we enter our new fiscal year July 1."

Walter said he does not "think it's going to come to a showdown at the O.K. Corral." There "is no manufacturer that can self-distribute or pursue a third-party distribution alternative that can come close to the cost structure and price that we offer manufacturers."

Walter maintained that Cardinal would have no choice but to raise prices to customers if it is unable to convert all of its distribution business to a fee-based model. "Our provider customers are cheering for us basically because they realize that if we didn't get the margins replaced back from the manufacturers...we would have to raise our prices," Walter said.

He acknowledged that Cardinal has already initiated some price increases on products and services that its pharmaceutical clients would be unlikely to subsidize through distribution fees. "We're already raising some prices to customers essentially by holding them accountable for terms that we really haven't held them accountable for before, be it emergency orders or many different things like...health and beauty aids."

Cardinal Drops Eisai; Wholesaler Still Confident In Fee-For-Service Model

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