Healthy Skepticism Library item: 17947

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Publication type: news

Jack A
European drug groups fear parallel trade
The Finanical Times 2010 Jun 7
http://www.ft.com/cms/s/0/5c9d7242-7195-11df-8eec-00144feabdc0.html

Full text:

When the Greek government cut medicine prices sharply last month, pharmaceutical companies complained of a knock-on effect on pricing throughout the European Union.

Only Novo Nordisk and Leo Pharma, two Danish pharmaceutical groups, went as far as refusing to comply with Athens, which imposed a 27 per cent average cut in patented medicines as part of its efforts to tackle the country’s budget deficit. But others, including Merck of Germany, are watching developments closely.

The pharmaceutical companies fear not only a hit in their Greek revenues, but a fresh surge in so-called “parallel exports” – estimated to account for a tenth of Europe’s medicine trade – elsewhere across the EU, undermining their margins in many larger and richer countries.

Europe’s hybrid approach of free trade across the EU, while countries are left free to manage their own healthcare systems and prices, has created an arbitrage, or “parallel trade”, in drugs worth several billion euros a year.

Repeated legal rulings in Brussels have left pharmaceutical companies largely powerless in fighting parallel trade, by upholding the rights of intermediaries – pharmacists, drug distributors and other traders alike – to participate.

They arbitrage by buying up prescription medicines in countries where they are priced cheaply, and then resell them profitably with a mark-up elsewhere, but still below the official price in the countries to which they import.

“The Greek prices would be lossmaking and our medicines would travel to other markets in a completely uncontrolled fashion,” says Lars Sorensen, the chief executive of Novo Nordisk, which has tried to impose a universal price for its latest generation insulin products for diabetics.

But a new analysis from IMS, the healthcare consultancy, suggests that the grey market cross-border trade in drugs may slow in the coming months, even as more cash-strapped authorities impose fresh discounts.

Data collected by IMS shows that most “parallel import” markets are the wealthier northern European ones where the local medicine prices negotiated with manufacturers are sold at higher prices.

Germany alone accounted for 61 per cent of the total trade in March this year: over the preceding 12 months imports reached €3bn ($3.5bn), up a quarter compared to a year earlier. The UK and the Netherlands accounted for another 12 per cent each.

But Per Troein, a consultant at IMS, says that recent trends among the largest parallel importing countries will reduce their role naturally. The Dutch market has been been stagnant for three years. In the UK, a government imposed price cut and the weakening of sterling against the euro during 2009 meant that it was no longer a profitable market for arbitragers from other EU states for most drugs.

In fact, the relative shift in exchange rates made the UK – with some of the highest patented medicine prices in Europe – a net parallel exporter.

Similarly, Germany’s domestic appetite for cheap medicines from Greece and elsewhere may also dampen in the months ahead, following newly introduced discounts that reduce the official prices agreed with drug companies supplying the country.

A requirement by Germany’s healthcare funds for pharmacies to import about 7 per cent of their stock in order to reduce the drugs bill is also set to be abolished, further dampening demand.

But Mr Troein warns that these factors could be outweighed by new exchange rate shifts, which could stoke fresh demand for parallel imports elsewhere, including Sweden.

Some drug companies believe that recent price cuts in Greece, as well as in Spain, Italy and other low-priced markets, could help their case. They argue that while the cuts may boost parallel trade, they could at the same time highlight its iniquities, with richer countries benefiting and profits largely retained by traders.

The drug industry has done its best to stem parallel trade by imposing national supply quotas or exerting greater control over the drug distributors to whom they traditionally sell their products.

But in the end, direct intervention has achieved very little and pharmaceutical companies will hope that circumstances beyond their control dampen the grey market.