Several contentious issues crop up time and again in discussions around parallel trade. With so many vested interests at play, the facts don’t always match the rhetoric. Resident IMS Cambridge parallel trade expert, Janice Haigh, separates some of the myths from the reality of parallel trade.
1. Price convergence
It is often assumed that the recent stabilisation of parallel trade is a result of European price convergence – a deliberate practice on the part of manufacturers to reduce their parallel trade bills. In practice, the evidence for convergence around a single European price is weak. While there has been some narrowing of the average price gap between countries, substantial price differences – enough to be profitable for arbitrageurs – remain for individual products. What is true, however, is that pharmaceutical companies manage their losses to parallel trade in different ways, and there is significant difference between the best and worst performers.
2. EU enlargement
The expansion of the European Union has not played out in the way that many in the research-based industry forecast. The fear that the accession of 10 new central and eastern European member states would flood the rest of Europe with parallel imports has not materialised. This is partly because of the derogation in place to prevent the movement of goods where there is a difference in intellectual property protection between new and existing member states. But more importantly than that, parallel trade has not taken off for the simple fact that the new source markets are relatively low volume with mid-range prices. There is not enough product available to supply demand in the major EU markets and nor are price differences consistently attractive to parallel traders.
3. EU policy – Treaty of Rome
The notion that parallel traders always come out on top in legal disputes with the research-based industry is now being challenged. While it was true to say a few years ago that parallel traders had won the majority of legal disputes, the research-based industry is now more regularly coming out on top. The ruling in favour of Bayer in the Adalat case, for example, was a watershed that paved the way for the explosion of supply quota deals that followed. While the legality of these remains open to scrutiny – Pfizer and GlaxoSmithKline’s supply quotas in Spain are still under investigation, for instance – there appears to be some tacit acknowledgment that the principles of the Treaty of Rome are subjugated in the case of pharmaceuticals. This is because pharmaceutical prices are not set in the free market; rather, they are controlled at the discretion of individual member states.
4. National government attitudes
Much of the attention on parallel trade has concentrated on the profits available to arbitrageurs, rather than the savings possible for payers. Increasingly, however, national governments are changing reimbursement structures to ensure that payers share in the savings. In the UK, the pharmacy clawback has long sought to redress the gap between reimbursed and actual prices in the Treasury’s favour. In Germany, meanwhile, mandatory discounts on drug prices, along with minimum dispensing rates for parallel imports, have been used to ring fence savings from parallel trade for the sickfunds.
5. Products launched in fewer countries
The threat that companies won’t launch new products in markets in which they cannot secure good prices remains just that – a threat. There is little or no evidence to suggest that products are deliberately held back in major markets, although companies do differentiate their products by dosage and pack size to get around the substitution of products with parallel imports.
6. Changes in the distribution system
Over the years, there has been a growing realisation that a manufacturer’s job is not finished when a product leaves the factory gate. In part, this change is being driven by the pressure on trade margins brought about by ever more rigorous cost-containment systems. Wholesalers, for example, are seeking further economies of scale through consolidation, forward integration into retail pharmacy and the addition of value added services like pre-wholesaling. For their part, manufacturers are investigating new distribution models to promote product and supply integrity, and to recoup margins. Traditional channels are increasingly by-passed in favour of a more cost-effective and patient-friendly supply chain. For example, mail order services for lifestyle drugs are taking off in Germany and Sweden, while homecare delivery for specialist products is increasing in the UK and the Netherlands (though homecare distribution is not allowed in most European countries).
7. Parallel trade does not take place in some types of products
The evidence shows that products previously thought immune from parallel trade – for example, injectables, products requiring cold chain distribution, specialist products and hospital only products – are increasingly targeted by traders. There are two main reasons. First, as the supply of major retail brands is more effectively managed, parallel traders are looking for alternatives. Second, such specialist products often have high prices and so a relatively small percentage price difference translates into a substantial absolute price difference.
Extracted from Pharma Pricing & Reimbursement, published monthly by IMS Health. For further information, please contact Richard Mee or call +44 207 393 5757.