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a blog from young economists at Nova SBE

Homogenization of European Regulation in the Pharmaceutical Industry

The thought I wish to bring to the discussion is the existing divergences of regulatory measures among European countries regarding the sale and manufacturing of pharmaceutical drugs and the impact this has on the healthcare sector in countries of the old continent. Notice that this is mostly a non-technical discussion; it is rather a way to express my opinion on a topic which I believe could be improved.

The pharmaceutical industry in recent years has been undergoing many changes to fight off some of its main challenges, mostly related to parallel trading, counterfeit drugs and government price pressures. In 2007, Pfizer decided to adopt a new distribution model (direct-to-pharmacy, DTP) with the goal of being able to control more tightly the distribution process of its drugs by wholesalers. The DTP model meant wholesalers would simply become logistics service providers to drug manufacturers such as Pfizer, meaning they would face much tighter inventory controls. Many other manufacturers followed – Merck, GlaxoSmithKline, etc. – adopting at least a hybrid version of this model, achieving similar results. The main goal of this model, as self-proclaimed by Pfizer, was to be able to do what European regulation had failed to accomplish: put a stop to the impact parallel trading has on their profits and on the patients of local markets, mainly resulting in drug stock shortages in exporting countries.

What is parallel trading? It is a scheme used by wholesalers and pharmacies to benefit from the fact that in some countries drugs are cheaper to produce than in others. This arises from different dynamics of competition among countries (between manufacturers, wholesalers or pharmacies, the main players of this industry) in producing the drugs, the differences in exchange rates (e.g. a weaker pound means if Eurozone countries import the drugs they will have a relatively lower price) and the different regulations in place in the countries. Big pharma manufacturers want to prevent parallel trading so that they are able to continue price discriminating (e.g. charging the profit-maximizing price) for each individual country. This is only possible if parallel trading does not exist, since only then will a domestic market be “isolated” from the prices practiced elsewhere.

Opposing to the interests of big pharma manufacturers are the interests of the European citizens and of the European Commission. These stakeholders are likewise interested in halting parallel trading, given that it has resulted in drug shortages in exporting countries. Yet, they do not wish to accomplish this by a means which gives more power to manufacturers! They will want to do this by homogenising regulation among the EU markets (it is a single market after all!) to allow for a convergence of domestic competition dynamics and ensuing similarity in prices. This is, in fact, a sustainable way for regulators to ensure the fairness of pricing in this industry, as opposed to parallel trade. Leaving the correction of parallel trading solely in the hands of manufacturers will result in an incomplete solution that is designed to benefit the firms, not patients. If regulation and, consequently, dynamics of competition were similar across Europe, manufacturers would have no means of achieving this price discrimination and, perhaps most importantly, there would be a resource reallocation among the industry based only on production advantages (e.g. lower manufacturing price) by the most efficient manufacturers, and not “market inefficiencies”.

What is surprising, however, is that the case[1] I am basing this discussion on is dated from 2009 yet European regulation has barely evolved since then. Why is there little to no evolution in terms of the homogenization of intra-EU regulation?

On a final note, and having acknowledged the irreplaceable role played by European institutions in correctly shaping the dynamics of this industry, I would like to reinforce that this need not equally apply to domestic governments. These governments play a fundamental role in subsidizing prices for patients, yet it is my belief that its role should be restricted whenever stepping outside this function. If EU regulation is in fact changed in a way to homogenize the European market, it is key that the local realities of individual countries do not disrupt the convergence of markets in this industry. Currently, both EU legislation and domestic governments still have a long road ahead before this is achieved[2].


Author: studentnovasbe

Master student in Nova Sbe

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