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Parallel Trade in the European Drug Industry

Pharmaceutical Companies, National Governments & European Commission: Opponents or Allies?

A major threat for Pharmaceutical firms’ profit in Europe is parallel trade. Parallel trade refers to drug exports by wholesalers from a low price country (e.g. Spain) to a high price country (e.g. Germany).

The value chain dynamics in Europe for the drug industry counts with 4 players: (1) the manufacturers (pharmaceutical companies that develop and produce drugs), (2) wholesalers (distribution firms), (3) pharmacists (points of sale) and (4) patients (end consumers). The regulation scenario regarding this industry is different for each nation. For instance, in the UK it is possible for wholesalers to own pharmacies, making the country an exception in Europe; additionally some countries allow for pharmacies’ chains whilst others do not. Profit margins also vary across countries, wholesalers holding the lowest margins within the supply chain.

Parallel trade is a growing phenomenon that represents more than 5% of European sales, which was catalyzed by EU free trade policies. Taking into account relabeling and repackaging costs, usually a 15% price difference is enough to trigger a movement between countries. The prices differ between countries for several reasons: (a) different income levels, (b) different willingness to pay, (c) different market share of generics, and mainly (d) different health care systems. Moreover, even if there is no price difference, and particularly in crisis periods where wholesalers’ margins are under pressure, there is incentive for these firms to act opportunistically and sell the majority of drugs they held, in countries where their profit margin is higher (wholesalers’ margins in UK and Germany are much higher than Spain, France or Italy for example).

In high price countries, parallel trade has a negative impact on pharmaceutical subsidiary’s revenues. Additionally, it creates stock shortages in low price countries, and here is where national governments’ and pharmaceuticals’ goals align: firms do not want to damage their profits by underserving low price markets and cannibalizing sales in high price markets, whereas governments of low price countries want to secure accurate drug supply for their population. Therefore, in this item, it is in the best interest of both parties to become allies.

Nevertheless the previously referred goal alignment between national governments and pharmaceutical is not always the case. The pharmaceutical industry is extremely lucrative holding on average 70% gross profit margins. However, in recent years, the main concern for companies operating in this industry is the combination of increasing R&D costs with government’s unwillingness to pay for new and improved drugs. Moreover, government price pressure is even more acute after the debt crisis that led some European governments to cut their budgets for Health care also encouraging the usage of generic drugs.

To conclude, in order to tackle parallel trade in Europe and keep medicine for local market sold in local market, national regulatory authorities should join forces with pharmaceuticals by defining the introduction of track numbers to understand the trajectory of drug units; and through regulation such as minimum stocks wholesalers are obliged to have. Furthermore, monitoring mechanisms and penalties in case of default should be in order so that rules are enforceable. Only this way, meanwhile pharmaceuticals protect their profits national governments are able to protect patients.

Despite all the above mentioned, when considering how to deal with parallel trade and subsequent profit loss in Europe, Pharmaceutical companies should not forget the EU’s competition law. Indeed, parallel trade is defended by EU law. The situation is highly complex and constantly evolving, but when adopting measures to restrict parallel trade, Pharmaceuticals may cross a line and engage in anticompetitive behavior which segregates the European Commission’s view of a single market.

Sources: “Pfizer and the Distribution of Pharmaceuticals in Europe in 2009”, INSEAD paper; “Parallel Trade of Pharmaceutical Products and EU Competition Law”, Francesco Liberatore (http://www.freedomhouse.ro/old/images/Francesco_Liberatore_-_final.pdf)

Catarina Teixeira de Figueiredo

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Author: studentnovasbe

Master student in Nova Sbe

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