[Ip-health] IMS report: Parallel trade: myth versus reality

[James Love]

*The evidence for convergence around a single European price is weak

*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.

* national governments are changing reimbursement structures to
ensure that payers share in the savings [from lower prices in the
source of parallel traded products].

* 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.


http://open.imshealth.com/webshop2/IMSinclude/i_article_20060530.asp

IMS HEALTH.com
Parallel trade: myth versus reality
30 May 2006

Janice Haigh, IMS

Several contentious issues crop up time and again in discussions
around parallel trade. With so many vested interests at play, the
facts don=92t 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 =96 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 =96 enough to be
profitable for arbitrageurs =96 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 =96 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 =96 Pfizer and
GlaxoSmithKline=92s supply quotas in Spain are still under
investigation, for instance =96 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=92s 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=92t launch new products in markets in
which they cannot secure good prices remains just that =96 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=92s 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 =96 for example, injectables, products requiring cold
chain distribution, specialist products and hospital only products =96
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.

Copyright IMS Health, 30 May 2006

---------------------------------
James Love, CPTech / www.cptech.org / mailto:james.love@cptech.org /
tel. +1.202.332.2670 / mobile +1.202.361.3040

"If everyone thinks the same: No one thinks."  Bill Walton