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Parallel trade is a practice
whereby licensed importers purchase pharmaceuticals in a
European Union member country, for example Spain, with comparatively
low prices, and import them into a country with relatively
high prices, such as the UK.
It has become the number one
issue on many pharmaceutical executives' minds, and is a
growing problem, exacerbated by government price controls
in many countries. By selling drugs at cheaper prices, companies
lose out, but tactics such as supply quotas for individual
countries and specific pricing policies have so far proved
ineffective.
Parallel importers moving
faster
It used to be the case that
a company launching a new product onto the European market
would first have concerns about reimportation after the
launch stage. This was based on the supposition that parallel
traders needed time to evaluate whether a product would
offer the potential for profit. But the concept of a ‘period
of grace’ is no longer the case.
Parallel traders are now much
more sophisticated. They are capable of identifying future
blockbusters even before they are launched, licenses are
much quicker to obtain, the processes are more transparent
and parallel trade companies are much better financed. In
addition, because they deal with wholesalers as their main
clients rather than selling into individual pharmacies,
parallel traders are more able to offload stock quickly
and receive payment. Their operations are more fluid, they
are able to become involved earlier in the product life
cycle and, as a consequence, their influence on the available
market for a particular drug is growing.
Even unbranded products
under threat
Once a product was off-patent
and subject to a significant amount of generic competition,
it used to be very hard for parallel traders to compete
with generic manufacturers, particularly on price. This
is no longer true.
For example, one of the products
that most quickly went into generic sales on patent
expiry was Eli Lilly’s
antidepressant Prozac, which is available in generic
form as unbranded fluoxetine in the UK and many other EU
countries. Parallel traders, however, continued to import
branded Prozac. Once a parallel trader has a source of supply
and some customers, the price difference needed to continue
importing is much less than the price difference that made
importation worthwhile in the first place. In effect, price
difference narrows through the life cycle.
Low barriers to deter parallel
trading
This leads to the question
of whether there is a threshold of price differential at
which parallel trade starts and is profitable. A few years
ago this was held to be 20%, but IMS Health has discovered
that there are parallel imports of products that on paper
were more expensive in the source country than the destination
country. Investigation showed that products were being discounted
into hospitals, and it was this hospital stock that was
being exported.
There are 18 countries in the
European Economic Area between which products can be traded.
Looking at the price difference between two of those countries,
if the lowest price country in Europe is half the highest
price, then parallel trade might well take place because
the price difference creates profits. If the lowest price
country in Europe is only 15% less than the country with
the highest price, however, that makes a considerable difference.
It is the total range that counts as much as the difference
between two specific countries.
Parallel
import penetration 2001
Source: IMS and local information
The belief that parallel traded
goods are of poorer quality is actively encouraged by the
pharmaceutical industry. For example, a parallel traded
product available in Spain is believed to be of poorer quality
than the same product available in the UK. But for the most
part, parallel traded products are as good as the local
product because they are identical - the only difference
is that they were packaged in a box of a different design
to appeal to the needs of a different European market, a
market which has exactly the same high quality requirements.
Pricing is not the only
issue
Misconceptions have led to
the belief that ‘typical’ price differences cause parallel
trade. Spain, for instance, is always considered to be cheaper
than the UK so that a particular parallel traded product
will always be sourced in Spain rather than the UK. The
truth is that the picture is different for every single
product, and can depend on:
- product price
- the volume in the source
country
- the volume in the destination
country
- how easy it is to acquire
the product
- and how big the price
difference is between the two countries
Every country in Europe imports
some products and every country exports some products: there
are no totally ‘importer’ or ‘exporter’ countries.
One of the most basic assumptions
commentators make is that it is only the price difference
that matters for parallel trade to exist. This is not true:
there are other factors at work as well. Price difference
is a necessary condition but there also has to be:
- a sufficient volume of supply
that is substitutable for the product in the destination
market
- commercial, economic and
regulatory conditions (especially in the importing country)
that allow adequate profits to be made
- economic transportation
between the source of supply and the destination market
- legal and regulatory conditions
to support the importer’s rights
- and market acceptance by
patients, pharmacists and wholesalers
Parallel traded products are
high quality, well-packaged and well-distributed and cannot
be criticized for their inferior quality compared with branded
products. The market is growing. An important future trend
will be switches from prescription-only to over-the-counter
status for some products, leading to new opportunities for
importers in OTC products.
At the same time, brands being
reimported will move away from being simply a European phenomenon
to become global, a situation that can only further harm
the current and future business prospects of international
pharmaceutical companies.
For further background information
on this topic and more detail on the services IMS
Global Consulting can
provide to help manage the impact of parallel trade in pharmaceuticals,
please contact Janice
Haigh.
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