It
is widely assumed that the preconditions for east-west
parallel trade will exist the moment the EU opens its
doors to ten new members in May 2004. While the derogation
adopted in the Accession Treaty will offer protection
when there is a difference in the patent or SPC (Supplementary
Protection Certificate) status of a product between accession
markets and existing member states, what about products outside
of the derogation? The widely held view is that a significant
enough price difference will facilitate parallel trade under
such circumstances.
But IMS research
casts doubt on whether price differences between east
and west are the one-way street
previously
assumed. And, as IMS
Global Consulting’s Janice Haigh explains,
while a price difference between the source and destination
countries is a prerequisite for arbitrage to take place,
it is not sufficient in itself to drive parallel trade – other
factors must also come into play.
Price differences
IMS analysed the top 25 molecules by comparing prices
in the 15 EU member states and Norway with prices in seven
accession markets:
- the Czech Republic
-
Hungary
-
Latvia
- Lithuania
- Poland
- the Slovak Republic
- Slovenia
The ex-manufacturer price per standard unit (in practice,
the cost per tablet) for each form and strength of the
product was indexed to the UK in euros and an average,
unweighted price calculated (UK=1).
The
results showed that average prices in existing member
states
were only fractionally higher than in accession
markets – 0.76 of the UK index, compared with 0.75
for the accession markets (see Figure 1). Moreover, the
standard deviation in accession markets was significantly
lower (0.08) than in the EU15 (0.18), indicating a tighter
price corridor and fewer statistical outliers of the type
that make arbitrage so profitable. Average prices in Greece,
Italy and Belgium, for example, were only around half of
those in Norway and the UK, creating a profitable differential for
parallel traders to exploit. The use of the top 25 molecules
was also significant because leading products and companies
are disproportionately affected by parallel imports. In the
UK, for example, 50% of parallel imports were accounted for
by just 12 brands, while just four companies experienced
55% of parallel imports.
Conclusion: Average prices are not always significantly
lower in accession markets than in existing member states,
so the opportunities for parallel trade are more limited
than might be expected.
Figure 1: Average prices of top 25 molecules in the enlarged
EU*
 *Measured
in standard units dispensed. In practice, this is the equivalent
of tablets for oral solids and is appropriate for measuring
parallel trade because it takes different pack sizes into
account; some products and strengths not available in all
countries.
Source: IMS Health
Availability
of supply
On top of the need for a price difference, parallel trade
will only take place if sufficient volume of substitutable
low-priced product is available in the source market to
supply the destination market. And that product must be
able to be transported economically to the destination
market by an importer whose rights are upheld in the import
market.
Here again the
evidence is not compelling. Taking the top 25 molecules
as before, an average unweighted volume
was calculated for the same member states and accession
countries and indexed to the UK (UK=100). Based on these
market sizes, it was then calculated how much of each of
the seven accession countries’ total market would
need to be exported to achieve 10% import penetration in
the UK.
The results range from a low of 34% of the value of the
domestic market in Hungary to an improbable high of 1,249%
of the market in Latvia (see Table 1). Even taking the
figure for Hungary, it is unrealistic to think that one-third
of the market could be exported to meet just 10% of UK
demand. Similarly, even if all seven accession countries
exported 20% of their domestic markets, that would still
only supply 16% of the UK market.
Conclusion: Even where price differentials exist, a sufficient
volume of substitutable low priced product is not necessarily
available for accession countries to supply existing member
states with parallel imports.
Table 1: What
proportion of an accession country’s
domestic market must be exported to achieve 10% import
penetration in the UK?
Country
|
Index
|
10%
UK
|
| Czech Republic |
9.12
|
110%
|
| Hungary |
29.63
|
34%
|
| Latvia |
0.80
|
1,249%
|
| Lithuania |
2.50
|
401%
|
| Poland |
18.41
|
54%
|
| Slovak Republic |
12.26
|
82%
|
| Slovenia |
6.63
|
151%
|
| |
|
|
| UK |
100.00
|
10%
|
Source: IMS Health Market acceptance
A third factor is also significant in driving
the propensity for parallel trade. This is more intangible
but no less important. It centres on the broad market acceptance
of parallel trade by stakeholders, including national governments,
patients, pharmacists, wholesalers and doctors. For example:
-
How do wholesalers in the source market
view margins and exports?
-
What are the attitudes of pharmacists
in the destination market to government-backed dispensing
incentives?
-
And what do patients make of packs
printed in foreign languages with overstickered boxes?
In
the circumstances, it is perhaps no coincidence that
the UK has the highest penetration
of parallel imports
in Europe – 19.8% of the branded prescription market,
or 16.5% of the total UK retail market in 2002. In addition
to high average prices, which make the UK an attractive
destination for parallel traders from across the EU, pharmacists
are all but forced to stock parallel imports to avoid being
hit in the pocket by the pharmacy clawback. This recoups
the difference between National Health Service list prices,
as published in the Drug Tariff, and the average discount
at which pharmacists actually buy drugs. Pharmacists that
fail to dispense parallel imports risk a higher clawback
bill – even if they sometimes have ethical reservations
over the use of products intended for overseas markets.
The UK’s Medicines and Healthcare Products Regulatory
Agency (MHRA) also plays its part by operating one of Europe’s
most efficient registration procedures for parallel imports.
The MHRA’s forerunner, the Medicines Control Agency,
issued more than 1,500 parallel import licences in 2001.
Likewise,
the growth of Europe’s largest
parallel import market, Germany, has been fuelled by the
April 2002 introduction of a parallel import quota requiring
pharmacies to dispense at least 5.5% of the value of drugs
as parallel imports. As a result, parallel imports’ share
of statutory health insurance drug spending grew from 4.8%
in July 2001 to 8.7% (and 4.0% of prescriptions) in July
2002. The quota was increased to 7% from January 2003,
so there is little prospect of any let-up in the growth
of parallel import penetration.
On
the other hand, countries like France have long taken
a sceptical view of parallel
imports. Even
given its status as a low-price market and therefore more
of a source than a destination market, France has consistently
held up applications for parallel import licences beyond
the terms of European law. Back in 2000, the European Commission
delivered a reasoned opinion on the matter. This called
on the French authorities to “execute without delay” a “‘rapid,
simplified procedure” for the authorisation of parallel
imports to determine that they are identical to the same
product in France. Previously, parallel imports were subject
to the standard, lengthy authorisation procedures.
Conclusion: Even in situations
where price differentials exist and supplies are available,
parallel trade is still moderated by variables and parameters
specific to both country and product.
Future scenarios
What can be concluded from these findings?
One possibility is that parallel trade will go through
three distinct phases after accession. With the derogation
on east-west parallel trade in place, the initial phase
might well be characterised by west-east trade to meet
rising demand and take advantage of price differences in
the opposite direction to that widely expected.
A second phase might then follow in which
the west is flooded with a supply of high-quality, low-priced
generics. This is likely as companies in accession countries
take advantage of EU regulatory harmonisation and their
traditional strengths in low-cost production. Importantly,
this process will be legal in cases where there is no difference
in the patent/SPC status of a product between accession
markets and existing member states. A third phase is likely
to finally see growth in east-west parallel trade, as volumes
rise in the accession markets and the effect of the derogation
erodes over time.
Conclusion: Speculating
on the future of parallel trade has always been an unpredictable
business because of the creativity of traders in identifying – and
quickly exploiting – a commercial opportunity; it
will remain so post-accession.
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