Pharma's
growing concern over parallel trade
In recent years, parallel trade of pharmaceutical products has grown to some
the highest levels ever seen, exerting additional pressure on pharmaceutical
companies' profitability. Companies need to be proactive to restrict parallel
trade, especially in the EU, which is expected to continue to be the market of
most concern for pharmaceutical firms.
Parallel trade of pharmaceutical products has risen over the past few years,
driven by payers seeking to lower prescription drug expenditures and parallel
traders seeking to cash in on the price differential of drugs in different
countries. This has made parallel trade a growing concern for pharmaceutical
companies - particularly those companies operating in the EU, where a high
level of parallel trade exists because of EU law supporting the free movement
of goods between member states.
As a result, pharmaceutical companies are facing an increasingly difficult
environment to drive growth in, combined with additional pressures from
failing R&D productivity, increasing regulatory pressures and an impending
wave of patent expiries.
While parallel trade is legal between EU member states as part of the EU's
objective to integrate Europe into a single market, support for legalizing
drug importation in the US had been gaining momentum until recently. Since
2000, two bills allowing drug importation have been passed in Congress.
However, successive secretaries of health and human services have failed to
allow the implementation of the legislation, citing that they could not
guarantee the safety of foreign drugs imported and ensure that consumers would
make substantial cost-savings. Although drug importation remains illegal,
there has been a low level of illegal drug importation by individual Americans
seeking to lower their prescription drug expenditures as a result of the FDA's
discretionary policy regarding this.
Medicare has reduced demand for cheap foreign drugs
The affordability of drugs has been a major issue in the US, particularly for
the millions of uninsured Americans that are personally responsible for paying
the entire costs of their drugs. Many have sought to reduce their drug costs
by purchasing and importing foreign drugs mainly by foot traffic or via
internet pharmacies.
The US government has recently taken steps to address the issue, with the
launch of the Medicare Part D program on January 1, 2006, providing people
over the age of 65 and people with disabilities with prescription drug
benefits for the first time. Anecdotal evidence has indicated that the program
has subdued the pressure for legalizing drug importation and reduced the level
of illegal drug importation that has been happening for several years.
However, drug importation has not completely diminished as there are still
millions of uninsured Americans who do not have prescription drug coverage and
are importing drugs to lower their drug expenditures.
Later this year, there is expected to be a surge in drug importation as
millions of Medicare participants reach the 'doughnut hole' in Medicare Part D
coverage, where they are entirely responsible for drug costs, and seek cheaper
alternatives such as generics or parallel imports. However, seven
pharmaceutical companies are developing a patient assistance program, known as
Bridge Rx, to help participants bridge the gaps in coverage and prevent this
switching to cheaper alternatives. It is expected such a program will help
patients continue to buy locally-sourced drugs rather than turning to drug
importation to reduce their prescription drug costs.
In addition to the Medicare Part D program, the continued restriction of drug
supplies by some of the leading drug manufacturers to those Canadian
pharmacies known to be selling foreign drugs to Americans is expected to
contribute to the decline in drug importation in the US over the next few
years.
EU parallel trade to rise
While there is a downward trend in parallel trade in the US, parallel trade in
the EU is expected to be stable for the short-term and then begin to gradually
rise in the longer term as the impact of the most recent EU enlargement and
future ones materialize.
Although there were fears among the pharma industry that the recent
enlargement of the EU in 2004 would result in a flood of cheap prescription
drug exports hitting the shelves of pharmacies in the 'old' member states,
this has failed to materialize as yet. One of the key factors for this has
been the low volume of branded prescription drugs available in many of these
countries as a result of their small populations and high penetration of
generics. In addition, analysis of drug prices has indicated that the price of
some drugs are similar, if not higher, than other common sources for parallel
traded drugs, like Spain and Greece.
However, one of the most important factors is the derogation included in the
Accession Treaty for eight of 10 of the accession countries, which prevents
the parallel export of drugs from those countries where there was no
equivalent patent protection available when the patent was originally filed in
an EU member state.
Such patent protection was only introduced in these eight countries between
1991 and 1994. Given that it typically takes at least 10 years for a drug to
reach the market after the patent for the product has been filed, the majority
of branded products already launched in the EU are likely to be protected from
parallel trade from most of the new accession countries because of the
derogation.
However, going forwards, the effect of the derogation will be eroded as new
products are launched, which is then likely to contribute to a gradual
increase in parallel trade.
The accession of Bulgaria and Romania in 2007 or 2008 is expected to impact
parallel trade in a similar manner to the most recent accession countries.
However, the possible accession of Turkey in the future poses a serious threat
to parallel trade in the longer term given the substantial volume of branded
prescription drugs available at low prices in this market.
Pharma firms should be proactive
Although pharmaceutical companies are restricted in the actions they can take
to limit parallel trade in the EU, there are some measures that companies have
used to effectively tackle the situation. Supply quota systems have become one
of the most popular strategies, particularly following the European Court of
Justice's landmark ruling on the Bayer Adalat case in 2004, which paved the
way for companies to design and implement such systems without infringing on
community law.
Pricing strategies have been used selectively to tackle parallel trade,
essentially reducing the price differential between markets, a key driver of
parallel trade. In 2005, a number of pharmaceutical companies used the
compulsory PPRS price cut in the UK to modulate the prices of particular
products and packs that were subject to high levels of parallel imports. In
June 2005, Pfizer made a bold step by introducing a dual pricing system with
wholesalers in Spain for products sold domestically and those exported -
however some complaints have been filed and the European Commission is
currently investigating the legality of the strategy. It remains to be seen
whether Pfizer will be allowed to continue this strategy, following the
European Commission's previous decision to ban Glaxo Wellcome's dual pricing
system back in 2001.
Drug manufacturers can of course take the 'do nothing' approach using the
argument that parallel trade is legal, and it allows companies to focus their
resources on other issues. However, in Datamonitor's view, this is a risky
approach to take because, as competitors take action to restrict parallel
trade, this will leave products vulnerable to attack from parallel trade.
As a result, companies should actively monitor the situation, assessing what
their competitors are doing to determine when and what action should be taken
to limit parallel trade.
Related research:
Parallel Trade in Europe and the US: The challenges facing pharma
The Pharmaceutical Industry: Key events and trends shaping its current
status and future direction
Marketing Drugs in an Era of Pharmacovigilance - Best practice after drug
safety scares and the implications for the future
