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Bridging the gap

Currency fluctuations have led some UK pharmacists to a lucrative trade in parallel exports

A bridge between two pieces of land, one populated by '£' signs and one populated by '€' signsAttitudes towards the parallel trade in pharmaceuticals across Europe have undergone a volte-face in the UK in recent months. Before the financial crisis, UK pharmaceutical companies highlighted the plethora of problems arising from parallel imports. Today, Sterling's relative weakness against the Euro has switched the focus to parallel exports.

Around 10 per cent of UK pharmacies order quantities of some medicines far in excess of their local health needs. Exporting the surplus to other countries in Europe contributes to problems currently affecting the supply of certain drugs for National Health Service (NHS) patients in the UK.

According to the European Commission, "the parallel import of a medicinal product involves importing the product into one member state from another and then distributing it outside the distribution network set up by the manufacturer or their authorised distributor". Unlike most other industrial sectors, governments, rather than the manufacturing company and distributor, set pharmaceutical prices, either directly or indirectly. Differences in reimbursement policy and currency fluctuations can produce marked variations in prices of pharmaceuticals between countries.

Differential
This differential allows entrepreneurs to realise considerable profits by purchasing drugs in a country with a relatively low price and re-selling in those parts of the European Union where prices are high. In many cases, parallel imports undercut prices set by local distributors and the market can offer rich rewards. According to a 2006 report by Spectra Intelligence, approximately 20 per cent of drugs dispensed by the NHS were parallel imports, and Spectra estimated the value of the parallel imports market at over £1bn annually.

At first sight, parallel trade may seem benign. After all, drugs from all member states face the same rigorous scrutiny from the European Medicines Agency (EMA) and many medicines are manufactured at the same site, wherever a drug is dispensed. Furthermore, market forces help control costs. Nevertheless, the costs of parallel trade to the UK outweigh the benefits. A 2004 study funded by the UK's Economic and Social Research Council (ESRC) estimated that parallel importing could cost the UK economy, after accounting for the benefit of lower pharmaceutical prices, more than £290m annually.

The UK Association of the British Pharmaceutical Industry (ABPI) claims that parallel trade undermines the sector's capacity to maintain investment in R&D there. The ABPI also argues that parallel trade may compromise a product's safety and quality, despite the common regulatory standards that apply across the European Union. Furthermore, it states that the longer supply chain "creates a significant risk to product quality, particularly of medicines that need to be kept at a low temperature". Such factors clearly apply where the drug is exported from, or imported to, the UK. Nevertheless, the switch in focus from parallel imports to exports has presented a new problem for the UK: shortages of several medicines. 

The weakening pound accounts for the parallel trade reversal. In November 2008, a pound bought more than €1.25; now, the pound and Euro are close to parity. Some analysts predict that Sterling will continue to decline gradually against the Euro.

Medicines intended for UK patients now end up in markets like Germany, where prices are higher. For example, the ABPI commented that an analysis of an unnamed cancer drug showed that UK exports rose as the exchange rate against the Euro declined. Research by IMS Health suggests that 11 per cent of UK pharmacies and "a tiny number of dispensing doctors" export UK medicines in a trade worth £30m each month. Therefore, if the pound continues to weaken against the Euro, the value and extent of parallel exporting could rise, potentially exacerbating shortages.

Already, pharmacists find that certain pharmaceuticals are difficult to obtain. A survey conducted by Chemist and Druggist in August 2009 found that almost 38 per cent of pharmacists experienced difficulties sourcing the anti-obesity drug Xenical (orlistat). Furthermore, 34 per cent and 23 per cent reported problems obtaining Zyprexa (olanzapine; an antipsychotic) and Cipralex (escitalopram; an antidepressant), respectively.

Additionally, the ABPI reported that the number of emergency deliveries of pharmaceuticals from three major UK companies rose by 1156 per cent, from 6,134 between January and May 2008, to 77,020 a year later. Taken together, these figures suggest that, if pressure on the supply chain increases, such as through increased parallel exporting, some patients in the UK may not receive the medicines they need.

Yet, ironically, pharmaceutical companies have increased production to meet demand. The British Association of Pharmaceutical Wholesalers (BAPW) prepared a list of 24 drugs that seemed difficult to obtain. An independent analysis found that supply of these drugs exceeded UK demand by an average of 15 per cent, and that UK demand exceeded supply for none of the 24 drugs, suggesting that pharmacies should not experience problems acquiring them.

Against this background, various stakeholders, including the ABPI, the BAPW, The National Pharmacy Association and Pharmaceutical Services Negotiating Committee, are discussing approaches to bridge the gap between supply and demand created by parallel exporting. A consensus also seems to be emerging that the UK government must contribute to any solution. In August 2009, the Chief Pharmaceutical Officer at the Department of Health (DH) issued a letter to secondary care trusts strongly discouraging involvement in exporting. After all, such initiatives would be tantamount to running an import and export business partly funded by taxpayers. 

Other recent UK proposals may increase the parallel export market further. 

Proposals that would allow the dispensing of generic medicines instead of branded medicines in primary care, further to the Pharmaceutical Price Regulation Scheme (PPRS) 2009, have been set out by the UK's DH. While it is claimed that these proposals will result in long-term savings for the NHS, the impact on the parallels market should not be underestimated.

Furthermore, recent data from the PPRS Tenth Annual Report to Parliament from the DH show that, for the first time, the UK lags behind Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Spain and Sweden regarding the price paid for medicines.  The report, published in December 2009, compared the 2008 prices of the leading 150 branded medicines in 11 European countries, the US and Australia. The UK ranked 12 out of 13, behind the US and all of its counterparts in Europe, with only Australia, a new addition to the list in 2007, lower. The fall in value of the pound between 2004 and 2008 accounts for much of the change in the position of the UK relative to other countries over this period. On top of this, all companies in the PPRS agreed to reduce their prices by 3.9 per cent from February 1, 2009, with a further price cut of 1.9 per cent agreed from January 1, 2010. The NHS spends about £9bn a year on branded prescription medicines in the UK, and each percentage point cut saves the NHS about £80m. This will undoubtedly add further turmoil to the parallel export market.

UK governmental involvement would be especially salient since the European Commission emphasises "that parallel imports are a lawful form of trade within the Internal Market based on the principle of the free movement of goods". Nevertheless, the Commission remarks that countries can restrict parallel pharmaceutical imports that "constitute a risk to the protection of human health and life and to the protection of industrial and commercial property". However, unless destination countries take a radically different view of risk and property protection to the UK when facing parallel imports, trade barriers seem unlikely.

Another approach involves addressing the source of the problem: the exporting pharmacists. Pharmaceutical companies' increasingly sophisticated market intelligence systems can rapidly identify seeming discrepancies in demand for one or more products. In some cases, these discrepancies may reflect genuine clinical need; in others, however, selling into the short-line wholesale market for export accounts for the discordance. 

Pharmaceutical companies have tried several ways to stem parallel trade between European countries. For example, in some countries, Sandoz explicitly stated 'export prohibited' on its invoices. Therefore, unless the pharmacist or wholesaler expressly objects, recipients implicitly accept this condition if they continue to order products.

Other pharmaceutical companies have countered this trend by introducing a direct-to-pharmacy (DTP) distribution model that allows them to set quotas by pharmacy to meet local demand and reduces the likelihood of surplus stock being exported overseas.

The unilateral imposition of these quotas is legal, based on the 'Bayer Case' heard in the European Court of Justice (ECJ) in 2004. This case stemmed from the fact that Bayer found that UK sales of the antihypertensive, Adalat (nifedipine), almost halved between 1989 and 1993, and they believed that parallel imports from Spanish and French wholesalers accounted for much of the decline. Therefore, Bayer introduced a quota system to ensure that supplies of Adalat to its Spanish and French wholesalers could meet domestic demand but avoided surpluses. The ECJ ruled that setting quotas in this way was legal but had to be set unilaterally, and that everyone had to be treated equally.

In effect, the ECJ decision means that pharmaceutical companies cannot negotiate directly with pharmacists to agree quotas, but they can set unilateral quotas. However, setting the quota depends on accurate, independently verified information. For example, where a pharmacy's demand for a product routinely exceeds its quota, specialist independent audit teams can audit its prescription demand and provide verified data to the pharmaceutical company, enabling it to reconsider the quota.

There is no single answer to the parallel trade problem. Indeed, the Internal Market is at the heart of the European project, and pharmaceutical export is a legitimate trade. However, innovative approaches, like those detailed here, offer pharmaceutical companies the opportunity to exert unprecedented influence over the integrity of the supply chain in the UK and beyond.

The Author
Stephen Dunn is commercial services director at 4Sight RSD

To comment on this article, email pme@pmlive.com

6th April 2010

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