Portuguese Government to Scrap Fixed Distribution Margins as Apifarma Revenue Drops US$699 mil. in Three Years

The Portuguese government has decided to stop imposing distribution margins on pharmaceuticals and leave mark-up determination to market forces, reports the Portuguese Industry Association Apifarma. The government will however impose maximum prices on pharmaceuticals. The decision comes after complaints from pharmacists that the 2005 and 2007 reductions in their margins did not result in a decrease in drug prices, although it cut their collective revenues by 207 million euro (US$268.5 million). Indeed, the Portuguese Pharmacy Association has accused the industry of reaping off the benefits of the distribution margin cuts by increasing their own margins from 72% to 74.88% over the period. In February 2007, wholesale-distributor margins were cut from 7.45% to 6.87% and pharmacy margins were cut from 19.15% to 18.25%. Wholesaler margins had previously been cut from 8% to 7.45% and pharmacy margins from 20% to 19.15% as part of the drug price revision of September 2005.

In the meantime, Apifarma has estimated that the pharmaceutical industry is 539 million short of revenues as a result of the successive price cuts implemented unilaterally by the Portuguese government over the last three years. The amount was determined by the subtraction of actual sales to projected sales figures based on 2005 pharmaceutical prices (see Table). Apifarma calculated that the industry lost out on 102 million euro in 2006, following a 6% price cut on reimbursed medicines implemented in July 2005. The figure rose to a 196 million euro shortfall in revenues in 2007 as the government implemented an additional 6% price cut on reimbursed medicines in January 2007 and extended the basket of reference countries to include Greece. Apifarma finally estimates that the shortfall in revenues will stand at 241 million euro in 2008.

Outlook and Implications

The scrapping of fixed distribution margins on pharmaceuticals is expected to have an impact on the profits made by the different players in the supply chain although there is no guarantee that it will result in lower pharmaceutical prices for the customer and the National Health System. The government has nevertheless made provisions that it will not result in higher prices by retaining the maximum pharmaceutical price rule.

There are three players in the pharmaceutical supply chain, namely pharmaceutical companies, wholesalers and pharmacies. Under Portuguese law, wholesalers have an obligation to stock the full range of medicines available in the country, a principle that is also know as the public obligation service. Under this model, wholesale margins retained on premium-priced medicines cross-subsidise distribution of cheaper medicines, which otherwise would be non-economical. Under the new model of margins being left to market forces, the outcome for the industry is likely to depend on whether they deal in patent-protected or generic drugs. In the case of patent-protected medicines, only the original manufacturer of the drug can supply the wholesaler, meaning that the bargaining power is with the industry when fixing their own margin, although it will have to be mindful of parallel trade. In the case of generic medicines, wholesalers can get their supplies from a number of companies, promoting competition and resulting in lower margins for manufacturers. Nevertheless, the price of a generic is such that wholesalers are unlikely to make significant profits from this medicine class and this will not make up for the potential loss of revenues on innovative drugs. Further down the supply chain, pharmacies will have significant bargaining power as there are 334 different wholesalers in Portugal. Competition to secure pharmacy business will be intense putting even greater pressure on wholesale margins and potentially squeezing the smaller players out of the market.