Global Insight Perspective | |
Significance | The European Association of Pharmaceutical Wholesalers (GIRP) held its annual meeting this week. High on the agenda was the demonstration that the industry adds value to the medicine supply chain and that this added value comes at a cost. |
Implications | Margin squeezes and direct-to-pharmacy (DTP) schemes continue to weigh on the wholesale sector's revenues. Xander Schrager, Manager of Corporate Affairs for Dutch wholesaler OPG, stated that profitability has become an issue for the wholesale industry. The sector is coming to terms with the need of a new business model in order to navigate successfully in an increasingly challenging environment. |
Outlook | A Europe-wide roll-out of the principle of public service obligation could bail the wholesale industry out of profit cuts at the hand of DTP schemes. Nevertheless the innovative industry is expected to lobby against such an initiative as a fundamental redefinition of the supply-chain business model is likely to squeeze manufacturers of cheap and low volume medicines out of the market. |
Change seemed to be the word of the day at the 49th Annual Meeting of the European Association of Pharmaceutical Wholesalers (GIRP) held this week in the Czech capital, Prague, as wholesalers explored options for a new business model that would preserve fair access to medicines in their geographic area. While the sector wishes to keep carrying on full-line operations, they are questioning the economic viability of their traditional solidarity-based portfolio in the current regulatory and business environment. Recurring topics were access to medicines as a basic human right, the concept Public Service Obligation (PSO), transparency, direct-to-pharmacy (DTP) schemes, short-line wholesaling, margin squeeze and counterfeit medicines.
Emerging distribution channels such as direct-to-pharmacy (DTP) schemes, online and mail orders are changing the European distribution landscape and are affecting the sector's full-line approach to medicine distribution. DTP schemes, under which exclusive wholesalers are paid a fixed fee for delivering a manufacturer's medicines to pharmacies, were put under the spotlight on a number of occasions during the meeting. Rolled out by manufacturers as a means to control the volume of parallel imports and counterfeit medicines, the schemes are depriving wholesalers not chosen as logistic service providers (LSP) of a part of the market, and as a result are shaking the foundations of solidarity-based full-line medicine distribution. Under this model, wholesalers are able to distribute all marketed medicines as revenues generated from higher-margin medicines counterbalance the losses that result from the distribution of lower-margin medicines. In an interview with Global Insight, Jos Verdin, President of Belgium leading wholesaler Febelco, stressed on the importance of the solidarity-based portfolio principle. Commenting on IMS data, Verdin underlined that out of the 7,000 medicines available on his domestic market, 732 generated 80% of the sector's revenues, while among the remaining drugs, the vast majority could only be distributed thanks to the solidarity-based portfolio principle. GIRP Director-General Monika Derecque-Pois suggested that the Public Service Obligation (PSO) implemented in some European countries, under which wholesalers are obliged to supply the full range of medicines to all licensed pharmacies, would ensure the survival of solidarity-based portfolios. Countries such as Belgium, France, Luxembourg, Italy, Portugal, Spain, and Greece have implemented the PSO principle, while Germany and Austria are considering doing so. Other countries such as the United Kingdom and the Netherlands have not.
Another hot topic was the squeeze on margins that the distribution industry has incurred at the hands of payors. The Dutch insurers' decision to expand preference pricing policies to the 35 best-selling generic medicine classes was consistently brought up as an example for the policy's implementation results for the concerned medicines packs being distributed for under 0.15 euro (US$0.23) each. In an industry working on margins and discounts, variations can have a tremendous impact on profitability. Indeed, Dutch leading wholesaler OPG revealed in a press release that in 2008 preference pricing policies in the country would have an adverse financial impact of 355 million euro (US$553.3 million) on the supply chain as a whole and of 24 million euro on the company alone. In light of such developments, European wholesalers are collectively coming to terms with the possibility of turning to a more transparent fee-per-pack remuneration system.
Also high on the agenda and somewhat related to the DTP model were counterfeit medicines and parallel trade. While Sanofi-Aventis' Bernard Amoury linked parallel trade to counterfeit medicines, Richard Barker, President of the Association of the British Pharmaceutical Industry (ABPI) discussed the possible introduction of a track-and-trace device on medicine packs to prevent counterfeits from slipping into the legitimate supply chain.
Outlook and Implications
European wholesalers have attempted to demonstrate that they add value to the medicine supply chain. In his interview with Global Insight, Verdin explained that the wholesale industry is the safest, fastest and most efficient way to ensure equal access to medicines for all Europeans. Nevertheless, in Europe, access to medicines for patients is not simply a matter of efficient distribution. With health economics playing an increasing role in reimbursement decisions, the main bottleneck impeding equal medicine access is the individual governments' decisions to fund or not to fund the use of individual medicines. The pace of reimbursement decisions and the uptake of innovative medicines vary greatly from country to country in the geographic area.
The outcome of the battle between the pharmaceutical and the distribution industries over PSO versus DTP models will shape the future of the sector. Following the roll-out of a number of DTP schemes in the United Kingdom, national watchdog the Office of Fair Trading (OFT) did not find the schemes anti-competitive and the U.K. government has not seen fit to ensure through legislation that standards of service do not drop in the country. Nevertheless, DTP schemes transfer the business relationship with pharmacists to the pharmaceutical industry, which not only gives the drug manufacturer detailed access to prescribers' behaviour but also provide the opportunity to influence retail behaviour. On one hand, the expansion of DTP schemes may squeeze smaller wholesalers out of the market or may prompt further consolidation in the segment. On the other hand, it would also promote a business-model switch from the current full-line approach to a short-line approach, where wholesalers would exclusively distribute high-value/low-volume and low-value/high-volume medicines. This is expected to be detrimental to the generic industry as cheap and low-volume copycat drugs will lose market access as their distribution is not profitable. Obviously, implementing DTPs across Europe would maximise the schemes' benefits to the innovative industry. However, a European regulation implementing the PSO principle across the geographic area could also call time on such schemes.
Although all parties agree on the need to eradicate counterfeits from the legitimate supply chain, one can question the economic viability of a track-and-trace device for the industry as a whole. The cost of the scheme, which is likely to be shared between the manufacturers and the wholesalers, could be unsustainable for manufacturers of cheap generic medicines. If the proposal is rolled out to all medicines present on the European market, it is likely to squeeze manufacturers of low-value medicines out of the market, once again to the benefit of the innovative industry.