Pharmaceutical Executive Europe - February 2008 - (Page 32)

32 Comment February 2008 Pharmaceutical Executive Europe Taming the Trader Stuart Tutt advocates a ‘calm response’ to the controversial issue of parallel trade. t is hard to find a bigger hot button issue in pharma than parallel trade. While understandably aggravating, this emotive topic has contributed to heated and occasionally unwise decision-making. The challenge is find constructive mechanisms to tame parallel trade. Why does industry find parallel trade so infuriating? Firstly, it is difficult for companies to understand why parallel trade is allowed in the EU, where government price controls make substantial price differences unavoidable. The uncomfortable reality is that the free movement of goods is a founding principle of the EU. The case law is clear: being subject to price controls does not grant pharmaceuticals exclusion. Secondly, traders profit at the industry’s expense, making minimal contributions to healthcare, as the net savings to healthcare systems are low. Thirdly, and perhaps most importantly, parallel trade has a negative impact on the sales of affiliates in importing countries, with a smaller increase in sales in the exporting countries. When affiliates report a high level of parallel imports (say 80%), the corresponding revenue loss can cause individuals and companies to react emotionally. Emotion is further heightened if bonuses are tied to affiliate ex-factory sales. I 1. There is no agreement between the manufacturer and the wholesalers; that is, the manufacturer informs the wholesaler of the quota without any form of negotiation. 2. All similar wholesalers are treated in the same way; that is, there must be a method of calculation that treats wholesalers fairly. 3. The amount supplied is sufficient to meet domestic demand and to allow individual wholesalers to grow. Quota schemes will not entirely prevent parallel trade of a product, but they can substantially reduce the volumes available. Introducing a quota scheme involves substantial work and legal risk if not implemented correctly, so it is essential to do a thorough feasibility study before commencing. Prevention is better than cure Managing prices across Europe is a key goal. When developing price strategy, a company may seek to avoid or minimise parallel trade. This is an inappropriate objective for two reasons: geographic reference pricing almost always has a greater impact on European revenue, and the only way to prevent parallel trade completely is to set and maintain a very tight range of prices in Europe. Price controls and individual country’s healthcare objectives make this very difficult: either potentially higher-priced markets must price low, or reimbursement restrictions must be accepted in lower-priced markets, or both. The resulting revenue loss will almost certainly be greater than the parallel trade avoided. The mindset must be to accept a certain amount of parallel trade in order to have revenuemaximising prices across Europe. This does not mean that every low price has to be accepted. Cross-market modelling can help set and implement a pricing strategy, which takes account of both reference pricing and parallel trade. Modelling enables the user to balance one country’s gains from a price against the losses likely to arise elsewhere. Reacting appropriately to parallel trade requires companies to keep a cool head, take account of parallel trade in pricing strategy development and implementation, seek revenue maximisation and be prepared to use all legal measures — in particular, quota schemes. While parallel trade will not disappear, manufacturers can legally make it more difficult. It is up to each manufacturer to ensure that its products do not suffer disproportionately. Taking the heat out of parallel trade A first step towards a calm view of parallel trade is to look at the losses it causes at a European level. Consider this example: • Country A has a price of €100 and suffers 80% parallel imports on a demand of 100000 packs • Country B, whose price is €60, is the most likely source for these imports. • In Country A, the loss due to parallel trade is 80000 x €100 = €8 million (80% revenue loss for the affiliate). • However, for Europe the loss is 80000 times the difference in price between Countries A and B (that is, €40). So the net loss for Europe is €3.2 million — a large amount, but probably not a high proportion of total European sales, which might be €100 million. • It is easier to react calmly to a 3.2% loss of European sales than to an 80% loss in one country. Personal emotion can be largely removed by basing bonus calculations on all sales (domestic and imported) in the country. Once emotion is removed, companies can try to manage parallel trade. The most successful way is through supply quotas in the exporting countries. Rather than supplying product to wholesalers on demand, use a pre-announced limit on how many packs will be supplied during a given period. This is acceptable under European law, provided: About the Author Stuart Tutt ( is a director at PriceSpective (UK), a global value strategy company.

Table of Contents for the Digital Edition of Pharmaceutical Executive Europe - February 2008

Pharmaceutical Executive Europe - February 2008
From the Editor
News and Analysis
Brussels Report
R&D: Innovation - Learning to Share
Drug Launch - The Preparation Game
Q&A - Getting a Head Start
Regulatory Compliance - Credible Compliance
Clinical Trials - Establishing Trials in China
The Mix - Relevant ROI
Comment - Taming the Trader
Last Word - Under the Microscope

Pharmaceutical Executive Europe - February 2008