London Calling: Fake Drugs Get Real

The British fake Lipitor scandal continues to expand after an additional recall was announced yesterday.

It’s really a shame that the public perception of pharmaceutical manufacturers is so low that no one believes in the dangers of cross-country importation. As I commented on the PharmaMarketing blog’s recent snarky PhRMA Intern post, just because an issue favors pharmaceutical manufacturers doesn't mean that it's wrong. That's not demagoguery, just reality.

This got me thinking: What can we learn from the European situation that can shed light on the misguided attempts to allow importation into the US? (See my cosmic irony post.) Plus, there’s a special bonus for everyone who reads to the end of this post!

Of course, the secondary market here in the ex-colonies pales when compared to parallel trade in the EU. Multi-billion parallel trading runs rampant within the EU as authorized wholesalers in countries such as Spain and Greece sell to importers in higher priced countries such as Germany and the UK. Products are often repackaged by intermediaries along this supply chain. Mention pedigree, as I did to some European executives recently, and you will get either a blank stare or a hearty laugh.

EU competition policy hinders manufacturers’ efforts to monitor the distribution channels of their products. Direct restrictions on parallel trade conflict with the principal of European market integration, which allows a product available in one member country to be legally distributed in any other country. As a result, manufacturers face ongoing legal challenges using supply quotas, allocation of available quantities, or refusals to supply as mechanisms to limit purchases for export.

Here's my take on the winners and losers in the EU system:

• Wholesalers & Parallel Distributors are the big winners. Wholesalers and importers/exporters absorb 80% or more of the price differences between countries.
• Pharmacies also win from parallel trade. UK pharmacies profit from parallel imports because reimbursement is the same regardless of the source of the drug. Thus, a pharmacy can keep the difference between the import price and what they pay to a wholesaler.
• Government payers, such as the British National Health Service, indirectly benefit from parallel importing because pharmacy compensation rates can be reduced as long as pharmacies can be subsidized by parallel import profits. The NHS even goes so far as to assume a certain level of parallel importing and then claw back some of the profits. The average claw back was 10.4% in 2002.
• Manufacturers are the big losers, of course. Cross-country arbitrage costs them billions in lost revenue. Their costs also go up because they can not allocate production or distribution properly because market information is so wacky. IOW, Spaniards probably do not consume all of the products shipped to their country.
• Ironically, consumers receive almost no price benefit from parallel trade, especially in countries with flat rate patient co-payment such as UK and Germany. Yet consumers also bear all the risk when products are counterfeited, mishandled, or inappropriately relabeled.

Bottom line:
Parallel import in Europe is a basically a punitive tax on innovative pharmaceutical manufacturers, with consumers bearing all the risk and getting little of the benefit.

SPECIAL BONUS

Tired of seeing boring old art or pictures of your kids in your office? Then check out this July Pharmaceutical Executive magazine article and the scary mug shots of the bad guys.

Mug Shots of the Bad Guys

What the Bad Guys did
(Hint: If you can't read this page, left-click and then click the box on the bottom right to expand.)

Suitable for framing? Better yet, how about we all send these links to Senator Vitter?