Pharma moving to more restricted drug distribution, in attempt to guard drug supply chain

Driven in great part by the lost revenues such arbitrage brings, manufacturers have implemented several strategies to tighten their grip on the drug supply chain, with direct to pharmacy distribution schemes implemented in the UK being one of the most recent. However, the legitimacy of such action is often unclear, and a recent European Commission recommendation spells bad news for manufacturers seeking greater supply chain control, according to a new report (Pharmaceutical supply chain strategies - Reassessing product distribution to cut costs and improve supply chain management)* by independent market analyst Datamonitor.

Parallel trade link to counterfeit drugs

Last year's breach of the pharmaceutical supply chain in the UK has put the issue of parallel trade at the top of the agenda for the European Commission. In the first half of 2007, three batches of counterfeit drugs - Lilly's Zyprexa (olanzapine) [1], Sanofi-Aventis's Plavix (clopidogrel) [2], and AstraZeneca's Casodex (bicalutamide) [3] - were discovered in the UK supply chain, having entered the country as part of legitimate consignments from France.

Europe's free trade policy, combined with the often large price differentials across member states, has driven parallel drug trade, a practice in which distributors absorb most of the profits at the expense of manufacturers, says Datamonitor pharmaceutical strategy analyst Pam Narang. “Aside from the lost revenues, manufacturers contend that parallel trade can lead to drug shortages in the export markets and increase the risk of counterfeit drug entry; a claim that now has some weight behind it following developments in the UK.”

Restricting distribution to reduce parallel trade

As a result of revenue lost to parallel trade, manufacturers have long sought ways to gain greater supply chain control and have used several tactics to do this, often bringing them into conflict with distributors. The resolution of one such dispute, between Greek wholesalers and GlaxoSmithKline (GSK), looks to be an unwelcome one for the manufacturing industry as a whole, with ramifications for its stock management powers.

Drug prices in Greece are low relative to many other European countries, leading wholesalers to export to countries such as Germany and the UK, where prices are much higher. In a bid to eliminate trade of this kind, GSK stopped filling Greek wholesaler orders for three drugs -Imigran (sumatriptan), Lamictal (lamotrigine) and Serevent (salmeterol) - in 2000, distributing directly to pharmacies and hospitals instead. In 2001, the company reinstated restricted wholesaler distribution.

Greek wholesalers accused the company of anticompetitive behaviour, and bought the matter to the attention of the Greek Competition Authority (GCA), which referred it on to the European Court of Justice (ECJ). Although an Advocate General recommendation came down in favour of GSK, the ECJ refused to rule, batting the issue back to the GCA. In what has become a long drawn-out battle, the EJC is now expected to issue a ruling some time this year. However, a recent Advocate General recommendation suggests that GSK's actions were not justified [4], in what may turn out to be a victory for the wholesalers.

Pricing distributors out of the parallel trade market

The ruling may well influence the outcome of other cases relating to pharmaceutical supply restriction, such as dual pricing and direct distribution, Ms Narang says. “Three manufacturers - GSK, Pfizer and Novartis - have, or intend to introduce, dual pricing in Spain, another popular export country due to the low cost of drugs here.

“Under dual pricing, drugs intended for export are sold at a premium compared to those destined for domestic use. While the manufacturers claim the scheme cannot be classed as true dual pricing because it is only one price - the export price - that they set, the European wholesaler association holds that these actions are anticompetitive, and awaits a decision from the ECJ,” she says.

Direct distribution in the UK throws wholesalers into disarray

Equally contentious has been the introduction of direct to pharmacy (DTP) distribution in the UK. GSK adopted a DTP scheme many years ago and employs all full-line wholesalers (those carrying all prescription drugs) as logistics service providers. More recently, in March 2007 Pfizer controversially introduced an exclusive version of DTP, with just one wholesaler -
UniChem - to provide logistics support. AstraZeneca and Sanofi-Aventis have since implemented DTP, using two and three full-line wholesalers to provide logistics, respectively.

Manufacturers claim that the greater control DTP affords creates a transparent and secure supply chain that can respond more flexibly to market changes, and facilitates the creation of a stronger pharmacy relationship, Ms. Narang says. “Indeed pharmacists are beginning to have a much greater role in healthcare provision in the UK, and represent a stakeholder group it would do well for manufacturers to forge links with.”

Wholesaler groups are understandably worried, with the potential loss of a third of the UK primary care drug market, corresponding to more than $3 billion in sales. “With a large proportion of the top-end high-value drugs passing out of reach of the smaller regional and secondary wholesalers, the industry must act quickly to avoid sinking,” Ms. Narang says.

Pharmacies may also suffer in terms of discount and service levels. Under the traditional UK distribution model, wholesalers had to compete to obtain pharmacy contracts in a way which manufacturers operating through DTP do not. An Office of Fair Trading report [5] claims that for each percentage point reduction in pharmacy discounts, the NHS will be forced to pay out more than £50m ($100m) a year.

The scheme has been in operation for a little over a year and the jury is still out as to exactly how DTP will impact on drug distribution as a whole in the UK. The rest of Europe will undoubtedly be looking on with interest, Ms. Narang says. “It is likely that other drug companies will follow suit in the UK. However, whether DTP is to be adopted on a wider scale will depend very much on decisions that the European Commission makes regarding parallel trade and the tactics manufacturers use to oppose it.”

References

[1]. Parallel trade blamed for UK counterfeit Zyprexa (May 30 and June 1, 2007) Scrip Issue no. 3263/64
[2]. ‘Suspect' Plavix in UK leads to recall in France (February 14, 2007) Scrip Issue no. 3233
[3]. Counterfeit Casodex found in UK supply chain (June 6, 2007) Scrip Issue no. 3265
[4]. EU blow to supply restrictions (April 09, 2008) Scrip Issue no. 3351
[5]. Medicines Distribution: an OFT market study (December 2007) Office of Fair Trading Available from http://www.oft.gov.uk/shared_oft/reports/comp_policy/oft967.pdf [Accessed January 2008]

*Datamonitor's report Pharmaceutical supply chain strategies - Reassessing product distribution to cut costs and improve supply chain management provides an overview of the pharmaceutical distribution model in Europe and the US, and highlights recent changes in the supply chain that impact on the industry, particularly with regards to parallel trade and counterfeit strategies.