Competition and Pharmaceuticals - Panos Kanavos - 2014 OECD Global Forum on Competition

Competition issues in pharmaceutical distribution

Panos Kanavos, PhDLSE HealthLondon School of Economics

OECD, Paris, 28 February 2014

Outline

• Pharmaceutical supply chain: an important stakeholder• Issues in distribution and competition

• Market structure• Entry and exit• Remuneration and discounting• Horizontal and vertical integration• Additional services

The pharmaceutical supply chain: actors and channels

Manufacturer

Primary distribution

Wholesaling

Pharmacysupply

Consumption by medicine users

Direct manufacturerdistribution?

Doctor dispensing?

Direct pharmacysupply

Self supply and other options(Parallel) export*

(Parallel) export*

* If allowed; definition of IP rights exhaustion (national, regional, international)

High price country

Manufacturer Wholesaler

Distribution and parallel trade: How does it work?

Parallel trader (wholesaler) obtains PD license

Pharmacy

Low price country

Manufacturer Wholesaler Pharmacy

Impact of Distribution Margins: An exampleD S

DK

CH

IRL

B /

L N

NL

GB

FIN F P

GR E I

80

90

100

110

120

130

140

150

160

Eur

o

= Price that pharmaceutical companies charge directly to the local wholesalers (excl. VAT)

Ex-Factory Price (EFP)

Ex-Factory price (EUR), Zyprexa 28 tabl. 10mg Public Prices (EUR), Zyprexa 28 tabl. 10mg

Retail price

= Pharmacy selling price (incl. VAT)

Public Price (PP)

Similar Ex-Factory prices do not automatically lead to similar Public Prices

Δ = - 46.5%Δ = - 46%

Sweden / Denmark Δ = - 1% Sweden / Denmark Δ = - 24.7%

Presentation of branded expensive, mid-priced and low priced ex-factory price (EFP), wholesale (WS) margin/markup, pharmacy

(Ph) margin/markup

Price build up for a high volume generic molecule across EU countries; prices as of 15 June 2009.

Wholesale and retail

markups in Developing countries

Issues related to distribution and likely implications for competition

1. Market structure/Regulation Competition 2. Market entry and exit Regulation and

Competition 3. Remuneration Competition 4. Ability to substitute (Ph) 5. Discounting practices and competition6. Horizontal and vertical integration7. Additional services

1. Market structure: National and regional wholesaler presence in select EU member states (2010)

• The absolute number of wholesalers in a country varies significantly across the EU. Greece, Italy, Spain, Estonia, Romania and the Czech republic have the largest number of wholesalers, whether regional or national.

• By and large, wholesaling in Europe is fragmented, with over half of total market occupied by national wholesaling entities

0 20 40 60 80 100 120

UKSweden

SpainSloveniaSlovakiaRomaniaPortugal

NetherlandsLuxembourg

ItalyIreland

HungaryGreece*

GermanyFranceFinlandEstonia

DenmarkCzech Republic

BulgariaBelgiumAustria

National Wholesalers Regional Wholesalers

1. Market structure: Community pharmacy numbers in Europe per capita

population

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Country

Popu

latio

n (t

hous

ands

) se

rved

A

B

D

Fin

Fra

Ger

Gre

Ire

Ita

Lux

Neth

Nor

P

Spa

Swe

Switz

UK

• Percent in chains: Norway = 86%; the Netherlands = 50%+; UK = 50%+; Belgium = 12%; Italy = 10%

• In principle, a fragmented structure

2. Market entry and exit

• Geographical (minimum distances) and demographic (min number of population)criteria apply to the establishment of pharmacies

• Pharmacies in urban (overconcentration) vs rural (relative lack) areas

• Ownership regulation– Structure of pharmacies (pharmacists or other groups allowed)– Multiple ownership allowed or not– Trade in pharmacy licenses (allowed or not)

Pharmacy – Ownership regulationCountry Ownership structure of

pharmaciesMultiple ownership Trade in

pharmacy licensesPhar

macists

Other groups allowed

Allowed

Specifications

Ireland No Any individual or legal person bar prescribers in same area

Yes No limitation on number of pharmacies in a chain

Allowed

Netherlands

No Any individual or legal person

Yes No limitation on number of pharmacies in a chain

Not allowed

Norway No Any individual or legal person bar prescribers and mfg

Yes Limitation on No. of pharmacies in chain (max 40%)

-

Austria Yes - No No multiple ownership allowed – may run one branch pharmacy

Not allowed

Finland Yes - No No multiple ownership allowed – may run max 3 branch pharmacies

Not allowed

Spain Yes - No Allowed

Source: OBIG

3. Remuneration and terms: Wholesale distribution margin/markups, types, regulations and discounts/rebates for reimbursable medicines

in EU (2010) Regu-

lated Different Margins: Different

Drug Classes

Regressive ≤ 4

Categories

Regressive: 5-9

Categories

Regressive: ≥ 10

Categories

Linear Mark-

up

Average WS Margin† (% PPP)

Discounts, Rebates to

Health Insurance: Mandatory

Discounts, Rebates to

Pharmacies: Commercial

Austria A - - 6.5 - 13.4%2008 Belgium - - 8.45% T, 2007 Bulgaria PM - - 7-10% T, 2009 Cyprus PR B - - - na Czech Rep. + ph. - - 4.3% T, 2007 Denmark n.appl. Private Negotiations, Unregulated 6-7% T, 2009 Estonia - - na Finland n.appl. Private Negotiations, Unregulated 3.0% T, 2008 France + ACC - - 6.2% T, 2007 Germany - - 4-6.1% T, 2007 H Greece - - - 4% T, 2007 Hungary 6.04-6.36% T, 2007 Ireland C - - - Na Italy - - - 6.65% 2009, 1

3%August 2010

Latvia - - 3.34%2008 Lithuania - - 8-9% T, 2005 Luxembourg D - - - Na Malta PR E - - - 15% PR, 2009, 1 Netherlands n.appl. Private Negotiations, Unregulated 13-24% T, 2007 Poland - - - 9.78%2007 Portugal - - - 6.87% 2007 Romania - - 10-14% 2007 Slovakia - - n.appl. Slovenia - - 8-9% T, 2007 Spain - - 3.5% T, 2007 Sweden n.appl. Private Negotiations, Unregulated 2-3% T, 2009 UK F Private Negotiations, Unregulated 12.5% 2007

3. Remuneration and terms: Retail distribution margin/markups, types, regulations and discounts or rebates for reimbursable medicines in EU (2010)

Regu-lated

Different Margins: Different

Drug Classes

Regressive ≤ 4

Categories

Regressive: 5-9 Categories

Regressive: ≥ 10 Categories

Linear Mark Up: Flat Rate

Dispensing Fees

Other Fees

Average Pharmacy Margin† (%PRP)

Discount, Rebates: Manda-

tory

Discount, Rebates: Commer-

cial

Austria PR, SF - - - 15%PR DD 19.16%2008 Belgium - - - €3.88pp R, INN na Bulgaria - - - 18-22% T,2007 Cyprus / PR, P - - - na Czech Rep. +WS - - - na Denmark - - - AF 19.3% 2009 D Estonia - - - PROG 19% T,2009 Finland - - - €0.42pp 23.6% 2008 France B, G +ACC - - - €0.53pp H na Germany - - - 24% 2004 na Greece - - - na na Hungary - - - 19.46% 2005 Ireland S - - - V na na Italy - - - na C na Latvia - - - 19% 2008 na Lithuania - - - na Luxembourg I - - - 46.7-50.2%2007 Malta / PR, P - - - 20% PR Netherlands - - - - €7.28pp na C Poland - - - na Portugal - - - 18.25%2008 Romania - - 12-24% 2008 na Slovakia - - €0.48pp 21% 2007 Slovenia Points - - - - €1.4-2.8pp €2.10pp Spain - - na C Sweden Off-P - - OP 21.3%2008 UK / - - - €1.52pp HC na C

3. Pharmacy remuneration: discounts received from manufacturers on certain types of medicines

Simvastatin (2.12.0.0, statin), UK Drug Tariff Price, 2008

Dose Pack size Reimbursed (Drug Tariff)

Price (£)

Lowest available market price (£)

Potential Discount to pharmacy off

Drug Tariff price (%)

Simvastatin tabs 10mg 28 2.12 0.45 78.8%

Simvastatin tabs 20mg 28 2.26 0.59 73.9%

Simvastatin tabs 40mg 28 4.87 1.95 60%

Simvastatin tabs 80mg 28 26.79 13.50 49.6%

• Competition game at pharmacy level is often determined by the level of discount offered by manufacturers to pharmacists esp. in environments where pharmacists are allowed to substitute

• Discounting practices may be regulated (e.g. 3 for the price of 2); elsewhere they are disallowed, whereas in some settings they form part of pharmacy income (UK, NL); most often discounts are not visible or transparent

• Where they are allowed and form part of pharmacy income, a clawback maybe in operation

Kanavos, 2007.

4. Horizontal and vertical integration

Horizontal integration Extensive between 1990 and 2004 in EU-15 led to a

significant reduction of full-line wholesalers from around 600 to 141

Further consolidation expected in the new member states Limitations by EU Competition law

Vertical integration Limitations by national legislation and regulation on

pharmacy ownership Who are the right/attractive partners

4. Wholesaling: new business models

• Traditional model: F-L wholesaler acts on behalf of a number of manufacturers; bound by public service obligation

• New models– DTP or Agency: single wholesaler – manufacturer

agreement• for all or part of the latter’s portfolio • Wholesaler is a logistics provider• Wholesaler does not own the stock• Implications for wholesaler payment

– RWM: manufacturer contracts with a limited number of wholesalers, usually 2-3• For all or part of manufacturer’s portfolio• Wholesaler owns stock• Deviation from FL wholesaling

4. Proportion of Pharmacy market share as source of delivery, including Full Line Wholesalers, Short Line Wholesalers and direct from

Manufacturer

• Whereas the majority of pharmacy sales continue to originate from (full-line) wholesalers, in a number of countries the proportion of pharmacy sales originating directly from the manufacturer can be significant (Denmark, Greece, Ireland, Luxembourg, Netherlands, UK, Czech Republic, France, Italy)

0102030405060708090

100

Aust

ria

Belg

ium

Bulg

ari

aC

zech

Republic

Denm

ark

Est

onia

Finla

nd

France

Germ

any

Gre

ece

Hungary

Irela

nd

Italy

Luxe

mbourg

Neth

erl

ands

Port

ugal

Rom

ania

Slo

vakia

Slo

venia

Spain

Sw

eden

UK

%

Pharmacy sales via Full Line WS (%) Pharmacy sales via Short Line WS (%)

Pharmacy sales via Manufacturer (%)

Description of degree of regulation of wholesalers and pharmacies across EU27 countries, 2010

Pharmacist generic

substitution allowed

Pharmacist must sell at lowest

price

Wholesale rebate to

Pharmacies

Regulation of

Wholesale margins

Pharmacy chain

allowed

Pharmacy ownership

by non-pharmacist

Regulation of establishment

of new pharmacies

Pharmacy ownership Regulation

Internet Pharmacy allowed

Austria / Belgium Bulgaria Cyprus / - Czech Rep. / Denmark Estonia Finland / France Germany / Greece Hungary / / Ireland Italy Latvia - Lithuania - Luxembourg Malta - - - Netherlands Poland - / Portugal / / Romania Slovakia - Slovenia Spain / Sweden UK

5. Additional services: Description of additional services provided by pharmacies across the EU countries. Starred (*) services have a charge attached to the

service, services with a ‘S’ are only available at some pharmacies

Dis

pens

ing

Pres

crip

tion

s Re

peat

D

ispe

nsin

g D

ispo

sal W

aste

M

edic

ines

Med

icin

e U

se

Revi

ew

Emer

genc

y Co

ntra

cepti

on Bl

ood

Pres

sure

M

easu

rem

ent

Chol

este

rol

Mea

sure

men

t G

luco

se

Mea

sure

men

t W

eigh

t M

easu

rem

ent

Preg

nanc

y Te

st

Smok

ing

Cess

ation

D

iabe

tes

Man

agem

ent

Ast

hma

Man

agem

ent

Hyp

erte

nsio

n M

anag

emen

t V

acci

nati

on

Hom

ecar

e Se

rvic

es

Nig

ht S

ervi

ces

Oth

er

Austria - - - - S Belgium * * Cyprus / - Czech Rep. - Denmark * S S S S S S * S S - Finland * S S S France Germany * * * * * * * * * * * * - Ireland *S *S *S *S *S *S *S S S - Italy S S S S S - Netherlands * * * - Poland S S S S S - Portugal S S S Slovakia S S S S S S S S S - Slovenia S S S S S S S Spain - Sweden S S S S S S - UK * * * * * - - -

Overall remarks on distribution

• Highly regulated (Europe) vs not clear rules of the game (LMICs)

• Regulated – Remuneration– Entry

• Fragmented structures• Variability in horizontal and vertical integration• Variability in regulatory practices (e.g. discounting)

Issues that merit further reflection and/or work

• Data and understanding of operating structures and regulatory frameworks in LMICs and, less so, in OECD

• Market structure and concentration levels: population coverage and service availability at regional/rural level

• Horizontal/vertical integration and likely impact on availability of medicines and sufficient levels of service

• Approaches to remuneration to appropriate regulation in LMICs• Safety and quality assurance in the advent of e-pharmacies• Future role of distribution: logistics provider or adherence to

specific levels of service• Discount practices: competition-enhancing or competition-

reducing