the distribution of pharmaceuticals in europe — current and future trends in wholesaling

Review

The distribution of pharmaceuticals in Europe - current and future trends

in wholesaling

As of January I, 1993 a huge market. encompassing mure than 325 million people, has been established with the unification of the I2 member states in the European Community. During the last IO years, the pharmaceutical wholesaling sector has therefore been involved in an in- tense restructuring process. But, there is a considerable scientific gap in the knowledge of pharmaceutical wholesaling. In view of the uncertain situation and the scarcity of structured information, the purpose of this article is to examine current and future trends in the Euro- pean pharmaceutical wholesaling sector. We reviewed the literature and identifxd three major areas of interest; general threat8 to traditional full-line wholesaling. wholesalers’ response to these threats, and the new Glaxo distribution scheme. The current and expected importance of these areas were assessed with the help of a suwy, encompassing 20 expetts in this lield. Based on the review and the survey, we conclude that there are many serious threats to traditional wholesaling, the major ones being governmental pressures to lower the already rcla- tively low gross margins, manufacturers contemplating taking over the drug distribution process themselves and increasing international competition. The major responses to these threats are to become a truly international player (via mergers, acquisitions and joint yen- tures). or being able to provide the customers wth detailed mpinagement information through computetired networks. In order to survive the next S-IO years. companies have to be very alert to the changing competitive situation.

Key words: Phanuaceutical wholesaling; Distribution; Trends; Threats; Future; Survey

0163.85101941W.00 0 1994 Elsevier Science lrcland Ltd. All rights reserved SSDl 0168.8510(93)00609-S

272

1. lntroductiw

E Andermon I He&h Policy 21 (1994) 27/-292

All components of the European pharmaceutical sector are currently under considerable strain, mainly from various govrnment initiatives but also from the other

components of this sector. The pharmaceutical manufacturers are under pressure to

lower their prices, for instance through the reference price system which is being introduced in more and more European countries [I]. The pharmaceutical wholesalers are under pressure because a major restructuring process is taking place. Between

1983 and 1989, the number of European wholesalers decreased by over 25% ]2.3]. The pharmaceutical retailers are still fairly national, but different local initiatives are expected to affect the basic structure of retailing. For example, in Denmark the

newly-established Council for Competition is trying to open the Danish pharmacy

sector by proposing a series of measures to increase price competition, establishing freedom to set up pharmacies and allowing non-pharmacists to own one or several pharmacies (41. Finally, buyers and consumers are under pressure to purchase drugs

more economically. Because of the current economic climate hospitals and insurers

are under tough budget constraints, doctors are requested to think of the price of

the drng (economic prescribing), and the patients have to tinance an increasingly larger share of their health care consumption [5].

The effect of the new initiatives on the pharmaceutical manufacturers and the

various buyers/consumers are generally discussed in the scientific literature. There is, however, a considerable gap in the knowledge of the effects on wholesaling and retailing, mainly perhaps, because these two components of the pharmaceutical sec-

tor have historically been locally focused. A potential study on wholesaling or retail-

ing in a specific country may therefore not have been applicable to other countries

in the same way as studies on the international pharmaceutical industry 01 the consumption and reimbursement of drugs. But this situation is changing dramatically. The international interest among retailers and wholesalers is increasing, for instance

with the recent EC Directive on wholesaling.

In view of this large uncertainty and the scarcity of structured information, the

purpose of this article is to examine what is currently happening in the European

pharmaceutical wholesaling sector, and what the effects will be on ti-,ditional

national wholesaling’. In order to answer these questions, we reviewed the existing literature on wholesaling. We also conducted a survey: a questionnaire-addressing several major issues identified in the literature - was mailed to a large number of knowledgeable individuals in this field.

This article is arranged in the following way; after this introductory note, the methods are described in the next section. The third section which includes the resu!t?, is divided into three parts: general threats to traditional wholesaling, whole- saled responses, and the new Glaxo distribution scheme. The tinal section encom-

passes a policy discussion of the tindings

‘What is taking plscc in pharmacy retailing is very different from wholesaling. This article wilt therefore concentrxe on pharmaceulical wholesaling only.

The study utilised a two-stage method:

m A literature review was conducted to identify critical issues. The review used several sources:

. published EC documents,

. a search in on-line databases,

. a review of relevant trade journals

n A structured questionnaire was sent to key individuals in this ares

First, the search through the scientific literature revealed that little has been published on pharmaceutical wholesaling. Bnt there was some useful (although scat- tered) information in the trade journals that concentrate on presenting pharmaceutical news, mainly: SCRIP, SCRIP Magazine, Pharmaceutical Marketing, The Pharnuceutical Journal, and IMS-Marketletter. The review of these journals identified several issues of interest. These issues were structured into three main areas: general threats to traditional wholesaling, wholesalers’ responses to these threats, and the new Glaxo distribution scheme.

The next step was to develop a questionnaire, encompassing the issues identified through the literature review as currently important or expected to become increas iogly important over the next 5-10 years. To conduct a comprehensive assessment of the re1e.vant issues we assembled a list of key individuals in the industries, the academic community and the consulting organisations involved in this area. Them- dividuals were identitied via the literature search, suggested by other participants or through our previous experience with this area of research. The individuals were contacted by phone to secure their co-operation. This contact was immediately followed by the questionnaire and a covering letter that provided further details of the study. The key individuals were given 2 weeks to complete the questionnaire before they were contacted again as a reminder. This two-stage method resulted in a total sample of 20 experts from nine countries in Western Euro&.

Initially, about 50 individuals were contacted to assure their participation. Those who decided not to return the questionnaire cited the following (in some cases related) reasons:

. reluctance to reveal trade secrets.

. time constraints,

. questionnaire too burdensome,

. lack of interest in the subject matter.

lThe expas repreunled: w!&saling companies: wholesaling. mailing and pharmsceutical-manufacacl- wing arsociations: pharmxeudcal manufacturers; academrs: and pha~awutical cmwilltants. The survey wao conducted during iite Spring of 1992. B.C. before Ihe Maastricht agree;nent came 2nt0 effect.

214 F “,&mm /Hew//h P&y 27 (IPWJ 271-292

. not enough knowledge (or, have not thought about these issues before).

From the responses above, it is interesting to note that many people in this field

seem not to have addressed these important issues before in any greater detail.

3. General threats to traditional wholesaling

3. I. Background

Wholesaling in the EC is currently in a very turbulent phase. Because a new EC

directive on wholesaling recently came into effect, reducing some of the historic trade barriers, many wholesahng companies are reorganising from a national or

regional status to become international. The literature identities several significant threats to traditional full-line wholesaling [a]?

. the new EC directive on wholesaling,

. increased competition from foreign wholesalers, short-line wholesalers, and

pharmacy co-operatives integrating backwards into wholesaling,

. parallel importers who trduce the market for full-line wholesalers,

. reduced margins through various governmental initiatives,

. manufacturers who are exploring alternative and more cost-effective ways

to supply drugs to their customers (an example is the new Glaxo agency scheme - a more direct form of distributing drugs).

Each of these live threats will be discussed in detail below.

3.2. EC hormonisarion

As of January I, 1993, the twelve member states in the European Common Market are (at least in theory) integrated into one single market - the world’s largest -

encompassing over 325 million people and over $70 billion in pharmaceutical con-

sumption [7]. Increasing integration within the EC will act as a catalyst for change in many areas, including wholesaling.

The purpose of EC legislation is to increase European economic strength and pro- sperity via an integration of market policies. With increasing emphasis on har-

monisation and free movement of capital, services. people and goods (Article 1CQa: Completion of the internal market), the European Commission is looking to elimi- nate any remaining barriers. Wholesaling is still seen as a missing link between the

heavily regulated phermaceutical manufacturing industry on the one hand and the equally highly (nationally) regulated retailing pharmacy sector on the other. Cross- border trade is not yet an important feature of pharmaceutical wholesaling. but it is increasing, and the Commission is anxious to avoid national legislation restricting

such trade IS]. Accordingly, the EC Court of Justice has ruled lhat a member

country may not prevent a wholesaler established in another member country from

directly supplying pharmacies in its territory 191.

‘A rull-line whc.%aler affers the r~tl ranse c$ drugs av&blc on the market. whereas B short-lme wholesaler c~neentrates on the m~s, profitable drup.

F AP.&-rsronl”drh Fw;q 27 (,9!w, 271-m 275

Further, a new EC directive on wholesaling became effective on January I, 1993

(No. 92/25/K) [8,10]“. This directive is likely to become the new standard of com-

pliance for all wholesalers. The Directive on Wholesaling introduces minimum stan- dards for wholesaling practice throughout the EC. The member states will be reqaired to ensure that all wholesalers arc properly licensed. Wholesalers will buy

products only from author&d scw~ces and sell only to-authorised retailers (it will be the wholesaler’s responsibility to check whether its customers arc licensed). Pharmacists will be required to obtain a wholesaler authorisation if they act as wholesalers. The new directive is expected to have an especially large zffect on some

of the countries which arc planning to join the EC in a few years. For instance, wholesaling in the Nordic countries, historically run by the federal governments. will bc opened for cross-national competition (12,131.

Industry experts in our su~ey were generally aware of some emerging EC directives that would affect the distribution of pharmaceuticals. The one most frequently mentioacd was the new pharmaceutical wholesaling directive. Other proposed direr-

tivcs that might affect the distribution of pharmaceuticals indirectly were those on

advertising and labelling5, and on uniform drug prices ir. the EC (Transparency D&&E+

The experts had different views on how these directives would affect wholesaling.

One expert believed that the short-line wholesalers and the parallel importers (these

will be further described later) would find it onerous to comply with all the new

directives and would therefore leava the market. Some experts believed that the dif-

ferent proposed directives would lead to gradual harmonisation of prescription

medicines, thereby allowing a faster and easier spread of the drugs to all EC countries. But, most believed that the proposed directives would have a limited short- term effect.

In conclusion, the new directive on wholesaling is generally seen as the new stan-

dard to which all wholesalers must comply, i.e. a form of code of practice. The objcc-

tive of increased harmonisation thrwghout the EC is evident in this directive.

Industry experts and the literature both predict that this directive is the one that

probably will have the largest (albeit, still relatively limited) effect on wholesaling

over the next few years.

3.3. Increasing comperition Competition can take various forms, such as international competition from other

wholesalers in the EC 161. In line with this, many companies are acquiring companies

*ea&n are referred 10 [I It for a nuwc de&!ti hirmris description ofthe EC and pan kgirlation affec. ting dx phammcutical market.

%hc directives on advenising and labelling, plus a direclive on legal stalus and tk directive on wholesaling, are called the p~ckag of rational USC directives. The directive on labclling cam into eWec1

on lanuary 1, ,994, v&rear the other three came mm efkt on January 1, 1993.

tic price of a drug may v:q co~~derably depending on whether the drug II mid in a low-price ccuntly (such as GmK, France or Eklgium) or in a high-price munwy (such as Gemmy. the Netherknck, the

United KinEdm or Denmark). ‘The proposed Tranrparen;y dmctive has wen dropped since the survey

was conducted.

in other countries, a trend that will probably grow with the unifictuion of the EC (this will be discussed later). For instance. the German wholesaler Cehe recentlv nur-

chased the leading French wholesaler OCP ]14.15]. Short-line wholesalers also pose

a serious threat since they concentrate on protit-making drugs only. A traditional full-line wholesaler offers the full ranae of drum available. but most drugs are sun- plied at a loss; full-line wholesalers ii the U&d Kingdom make rnooe; on fewer

than ten percent of the drugs they carry [la]. These ten percent account for 85% of turnover 117). This increasing ‘cream-skimming’ naturally concerns the full-line

wholesalers. Yet another new form of competition comes from retailers who form co-operatives and integrate backwards into wholesaling. thus supplying themselves

without the involvement of traditional wholesalers 16,181. Two such examples are the large retailing chains Boots and Lloyds in the United Kingdom [IS].

The experts believed that the presence of short-line wholesalers (and the related parallel importers) would increase over the next few years. However, in the long run

they are likely to become very marginal players because the manufacturers and

retailers will increasingly demand detailed up-to-date information on the sales of the products. Bezause of their limited size, the short-line wholesalers may not be able to provide such detailed and extensive infortnation. With regard to the competition

from retailers, the experts were divided. Some believed that increasing competition from the retailers is no: to be expected, because they have not enough capital to set

up a large-scale operation. Other experts anticipated increasing competition, hut

also increasing co-operation through electronic communication and mergers/at-

quisitions.

A third threat to traditional wholesaling comes from parallel importers ]6].

Because of the varying prices in the EC, it is sometimes profitable to buy certain

drugs in low-price countries (such as Portugal, Greece, Italy, Belgium and France)

and export them to high-price countries (such as Germany, the United Kingdom, the

Netherlands and Denmark). This trade reduces the market for the incumbent

wholesalers, especially since the parallel importers concentratr: on high volume drugs.

Parallel importing (PI) of pharmaceuticals occurs when a third party purchases a

product in an EC member state where the price is low and imports it - without

reference to the originator - into a higher price member state, and then sells it in competition with the originator in that country ]ll,ZO]. PI has become a controver- sial issue in the EC in recent years, because PI leads to savings for the third party payers but to loss of sales for the manufacturers and wholesalers in the importing countries (20,21]. Although PI has been fought both by the manufacturers and the full-line wholesalers, the European Court of Justice has still consistently declared

parallel imports legal [I 1,221.

For PI to work, the price difference between two countries (the exporting or

source country, and the importing country) has to be large enough for all the in-

volved parties to gain. A required price difference of around 30% has been suggested

[ZO]. The difference must be large enough to remunerate: the exporting wholesaler

in the low-price country; the importer himself; plus the wholesaler (if used) and the

pharmacist in the high-price country. In addition, the exporting (and, if used, the importing) wholesalers and importing pharmacists must have higher margins from parallel trade than from direct-route trade lo compensate for the inherent disadvan- tages of Pls (such as limited supplies, delay in distribution, different packaging).

In 199% PI was estimated to account for about two percent (or between S445 and 525 million) of the value of sales of prescription drugs in the EC. Tbe main importers are the high-price countries; the United Kingdom (8% of their prescribed drugs are being imported), the Netherlands (5-10%). Germany (l%), and recently, Denmark (PI started towards the end of 1990 and is still very marginal). Today, almost 100 parallel importers are active in these four countries [ZZ]. The main suppliers are the low-price countries, primarily Belgium, France and Italy ]20,23].

The literature presents different views on whether PI will continue lo play a role in the future. The main authorities in this area. REMIT consultants, predicted in a recent EC report that parallel importing will increase because harmonisalion of prices in the EC will take considerable time [20,23,24]. Also, more centmlised EC registration, leading lo standard&d trade names and packs, will boost the trade 1221. Other factors that will encourage PI include increased enthusiasm of national governments for PI lo help in reducing their drug bills, greater incentives for pharmacists lo dispense Pls, less hostility from pharmacists to Pls. new source countries, and more involvement by traditional full-line wholesalers. In fact, parallel trade may become irresistible for many full-line wholesalers who see this as a growth oppnr- tunity and a way to meet clients’ needs 161’.

Conversely, other experts in this field predict that PI is just temporary and may cease in a few years when EC becomes more harmonised. PI will probably become less appealing as price differentials are eroded, and its volume is likely lo fall considerably by 1994. according to Count van Limburg Slirum. secretary general of GIRP - the European association of drug wholesalers 1161. Even without the recently dropped Price Transparency directive the trade in PI is believed lo have a maximum time span of 10 years, given rising price levels in the low-price countries

WI. Another factor that may come lo affect the size of PI is the increased use of

generics. Governments, insurers and public policy makers are increasingly attracted lo aeneric comnelilion. orescribina. and substitution as a means lo curb rising drug . expenditures. If generics are used more, the necessary margin for a PI will be eroded 161. It has been suggested that the PI companies may start distributing generics when PI is no longer profitable [26].

Finally. price adjustments in the form of massive discounts from the manufacturers, targeted al brands most affected by PI trade, are the most recent develop menl. Some manufacturers are said periodically lo offer special price deals to wholesalers, lo be passed on lo their retail customers f22.27.

The surveyed experts anticipate PI to increase over the next three to 5 years from the current rate of two percent of the EC prescription market lo a maximum of about five percent. This increase is likely to be concentrated to the countries currently having PI, i.e. the high-price countries: the United Kingdom, the Netherlands, Ger-

many and Denmark. Afier about 5 years of increase, PI is expected to decline, accor-

ding to most experts. The experts are divided on whether pan-European wholesaling associations. joint

wholesaling ventures or single companies will diversify into parallel importing. Ex- perts who did not believe in diversifying into PI justified their view by claiming that

this would remain a marginal market. Experts who believed in PI claim that it would be natural for these groups to use their units in low-price countries. Indeed, some

single full-line wholesalers are expected to diversify into PI. For them this limited market can he more important than for the large pan-European groups.

In conclusion, the future of PI is uncertain. Experts present different scenarios: some believe that PI will increase considerably because the compkte hammnisation of prices in the EC will take many years to complete; the majority of the experts predict that PI isjust a temporary phenomenon that will become less important as price

differentials erode naturally.

3.5. Reduced margins through governmenral initiatives A fourth danger comes from reduced margins through various governmental ac-

tions [d]. While the gross wholesale margin varies widely between countries (we Table I), after allowing for competitive discounts, the net gross margin is generally between 6.5 and 8.5%. Pre-tax p&its are mostly about l.5-2% [30].

As noted above, governments are putting pressure on the entire pharmaceutical

sector to limit annual increases in expenditures. One way is to lower the wholesale margin. For instance, the margins in France fell in 1991 from 9.88 to 9.7% [3].

Wholesalers have little influence on drug provision because governments and manufacturers determine the gross margin. In response, who!esalers have reduced

costs by increasing productivity and improving their efliciency in forecasting de-

mand, by automating their warehouses and upgrading transportation logistics. For

instance, the UK wholesaler AAH closed four warehouses during 1992 and early 1993 to reduce operating costs. in the same period, as a way to mtdemise and rationalise its branch structure, AAH opened a new warehouse unit and installed additional capacity in another warehouse [3l]. But this process of prod?ti<ity and efftciency improvements cannut continue forever.

Some experts believed that :he decreasing margins may eventually lead to reduced quality in the distribution and the services provided. Further, reduced margins will lead to many small wholesalers going out of bosiness.

The next threat to traditional wholesaling, and a iairly recent one. comes from the manufacturers. Manufacturers have previously been wntent to let the wholesaling sector run itself, as long as they have been pleased with the service provided. Now, they are looking at alternative and more cost-effective ways to supply drugs to their

customers (i.e., retail pharmacies, hospitals and doctors). In principle, a manufacturer has four ways to supply its products to the consumers [32]. The iirst uses wholesalers in a traditional way: wholesalers distribute over 80% of pharmaceuticals (Table 2 prescilts the channels of distribution of pharmaceuticals for some European countries.). A second method is to establish a manufacturers’ distribution organisa- tiou, in which a group of manufacturers co-operates to distribute drugs. To date, this method has not been used much in Europe. One exception is Kronans Droghaudel (KD), which is owned by the foreign pharmaceutical manufacturers in Sweden (Kh market share is about 28%). A third way has individual companies distributing directly to the customers, so that the manufacturer acts more or less as a wholesaler. This way has not been used to any large extent but is being discussed 1351. A fourth, and a method Very close to the previous one, uses agency distribution. This method is currently being tried in the United Kingdom by Glaxo. Since November 1, 1991 Glaxo has supplied drugs di-cctly to retail pharmacies, using wholesalers only as dis-

280 F. A”dtT.wm/Hea,,* m/icy 1, (IOW, 271-m

tribution agents. If this approach works, it may pose a serious threat to traditional

wholesaling (see also reference [36]). This issue will be addressed separately below. Research-based pharmaceutical companies are not expected, according to the

experts in our survey, to acquire wholesaling companies. On the contrary, they are expected to continue to distribute drugs through the traditional wholesaling route.

Ox expert noted that wholesaling is not profitable enough when compared to manufacturing, but if the wholesalers were to become too powerful, manufacturers may be forced to acquire wholesalers to better control the pharmaceutical market (One such example is the recent interest shown by Rhone-Pouknc Rarer and other

phamtaceutical companies in the French wholesaler OCP (371.).

4. Whuleselers’ responses

4.1. Background What can wholesalers do to meet all these challenges? According to some experts

in this Reid, there are three possibilities for the wholesalers: consolidation, intema- tionalisation and diversification p&39]. Consolidation means that the company

decides to stay within its niche, stay nationrd/regional, streamline its organisation

and concentrate on what it knows best, i.e. supply (well-known) customers within

a limited geographic area. Internationalisation results in companies moving into

other countries. This may occur because some companies are merging, co-operating, or choosing to internationalise through acquisitions of other, smaller companies.

Finally, diversification is an expansion of the company into a related market sector. For instance, a wholesaler can integrate backwards into generic manufacturing or

integrate forwards into pharmacy retailing. These three opportunities will be dis

cussed next.

4.2. Consolidation A wholesaler may decide to stay local and concentrate on the business it knows

best. A local/regional company can compete mainly through price (e.g., discounts) or by providing extensive service to manufacturers and pharmacy retailers. Local

wholesalers can provide more extensive personal service because they are more

familiar with the local market than the pan-European companies. What small wholesalers cannot provide is the extensive management information that is now becoming avzilab!e with the introduction of computer networks. These extensive networks are probably too expensive for small regional wholesalers to set up and

manage. Another problem local wholesalers face is a limited potential for growth because of market saturation, especially in the northern parts of Europe where con-

centration is high. Further, in the long run, it is unlikely that a local wholesaler will

be able to compete through price with the large pan-European wholesalers. A full-

line local wholesaler may therefore find it difficult to distribute the whole range of

drugs, and instead may have to concentrate on the most protitable ones, thus becom-

ing a short-line wholesaler. Finally, if a company decides to remain local, it may

become vulnerable to aggressive marketing or acquisition by a major pan-European

wholesaler.

The 20 experts projected that the wholesaling sector will become even more concentrated in the next IO-year period. By the year 2Cfttl the experts anticipated that

F. Anliersmn,“ec,,* f-&y 27 (IW, 271-m 281

approximately three to ten major pan-European wholesalers will exist in the EC. There will still be room For local wholesalers, though. Most experts estimate that between one and tive local full-line wholesalers will exist in each EC country in year 2000 (see also Table 1 for a comparison with #current conditions).

In conclusion, it is important to identify areas where a company can compete

successfuiiy. One area that will become particulan.~ important is the potential to

provide customers with extensive management Gormation. such as detailed data on sales. The problem For small wholesalers is that they cannot anbrd to set up the necessary extensive computerised data information systems.

4.3. Inrernotionalisar~on

More and more companies are beginning to view internationalisation as the

opportunity For growth and to reach the necessary critical mass. Companies can become international in three ways: (I) acquisitions and mergers; (2) joint vemures;

and (3) collaboration in associations 16,391. The most commonly used strategies For internationalisation are acquisitions and

mergers. Maw acquisitions are taking place because small family companies

(especially in the Southern parts of Europe) are selling their businesses in the wake

of uncertainties created by the unilication of the EC. For a purchaser, this offers an

opportunity to acquire a share of a new market and an experienced staff with knowledge of local market conditions.

Market conditions have resulted in increasing concenlration, primarily through

acquisitions and mergers. From 1983 to 1989 the number of EC wholesalers Fell by

26% 12.31. The International Federation of Pharmaceutical Wholesalers (IFPW) ex-

pects that the number of companies will decrease by another quarter by year 2ooO.

After year 2000 the rate of concentration will decline 1401.

The process of concentration has been focused primarily in northern Europe while in southern Europe the wholesaling sector is still largely unstructured. Different

countries have reached different levels of market maturity. For example, in France

and Germany, there is a small number ofpowerFul companies [41]. In Italy, Belgium and Spain there is a large number of wholesalers and tte concentration process is

just starting (Table 3 presents the combined market shares For the top three wholesalers in various national markets). These differences in market maturity will result in even Fewer independent wholesalers in Europe over the next 10 years. ln- deed. international acquisitions are currently b-zing made by German wholesalers who are purchasing wholesaling companies in the Netherlands, France and Italy

1141. French wholesaling companies are purchasing companies in Belgium, Spain

and Portugal [42]. The largest French wholesaler, OCP. nota has wholesale opera- tions in the U.S., Belgium. Spain. Italy, Luxembourg, Poland and Portugal [43].

British wholesaling companies are purchasing companies in Ireland [31] and Por-

tugal [17], and foreign groups now control between 15 and 2Ci% of the Portuguese

wholesale market [44]. Tables l-4 present more data on the market conditions for

wholesaling in various European countries.

Joint ventures are an alternative to acquisitions. A joint venture sets up a new sub-

sidiary in a Foreign country, often in co-operation with a local company. This method has several advantages: it eliminates the need to use capital on acquisitions

before the Foreign company has extensive knowledge OF the local market. the col-

C”““Lrv Too-3 conmanies Share

ltaiy

NEtherlands

Spain

PCB Asma Inter Noa OCP CERP IFP

Sanacorp group (Anra@%‘ivcdalEgwa!T%xveda) Merckk Group (SchulMRcichclVStumpO Alkanza Farmaceutica Comifar Farm Distribuzi0ne OPO Brocacef Medicopharma Cofares Murciana SAFA AAH UniChem Medicopharma

Apotckernes Fellesindkj6p ADA Kronans Dronhandel (KD)

100

hnl

Source: 121 and own calculations. Now Since this table was prwnted ModiFopharri has withdrawn from both the UK and the Dutch markets. The UK assets were acquired by AAH in late 1991. AAH and UniChem now account for about 70% of the UK make, [36,. In the Dulch market. OPO and Brocscef now account for abou, 8W of the

market 1361. Apolckcmer Fethsindkj5p war acq!!imd by NMD in 1991 [121.

laborating companies can start co-operative large-scale buying, and technical exper- tise can be exchanged.

There are not yet ~(1 many joint venture: in the EC, although a few have been set

ttp during the last three to four years. The best-known joint ventures are FPN, ERPI and PAG. FPN (First European Pharmaceutical Wholesale I‘!etwork) is a Dutch private limited company with 14 member wholesalers. Tiie group, established in 1990, has wide European coverage (e.g., France, Spain and Portugal) but most of the companies are small with low ma:ket shares [45]. ERPI (Eurofiene de Reparti- tion Pharmaceutique et d’lnvestissements) was set up in 1989 to link several French wholesalers to a Portuguese and an Italian wholesaler. The members now hold market shares of around 30% in France, 14% in Italy and 4”/~ in Portugal. ERPI, a holding company with a complex structwe, aims to acquire cross-share holding stakes in other pharmaceutical distributors and achieve pan-European coverage [45].

Finally, PAG (Pharma-Holding AG), which appears to be thr mwt sigoiticant of the new ventures. Established in 1990, it now has four members: U&hem (the second largest wholesaler in the UK), OPG (a leading, co-operative, wholesaler in the Netherlands), Egwa-Wiveda (a leading wholes&r in G&nany), ?zxl Galenica Holding (a leading Swiss wholesalerj. One assei is a 5&i&& boiding in the leading German wholesaler, Anaag (45.461. A number of wholesalers in Italy, Spain, Belgium, France and Auslria are reported to have shown interest in joining PAG 1371.

Working through international associations is a third way to intemationalise. With increasing harmonisation, more and more companies share co-n objectives of economies of scale in sourcing products. joint acquisitions and single-point negotiations with manufacturers for pan-European distribution. Therefore, over the last 34 years several more loosely formed associations have been created. These associations are not limited or holding companies, instead member companies try to co-operate in areas of common interest.

Two associations are worth mentioning: Tredimed. a French-based wholesaling association. is an alliance between the UK wholesaler AAH (26% ofthe UK market), the French wholesaler OCP (39% of the French market and the biggest pharmaceutical wholesaling operation in Europe) and the German group, Gehe (15% of the German market). Formed in 1990, Tredimed was the firs1 significant attempt by leading wholesalers to operate a cross-border association. The association aims to provide bulk purchasing facilities for its members, focusing initially on OTCs [45].

The second association is ORPhE (Organisation des Repaniteurs Pharmacettti- ques Europ&ns). established in 1989. This association has a relatively wide geographic coverage, linking members from France, Spain, Italy, Belgium. Greece and

Germany. Member companies, predominantly co-operatives, are generally small with low national market shares. ORPhE aims to invest in new subsidiaries and Pk.

and to encourage trading among its members [45]*. See also Kennedy [36] for a list

of joint ventures and associations. In the experts’ view. acquisitions of small companies and mergers with larger companies are more favourable ways to become international ihan atlempts to set up a completely new operation in anolher country. It is generally acknowledged that setting up a completely new operation in another country is diilicult. First, it is very

costly. Second. established companies are already powerful and the market is satur- ated, at least in the Northern parts of Europe. Third. a new company lacks knowledge about local requirements. These three factors make it difficult to obtain a

market share large enough to make the project profitable. Setting up a completely

new operation single-handedly in another country is therefore not a realistic way to move into the international market.

Industry experts anticipate that concentration will continue, with the number of wholesalers decreasing by at least another 25 percent by year 2000. In IO years. the

large pan-European wholesalers are expected to come primarily from Germany,

France and the United Kingdom because they have large tinancial bases and home

markets, and necessary technical knowledge. Joint ventures are beginning to become more popular. The advantages are many:

uncertainty is reduced because the company deals with a loca: company. thele are economies of scale in buying groups, information can be exchanged, and joint acquisitions are possible. This alternative is expected ro increase in popularity in the future.

The more loosely formed associations have advantages similar to joint ventures.

These associations are also favourec! by the experts. One major disadvantage. which will probably increase in importance, is that it may become difficult to keep these

associations together as the EC becomes more unitied. One would expect the

members in these associations to have different ideas on how to best da: ivith such a large potential market and the increasing competition. Because of this disadvan-

tage, many companies may instead opt to become international through acquisitions and mergers, or through joint ventures with other companies.

4.4. DiversiJ%x?ion Diversification into related areas. an increasing trend among whoiesalers, is a

third way to meet the new challenges [40]. It czn help meet the need for volume (wholesalers’ margins are often fixed by the local government) and also provide sales

with higher margins. Companies can diversify in three ways: (I) by increasing the

spectrum of services or the choice of goods (A related alternative. but not directly

‘There is also a European aswiadon ofdrug wholesalers (Groupement tnrernational de la Repartition Phamwceutique - GIRP). GIRP war rounded in 1960 and now represenlr the wholesaling industry in

F. Andermn /He&h Policy 27 /,994, 27&292 285

a way to diversify, is also to find new markets for the service or products already provided by the company): (2) by vertical integration backwards, for instance when B wholesaler starts manufacturing generic or OTC drugs; and (3) by vertical integration forwards, for instance when a wholesaler purchases a retail chain to secure deliveries.

According to William Gwtz of IFPW, wholesalers will diversify into distributing new products (cosmetics, toiletries, baby products personal hygiene.); new markets (distributing to hospitals, clinics, nursing homes and homes); and into new business (wdeo tapes, data processmg services, financial services, me&d and surgical SJP_ plies) 1401. Count Van Limburg Stirum of GIRP believes that wholesalers will become more diversified with increased emphasis on generics, and greater exploita- tion of the OTC, homeopathic and veterinary markets [I@

lo some countries the diversification has already started. In the Netherlands, the United Kingdom and Germany, whciesalers are turning to backward integration and are acquiring companies which import or manufacture drugs. For example. the leading Dutch wholesaler, OPG, is very diversified. Resides traditional wholesaling, OPG subsidiaries produce generics, handle parallel imports, produce a range of own-label OTCs, provide medical supplies, and offer a range of services to pharmacists from finance to quality control 1301. Another example of backward iategra- lion comes from the large German wholesaler, Gehe, which in 1989 purchased a 5@X, equity in Azuchemie, the second largest German generic manufacturer. Further, the leading German wholesaling group Merckle includes Ratiopharm, the number one generic manufacturer in Germany 1191. The purchase of pharmacy chains by wholesalers in the United Kingdom and Belgium is an example of forward integration 131. For instance, the UK wholesaler AAH owes, a~(! either manages directly or franchises, over 220 retail pharmacies 1311.

The experts were relatively certain that wholesalers would diversify into new areas, but were split on how they would diversify. The option receiving most votes was paraM importing; followed closely in descending order by pharmacy retailing; other markets (delivery to hospitals and clinics); generic manufacturing; OTC manufxtur- ing and new products (supplying surgical and medical supplies).

5. The Glaxo distribution scheme

5.1. Bacirgromd A few years ago, Glaxo, the second largest phamweutical company in the world,

announced a new approach to supplying its products in the United Kingdom. 00 November I, 1991 Glaxo began supplying its drugs directly to retail pharmacies, using wholesalers only as distribution agents. The main difference compared to traditional wholesaling is that Glaxo continues to own its products held in stock by the agent. Under the coctract the agent has also to sopply information on the sales of Glaxo’s own products as well as those of its. competitors. In line with this, Glaxo has provided tinancial assistance to the wholesalers to set up a computer&d data information system.

Wholesalers .ire getting a tive percent service charge for the distribution and information services. This abolishes the 12.5 percent margin (in the form of a general dis-

286 E A”*,sson,“tw,,h fwiq 27 (1994, 27,492

count) in the previous system, under which wholesalers bought the products from Glaxo and then sold them to the pharmacies, with varying discounts 1471. In 1990 the average wholesaling discount to pharmacies was just over nine percent in the United Kingdom 1481 Under the new scheme p!larmacists will continue to receive discounts on their purchases, but from CLAO rather than from the wholesaler. Glaxo varies the levit of discounts (which are generally much smaller than what the wholesalers offered) depending on the product and on local competitive conditions, as well as order volume.

Initially, Glaxo approached the three national and three large regional full-line wholesalers. These six wholesalers accounted for two thirds of Glaxo’s sales. It has been suggested that Glaxo took a very tough line with these wholesalers, indicating that it might be prepared to take over wholesaling activities itself. The wholesalers had little choice but to accept Glaxo’s proposal or risk losing a large share of their business [49]. They agreed to a trial period of I2 mouths (ending in November 1992).

Why Glaxo introduced this scheme is still somewhat unclear and the company itself is saying little about its underlying objectives. The company has stated that it wants to get closer lo pharmacists and to respond more quickly to local market conditions. Glaxo has also admitted that one of its objectives is to obtain more detailed and up-to-date information on the sales of its own products and those of competitors at the pharmacy level. In this way they can obtain increased control over the kvcl of discounts to pharmacists, which opens the way to local pricing of drugs, depending on competition and order volume. Wholesalers argue that this is an attempt to tackle the growing threat from parallel imports since Glaxo’s two best selling pmd- ucts (the anti-ulcer drug Zantac, and the anti-asthma drug Ventoline) are highly affected by parallel imports. Therefore, Glaxo wants to make the PI purchase less profitable by controlling the discounts of its productsg. Wholesalers also argue that Glaxo wants to gain greater control over the pharmaceutical distribution structure by taking advantage of its IS-17% share of the UK pharmaceutical market. The UK wholesale market is dominated by two companies, U&hem and AAH, with about 30% each of the market. Tbis oligopoly could become a threat to all pharmaceutical manufacturers because of its increasing power. Finally, Glaxo has been evaluating the f40-45 million it gives away in discounts each year to wholesalers and what it gets back in return. Naturally, Glaxo wants to use a part of this huge sum to develop its own business [SO].

The new Glaxo strategy has provoked a heated discussion with pharmacists and wholesalers because it has been seen as a threat to traditional wholesaling ]Sl]. Wholesalers claim that the line balance of discout+ $5 dt risk. They also compktin that they incur more expenses because of the scheme: separate invoicing; weekly data reporting; monthly stock reconciliation; credit control of Glaxo’s sales;, etc. [52].

This approach has also led to arguments between wholesalers and pharmacists. The PSNC (the UK pharmacists’ negotiation body) argues that the wholesalers ought to reduce their old discount thresholds since a Istgc share of I;& has heen transferred to the Glaxo scheme. Otherwise. pharmacists would find it more difficult

-- ‘?his strategy terns to have sunecded for the larger or mukiplc group retailerr. who have dramatically reduced lhcir PI purchases 122).

L Anderrron /“w,,h Pdiey 27 (I*, 271-m 287

to reach the various threshold levels in the old system because Glaxo products are not included (531. Wholesalers have tinnly rejected this proposal. The PSNC therefore claims that Glaxo and wholesalers are profiteering at the expense of pharmacists and that EIO-12 million a year in discounts will be lost to pharnmcists because of the Glaxo scheme and the wholesalers’ refusal to adjust the discount thresholds 1531.

5.2. At leasr six possible outcmnes The outcome of the new Glaxo agency scheme has yet to be seen, and at least six

posslbhtles have been proposed 1481. These outcomes are by no means mutually ex- clusive. First, the Glaxo initiative may succeed, but it is the only company with s&i- cient critical mass to make it work. It has been estimated that this schen~ will not work for companies that have a share of less than eight percent of the market. Glaxo has a share of 15-17% of the UK market, which is more than twice as much as its nearest competitor 150). Because one company is rarely as dominant in a country as Glaxo is in the UK, it is not expected that other companies will follow suit in other European countries. A” alternative is for companies that lack the critical mass to form groups, to set up and operate a similar scheme.

A second possible outcome is that the initiative does not work and that Giaio reverts to a normal wholesaler relationship. The possibility that the scheme may backlire is frequently discussed in the press. Mike Watts, the director of BAPW (which represents the full-line wholesalers in the United Kingdom), claims that the wholesaler alliances now being formed in Europe could soon break the Glaxo supply monopoly in the United Kingdom. The alliances will have a large purchasing pwer, whiih will result in collective purchasing and significant economies of scale [49]. This means that the alliances can import Glaxo drugs from countries where the products are much cheaper (i.e., parallel import) and buy other products in Europe at the best available terms. Pharmacists could also retaliate by dispensing parallel imported products and encouraging doctors to prescribe generic versions of Glaxo products [52]. This has actually been the case for smaller independent retailers, which have felt financially disadvantaged by the Glaxo scheme [22].

A third option is that wholesalers, who are not participating in the Glaxo strategy, could compete by offering parallel imports and generics only. This is not likely since Glaxo has now signed zgreemcnts with about 30 regional wholesalers, besides the six leading wholesalers [4., “‘O. Clearly, one reawn behind the schenx was to make parallel importing and genetic substitution redundant.

A fourth outcome is that the initiative could work so well that Glaxo :preadS tCc idea to Europe, to further combat the parallel imports. There are reports that Glaxo has been considering efforts to implement the scheme in other countries that have a high share of parallel importing, such as the Netherlands. In the Netherlands there are significant inccatives for pharnwcistb to dispxc generics and paral:cl iinpxts 1541. The problem from Glaxo’s perspective is that the company is not as dominant in these countries as it is in the United Kingdom, and wholesalers in other countries “my well be strong enough to refuse to co-operate.

288 E Adcmmn/HeaM Policy 27 (1994) 271-292

A fifth possibility is that the scheme could succeed for a few years until the EC is better integrated in tertns ofcross-border trade and prices. Local initiatives, such as the Glaxo scheme, would then disappear.

Finally, the legality of the Glaxo approach is still in question. Although it has heen

cleared by the European Commission 1551, it may still infringe EC competition rules (Articles 85-86) 1471. It may also be contrary to Article 65 of the Treaty of Rome

1561. No evidence on the success or failure of the first trial year of the new scheme has

as of yet been published (with the exception of PI. outlined above and in note 9). but the outcome is being closely watched by other phartnaceutical manufacturers and wholesalers.

53 The experts’ view Industry experts listed several reasons why Glaxo created this scheme: to gain

more control over the increasingly dominant whokwlers; to improve their control over discounts; to obtain better sales data, control oi sales of their products, and to

control cross-border trade (parallel importing).

The majority of the 20 experts believe that the new Glaxo scheme may spread to

other European countries. If the scheme is spread to other countries it will most likely be by Glaxo, because most experts do not anticipate that similar schemes will

be introduced by ot!w major European pharmaceutical companies or by col- laborative groups of companies. Many participants of the survey suggest that it is still too early to predict, particularly since the strategy may not be viable in other

locations vhere Giaxo does not enjoy so dominant a market share.

On whether the Glaxo scheme poses a serious threat to traditional wholesaling or

not, the industry experts have differing opinions. Some see it as a serious threat but

others believe it is just a temporary initiative tltat will either fail or eventually become redundant as the EC becomes more harmonised.

In conclusion, the outcome of the Glaxo scheme is still very uncertain. Glaxo may try to implement this strategy in other countries but it may be more problematic

because it requires control of at least eight percent of the local market - an advan-

tage Glaxo does not enjoy outside the United Kingdom. The experts do believe, however, that even if the Glaxo agency scheme fails, it will still serve as the stimulus for many future ideas on how to improve the distribution ofdrugs. If similar agency schemes are implemented by all the major manufacturing companies, or rf manufacturing companies fortn wholesaling groups, this could pose a very serious threat to

traditional wholesaling [48).

6. Diselesion

The unification of the member states in the EC will eventually result in reduced

barriers to the movement of goods, capital, services and people. The economic unili-

cation of the EC is expected to act as a catalyst for change in all areas, including

the wholesaling sector. At the same time, the wholesaling sector is restructuring, to

some extent independently of the unification of the EC countries. The rllect of these rapid changes is unclear. This study has therefore attempted to identify and assess

F. Andmm / ffealrh P&y ~7 I IV’?,, 271492 28.9

the seriousness of current and future trends in pha:macczical wboksaliog ia EWOpe.

Both our review of the literature and the opinions of the industry experts indicate that the wholwaling sector is in a very dynamic state, with many new ideas and strategies being tested. Many want a piece of the huge pharmaceutical market at stake: pharmaceutical companies, parallel importers, short-line wholesalers, wholesalers in other countries, and retailers. New ways of distributing pharmaceuticals are being implemented: the Glaxo distribution scheme and backward integration by co-oper&e retailers are two examples. Traditional full-line wholesalers are also being pressured by the gvemments, who want to Rnd new and more cost-effective ways of distributing pharmaceuticals.

The experts viewed the increasing pressures on the wholesale gross margin as the most serious threat to traditional wholesaling. They claimed that rhe gross margins are already low, and if the governments decrease them even further many smaller companies will go oat of business. Another very serious threat comes Crnm the manufacturers, looking at new ways to distribute the drug% Some of the wholesaling experts argued that the government and the manufacturers do not realise that distributing drugs via wholesalers constitutes the mos: cost-effective way of distributing drugs. More immediate threats, but less likely to pose any serious threat in the long nm, were parallel importing, ‘cream-skimming’ by short-line wholesalers and ntail- ing chains integrating backwards into wholesaling. The first two threais will probably disappear when the EC becomes more uniform in live to ten years, and when the large full-line wholesalers will be able to provide the customers with detailed management information (something which is too expensive for smaller companies). The third threat is not a serious one for the larger wholesalers, because these retailing chains are still too small in many countries and lack enough starting capital. The retaders are therefore more likely to start collaborating with the large wholesaling companies.

To counteract these pressures and threats, traditional full-line wholesalers are trying to find new markets, for irstance establishing themselves in other countries, diverting into parallel importing, providing management information, or integrating retailing or manufacturing into their business strategy. New techniques, such ds computers and automatic picking, are also being implemented. The experts argued that the best way for wholesalers to increase their competitiveness is to become troly international players, in order to reacu the necessary critical mass. This can be achieved mainly through acquisitions of, or mergers with, wholesalers in other countries. Joint ventures are also likely to become more important in the future. Another method, strongly supported by ibe experts, is to provide the customers (mainly the manufacturers and retailers) with detailed sales data and other management information. A large-scale investment in education, computers and other equipment would then be required, something that the majority of smaller companies, parallel importers or short-line wholesalers cannot afford. The experts did not believe so strongly, however, that an additional way for wholesalers to survive would be to divert resources and integraie into retailing or manufacturing.

Finally, the new Glaxo agency scheme of direct distribution of drugs has aroused a heated debate among experts, manufacturers, wholesalers and retailers. The com-

290 E Andemson/Heol~h P&y 27 (1991) 271-292

ments from the experts were very varied and many experts argued that it is still too early to predict the outcome of the trial. Many experts believed. however, that the Glaxo aency scheme may spread around Europe in one way or another, via Glaxo or through manufacturing companies collaborating in a joint wholesaling effort. If this would be the case, many wholesalers may tind themselves without any customers in the future.

Naturally, the topics identified and dixussed in this paper are not a complete list. We may have failed to identify an important future trend that may also have been overlooked in the literature and by the experts WC consulted. This is one weakness inherent in trying to foresee the future for an industry which is changing so rapidly. Further, the sample of key individuals is not randomly selected. Therefore, the epi- nions expressed by thrr 20 experts may not be representative of the entire wholesaling sector. But, because our sample covers a fairly heterogeneous group of people we believe it to be representative.

In conclusion, most players in this sector are very uncertain about the future of wholesaling and how they will be affected by changes in their industry. Given the dynamic state of European whoIesaling, it is essential that these companies continue to be proactive and responsive to new ideas. This article identified and listed a number OF future thr%ats and opportzdties for traditional pharmaceutical wholesaling. If a company neglects to look at these threats and opportunities seriously, they may find themselves in a very difficult situation. Particularly the next 5-10 years will see major changes in European pharmaceutical wholesaling.

7. Acknowledgement

The author is grateful to Annabelle Shakespeare for excellent research assistance, John Hutton for valuable comments, and to the participants of the survey. Financial support from Apoteksbolaget AB (The National Corporation of Swedish Phar- macies) is gratefully acknowledged. The views expressed in this paper do not necessarily reflect those of Apoteksbolaget AB, Battelle MEDTAP, or the author’s current employer, Astra Hlssle AB.

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the distribution of pharmaceuticals in europe — current and future trends in wholesaling

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