Industry Example: The European Market for Pharmaceuticals for... · The European Market for...

Vorlesung Western European Business

Professur für BWL, insb. Internationale Wirtschaft Folie 1

Industry Example:

The European Market for Pharmaceuticals



Agenda

1. The National Markets for Pharmaceuticals

2. EU Pharmaceutical Policy

3. The Market for Pharmaceuticals in Europe

4. Future Perspectives



1. The National Markets for Pharmaceuticals



Agenda1. The National Markets for Pharmaceuticals

1.1. Definition and Classification of Pharmaceuticals1.2. General Characteristics of the Market 1.3. Price Regulation for Pharmaceuticals1.4. Market Structure






1.1. Definition and Classification of Pharmaceuticals

Definition of a medicinal product

Any substance or combination of substances presented for treating or preventing disease in human beings or animals

Any substance or combination of substances which may be administered to human beings or animals with a view to making a medical diagnosis or to restoring, correcting or modifying physiological functions in human beings or in animals is likewise considered a medicinal product

(Directive 65/65, 26 January 1965, Art. 1 II)



1.1. Definition and Classification of Pharmaceuticals

Classification

Status of release:

prescription over-the-counter (OTC)

Distribution channel:

Financing:

Product:

restricted to pharmacies

no restriction

refunded by health insurances

paid by the consumer (self-medication)

original generic



1.2. General Characteristics of the Market for Pharmaceuticals

Area: health careSupply: Science-based & innovation intensive industry

High costs for R&Dfix costs often at 70 % of the total costslow marginal costs (20-30%)

⇒As imitation of a product is simple and cheap patent protection necessary!

Demand is split between the patient (consumer), the doctor (product selection) and the health insurances (financing)⇒Different price sensitivities



1.2. General Characteristics of the Market for Pharmaceuticals

Source: Attridge (2003)



1.3. Regulation for Pharmaceuticals

Guarantee access to safe and efficacious drugs to the largest possible share of populationCounter information asymmetry (producers vs. doctors, consumers)⇒ Safety of drugs⇒ Prices set too high?

Contain costs as price sensitivities too lowDeal with the temporary and product specific natural monopoly⇒ Patent regime - incentives for R&D⇒ Countervail monopolistic pricing⇒ .. but guarantee adequate incentives for research

Regulation on pricing, labelling, procedures for product approval, patent regime



1.4. Market Structure

Heterogeneous national markets

Different health care systems Different regulation policyDifferent kind of disease incidence Different standard of livingDifferent distribution costsDifferent demand elasticitiesDifferent prices

⇒ Market segmentation




2. EU Pharmaceutical Policy2.1. First Phase: History and Objectives2.2. Second Phase: First Steps towards a Single Market2.3. Third Phase: A New European System for the

Authorization of Pharmaceuticals (since 1995)2.4. Results and Remaining Problems





2.1. First Phase: History and Objectives

Background: Thalidomide Disaster in the early 1960s⇒ Directive 65/65 EEC establishes Host Country Control:

“No proprietary medicinal product may be placed on the market in a Member State unless an authorisation has been issued by the competent authority of that Member State.” (Art. 3)Objective:

⇒ Protection of the patient, public health to be guaranteed⇒ Control may not hinder the development of the

pharmaceutical industry or trade in medicinal products within the Community

⇒ Harmonization of procedures not envisaged



2.2. Second Phase: First Steps towards a Single Market

ObjectiveFacilitating the movement of pharmaceuticalsPreventing double controls

⇒ Introduction of a procedure for the mutual recognition of authorized pharmaceuticals within the European Community by the directives 75/318/EEC and 75/319/EEC

ContentRecognition not automatically, but the holder of the authorization has to apply and testify that the dossier is identical to that accepted by the first Member StateThe Member State may reject the application for reasons of public health

⇒ Creation of a “Committee for Proprietary Medicinal Products” (CPMP) as a monitoring body



2.3. Third Phase: Regulation 2309/93, directive 93/39/EEC

European system for authorization: two routes1) Centralized Procedure:

Creation of the “European Agency for the Evaluation of Medicinal Products” (EMEA)

Applications are made directly to EMEA

Compulsory for products from biotechnology, optional for other innovative medicinal products

Procedure covers around 10% of medicinal products

⇒ Europeanization of the authorization procedure



2) Decentralized Procedure: Mutual recognition mechanism

Marketing authorization is obtained from one Member State and extended to the othersAssessment report of the country with the initial market accession of the product is recognized within the EUBut: Authorization must be obtained in the concerned Member StateAccession can only be refused for reasons of public healthIf so, EMEA will initiate an arbitral procedure where the result is binding for the Member StatesProcedure covers 90% of pharmaceuticals

2.3. Third Phase: Regulation 2309/93, directive 93/39/EEC



2.4. Results and Remaining ProblemsEC regulations only affect the access of pharmaceuticals on national marketsDirective 89/105/EEC (“Transparency-Directive”):

- Price- and profit regulation & reimbursement policy of a Member State must be transparent

- National and foreign products must be treated equally (no discrimination)

- Health sector remains national affair, no harmonization intended!

⇒ Free movement of pharmaceuticals vs. regulated prices on different national levels

⇒ Parallel imports, re-imports as a result of different price regulations in the Member States



2.4. Results and Remaining ProblemsReview of EU Pharmaceutical Legislation from 2001-2004Objectives:

acceleration of authorization procedures Reduce bureaucracy for pharma companies in order to enhance international competitiveness

Regulation 726/2004: community procedures for authorization and supervision establishing European Medicines Agency EMEA

in force since May 2004Directive 2004/27/EEC and 2004/28/EEC: Community code concerning medicinal and veterinary medicinal products

in force since October 2005



2.4. Results and Remaining ProblemsMajor changes:

Accelerated authorization procedures Centralized route of authorization is mandatory to

medicinal products concerning rare diseases, and all products dealing with cancer, AIDS/HIV, diabetes, neurodegenerative sicknesses – since november 2005From May 2008: other immunity-deficiencies diseasesReinforcement of the Role of the European Medicines Agency

Labelling of productsImprovement of products safety

Databases for adverse reactionAll three years reports on product safety (before: 5 years)

⇒ National agencies lose power, EU enlargement can be dealt with





3. The Market for Pharmaceuticals in Europe3.1. Key Players3.2. Pricing & Parallel- / Re-Imports3.3. The Generic Market3.4. The Significance of Self-Medication3.5. Strategies of the Supply-Industry3.6. Strategies of the Wholesalers & Retail implications




3.1. Key Players: supply-side (2004)

Company Pharma turnover1 Pfizer/US 42.32 GlaxoSmithKline/ GB 30.03 Sanofi-Aventis/F 25.44 Johnson & Johnson/ US 24.55 Merck &Co/ US 18.5..15 Boehringer Ingelheim/Germany 8.2..17 Bayer/Germany 7.218 Schering/ Germany 4.9..22 Merck KGaA/Germany 3.5

Source: IMS, Manager Magazin



3.1. Key Players: wholesale


largest 3 wholesalers have 60% market share, about further 1000 wholesalers Comparison: in US 90% - concentration much higherPosition in EU: 1) CELESIO (former GEHE) 2) Alliance UniChem 3) Phoenix



3.2. Pricing

Pharmaceutical prices



3.2. Pricing

Price structure in Europe – percentage shares



3.2. Parallel- / Re-Imports

Definition:Wholesale importers obtain supplies of standard brand-name medicines in countries where these products are cheap and sell them in countries where the market prices are higher

European Court of Justice: Parallel importation of a medicinal product is a legal form of trade

⇒ Price decrease and price adjustment within the EU, consumer and health care system profit by falling prices and a bigger range of products

⇒ Decreasing profit margin for the industry, less investments for R&D? European competitiveness in danger?




Market Shares

Source: Institute of Health Economics, Sweden



3.3. The Generic Market

Drugs which are bioequivalent to formerly patented drugs

Competitive impact of generics depends on brand loyalty and price sensitivityApproval of generics according to EC Law:

– Replication of the extensive clinical trials is not necessary to obtain the original marketing approval

– Manufacturers only need to show “bioequivalence”with the original branded “reference” product (EC Directive 65/65, article 4.8(a)(iii))




Increasing importance of the generic marketStriking financial constraints of the health care systemsIn most countries promotion of generics as part of overall health care reformHigh number of running out patents

Generics turnover in Europe 2003




2003: generics in the pharma market (EurActiv)

Generics in the pharma market in %

0 10 20 30 40 50

ItalySpain

PortugalFrance

NetherlandsUK

DenmarkSweden

USAGermany




Data protection: set at 8+2+1 year ⇒Generics can introduce an authorisation request 8 years after, ⇒start the marketing after 10 years, ⇒ if new therapeutic indications are authorised, protection

extended to 11 years

Problem Manufacturers of original products remove their product from the market before the patent expiresGeneric manufacturer’s application can be rejected as there is no longer a reference product on the market



3.4. The Significance of Self-Medication

Promotion of self-medication as a possibility to complete the Single Market

Interesting for industry as distribution chain does not contain doctor and health care system any more; buyer is the patient, product is not prescription bound

⇒ Different health care systems do not matter any more

⇒ No price regulations in most of the countries

⇒ Commission tries to abolish remaining price regulations and to establish normal market mechanisms (directive 92/26 intends to harmonize the classification of the products into OTC- and prescription bound products, Switch-Guideline)



3.5. Strategies of the Industry

Strategic alliances in certain fields (common research projects, common distribution channels,…) Increasing concentration of enterprises on the horizontal level (competitive size, extension of the product range, extension of the market share, synergies) e.g. Schering: Merck vs. Bayer 03/2006“Vertical” integration of generics and original pharma firms, e.g. Novartis acquires Hexal AG and Eon Labs in 2005 Novartis’ Sandoz division: largest generics firmBut: Search for partners particularly in USA due to legal diversity in Europe and lower venture capital

⇒ Decreasing attractiveness of Europe as a location for R&D



3.5. Strategies of the Industry

company Pharma turnover1 Pfizer/US 42.32 GlaxoSmithKline/ GB 30.03 Sanofi-Aventis/F 25.44 Johnson & Johnson/ US 24.55 Merck &Co/ US 18.5..15 Boehringer Ingelheim/Germany 8.2..17 Bayer/Germany 7.218 Schering/ Germany 4.9..22 Merck KGaA/Germany 3.5




3.6. Strategies of the Wholesalers

Concentration process because of cost pressureWholesalers mostly operate on national markets, but: tendencies towards horizontal integration Vertical backwards integration (takeover of the producer’s logistic), also forward Integration (into retail)




e.g. Celesio AG (former GEHE): leading pharmaceutical wholesaler in Europe (15 countries retail and whole sale & „solutions“) Celesio and Phoenix (no.2 in germany) accused of price fixing behaviour in Germany to prevent entry of AllianceUniChemApril 06 March 2006: Celesio against merger of AUC with Boots in UK – appeals the decision April 2006: acquisition of two Danish companies: Max Jenneund K. V. TjellesenMay 2006: acquistion of Pharmexx GmbH: one of Europe's two leading providers of sales and marketing services for the pharmaceutical industry





Position in EU: 1) Alliance Boots2) CELESIO (former GEHE) 3) Phoenix



3.6. Changing retail

Chain pharmacies where allowed:



3. Summary


Still heterogeneous national marketsStrong differences in pricing regulation lead to different price levels BUT:

Integration on supply and wholesale level through M&AsParallel trade slowly leads to price convergence

Problem: incentives for R&D are reduced as original products are substituted by generics, and lower prices due to pricing regulation and parallel trade




E-commerce and mail order as the future?

Case C-322/01: Deutscher Apothekenverband eV vs. 08000 Doc Morris NV (11 December 2003)

– Mail order of medicinal products which are subject to prescription may be prohibited by Member States for reasons of public health

– Mail order of medicinal products which are notsubject to prescription cannot be prohibited by Member States for reasons of public health

⇒ Completion of a Single European Market for Pharmaceuticals which are not subject for prescription?

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