Pfizer's example proves contagious

When Pfizer took direct control of distribution of its medicines across the UK last spring, it soon noticed curious patterns in orders for Genotropin, a growth hormone for children.

One pharmacy requested 300 packets at a time, although the drug is so rarely used it was unlikely it would have had more than a single prescription to fulfil each month in the community it served. The pharmacist was ordering large quantities of the drug to resell to other pharmacists at a higher price.

This chemist was part of a relatively widespread pattern among retailers and wholesalers alike of reselling medicines within the UK, and even elsewhere in Northern Europe and North America where they can realise still greater profits.

While legal, the trade was one of several practices that reduced Pfizer's margins, as well as leading to supply shortages for which it would be criticised. But until this year - in line with standard industry practice - it sold its drugs to wholesalers and had no influence over their subsequent distribution.

"We got the blame but we had very little control," says Dave Watson, European commercial director for Pfizer. "The wholesaler decided prices and stock availability."
Pfizer decided to change its distribution practices, retaining ownership of its medicines until they reached pharmacists, and paying a fixed fee for their distribution via a single wholesaler, UniChem. That enables it to reduce and to adapt the discounts it offers, to control supplies more tightly and to build closer links with pharmacists.

But its decision to sell directly to pharmacies has had wide ramifications. It has meant imitation by other pharmaceutical companies, concern by medicine distributors and pharmacies, and a probe from the Office of Fair Trading concluded this week.

UniChem's rivals complain Pfizer's exclusive arrangement is particularly invidious, since its medicines represent about 10 per cent of all prescription medicines in the UK. Pharmacists express concern they too have been squeezed and are dependent on a single distributor.
The OFT is now calling for the distribution arrangements to be reconsidered as part of negotiations currently taking place on the complex British Pharmaceutical Price Regulation Scheme (PPRS).

In the current system pharmaceutical companies negotiate a price with the Department of Health. The pharmaceutical companies are allowed to add 12.5 per cent to cover distribution costs. Most companies then sell their products at this discount to a network of wholesalers that supplies the medicines to pharmacies.

Panos Kanavos, an academic at the London School of Economics specialising in medicine pricing, says the discount is about twice as high as in the rest of Europe, and still greater than US levels. "It's a source of inefficiency for the NHS," he says.
But pharmaceutical wholesalers say they typically retain only 1.5 per cent, passing on most of the discount to pharmacists.

Sue Sharp, chief executive of the Pharmaceutical Services Negotiating Committee, which represents pharmacies in their reimbursement arrangements with government, says 10.5 per cent of the discount is in turn deducted from the payment made by the NHS to her members on each medicine prescribed. She says that leaves most with little or no profit beyond the 94p fee they receive on each prescription fulfilled. She says Pfizer has undercut the arrangement still further, with discounts as low as 8.5 per cent, which can leave pharmacists out of pocket. "There is no profit or a small net loss."

But pharmacies and wholesalers gain from discounts on off-patent generic drugs with less draconian reimbursement rules.
They are also increasingly vertically integrated - through joint ownership of UniChem and Boots or AAH and Lloyds, for instance - which adds greater scope to maximise returns from the system.

By Andrew Jack
Source :
If Pfizer now gains from using the different discounts to its own advantage, many see the company's strategy as driven by a desire to squeeze out "parallel traders," the arbitragers who buy medicines in EU countries where they are sold cheaply, in order to repackage and resell them in higher priced markets.

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