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Pharmaceutical Drug Shortages?

Recently reported in the press (see Times, 27/02/2011) of a current shortage of drugs in the UK. This apparently has been brought about by the UK being one of the cheapest in Europe and subject to exporting of certain medicines to countries where the price is higher and thereby claim higher reimbursement in countries of destination.

It is not clear whether these ‘exports’ are opportunistic sales by chemists or authorised parallel traders into those countries. This seems to be the obverse of the parallel trade into this country a few years ago when the price of medicines in the UK was high. Then, the industry moaned bitterly that their trade and profitability was being severely disrupted. I do not recall there being any complaints of drug shortage in those countries of origin.

Now with the opposite situation complaints are coming from users of prescription drugs. But what is the reality of the situation: is it just a local matter or does it concern both exporting and importing countries. With price differentials likely to continue, the problems surrounding exporting and importing medicines will be perpetuated.

However one can recognise a common thread in both these scenarios and they both relate to pharmaceutical companies trying to protect their profitability. It is all a part of the industry’s antipathy towards parallel trade.

Companies do not like to see their products moved to a country where they can be obtained relatively cheaply. So, they impose quotas to restrict this flow. If there would be a common price throughout the EU this action would be unnecessary and parallel trade would disappear. But then to do so would be even more damaging to the profitability of the producers. It is all to do with profit, but who is to legislate against that.

The drug shortages reported on are caused by drug companies imposing quotas to stop speculators from “profiteering” from price differentials in same brand drugs in the EU. For years, the exchange rates dictated that the UK was one of the most costly countries in the EU for drugs. Thus, parallel trade saw some same brand drugs coming from EU member states at lower prices. This was sanctioned by the UK government who introduced a parallel import licensing scheme for such products. It can even be said that government action encouraged parallel trade by adjusting reimbursement to chemists to allow for such products.

Now, the exchange rate dictates that the UK is one of the cheapest countries in the EU. Therefore same brand products will often be cheaper than the equivalents in other EU member states. So, it is quite natural to expect speculators to take advantage of this situation, ie, buy at the lowest price and sell at the highest. This is normal business practice and is encouraged by the EU as representing cross border free trade activity.

A government all-party Pharmacy Group, chaired by Keith Barron has been set up to examine the shortages. It would appear that steps taken to mitigate the problem have been to impose quotas. This, in my view, is a significant contribution to the problem, not the solution. The medicines in short supply are all patent protected single source products. Therefore alternative products are not available.

In normal market conditions manufacturers confronted with increased volume requirement, for whatever reason, would deal with it by increased manufacture and supply. However, in this situation the increases have been brought about by possible parallel exportation to EU member states. These products would be replacing those locally available that would have otherwise been sold at the higher price. This would result in a reduction of profits generated by these products which the industry generally finds unacceptable.

So, it all boils down to profits, irrespective of the problem it may cause to the ultimate user. There has been no published estimate of the loss in revenue of this practice to the industry, but I suspect that it is relatively small. There will be no volume loss to the manufacturers; just a switch from one EU member state to another.

The action by speculators is not illegal, immoral or even unacceptable. However, one may question the imposition of quotas as a restriction of trade at the very least and the real cause of the shortages. The manufacturers are in a monopolistic situation and can dictate what action taken. So, who are the profiteers? After all, anything that impinges upon the profitability of the industry is going to evoke a reaction.

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