Health Reforms in Germany Will Squeeze Parallel Trade Sector and Wholesalers

The pharmaceutical pricing fallout from Germany's health reforms will be felt beyond the branded pharmaceutical firms. Also hit are the country's wholesalers and parallel traders.

Germany's impending health care reform and its specific focus on making savings in the pharmaceutical sector represent a significant threat to the country's parallel trade sector and smaller margins for its wholesalers.

Whilst the research-based pharmaceutical industry has complained bitterly about increases in forced rebates that they are obliged to give the statutory health insurance funds, it will undoubtedly welcome the fact that this increase could spell disaster for smaller and more specialized pharmaceutical parallel traders ('The Pink Sheet' DAILY, July 6, 2010).

The parallel trade sector, which makes its living buying drugs in lower-cost European markets and selling them in relatively price-insensitive markets like Germany, realizes that the pharmaceutical savings packet will force it to adopt a new market strategy.

"We will be significantly affected, because by raising the rebate from 6 percent to 16 percent there is a range of medicines from which we will not be able to earn anything with this type of margin," said Andreas Mohringer, director of the pharmaceutical import company Eurimpharm and chairman of the German Federal Association of Pharmaceutical Importers.

Karsten Wurzer, spokesperson for Germany's largest parallel importer, Kohlpharma, pointed out that in the eyes of the law, parallel importers are considered to be manufacturers, but they are in fact traders. This means that, in view of the fact that their margins are not as great as those of manufacturers, they will be hit harder by the rebates.

"With this rise, and the implementation of a price freeze for three years, they are destroying the market forever," he said. Parallel trade products that disappear from the market will be replaced by more expensive versions from originators, he said. "We are the only form of competition for original manufacturers and government is putting this in danger for no reason," Wurzer said.

At present, pharmaceutical parallel importers are feverishly calculating which products they will have to take off the market as a result of the impending margin squeeze. It is currently not possible to say which specific products will be targeted, Mohringer explained, as the larger parallel importers market a wide range of drugs. "For example, Eurimpharm has 1,800 different packages, we have to look through these and determine which ones can remain in the portfolio and which ones must be discarded," he added.

Mohringer said that the calculation process is complex not only because of the wide range of products, but also because of fluctuating currency exchanges. Parallel importers must then negotiate possible concessions with their distributors. "The entire process will take a number of weeks but it will certainly lead to the disappearance of certain products from the market," Mohringer confirmed.

That the health care reforms will have a negative impact on the competitiveness of pharmaceutical parallel importers is undisputed, but Mohringer stressed that the industry will survive. "It is not possible to assess the extent of the damage yet," he said. The likelihood is that smaller or highly specialized importers that carry drugs that require at least a 16% margin to make them profitable may go out of business.

Mohringer also pointed out that the growth of parallel trade in Germany has led pharmaceutical parallel importers to create large administrative structures. The worsening economic situation for these companies may force some of them to cut jobs, he suggested. In fact, Kohlpharma has already announced that it is set to let 150 employees go, out of a total team of 900. Wurzer suggested that if parallel traders were hit by a 20 percent to 30 percent loss in turnover, arising from the need to slim down their product range, then more jobs would be in the firing line.

Mixed Messages From The Health Ministry

In its health care reform proposal document, published at the start of this month, the federal health ministry stated: "Economic reserves achieved as a result of the re-importing regulation will be increased." Indeed, health minister Philp Roesler talked about savings in the region of an additional €100 million through this mechanism, which relies on the very companies squeezed hardest by increased rebates. The specifics of this plan and how it can be put into action if numerous parallel traders are forced out the market are not yet clear. "We must discuss the details with our government coalition partners," said Stefan Kapferer, secretary of state at the health ministry.

In 2008, the pharmaceutical parallel trade industry in Germany employed some 4,000 people, had a turnover in the region of €2.3 billion and a market share approaching 9 percent. This saves the statutory health insurance system some €300 million of the €31 billion (2009) drug budget. Furthermore, pharmacists are obliged to dispense parallel trade products if they are 15 percent or €15 Euros cheaper than a product manufactured in Germany.

Wholesalers Also Feeling The Pinch

The pharmaceutical saving proposal is also set to squeeze wholesaler margins. Whereas currently wholesalers are permitted a margin of up to 15percent of the manufacturer's price, with a maximum of €72 per drug pack, under the new rules, they will be allowed, in addition to a fixed margin of €0.60 per pack, only 1.7 percent of the manufacturer's price, up to a maximum of €20.40.

Bernadette Sickendiek, spokesperson for the pharmaceutical wholesalers' industry association, Phagro, said that the figures mentioned in the health ministry's proposals, which have been passed by the federal cabinet and must now go before the Bundestag (Lower House), will make life difficult for wholesalers. "We hope that this is not the last word on the matter. As such we do not yet know what the consequences will be, nor the reactions to them," she added.

-- Faraz Kermani ([email protected])