A sub-study from the report “German generics market 2016-2018” recently published by Emergpharma shows interesting facts regarding the effect that parallel trading companies (PT) are having on business results of big pharmaceuticals. Probably a detailed evaluation of this topic has not been carried out to date and the outcomes may be somehow surprising. The sub-study is focused on one of the fastest growing therapeutic categories, antineoplastic and immunomodulatory agents (ATC L).
The analysis includes 226 molecules & combinations marketed by 167 different companies. These findings may be to some extent extrapolated to other therapeutic segments, according to the results of the report.
Considering the data as a whole, parallel trading companies barely accounted for 7.2% of the total market sales in units in 2018, a seemingly modest figure. However, we decided to evaluate these numbers more in detail. Then, it was found that 84% of the standard units sold in 2018 in this therapeutic group have been of products with patent expired, that is to say, molecules with generic versions in the market. Taking this group alone, the original brands (innovators) still kept approximately 30% of the market, while more than two thirds of sales have been made by generic companies. This pattern is very similar in the largest European markets, with the exception of the UK where the penetration of generics is much higher.
"Parallel trade companies accounted for 32% of the total sales of branded products after patent expiration, with sustained growth at least the last 4 years of 1% per year."
It’s not too bad that, despite the presence of -supposed to be- cheaper generics, original brands can keep almost 1/3 of the market in units, and the trend remains stable. Movig a step further, we reviewed which companies were selling these after-patent brands, (Humira, Embrel, Alimta, Mabthera, Cellcept, etc.). Not surprisingly, the companies that had launched these products accounted for the majority of sales, although the parallel trade companies represented 32% of total sales of branded products after patent expiration, with sustained growth at least the last 4 years of 1% per year. This is something that only has been seen in this market.
Traditionally, products that have lost their patent, in addition to "mature" have also been called "cows". The name comes from the fact that, considering that their research and development expenses have already been amortized, and the promotional expenses are considerably lower than those of their peers still under patent, continuing to "milk" them helps to improve the p&l. In fact, as they still keep an interesting price, although it may be lower than they had before the patent loss, they are one of the most profitable business segments and therefore, protecting these sales is one of the company priorities.
First threat is, obviously, generics. Pharmaceutical companies are fully aware of the impact that generics entry have in profits and put all their efforts to delay it as much as possible, understanding that those months / years won meant an important contribution to the bottom line of the p&l. However, the same companies usually consider that the impact of parallel trading is residual, as at the end these companies end up by buying elsewhere and therefore should not have a great influence in global sales. In the macro aspect, this is partially true, although it is quite probable that many financial directors of German subsidiaries have been surprised by the local deterioration of the profit, without fully understanding the reasons. In addition, parallel trading companies can sell cheaper because they buy cheaper, and this price reduction also forces the manufacturer to do so. Compared to generics, the company can always claim differences in quality, but the argument does not hold up against companies that sell the same product with the same origin. In order to quantify, even roughly, the impact on sales of the parallel trading activity, we have also reviewed the prices at which PT companies are selling original branded products and compared them with those of the innovator manufacturer. The range we found is very diverse depending on the molecule and the company, with 80% ranging between 35% and 25% discount, but in some cases differences rise significantly until more than 50%. In other words, the German government benefits from 10% discount more or less (average 30% discount x 33% market) on the purchasing costs of original products with expired patents thanks to the PT, which is not a bad goal. For big manufacturers it may seem a modest figure, but we must bear in mind the mentioned variability, and also, the fact that some subsidiaries are used to grow in single digits and that the big impact of PT is not just in sales but affecting one of the more profitable segments.
Parallel trading provides interesting arbitrage opportunities and costs reduction for European healthcare systems and the example of Germany will probably be followed by most countries soon. It remains unclear yet if it is possible to do something about it, beyond trying to control as much as possible the sales prices in different markets, something that the European Union will not make easy. Maybe the new serialization requirements that came into force in February help in the control, but it's something to be seen.
"Big Pharmaceuticals started long time ago the process to business diversification: CROs, CMOs, hospital and distribution chains, etc. Will be parallel trading companies next step?"
Companies that allocate important items to the analysis of their competitive position should not forget this type of local distortions of their business, which should also be analyzed transversally and probably with a broader regional perspective. Big Pharmaceuticals started long time ago the process to business diversification: CROs, CMOs, hospital and distribution chains, etc. Will parallel trading companies be the next step?