Healthcare in Transition:Threat or Opportunity for Pharmaceutical Wholesalers in Europe

MA-Thesis / Master von Andreas Cmolik

Introduction:

Tradition and Change:

Many of the well established Western European pharmaceutical wholesalers are companies with strong local traditions and roots dating back for several decades and more. GEHE Pharma Handel GmbH, one of the top pharmaceutical wholesalers in Germany, was celebrating its 175th birthday in 2010. AAH Pharmaceuticals Ltd., the UK’s leading distributor of pharmaceutical and healthcare products, was established in 1923, and Herba Chemosan Apotheker-AG, Austria’s largest pharmaceutical service and trading company, was established in 1916 as a cooperative from pharmacists for pharmacists. But having years to add does not equal getting old, as we will see in the course of this study.

The times of transformation free eras have long gone, stability is not the norm anymore and the challenges being faced today are completely different. The globalisation of markets and competition has forced and still ‘is forcing firms to make dramatic improvements not only to compete and prosper but also to merely survive’.

For many reasons, which will be detailed throughout this study, pharmaceutical wholesalers across Europe have been facing the need for improvements to secure sustainability and growth. In addition, ‘there has been significant consolidation of pharmaceutical wholesalers in Europe … affecting not only the distribution of market share but also the strategic orientation of the surviving firms’.

Healthcare in Transition:

Not only within the European Union but also across the entire OECD countries, healthcare is one of the largest industries with a dominant position in terms of job creation and a dynamic force in terms of innovation. Despite significant achievements in the health status of populations, concerns prevail on how resources are used in healthcare and how to guarantee an efficient and effective use of modern medicine.

The weight of healthcare expenses in relation to GDP has increased the demand to harmonise internationally different definitions and improve the cross-national comparability of data on healthcare expenses. Consequently, the OECD has developed the ‘System of Health Accounts’. This manual provides a common framework and supports the international comparison of healthcare data across countries and over time.

A combination of medical progress, demographic changes and shifting social expectations are the major drivers of increasing health expenditures in developed countries. Within the EU-15, spending for healthcare has a significant share in percent of GDP. In 2005, the average healthcare spending in the EU-15 was 8.3% of GDP, leading to an increased dominance of expense controls (Figure 1:Total spending on healthcare in % of GDP (2006)).

The pharmaceutical market is an integrated part of the overall healthcare market and driven by innovation and milestone improvements as is the overall healthcare market. The pharmaceutical market is the major reference market for the pharmaceutical wholesale industry.

The standing and weight of the pharmaceutical market is expressed in the pharmaceutical quota. The pharmaceutical quota reflects the ratio of pharmaceutical expenses in comparison to the overall expenses for healthcare (Figure 2: Pharmaceutical expenditure in % of total health expenditure (2006)).

Pharmaceutical expenditure varies significantly across Europe with a record share of 31.9% of total health expenditure in Hungary. The focus on pharmaceutical spending has become of growing importance, as governments are increasingly facing budget problems in financing healthcare activities for their citizens.

The prices of established medicines are generally declining over their life cycle but pharmaceutical spending is triggered by non-cyclical trends, such as increasing life expectancy in industrialised nations and the introduction of new and innovative medicines at increased costs. The global pharmaceutical market will continue to grow and drugs will still be perceived as an efficient method of treatment compared with other types of medical care (Figure 3: Life expectancy in years at birth (2008)).

Total spending on healthcare in relation to GDP and life expectancy is still relatively low in Central and Eastern Europe (CEE). However, the higher share of spending in pharmaceuticals can be interpreted as reduced spending on other forms of treatment and thereby increasing the importance of pharmaceuticals.

Reduced average life expectancy in CEE shows that there is still a need to draw level with the rest of Europe. These trends will ultimately support the growth of pharmaceutical markets but further increase the pressure on local governments to finance additional healthcare.

Research Objectives:

Pharmaceutical wholesale distribution is an unknown area for the general public, and very often for other players in the healthcare market and politicians too. Little is known about this vital business-to-business link between pharmaceutical production at the beginning and dispensing of drugs at the end of the supply chain. Pharmaceutical wholesale distribution has a long-history in Europe and repeatedly proved to be the most efficient bridge between production and point of sale (PoS) or point of dispensing (PoD).

Within the last years, the topic of changes in European healthcare has become of ever growing importance. The pace of change has increased exponentially in some countries. In a functioning healthcare system, pharmaceutical wholesalers are fully embedded and thus significantly affected by a changing environment.

Risks and opportunities go hand in hand while governments are changing their policies in healthcare spending, pharmaceutical manufacturers are changing their mode of operating and patients and consumers are changing their ways of receiving or buying pharmaceuticals.

The aim of this master thesis is to highlight the role of pharmaceutical full-line wholesalers, to give detailed analyses of an ever-changing healthcare world and map out the most relevant threats and opportunities for European full-line pharmaceutical wholesalers.

Structure:

This master thesis comprises of five chapters. Chapter 1 provides an introduction to European healthcare and explains the purpose of this thesis. Chapter 2 focuses on the definition of full-line pharmaceutical wholesalers, the specific functions they hold within the pharmaceutical supply chain, and the value added they provide. Chapter 3 investigates the major trends leading to a changing healthcare environment, evaluating the effects of changing demographic compositions, governments’ needs to restrict healthcare spending and the consequences on pharmaceutical wholesalers. Chapter 4 deals with opportunities of growth to sustain the success of European pharmaceutical wholesalers in the long run: strategies for liberalising markets, the creation of value added services, vertical integration and the need to grow outside Europe are on display. Chapter 5, finally, summarises the findings of the master thesis.

Data Source:

Data for the analysis is mainly based on European drivers of healthcare systems. Analysis on national and corporate level has been included where applicable. Global research data, with a special focus on Brazil, Russia, China and India, has been analysed for the purpose of evaluating growth strategies for pharmaceutical wholesalers outside Europe.

The reviewed literature has been published by first-in-class experts in healthcare such as IMS Health, the world’s leading provider of market intelligence to the pharmaceutical and healthcare industries, GIRP, the umbrella organisation of pharmaceutical full-line wholesalers in Europe, OECD, the Organisation for Economic Co-operation and Development, and high-ranking consulting corporations such as Deloitte Touche Tohmatsu, Roland Berger Strategy Consultants and The Boston Consulting Group.

A diverse set of sources was used to provide a comprehensive analysis on changing healthcare markets and the threats and opportunities for pharmaceutical wholesalers.

Table of Contents:

Text Sample:

Chapter 2.1, Pharmaceutical Supply Chain:

Although the pharmaceutical supply chain has different peculiarities depending on national legislations and market structures, a general supply chain organisation exists and is to a large extent valid across Europe.

Figure 4 shows that the origins of the pharmaceutical supply chain are at the manufacturing level. Pre-wholesaling is a preliminary stage of wholesaling and usually covers the logistics processes that have been outsourced by manufacturers. Phoenix, one of the three large pan-European pharmaceutical trading companies, explains the growing importance of pre-wholesale activities: ‘Today, there is not a single country in Europe where it is not in manufacturers’ interests to outsource their entire distribution and logistics requirements, whether for drugs, medical products or veterinary pharmaceuticals, to a specialist company operating within an efficient pharmaceutical logistical system. This logistics partner takes over responsibility for distribution to all wholesalers.’ In addition to basic logistical services, such as the professional storage and transportation in accordance with legislation and special requirements for handling drugs, pre-wholesalers offer tailor-made solutions to the pharmaceutical industry. Tailor-made solutions include among others the tracking of medicine deliveries, monitoring of temperature, humidity and exposure to light, and country specific packaging and labelling.

2.2, Full-line Pharmaceutical Wholesalers:

Distribution of pharmaceuticals is the core business of full-line pharmaceutical wholesalers. They provide the most important link between pharmaceutical manufacturing and the point of sale (PoS) and point of dispensing (PoD).

‘The activity of pharmaceutical full-line wholesaling consists of the purchase, warehousing, storage, order preparation and delivery of medicines. Pharmaceutical full-line wholesalers carry and distribute the complete assortment of products in range and depth within the framework set by the authorities and the market to meet the needs of those with whom they have normal business relations. In addition to delivering all medicines in their geographical area of activity on the same day/within less than 24 hours, pharmaceutical full-line wholesalers provide working capital and extended financing services, funding of stock and receivables of pharmacies and health care professionals’.

Pharmaceutical wholesalers provide not only state-of-the-art logistics services but also a wide range of value added services to various stakeholders in healthcare. Tailor-made solutions for the pharmaceutical industry are becoming increasingly important and full-service support beyond logistics competencies has long been established for pharmacy customers. Value added services are no longer mere add-ons to the logistics services but are vital competitive assets. Wholesalers are not only creating benefits down-stream in the supply chain but also across the healthcare market including the final consumers of medicines.

2.3, Short-line Pharmaceutical Wholesalers:

Another mode of wholesaling is provided by short-line wholesalers, which are the cherry pickers of pharmaceutical wholesaling. Short-liners restrain their product portfolio to a specific range of pharmaceuticals only. Consequently, they benefit significantly from a narrow financially driven product portfolio and slim cost structures. By contrast, full-line wholesalers offer the entire spectrum of medicines in order to guarantee supply and to support the health of the population. Service offers from short-line wholesalers are either minimal or not existing.

National governments usually strive to achieve three targets concerning the pharmaceutical supply chain: drug safety, security of supply and quality of supply. Short-line wholesalers cannot guarantee the security of supply as they only provide a narrow range of medicines. Their focus on highly profitable products negatively affects the product portfolio of full-line wholesalers, which need the profitable products to be able to stock and distribute unprofitable medicines. Hybrid costing has been the economic baseline to guarantee the security of supply. To ensure that supply of medicines is guaranteed, several European countries have legally obliged wholesalers to provide the full range of medicines to pharmacies. France, Italy, Belgium, Greece, Portugal, Spain and some of the new EU member states have implemented these public service obligations.