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

Table of Contents

1. Introduction
1.1 Tradition and Change
1.2 Healthcare in Transition
1.3 Research Objectives
1.4 Structure
1.5 Data Source

2. Pharmaceutical Wholesale Distribution
2.1 Pharmaceutical Supply Chain
2.2 Full-line Pharmaceutical Wholesalers
2.3 Short-line Pharmaceutical Wholesalers
2.4 Functions of Pharmaceutical Wholesalers
2.4.1 Bridging of Distances
2.4.2 Bridging of Time
2.4.3 Quantity Function
2.4.4 Quality Function
2.4.5 Services creating Added Value
2.4.6 Coverage

3. Healthcare in Transition
3.1 Changing Demographic Composition
3.2 Challenges in Healthcare Funding
3.3 Cost-driven Changes
3.3.1 Generic Market Penetration
3.3.2 Price Erosion
3.4 Structural Alterations in the Pharmaceutical Supply Chain
3.4.1 Direct Deliveries
3.4.2 Public Service Obligation
3.4.3 Certified Supply Chain
3.5 Transforming Healthcare Systems in CEE
3.5.1 The Post-Semaskho Era
3.5.2 Informal Payments and Corruption

4. Sustainable Growth
4.1 Outsourcing
4.2 Value Added Services
4.3 Vertical Integration
4.3.1 Sweden Abolishes Pharmacy Monopoly
4.3.2 Legislation
4.4 Cooperation models
4.5 Pharmerging Markets

5. Conclusion

Index of Figures

Figure 1:Total spending on healthcare in % of GDP (2006)

Figure 2: Pharmaceutical expenditure in % of total health expenditure (2006)

Figure 3: Life expectancy in years at birth (2008)

Figure 4: Pharmaceutical supply chain

Figure 5: Functions of wholesalers

Figure 6: Direct vs. indirect distribution

Figure 7: Service spectrum provided by pharmaceutical wholesalers

Figure 8: Population density in Europe

Figure 9: Life expectancy at birth in CZ

Figure 10: Demographic changes in the EU

Figure 11: Medicine consumption in comparison to age groups

Figure 12: Newly available sales volumes for generics in DE, GB, FR and IT in € billion per year

Figure 13: Generic market shares in Europe

Figure 14: Development of wholesale margins on pharmacy prices in AT, ES, FR, DE, IT, NL, UK

Figure 15: Percentage of medicines (quantity) distributed by full-line wholesalers in the EU-22 in 2004

Figure 16: Direct delivery models

Figure 17: CPI 2009

Figure 18: Core competencies of manufacturers

Figure 19: Legal distribution of pharmacies

Figure 20: Evolution of retail systems

Figure 21: Liberalisation and retail systems in Germany

Figure 22: IMS regional pharmaceutical outlook in 2012 (USD bn.)

Index of Tables

Table 1: Life expectancy at birth in RO

Table 2: Pharmaceutical market growth

Table 3: Pre-wholesale activities

Table 4: Value added services

Table 5: European pharmacy regulations (03/2008)

Table 6: Growth of pharmerging markets

Index of Abbreviations

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Others

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Executive Summary

The aim of this master thesis is to identify the major drivers of change within the European healthcare systems and to evaluate risks and opportunities confronting pharmaceutical full-line wholesalers. These businesses are the most important link between pharmaceutical manufacturing and the point of sale; providing one-stop-shopping for healthcare professionals across Europe. Pharmaceutical wholesalers serve both ends of the supply chain, manufacturers and retail pharmacies, based on rigorous regulations and highest safety standards, while providing value added and customised services to the benefit of various actors in the healthcare system.

In general, healthcare is a social stabiliser and therefore an important point on the agenda of today’s governments. The need for healthcare is growing Europe-wide. The major source of growth in Western Europe is an altering demographic composition. Populations are aging and human life expectancy is increasing due to a better provision of healthcare. Countries in transition, such as the Central and Eastern European countries, face an additional need to catch up with Western Europe in terms of healthcare provision and healthcare standards. Also people expect higher quality of life in old age.

While on the one hand European governments are interested to ensure broad access to healthcare provision for the general public with a high level of quality, they are on the other hand concerned with limiting cost increases and with the need to cap healthcare spending. Cost cutting measures not only affect the patient and consumer but also the entire pharmaceutical supply chain. Shortages in public healthcare spending lead to an alteration of the pharmaceutical supply chain as generic producers are increasingly conquering European healthcare markets. Generic drugs are replica products of medicines, which have lost their legal patent protection, and are offered at significantly lower prices. In addition, the pharmaceutical industry faces a strong need to cut costs by outsourcing non-core activities and establishing new routes to the customer, often bypassing the established supply chain.

This thesis paper deals with the advantages that can be derived from the changing landscape of healthcare provision. Outsourcing activities of manufacturers provide a potential future source of income for wholesalers, through offering pre-wholesale services to manufacturers. Value added services become even more critical to distinguish competitors and to account for a healthcare system of constant change.

Vertical integration is a future-oriented strategic approach in pharmaceutical wholesaling to sustain the prosperity of wholesalers’ businesses and to counterbalance the harmful effects of changes in healthcare systems and margin erosions. Especially liberalising markets, such as the recently liberalised Swedish pharmacy market, provide a window of opportunity for growth and vertical integration. Legal provisions not only regulate operations and quality standards of pharmaceutical wholesalers but also limit vertical integration in many European countries.

The growth drivers within Europe are the healthcare systems of the former communist European countries. They have transformed their Soviet healthcare model of Semashko into the Western models of Bismarck or Beveridge. Healthcare markets in transition are buoyant and provide numerous opportunities for growth to wholesalers. Despite the growth potential in CEE, European wholesalers are largely limited by the fact that Western European governments are rigorously limiting their healthcare spending and do not permit significant market growth. Therefore, substantial growth in Europe is limited to only a few healthcare markets in the future, and pharmaceutical wholesalers will need to seek for business opportunities abroad. The emerging markets of Brazil, Russia, India and China will be the pharmaceutical growth engines of the future.

Changing healthcare environments across Europe ask for new strategies of pharmaceutical wholesalers to be fit for the future. Aging populations, markets in transition, outsourcing activities of manufacturers and legal changes provide the potential to turn threats into opportunities and further develop the business model of pharmaceutical wholesaling. Vertical integration, value added services, evolutionary development of the wholesale business model and access to emerging markets are only some of the opportunities that have been elaborated for the success of European pharmaceutical full-line wholesalers.

1. Introduction

1.1 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.^[1] AAH Pharmaceuticals Ltd., the UK’s leading distributor of pharmaceutical and healthcare products, was established in 1923^[2], and Herba Chemosan Apotheker-AG, Austria’s largest pharmaceutical service and trading company, was established in 1916 as a cooperative from pharmacists for pharmacists.^[3] 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”.^[4]

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”.^[5]

1.2 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.^[6]

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.^[7]

Figure 1:Total spending on healthcare in % of GDP (2006)^[8]

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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.^[9]

Figure 2: Pharmaceutical expenditure in % of total health expenditure (2006)^[10]

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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.^[11]

Figure 3: Life expectancy in years at birth (2008)^[12]

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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.

1.3 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.

1.4 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.

1.5 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.

2. Pharmaceutical Wholesale Distribution

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: Pharmaceutical supply chain^[13]

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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.”^[14]

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.^[15]

2.2 Full-line Pharmaceutical Wholesalers

Distribution of pharmaceuticals is the core business of full-line pharmaceutical wholesalers.^[16] 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.”^[17]

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^[1] GEHE Pharmahandel GmbH, http://www.gehe.de/unternehmen/index.html;jsessionid=3AA9D5BA69A6317D851BE2E15B50B531, date of access 08.01.2010

^[2] AAH Pharmaceuticals Ltd., http://www.aah.co.uk/content/about-aah, date of access 08.01.2010

^[3] Herba Chemosan Apotheker-AG, http://www.herba-chemosan.at/de/unternehmen/geschichte/ article/display.jsp?id=426, date of access 08.01.2010

^[4] Kotter, J.P. (1996), Leading Change, Boston, Harvard Business School Press, 18

^[5] Mossialos, E., Mrazek, M., Walley, T. (2004), Regulating pharmaceuticals in Europe: striving for efficiency, equity and quality, Maidenhead, Open University Press, 199

^[6] OECD (2000), A System of Health Accounts, Paris

^[7] Walter, E., Batista, A., Brennig, C., Zehetmayr, S. (2008), Der österreichische Pharmamarkt: ein europäischer Vergleich, Vienna, Institut für Pharmaökonomische Forschung, I

^[8] OECD: Health Data 2009

^[9] Walter, E., Batista, A., Brennig, C., Zehetmayr, S. (2008), 7

^[10] OECD: Health Data 2009

^[11] STADA Arzneimittel AG (2009), Annual Report 2008, Bad Vilbel, 3

^[12] EUROSTAT, http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/, date of access 07.01.2010

^[13] Lange, K., Thormann, P. (2007), Der vollversorgende Pharmagroßhandel, Berlin, Deloitte, Herba Chemosan Apotheker-AG (2009): Company Presentation, Vienna, Phoenix (2004): Annual Report 2003/2004, Mannheim

^[14] Phoenix (2004), 16

^[15] Celesio (2009), Annual Report 2008, Stuttgart, 16

^[16] Kaapke, A., Preißner, M., Heckmann, S. (2008), Profil und Effizienz des vollversorgenden pharmazeutischen Großhandels, Köln, Institut für Handelsforschung 6

^[17] GIRP (2009), The Role of Pharmaceutical Full-line Wholesalers in Europe, Brussels, 1