IHS Global Insight Perspective | |
Significance | A draft law that would have incentivised producers to retain wholesalers as a key part of their distribution model has been scrapped after coalition members failed to agree on its implementation. |
Implications | The law would have imposed restrictions on wholesaler margins. While this would have hurt wholesalers' topline growth, it would have helped them retain lucrative distribution contracts for expensive treatments, which are slowly becoming the preserve of direct-to-pharmacy deals. |
Outlook | The wholesale sector will not collapse without this legislation, but its slow pace of growth is set to remain, particularly now that it has also lost out on the opportunity to invest in developing pharmacy chains. |
Pharmaceutical wholesalers in Germany have been hit with a setback after the coalition government failed to pass new legislation. A law was being debated that would have changed the way in which wholesale margins are added to drug prices, with the end result being that wholesalers would sell the drugs on at cheaper prices than they do presently. This would have persuaded more drug makers to keep wholesalers in their supply chain, rather than sell their products directly to pharmacies.
As the situation currently stands, German wholesalers are heavily reliant on expensive treatments to stay profitable, despite wholesaler margins being regressive—ranging from 6% on the most expensive drugs to a maximum of 15% on cheaper products. Two factors are threatening this, however: the growing propensity of producers to bypass wholesalers and sell directly to pharmacies, and the growing prevalence of generic drugs on the market. Generics, which are being sold at ever-cheaper prices under the country’s generic rebate system, bring next to no profit for wholesalers, but their increased use under various cost-containment policies is making their large-scale distribution impossible to avoid.
The law debated in parliament would have changed the way wholesale margins are structured, from the current system of a percentage of the drug’s ex-manufacturer price to a combination of a fixed mark-up in euro and a smaller percentage-based margin. The new system had become known as the Phagro model, after Germany’s pharmaceutical wholesalers’ association. The government had been developing the draft law since late last year, when it was reported that up to 17% of all medicines in Germany were being sold directly from producer to pharmacist (see Germany: 30 December 2008: Draft Legislation Could See German Drug Makers Prohibited from Selling Directly to Pharmacies).
The conservative parties in the coalition government are understood to have demanded more detailed information on how the system would work, prompting accusations of delay tactics from the Social Democrats. According to Pharma Adhoc, the government's decision to abandon the draft legislation altogether, just days before it was due to be passed into law, could also have been partly due to another factor—the Ministry of Health is reportedly pushing for savings made through bypassing wholesalers in direct-to-pharmacy sales to be passed on to public health insurance funds.
Despite this setback, there remains a second piece of pro-wholesaler legislation that has yet to go before parliament. Reuters reports that another draft law obliging pharmaceutical companies to make their complete range of stock available to wholesalers will be next in line for parliamentary debate.
Outlook and Implications
The legislation is not necessarily dead in the water just yet, but its implementation will now be much delayed at best, and would likely be noticeably changed before any approval. This is bad news for wholesalers, who had viewed the margins reform as a means of keeping their business economically viable at a time of national recession. Pricing competition on medicines has intensified in recent years, and cutbacks on margins would typically be considered a bad thing for wholesalers, but when faced with the alternative of losing out on drug-supply deals altogether Phagro’s member companies need to resort to new tactics to remain profitable. For leading German wholesalers Celesio, Anzag, Phoenix, and Gehe, the breakdown in government talks on the law will mean less security on the market. Even if these firms choose to restrict their margins anyway, there is no guarantee that their competitors will follow suit.
For pharmaceutical producers, meanwhile, the news is likely to be well-received. Direct-to-pharmacy sales bring important efficiencies in operational costs and stock management. Producers choosing to sell directly to pharmacies will also be able to keep their own margins high, and will have more control over their stock throughout the supply chain. The wholesale sector will not collapse without this legislation, but its slow pace of growth is set to remain, particularly now that it has also lost out on the opportunity to develop pharmacy chains (see Europe: 20 May 2009: ECJ Upholds Right of EU Member States to Ban Outside and Multiple Ownership of Pharmacies).