European Association of Euro-Pharmaceutical Companies

Parallel distribution generates revenue for manufacturers
European pharmaceutical companies are healthy
Much of the investment in pharmaceutical R&D comes from public sources
The real challenges for pharmaceutical companies
Differences between the US and Europe

Large multinational research-based pharmaceutical companies often blame parallel distribution as the root cause of their inability to invest in Research & Development in Europe.

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They say parallel distribution eats into their profits and this in turn means there is no money left to invest in R&D. On the contrary, the US has high rates of investment because there is no parallel distribution.

But does this argument stack up?

Parallel distribution generates revenue for manufacturers

Parallel distributors source their products, either directly or indirectly, from the original manufacturers. This means that the manufacturer will receive the full market price and revenue generated from sales for its product, whether in Portugal or in Ireland. One presumes that any price at which the product is sold in any national market includes a profit margin for the manufacturer.

So, even though parallel distribution is worth around €5 billion per annum in sales in Europe, this does not equate to losses for the manufacturers. Most of this €5 billion will consist of revenues earned by the manufacturers.

Clearly a small proportion of the sales from parallel distribution will be lost revenue for the manufacturer. It will, in the main, be passed on to the buyers after logistic, marketing and other costs related to running a business are taken into account.

European pharmaceutical companies are healthy

The figures on investment in R&D are as revealing as the figures on sales are misleading. The profits of the biggest multinational pharmaceutical manufacturers continue to grow, including those of European-based companies. Indeed five of the top 10 most profitable pharmaceutical companies in the world are of European origin.

CompanySales ($)Operating profit ($)Net income ($)
Pfizer 45,2 bill   3,9 bill
J & J 41,9 bill 29,7 bill 7,2 bill
Bayer € 28,6 bill € -1,2 bill € -1,4 billl
GSK 35,2 bill 11,1 bill 7,8 bill
Novartis 24,9 bill 5,9 bill 5,0 bill
Roche 22,7 bill 4,6 bill 2,6 bill
Merck&Co 22,5 bill   6,8 bill
Aventis 22,1 bill 4,5 bill 2,4 bill
Bristol Myers 20,9 bill   3,1 bill
AstraZeneca 18,8 bill 4,1 bill 3,0 bill
Takeda 8,7 bill 2,6 bill 2,3 bill
Sanofi € 8,0 bill € 3,1 bill € 2,1 bill

The most recently available figures from 2003 also show that Europe´s share of world pharmaceutical sales grew. Manufacturers and market analysts are bullish that robust growth can be expected.

CountryDomestic brand
  value
bil euro
growth
2003-2004
total 63.1 5.5%
Germany 12.8 4.4%
UK 9.2 5.6%
France 13.8 4.9%
Nederlands 2.2 3.3%
Spain 7.1 9.1%
Italy 10.2 4.4%
Portugal 1.8 5.7%
Belgium 2.3 6.1%
Austria 1.4 4.7%
Norway 0.9 2.9%
Czech 0.7 11.7%
Ireland 0.8 17.8%

Much of the investment in pharmaceutical R&D comes from public sources

A report from the US National Institutes of Health discovered that only 14% of total R&D spending by the manufacturer went to basic research. 38% was dedicated to applied research and 48% was spent on product development, which does involve improving existing compounds or adding additional therapeutic applications to known compounds.

Whilst it is widely acknowledged that the clinical development of medicines costs time and money, it should also be borne in mind that, according to the February 2000 study, "public researchers often tackle the riskiest and most costly research, which is basic research, making it easier for industry to profit."

funding-sources

Erythroprotein (Epo) was discovered after two decades of work by a university biochemist called Eugene Goldwasser at the University of Chicago. Marketed as Epogen by Amgen, it has gone on to become one of the world´s best-selling biotech drugs. But a large proportion of the basic R&D was paid for by the US taxpayer.

The real challenges for pharmaceutical companies

Despite these soaring sales and profits there are serious challenges facing Europe´s pharmaceutical industry and its ability to continue delivering innovative medicines that correspond to patients´ needs. Yet none of them have anything to do with parallel distribution.

It is a fact that the majority of manufacturers now spend more money on marketing than on R&D, as this table shows.

CompanyMarketing costs ($)R&D costs ($)
Pfizer 15,2 bill 7,1 bill
J & J 14,1 bill 4,7 bill
Bayer € 6,5 bill € 2,4 bill
GSK 12,4 bill 4,5 bill
Novartis 7,9 bill 3,8 bill
Roche 6,9 bill 3,8 bill
Merck&Co 6,4 bill 3,2 bill
Aventis 6,7 bill 3,6 bill
Bristol Myers 4,7 bill 2,3 bill
AstraZeneca 6,9 bill 3,5 bill
Sanofi 2,5 bill € 1,3 bill

Source: 2003 annual reports of the companies

In fact, the percentage of revenue that manufacturers are investing in marketing has been growing as this table shows:

Country€ millChange to 2002 in %
Germany 1,914.93 +24.6%
Italy 1,041.71 +20.3%
France 890.57 +12.7%
Spain 515.78 +26.1%
UK 316.81 +15.3%


Source: IMS Health 2003

These figures should refute, once and for all, the claim that it is parallel distribution which is the ball hanging around the necks of the manufacturers when it comes to investment in R&D. There are underlying economic trends behind the loss of competitiveness of some of European pharmaceutical manufacturers which are independent of parallel distribution.

Differences between the US and Europe

It is claimed that Europe suffers in pharmaceutical R&D because of parallel distribution, especially in comparison to the US.

But figures quoted at a Senate hearing showed that the American pharmaceutical industry committed around $33 billion to R&D in 2003 while the equivalent figure for the EU was approximately $28 billion.

The differences can easily be explained by two factors: the levels of public investment from the American National Institutes of Health (some US$27 billion in 2003) and the greater availability of top-class scientific talent in the US.