Part two of three

Between June 2001 and July 2002, GlaxoSmithKline figured a quarter of its deeply discounted HIV/AIDS drugs bound for Africa never wound up at their intended destinations. In the summer of 2002 authorities in Belgium intercepted 800 Africa-intended packages of Glaxo's Combivir. A Dutch trader was allegedly behind this and 23 other trades involving 44,000 packs of Combivir, Epivir and Trizivir. Illegally diverted from five African countries, sometimes with the aid of government officials, $18 million worth of drugs were laundered through a number of routes to Brussels and Paris, then through Antwerp, all headed for ultimate sale in EU member states and Switzerland. (The civil case is in the courts; the Dutch police's criminal investigation is still in progress.) Manufacturers are now color-coding their poor-nation pills and creating special packaging to combat this illegal diversion.

On a risk-reward basis, trading pharmaceuticals is a far more attractive business than running heroin, confirms Thomas Kubic, executive director of the Pharmaceutical Security Institute, a drug industry group in Vienna, Va. fighting illegal pharma trade. Kubic says organized-crime busts frequently uncover drug inventories made up of a mixture of stolen drugs, diverted drugs and counterfeits. But the line between illegal substances and pharmaceutical trade is blurring. With 6 million Americans abusing prescription opiates and other pharma highfliers, prescription-drug abuse is second only to marijuana abuse in the U.S. The White House is now targeting so-called pill mills that sell diverted or stolen drugs over the Internet without prescriptions.

European governments have largely seen fit to embrace the arbitrage game, though it is doubtful they or their consumers are the primary gainers. Within the EU's free-trade zone stand government-run national health services, each negotiating its own drug prices with the pharmaceutical manufacturers: The wholesale price (daily dosage, adjusted for pack sizes) of fluoxetine, better known as Prozac, is 64 cents in Spain, $1.40 in Germany and $1.83 in Britain. With EU courts repeatedly ruling parallel trade is legal, companies like Medihealth have morphed into government-licensed repackagers. Germany's Kohlpharma alone booked $1 billion in 2002 revenue from drug arbitrage.

Britain is reimporting $2.6 billion, or 20%, of its drugs. The London School of Economics just concluded, in a study of 19 prescription drugs in six European countries, that parallel traders got 25% of branded drug sales in 2002. Low-price Greece was conversely exporting 22% of its drug supplies.

Because Europe's national health services are cash-strapped, EU governments actively protect their arbs, using pharma's murky gray market as a means of lowering health care costs. German law mandates that pharmacies have at least 7% of their stock coming from parallel trade or face penalties. Britain, meanwhile, financially rewards its pharmacists when they arbitrage.

Moss Pharmacy, a big drugstore chain, has shops in Shepperton, England. There, when a customer asks pharmacist Samir Beibars for Novartis' Famvir (famciclovir), a drug for shingles, Beibars uses his computer to scan his wholesaler's available stock in branded, discounted, generic and parallel-traded drugs. He finds a southern European import of famciclovir for $178; the National Health Service's listed reimbursement fee is $205.

So who gets the spreads in Europe's secondary market? "The patients don't benefit," says Panos Kanavos, an author of the LSE study and a lecturer on international health policy. Rather, he says, it's the middlemen--the parallel trader, wholesaler and, to a much lesser extent, the pharmacist and governments--who grab the differences.

The LSE's six-country study figured the total 2002 wholesale sales to pharmacists (but not hospitals) equaled $6.5 billion for the 19 drugs in question. The parallel traders skimmed off $680 million in trading profits. But complex government pricing mechanisms meant that national health insurance funds managed to claw back only $120 million of savings.

Studies commissioned by parallel traders claim governments are the big winners, but the LSE study (backed by Johnson & Johnson) is probably closer to the mark. Consider Medihealth's January trade in Nasonex. Medihealth bought the Schering spray from a French wholesaler for $11.80 a bottle; the English-language repackaging cost it another 37 cents. But Medihealth was able to sell the spray to British pharmacies for an average price of $16.51, capturing a $4.34 spread per bottle, or $17,347 for the in-and-out shipment. With the drug still competitively priced, the pharmacist then grabbed (after a government levy) a $1.48 trading profit, in addition to a standard dispensing fee allowed on the medicine.

On such backroom shuffles fortunes are made. Milan-born Stefano Pessina, 62, is the chief executive and major shareholder of publicly traded Alliance UniChem, a pan-European drug wholesaler with $17 billion in revenues. Pessina, a new member of FORBES' billionaires list, has built Europe's second-largest wholesaler and, in the form of Moss Pharmacy, its third-largest drugstore chain.

contd.