DrugBuyers.Com: Article on drug arbitrage trade; quite interesting

View article at Forbes magazine here.

Part one of three

"Pssst ... Wanna Buy Some Augmentin?"
Richard C. Morais, 04.12.04

Move over, heroin pushers. Pharmaceutical arbitrage is rapidly emerging as the globe's hottest drug-dealing business.

In January a truck pulled up to a loading dock in London's East End and discharged 3,997 boxes of Nasonex, Schering-Plough's prescription nasal spray for allergies. Earlier the drugs had been sold by Schering in France at around $11.80 per bottle, a price determined by the French government. But a middleman bought the product and shipped it to Britain, where Nasonex commands $3 more at wholesale. The East End buyer: $55 million (revenues) Medihealth, a specialist wholesaler.

Medihealth employees logged the Nasonex into their computer system and then passed the cartons over to East End women standing at tables in a back room. The women shuffled and repacked the boxes, covering the original French packaging with English-language stickers and substituting Schering's U.K.-approved leaflet for the French insert. The 3,997 boxes were soon legally bound for pharmacies across Britain.

"We actively trade 200 to 225 products," says P.R. Patel, Medihealth's chief executive. "Only the bestsellers."

Medihealth occupies a lucrative corner of the distribution world made possible by the peculiar pricing of prescription drugs. It's a "parallel trader" or "short-liner," an arbitrager buying in low-price markets and selling in high-price markets.

No one really knows the size of this drug arbitrage business, since much of it takes place in the shadows. Where it is legal, few in the pharma industry--neither the arbs nor the manufacturers nor big wholesalers--want to talk about it on the record. But this much is clear: The business of arbitraging drugs is huge, fast-growing and constantly morphing around the globe according to local laws and customs.

In Europe legal arbitrage of pharmaceuticals is already a $12 billion or so business. Paul Saatsoglou of IMS Health, a pharmaceutical consultant, says drug arbitrage along the Canadian-U.S. border was worth $1.1 billion (in U.S. prices) in 2003, up 70% in a single year. Add in the drugs coming up from Mexico, and legal pharmaceutical arbitrage in Europe's and North America's free-trade zones is probably approaching $15 billion. In comparison, United Nations statistics suggest the globe's entire heroin production is theoretically worth $20 billion at U.S. wholesale prices.

On top of all this legal, gray-market activity there is a thriving trade in illegally remarketed prescription drugs, a business whose dimensions can only be guessed at and whose markups dwarf those found on something like Nasonex. A single HIV/AIDS Combivir pill, priced at 33 cents for the African market, is worth $10 if it can be illegally diverted to the U.S. or Europe.

The U.S. has the toughest drug reimportation laws in support of manufacturers that want to segment markets by price: They strictly forbid the wholesale importation of drugs intended for distribution in other countries. The purchase of a 90-day supply of drugs for personal use while abroad is legal; overseas purchases via the Internet are illegal, but the law is rarely enforced(see box). European laws are more lenient. The trade is actively encouraged within the European Union, but illegal for drugs coming from outside the EU.

Any law forbidding consumers from grabbing bargains across the border is going to be hard to enforce. The popular mood in the U.S., as reflected in politicians' speeches and many sympathetic press accounts, is that drug companies are overcharging and the right legislation would save consumers a bundle. Bills working their way through Congress would, in effect, bar the FDA from blocking Nafta-sourced drug imports produced at previously FDA-approved manufacturing sites. The flow of cheap Canadian or Mexican drugs to the U.S. could become a flood. But the Philippines has taken this populist response further with the globe's first state-run arbitrage program, reimporting drugs sold more cheaply to India and other Asian countries.

Governments can do plenty of damage to drug company revenues just by looking the other way as drugs get redirected or shipped across their borders. Indonesia's Health Consumer Empowerment Foundation released a 2002 study claiming that almost half of all subsidized medicines intended for the poor found their way into the marketplace, including foreign government donations officially stamped by Indonesian authorities. An exaggeration? No one knows because Indonesia's health officials, claimed the Jakarta Post, never seriously investigated the charge. Meanwhile, according to the World Markets Research Centre, the Chilean Pharmaceutical Chamber estimated illegal cross-border trade represented 10% and 20%, respectively, of Chile's cancer and HIV/AIDS medicines in 2002. And last year the head of Lebanon's pharmacy association publicly accused 90% of that country's nonprofit clinics of reaping huge financial rewards by trading drugs originally given by donors; health authorities are now trying to better secure the country's distribution system.

contd.