UK parallel trade - unparalleled change

UK parallel trade - unparalleled change ACHIEVING ACCURATE MEASUREMENT OF THE UK PHARMA MARKET IN A PARALLEL EXPORT ENVIRONMENT EXECUTIVE SUMMARY The change in the balance of UK market dynamics from parallel import to parallel export has proved to be a challenge for the pharmaceutical industry from a supply chain management perspective and when assessing and accurately measuring the UK demand for products from a commercial perspective. It has also proved a challenge for IMS: specifically around how an accurate measure of the UK demand at a local and national level can be provided. IMS has spent 12 months designing and implementing a new more robust editing process specifically to deal with products that are being exported.this new process is based on the premise that, as the patients and prescribers in a brick are the same, any entities supplying drugs in that brick should reflect the same local demand. The development of this new methodology has been a lengthy and complex process and there have been additional challenges around its implementation into the audits, especially as there was a need to correct some of the history. IMS has worked closely with our clients throughout the development and implementation process and the general consensus is that the new IMS editing methodology is robust and allows for a fair and accurate representation of UK demand. The new IMS editing methodology is robust and allows for a fair and accurate representation of UK demand. IMS HEALTH ACHIEVING ACCURATE MEASUREMENT OF THE UK PHARMA MARKET IN A PARALLEL EXPORT ENVIRONMENT 1

BACKGROUND The recession that has gripped the world s economies has led to radical changes taking place in European pharma markets where changes in cross-border trading has, it s been argued, created risks to patients lives and posed new, additional challenges for pharmaceutical companies and regulatory bodies alike. One of the characteristics of the UK pharmaceutical market to emerge has been the steady rise of a parallel export (PE) market in products otherwise destined for UK pharmacies.this trend towards PE, rather than parallel imports (PI), developed as the UK s economic crisis deepened and the value of Sterling fell (Fig.1). in Europe to buy pharmaceuticals (Fig. 2). As a consequence a large, viable parallel export (PE) market has developed out of the UK which has also witnessed a sharp decline in parallel imports (PI). A new generation of trading pharmacists (IMS estimates that 11-14% of the UK s 12,500 pharmacists are now exporting product either directly or indirectly through third party license holders) have joined established parallel exporters to participate in profitable export activity.this burgeoning PE market - estimated to be worth around 35m per month from the Pharmacy Channel in Q3 2009 - has trailed a number of issues in its wake. FIGURE 1: THE FALL OF PARALLEL IMPORTS LINKED TO THE DECLINE OF STERLING AGAINST THE EURO. Ratio vs Euro 110% 0.25 100% 90% 80% 70% 60% 50% 40% Aug 08 Mar 08 May 08 Jul 08 Sep 08 Nov 09 Jan 09 PI (SU) Index Euro rate Index IMS PI in SU Mar 09 May 09 Jul 09 Sep 09 0.2 0.15 0.1 0.05 0 PI volume (bn) FIGURE 2: THE RELATIVE PRICES BETWEEN THE UK AND KEY EUROPEAN MARKETS FOR THE 20 BRANDS IN FIG. 1 IN JULY 2009. / Dose 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0 DEU R CHE R DNK R&H GRC R BEL R AUY R ESP R SWE R&H HUN R IRL R LUX R FIN R EST R NLD R SVN R&H ROM R SVK R PRT R ITA R BGR R FRA R Likely importers POL R LVA R LTU R NOR R CZE R GBR R Likely exporters 1400 1200 1000 800 600 400 200 0 Number of doses (m) Source: IMS MIDAS Parallel Trade Database Source: IMS MIDAS IMS research indicates that at least 205 medicines are experiencing exports from the UK. More detailed analysis of the top 46 individual products that our new methodology indicates have been over-supplied to the UK market by at least 12%, reveals: 15 medicines experienced 20% or more of their UK demand being exported in May 2009; 4 of these had in excess of 40% export; 6 medicines experienced exports valued in excess of 10m in the last year. Exacerbated by the PPRS price reductions in February 2009 the UK has become one of the cheapest countries The issue attracting the headlines has been the impact of these exports on the supply of product to the UK market.the challenge for pharmaceutical companies has been to ensure enough stock is released into the supply chain to cover UK patient demand whilst avoiding oversupply to the market. Should the balance be wrongly weighted UK patients would find it hard to obtain critical drugs when they needed them most. However, the change in market dynamics from a net importer to a net exporter has thrown up another issue that has challenged both the pharmaceutical industry and IMS: measuring with accuracy the UK demand from a commercial perspective. 2 IMS HEALTH ACHIEVING ACCURATE MEASUREMENT OF THE UK PHARMA MARKET IN A PARALLEL EXPORT ENVIRONMENT

UK PT white paper 1109 17/11/09 13:03 Page 3 ACCURATELY MEASURING UK USAGE IN THE NEW ENVIRONMENT The growth of PE volumes has required IMS to develop a new editing process in order to continue to provide clients with an accurate picture of local demand in the UK.These developments have been undertaken in conjunction with the IMS Statistics Office, using expertise in this area from across Europe. There is strong evidence that export is now the main driver of excess purchasing by UK pharmacies. The current IMS retail sales audits [British Pharmaceutical Index (BPI); Retail Sales Analysis (RSA); and Prescribing Indicator (RxI)] have always been subjected to editing a process that targeted and removed any anomalous sales believed not to be destined for local usage and that were out of trend with historic purchasing and the levels in surrounding pharmacies. In the past these data services have had two edit processes running in parallel: Chains with a central buying point(s), where the end point sale is not visible, are subject to the IMS redistribution process and edited at chain level Chains or independent outlets where the end point sale is visible are edited via the census edits process at the individual outlet level. (See Appendix for more information.) Traditionally the main reason for these anomalous sales has been onward UK trade (grey trading). However, there is strong evidence that export is now the main driver of excess purchasing by UK pharmacies. A new editing methodology Traders Analysis has had to be designed, validated and implemented over the last 12 months to account accurately for the increased volume of PE, and the associated growth of a practice known as skimming. Skimming occurs when trading pharmacies purchase additional low volume products in order to avoid manufacturer quotas and sell the product on for export purposes the skimming effect. In this way inflation occurs in the apparent demand for product locally, thus distorting the true, underlying picture. IMS HEALTH ACHIEVING ACCURATE MEASUREMENT OF THE UK PHARMA MARKET IN A PARALLEL EXPORT ENVIRONMENT 3

FIGURE 3: TRADERS ANALYSIS FOR A PRODUCT WHERE EXPORTING COMMENCES IN DECEMBER 2008 1.00 Relative trade value 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 Non-trader scaled pre-edit Trader pre-edit Trader post-edit 0.00 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Source: IMS BPI / RSA TRADERS ANALYSIS The premise of the new process is straightforward prescribers and patients are the same in each brick and therefore the entities supplying drugs should reflect this same local demand. For 90 per cent of entities ( nontrading accounts or non-traders ) this is true and they set the trends for performance of the market at a local level.these entities include most of the larger chains and around 80 per cent of independent pharmacies.the other ten per cent out-perform in often random patterns, buying where they see the opportunity for export trade ( trading accounts or traders ). The Traders Analysis compares the activity of the export traders with that of non-traders for all products that have been identified as having significant export volumes.the process works by scaling down the nontraders as a group to the size of the traders.the target amount to be edited for each product is calculated by comparing trader and scaled-down non-trader sales. Where the traders are high, the gap sets the national target edit.this target edit is then applied at form/strength level and spread regionally. Figure 3 above illustrates the Trader vs Non-trader program. The dark blue line shows the raw data for the trading accounts (TRADER PRE-EDIT) The original editing reduced the level to the mid-blue line (TRADER POST-EDIT) Once the trader edits have been applied, the trader data is brought down to the level of the orange line which shows the scaled-down behaviour of the non-traders (NON-TRADER SCALED PRE-EDIT). IMS research indicates that at least 205 medicines are experiencing exports from the UK. 4 IMS HEALTH ACHIEVING ACCURATE MEASUREMENT OF THE UK PHARMA MARKET IN A PARALLEL EXPORT ENVIRONMENT

FIGURE 4: SCHEMATIC OF THE IMS EDITS PROCESS Raw data Sales into retail chemist & dispensing doctors YES Chain with central buying point NO Redistribution edits NO Explored product? YES Census edits Traders analysis Chain & brick checks Live data Figure 4 demonstrates the new flows of the IMS editing process.the Traders Analysis is the addition to the process which specifically targets products that are believed to be exported. IMS HEALTH ACHIEVING ACCURATE MEASUREMENT OF THE UK PHARMA MARKET IN A PARALLEL EXPORT ENVIRONMENT 5

FIGURE 5: IMPLEMENTATION PROCESSES AND TIMELINES 2008 March June October 2009 April First indication of export market Q2 2008 Immediate actions undertaken (e.g. reducing the quantity limit allowed by redistribution chains) A full review was carried out on all accounts which showed trading activity Monthly traders vs. non-traders review run from July 2008 data for the top 500 products plus the top 50 most highly edited Any products being flagged as exported were reviewed more aggressively for editing. Development of new Traders Analysis programme Pilot markets run through the traders analysis Remaining 205 exported products put through the traders programme. History corrections applied for 2008 and 2009. Client Feedback IMPLEMENTATION PROCESSES AND TIMELINES The timeline for implementation is shown above in Figure 5. The development of this new methodology has been a lengthy and complex process and there have been challenges implementing it into the audits, especially as there was a need to correct some of the back data. However, the new methodology is now in place for 205 products and IMS is continuously reviewing trading activity to identify any more products that need to be added. As the parallel trade market continues to evolve we anticipate that more products will be added to the list of exported products. The revised methodology has been discussed in great detail with our Client Advisory Board as well as with a large number of our clients and other Boards including the BAPW, Department of Health, PSNC and ABPI. The general consensus is that Traders Analysis is now a robust process for removing parallel exports from the retail sales audits. 6 IMS HEALTH ACHIEVING ACCURATE MEASUREMENT OF THE UK PHARMA MARKET IN A PARALLEL EXPORT ENVIRONMENT

Appendix: Specific details on the IMS editing processes SPECIFICS OF THE RE-DISTRIBUTION EDITS PROCESSS Purchases by all accounts in a group (including warehouse) are summed at molecule/form/strength level The expected value for the chain for that form/strength is calculated from the universe file for all UK shops Each chain is weighted by a shop size and flagged for possible editing if the total chain purchases exceed the expected counting units by a factor of three An edit is suggested that brings the chain down to the expected monthly volume The suggested edit is not always applied but provides a guide for the reviewer who can chose to ignore, amend or apply The remaining product is apportioned across the outlets in the chain according to their size. SPECIFICS OF THE TRADITIONAL CENSUS EDITS PROCESS Census edits are applied to individual chemist and doctor accounts at pack level Each pack is assigned a Quantity Limit (QLIM) the likely reasonable purchase for an average chemist account for a pack based on three months of BPI history data Transactions that exceed 7/5 of the QLIM or, if the value is above 5000, 1/5 of the QLIM, are output as an exception to undergo review Experienced Production Analysts then review the exceptions and assess the amount to be edited, or flag the sales as not edits based on knowledge of the product/entity concerned In general exceptional purchases by accounts that are licensed to trade are edited down to the national average chemist purchase for that pack in the UK. The traditional census edits process would not spot skimming activity by a number of shops. For example, for product A on average two units are purchased by a UK pharmacy. Large pharmacies purchase up to eight units. If the QLIM is set at eight units all purchases above 11 units will be output for review. If Chain A has ten shops which in January purchase two units each totalling 20 units, in February each shop could purchase ten units (chain total 100 units) and not even be assessed for editing.this means that growth of 500 per cent would have been left in the data which in the current market is more likely to represent export or grey trade than real growth due to product switching. SPECIFICS OF THE TRADERS ANALYSIS EDITS PROCESS The Traders Analysis compares the activity of trading pharmacies with non-trading pharmacies at product and then pack level UK and PI sales are aggregated together The trader group represents 11-14% per cent of the pharmacy outlets in the UK If, at national level, the trend of the traders is significantly different from the non-traders a national edit is suggested to bring them back on trend with the growth of the rest of the market This is the maximum that can be removed via the automated process the national cap Local exceptions are generated by looking at trading accounts which have sales that are higher than the average non-traders in the same brick (allowing for shop size variations). IMS HEALTH ACHIEVING ACCURATE MEASUREMENT OF THE UK PHARMA MARKET IN A PARALLEL EXPORT ENVIRONMENT 7

ABOUT IMS Operating in more than 100 countries, IMS Health is the world s leading provider of market intelligence to the pharmaceutical and healthcare industries.with $2.3 billion in 2008 revenue and more than 50 years of industry experience, IMS offers leading-edge market intelligence products and services that are integral to clients day-to-day operations, including product and portfolio management capabilities; commercial effectiveness innovations; managed care and consumer health offerings; and consulting and services solutions that improve productivity and the delivery of quality healthcare worldwide. Additional information is available at http://www.imshealth.com IMS HEALTH EUROPE & WORLDWIDE 7 Harewood Avenue London NW1 6JB UK Tel: +44 (0)870 243 3222 www.imshealth.com UK_PT_WP_1109