Preparing for EMU: Strategies for success in the pharmaceutical industry

CONTENTS
LIST OF TABLES
LIST OF FIGURES
EXECUTIVE SUMMARY
ABBREVIATIONS
CHAPTER 1 INTRODUCTION TO EMU
1.1 EMU and the single European market
1.1.1 Schedule for the euro
1.1.2 Economic convergence
1.1.3 Maintaining economic performance indicators
1.1.4 The non-joiners
1.1.5 The role of the institutions
1.2 Alternative EMU scenarios
1.2.1 The optimistic scenario
1.2.2 The 'middle of the road' scenario
1.2.3 The pessimistic scenario
1.2.4 Risk factors
1.2.5 Factors for success
1.3 The transition period and beyond

CHAPTER 2 THE IMPACT ON PHARMA BUSINESS
2.1 EMU and the single European market
2.1.1 Competitiveness
2.1.2 The impact on the supply chain
2.2 Pricing regulations
2.2.1 EU pricing policy
2.2.2 National price controls
2.2.3 Distribution margins and VAT
2.3 Transfer pricing
2.4 Parallel trade
2.4.1 The future of parallel trade
2.5 Price convergence
2.6 Tax and accounting regulations
2.6.1 Taxation
2.6.2 Accounting
2.6.3 Staff pay and pensions
2.7 The legal framework
2.8 Information technology requirements

CHAPTER 3 DEVELOPING A PROACTIVE STRATEGY
3.1 Evaluating the benefits and drawbacks
3.1.1 The financial costs of transformation
3.2 Taking advantage of the euro
3.3 Establishing priorities for action
3.3.1 Implementing a euro strategy, case study: Hoechst Marion Roussel
3.4 Timing for compliance
3.5 Organisational restructuring and relocation
3.5.1 Relocation
3.5.2 Shared service centres
3.5.3 Mergers and acquisitions
3.6 Developing strategies to deal with pricing transparency
3.6.1 Price corridors
3.6.2 Strategies to combat parallel imports
3.7 Managing risk
3.8 Strategies for success

CHAPTER 4 SUMMARY OF THE FUTURE OUTLOOK

REFERENCES

LIST OF TABLES
Table 1.1 Timetable for EMU
Table 1.2 Convergence performance of EU member states (March 1998)

Table 2.1 European wholesaler consolidation (1998)
Table 2.2 Summary of retail prescription drug price and reimbursement systems in main EU countries
Table 2.3 Summary of national distribution margins in the EU (1996)
Table 2.4 VAT rates in EU member states (1993)
Table 2.5 Parallel import penetration in the EU (1995)
Table 2.6 Legal basis of the euro
Table 2.7 Estimated IT expenditure on EMU compliance by pharmaceutical companies

Table 3.1 Opportunities and threats posed by EMU to the pharmaceutical industry
Table 3.2 Differences between year 2000 and EMU IT projects

LIST OF FIGURES
Figure 2.1 Example of triangulation in practice

Figure 3.1 Functional impact of EMU

EXECUTIVE SUMMARY
The speculation has now ceased, and the real work is just beginning. Eleven European countries are set on an inevitable course towards Economic and Monetary Union (EMU) during the period 1 January 1999 to 1 July 2002. These countries are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. On the periphery of the single currency 'euro zone' will be Denmark, Greece, Sweden and the UK, which will remain outside it at least until 2002, although they will be far from immune to the impact of EMU.

From the broadest point of view, EMU should assist the pharmaceutical industry by providing a more stable economic operating environment in Europe, through the locking in of lower inflation rates and lower interest rates. It will also reduce transaction costs through the elimination of at least some of the requirements for exchange rate dealing. But the downside of the drive within the euro zone towards tighter government spending will be continued pressure on national healthcare budgets.

The euro will make pharmaceutical pricing more transparent, but will not lead to immediate price convergence. Price differentials will be maintained by differing national price regulations, distribution margins and VAT rates, as well as by continued disparities in national prescribing habits. Parallel trade will increase in the short to medium term as a result of price transparency and the emergence of new types of parallel importers. As prices start to converge in the longer term, the importance of the practice will diminish within the euro zone.

Most major pharmaceutical companies are well into preparations for EMU, having started to set up steering groups from mid-1996 to early 1997. Transformation will be a costly process. Estimates of expenditure required by the industry leaders over five years to convert to euros range from ECU10-40 million. Functionally, EMU will require companies to make important changes across almost every area of operations, with the emphasis on the transformation of IT systems to cement the process together. IT costs are estimated to account for 50-60% of the total EMU change process.

Pharmaceutical companies fall into two distinct camps concerning the single currency: either they are tending to adopt minimum compliance strategies or, at the other extreme, they view EMU as an opportunity for a re-evaluation of competitive strategy. Some companies see introduction of the euro as a chance to gain new sources of competitive advantage, such as through changes in supply strategies, rationalisation of administration, and revamping of pricing policies. The potential gains of EMU to the pharmaceutical industry are calculated by Price Waterhouse at 0.6-2.1% of total sales revenue.

Although the introduction of the euro will accelerate the ongoing process of harmonisation of the pharmaceutical market, it will not lead to the creation of a single European market. Cultural differences and widely differing purchasing power will not disappear overnight. EMU may, however, prove a catalyst for changes that will be beneficial to company operations.

This report looks at EMU from three perspectives. Firstly, it provides a concise introduction to the process of implementing the euro, and assesses the broad economic implications, outlining some possible future scenarios and risk factors. Secondly, it analyses the impact of the euro on the pharmaceutical business in terms of the broader issues, such as the supply chain and pricing, as well as on individual corporate functions, such as tax and accounting, and IT. Thirdly, it looks at how companies can develop strategies to ease the implementation process.

Introduction of the euro heralds a period of immense uncertainty, with most questions yet to be answered, and no past experience upon which to base strategies. This report offers strategies and options to consider, and outlines some of the questions that should be asked internally. It provides a checklist against which companies can benchmark their own strategies.

Preparing for EMU: Strategies for success in the pharmaceutical industry

Industry Alert

Industry managers widely agree that EMU offers both opportunities and threats to the pharmaceutical industry. It will create greater economic stability and lower transaction costs, improve long-term strategic planning and harmonise cross-border projects. Potential risks include high transformation costs, converging and lowering of prices and the risk of a weak euro.

Preparing for EMU: Strategies for success in the pharmaceutical industry provides you with a complete and authoritative overview of EMU, assessing advantages and disadvantages. It includes coverage of issues such as pricing, marketing, tax and accounting, IT requirements, suppliers and purchasers.

This report presents you with a checklist of strategies, including a case study from a top pharmaceutical company. It also explores the wider strategic implications of EMU, helping you to anticipate its effects on your company.

PUBLISHED: JULY 1998
REF: BS967E
PAGES: 64
PRICE: £143/$300/¥35,000

© PJB Publications Ltd. 2001
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