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e-business for pharma and electronic prescription – the European Commission’s perspective Reinhard Büscher Head of Unit B/3: Industrial Aspects of Electronic Commerce DG3

By Editor on Feb 8, 2001

e-business for pharma and electronic prescription the European Commission's perspective

Reinhard Bscher
Head of Unit B/3: Industrial Aspects of Electronic Commerce DG3
European Commission

Good morning, ladies and gentlemen. Of course electronic e-business is not only a topic for companies, this is also something which raises expectations and concerns in politics. The European Commission has accompanied the discussion from the very beginning. You could even say that with the different liberalization initiatives we have contributed to e-business in Europe quite largely. Now, if you look at the perspectives you will see that e-business is largely about B2B and to a much lesser extent B2C. You find many of such forecasts, but they are all the same with respect to the future expectations. Now, from this you can derive at least 2 conclusions. One is, e-business is turning from hype into reality, to starting to become measurable. This was not always the case. We have started to talk about e-business, about e-commerce at times where you could see only very little in statistics. This is now being changed and this is true both for B2C as well as for B2B. But if you look at the dynamics, you will see that the B2B will even grow faster than B2C. For the time being it is estimated that the share of B2C is approximately 20%, whereas this may decline to 10% in the future. Nevertheless, B2C is what is catching the headlines. This is what is being discussed at political level. B2B is something which is promising for companies, which is a must, which will have a direct impact on efficiency, on competitiveness. B2C may be an option. Whereas B2B is a revolution to our mind, B2C is more about an evolution or as one colleague of mine likes to put it, it could be described as the Cinderella of B2B.

Now, this is again what I'sve just tried to explain. There is often one mistake we observe, namely, if you just look at the figures, neither B2B nor B2C is rather impressive. Although there is a lot of talk, a lot of hype, nevertheless B2C will only grab limited market shares in retail. This should, however, not lead to the conclusion that B2C doesn'st matter. The real impact of B2C, of business to consumers, is much bigger than these figures indicate. Now, in some sectors it will completely change the business models such as in the financial services. In others it will at least result in new competitive patterns. But in any case, it will enhance competition, reduce profit margins, improve transparency, raise consumer expectations. Thus, even if e-business might have only a little statistical impact as compared with the overall share in gross national product, the overall implications go much beyond figures. Please bear this in mind.

Now, if we look specifically at the health sector, we should be aware and it has been mentioned again this morning that health is amongst the most popular themes on the Internet. This is where most Internet visitors are looking for information. Maybe in the case of the pornography they are not looking that much for information. It is maybe one of the reasons why health has become more popular than this specific web site. But nevertheless there is a growing number of web sites. Nobody can really tell how many web sites are available. What is important for policy makers is that, of course, you will find on the web, the good, the bad and the ugly. Nobody should be surprised, should be shocked to find on the web exactly those things which he or she finds in everyday life. The Internet is very much a mirror of our societies. Nevertheless it still attracts the

attention of media if abuses can be reported if low quality is at stake and to the like. Of course this is very important to know for well established companies who have to lose something. Their brand, their reputation and the like.

We have to be aware that, of course, the Internet reflects human behaviour. Nevertheless this may attract public interest, this may attract also the policy makers to resolve the issues. Now, we find many different forms of web sites. Some of them are more or less advertising, others are trying to better inform the consumers. Only very few are really interactive and where they are, of course, they are not necessarily well managed the supplies to many of the chat lines. So, there is a big opportunity for companies to improve the quality of such web sites, to better inform the patients and to pave the way for real dialogue between patients, doctors and maybe pharmacists. All this will happen online, at a global level, across the borders and of course this is adding to the problems we have already now. You may be aware of the recent Court decision in France where a French Court has imposed Yahoo to carefully watch their web sites not to allow access to web sites which contain racist material, for example, where you can buy Hitler's Mein Kampf and so on. So, be aware that even if your web site may be addressed to your local community only, it is accessible also to others and this may infringe with National Laws you'sre not even aware of.

As far as the health web sites are concerned, there is one interesting figure so far. We all believe that the Internet is driven by young people, by people between 25 and 40. Now the fastest growing Internet population is 50+. So, what we can observe is that the Internet is now really attracting everybody and there are quite impressive figures, not only in the US but also in Europe. For example, the Internet penetration in Germany has increased by 50% within 9 months from 21% to nearly 30% within 9 months and it is realistic to assume that also in Europe, in the near future, more than half of the population will have access to the Internet as this is already the case in 4 or 5 member states. You should not forget that there are different ways to access the Internet. This is not only through PC, through mobile telephony, but increasingly also through the digital TV. This can be done at home, this can be done at work. Most households own a PC already and it is very often only a very small step, a very little effort to be connected to the Internet. And this explains also this enormous increase over the recent months, because this is not mirrored in the statistics of PC sales, which may be striking, but this is clearly an indication that most households, most companies are well equipped and we will experience very rapid growth in Internet penetration. Now, for the time being, the Internet is clearly dominated by the English language, although we are trying hard in Brussels to destroy English by using it. At the very beginning our English colleagues are always very proud that they do not have to learn another language, that they can communicate easily in their own language, but nobody should believe that you can impress others by Oxford English and you can be sure that we will all manage to create a new international language. But on the Internet it's even worse. You will soon see that the domination of the English will diminish, will disappear. It is to be expected that already, at the end of this year, the next year, the non-English speakers will have the majority. Now, this is mainly due to the fact that more than 1billion people are living in China. So, Chinese will become the second language on the Internet. But also, many local, national communities will not only persist to exist, they will even gain importance. M-commerce is very much about localization and if you want to talk to your customers, you have to talk their languages. Even if English is the lingua franca, it will never become the language used in and by markets, in particular not in B2C markets. And this

can be observed by the fact that most of the global companies have established local subsidiaries. It is doubtful whether Yahoo can still be considered as one company. They have at least 24 local subsidiaries and you must speak Greek, you must speak Finnish if you want to approach these countries.

Now more information is still the key asset in the health sector. The question is whether this will really result in better informed patients. Of course, there is a lot of information, there is also a lot of confusion. What is important to understand is that there are many different groups interested in health information. We have, of course, the different net healthcare sites and these are the sites which are most popular now. But of course others will soon follow. Medical information will be provided also by pharmacists. They are aggressively entering into this kind of business as well, building up their own portals. So far retailers are still reluctant, they rely on their trusted relations with pharmacies, but it may well be that they will also try to build up brand names with a view to directly sell to end consumers. But of course medical insurance companies also have a strong interest in better informing their patients with a view to reduce costs. Now, all this will of course result not only in better informed but also in more demanding patients. An increasing number of patients already believe that there is a shared responsibility and a large minority believe that they themselves are in charge of their own health. Now this is, of course, something which can only be welcomed. The Internet will reinforce the self responsibility of the patient and this will change, hopefully, not only their behaviour but also their cost consciousness.

I am now speaking on behalf of public authorities, not necessarily reflecting the interests of pharmaceutical industry, I have to confess. Now, let's talk about one specific problem which is catching most of the political interests and this is the issue of e-pharmacies, cyber pharmacies. This is a growing phenomenon, in particular in the US where more than 400 cyber pharmacies are reported to exist. This may have changed after the Stock Market corrections because most of these e-pharmacies have never made any profits and they came under enormous pressure. So, there is also a kind of consolidation underway. Nevertheless they exist. They are part of the system, so to speak. Also, in the EU we can observe at least some e-pharmacies in some member states. So far most of them are operating at national level, and where they are trying to cross borders they face some difficulties, as you may have noticed in the case of a Dutch Pharmacy trying to sell drugs to Germany. Now, this is of course the beginning of this story. This may not be the end. Although, for the time being, it is extremely difficult to establish a successful business model in Europe and there are many well documented reasons for this. This is first of all the fact that Europe is largely fragmented. There are different reimbursement systems, different pricing mechanisms, but of course also the possibility to sell over the distance is regulated differently. Only 3 member states currently allow for distance selling of pharmaceutical products, these being the UK, the Netherlands and Denmark. On the other hand, however, there are well documented cost savings. There is of course the interest of the insurance companies to reduce costs, to negotiate special contracts with e-pharmacies. So, on the one hand we have apparently a strong economic interest, in particular on the side of the insurance companies, on the other hand there are some legal obstacles which can only be overcome in a very difficult manner. Now, if you look further at the opportunities of e-pharmacies, I think it should be acknowledged that e-pharmacies at least are promising the advantage of a more secure and better controlled chain from the doctor to the pharmacy. Many prescriptions are simply lost. They never arrive at the point of sale.

Now, of course, this risk could be minimized by e-prescriptions. Also, it is well known that a great deal of medical errors occur at the point of prescription or between the prescription administration. Here e-prescription again could ensure better handling of prescriptions, thus reducing the risks. And one should also not under estimate that pharmacies are often open market places, so to speak, where privacy is not well protected. Price differentials, price advantages are not necessarily the main advantage of e-pharmacies. One other advantage is often cited in service is simply convenience. And here there may be a market for such business models. Thus, e-prescription will solve many practical problems. It may also, contrary to what I put on this slide, create new ones in particular as far as the relations between pharmacies and insurance companies are concerned, but altogether we believe that the advantages are much bigger than the potential disadvantages.

Now, in economic terms, e-pharmacies provide some opportunities also. This is first of all lower prices through special price arrangements. Although this might be based on cherry picking, we should not assume that the current business model of retail pharmacies, covering the full board of medicines will be copied by e-pharmacies. It is more to be expected that e-pharmacies will limit the range of products, will concentrate on some best sellers and will aggressively advocate them. So, there is a different model behind. But on the other hand it allows also for more efficiency, more rationality, in handling the entire process. And once again, it is not only about lowering the prices, it is in many cases, also about more convenience. And this of course has something to do with the changing consumer behaviours. Maybe already next Christmas we will experience millions of new online customers. Now, once you start to use the Internet to buy products and services, to download, to stay longer on the Internet. Also this has dramatically changed over time. In the US, citizens stay roughly 10 hours per month, on average. Some don'st even sleep. But on average consumers spend 10 hours on the net, surfing, informing, buying, whatever, chatting. In Europe this is just 6 hours. Now, this has something to do with tariffs, this has something to do with the different consumer behaviour. But this is changing and the more consumers are accustomed to use the Internet, not only as a source for information but also to buy goods and services, the more likely it will become that they will also start buying or looking for medical products. Maybe starting with beauty and wellness products, but to the next category, may already be OTC, aspirin, skin screen and to the like, and of course the most difficult problem to solve is how to sell prescription drugs over the Internet because we have to assume that of course e-pharmacies are pharmacies as well. So, they have to fully respect national and European law. They should only issue prescription drugs if they receive the prescription. If they are in full control of the distribution channel and so on. Now, this is not easy to do and this is also the reason why even the most optimistic analysts do not believe that e-pharmacies will really take off in Europe over the next year. On the one hand there are promises, there are opportunities which are however very difficult to reap. This may be easier at national level. However, national markets are relatively small, in particular if you have to move first into the market for wellness, for OTC and the like. Now, if you want, however, to build up European company, you have to respect many different national laws. You have to customize your web site in many different ways and this of course will incur also higher costs. Higher costs in the marketing effort, higher costs in particular with respect to the distribution of medical products. Therefore there may be a big prize to win, but this prize will not be easy to be grasped.

Now, if we look at the likely scenario, we do not expect e-pharmacies to grab a market share higher than 0.5-1% of the overall market. Of course in absolute terms this is still a lot of money and many companies may be able to share this market even making profits. But nevertheless this will become a difficult market. And this is also the reason why not that many companies are successful, are making profits in this market and have received the full support of investors. Also this I think is a clear sign of the difficulties e-pharmacies are facing. Now, on the other hand, let's look also at some of the consequences, whether all this will happen or not. But at least we should expect also some changes. One element and this is, let's say, a very reliable prediction is that increasing cost pressure will force insurance companies to look for every possibility to reduce costs. And if e-pharmacies will overcome some of the legal and regulatory hurdles, of course they are promising to reduce costs, in particular for long term diseases, for frequent prescriptions and the like. And the moment where e-pharmacies, let's say, will take off economically will be once they have concluded special arrangements with national healthcare systems with insurance companies and this is what they are looking at. For Europe we do not expect alliances between e-pharmacies and the pharmaceutical industry that soon. This is mainly due to the fact that e-pharmacies are establishing a true European internal market, that price transparency enhance, that further incentives for parallel and import will be given and this is not really what pharmaceutical industry is looking for. On the other hand, we believe that e-pharmacies may reinforce already existing trends towards drug store chains and the like. And of course traditional retail pharmacies will be faced with these new realities whether they like it or not. So far e-pharmacies can operate only under very restrictive conditions. It is unlikely that most of the legal restrictions will be lifted over the next 1,2,3 years. Now, this is not difficult to predict because nothing has been initiated so far and it takes at least 3 years to adopt new European legislation. And nothing is in the pipeline for the time being. The legal and regulatory framework will remain stable at least for the next 2-3 years. I think this is fairly easy to predict. On the other hand there will be an increasing pressure on national derogation's. The distance selling directive leaves it to member states to decide whether they allow or ban distance selling for pharmaceuticals. And as I said, only few member states have opted, so far, for liberalizing distance selling also for pharmaceuticals. And what is not covered by the distance selling directive is often covered by other national law like the German Utznei Middel Gazettes, like ethical arrangements. However this is on the change and take the example of the UK where the ethical guidelines of the Royal Medical Commission have been changed in order to allow also for distance selling. And what will happen is the following: Of course there may be good reasons to restrict distance selling for pharmaceutical products. Safety, healthcare are extremely valid reasons and nobody should dispute them. However, there may be different ways to comply with such objectives and there will be a discussion to which extent e-pharmacies can offer secure and reliable services. To which extent they are really in control of the distribution. To which extent they can ensure the safety of their logistics. All this will be further investigated and depending on the answers given by the e-pharmacies, this may result in continuous ban or in new decisions. So, we still have to see whether this situation will alter the situation in member states. The problem may occur if member states give different answers to the same questions, because in that case we may face a conflict between national law, reflecting the legitimate interests such as protection of health, consumers and so on and European law, and also, and I would like to underline also, not exclusively but also, interested in the free circulation of goods and services and here we have a clear principle. And this is

the country of origin principle. That is to say, if one product can be legally produced, commercialized in one country, it should, in principle, also be exported to other member states. Except there is a problem, and then we have to see how resolve this problem. If other member states are blocking such an import, such a delivery, then they have to demonstrate that this action is reasonable, justified and proportionate. And there are different ways to find out whether this is the case. Now, summing up, it should be noted that e-pharmacies are a new reality. They exist, no matter the size of their economic impact. We do not believe that e-pharmacies will become the new dominant business model for the distribution of pharmaceutical products. They may only grab relatively little market share, maybe 0.5%, maybe 1%, maybe 2%, but that's it. This however represents great volumes, revenues, business opportunities and, unfortunately for us, this may also result in new conflicts between national and European law. Now there are different ways to handle such conflicts. One strategy is by national adaptation of law and this is what happened in the UK, this is what is being discussed for the time being in Germany and this is why the European Commission rather takes a wait and see's attitude. We still have to see what will be the real impact of e-pharmacies, which arguments will be used in order to defend existing structures and to which extent are member states prepared to change, to adapt their national legislation. This is not something which can be discussed at European level only. This will take time. All relevant stake holders will have to be involved in this process and it will have to be carefully checked how legitimate public interest can be best safeguarded. But one way to do it is to give member states the time to reflect, to discuss and, if necessary, to adapt their national legislation. This may also, let's say, trigger a debate at European level. And we may be in a situation that this discussion which has started at national level will be leveraged to European level. And of course, there are hopes and concerns. First of all there is the hope that the European Commission will give more importance to the home country control principle, to the free circulation of goods and services, but of course there is also the risk's that the perceived risks of the Internet will result in new legislation at European level, trying to limit the damages which can be created by unlawful, indecent or whatever dangerous practices. But it is not excluded that in the months, years to come, there will also be the need for a more harmonized approach at European level. This is however not the approach followed by the European Commission at this time, but we will have to see how the European Parliament will react, how the risks will be perceived and whether the national discussion will be leveraged to the European level and of course in the meantime such conflicts may also be subject to Court decisions. If, for example, the Dutch pharmacy which has been banned from the German market will directly appeal to the European Court of Justice, then we will have to see how the European Court of Justice will try to define a better balance between the internal market principles and the policy objectives. So, the European Court of Justice may also play an important role in this. And please don'st forget that at the very beginning of the internal market the European Court of Justice has given us, let's say, the direction. It was the famous Cassis de Dijon case where the German authorities tried to block the import of a French liquid by arguing that it had not enough alcohol to be allowed to label as liquor. This of course was not that convincing and it is very difficult to convince the European Court of Justice that you have to put more alcohol into a liquor in order to sell your product and that all this is defended by healthcare considerations, consumer protection. So, from the very beginning the European Court of Justice has acted as a catalyst for building, for shaping the internal market and the problem was always how to find a balance between national derogation's, national interest, health considerations on the one hand and internal market considerations on the other hand.

And of course we believe that a very strong catalyst in all this will have to be played by self regulation. Many of the problems created by the market, can be solved by the market itself. And this relates to privacy policies, to quality management, codes of conduct and the like. So, our plea is that self-regulation should be better used, more used in order to tackle also issues of public interest. Of course all this will result in further discussions, debates. There are different interests to be arbitrated. The question is only whether this will be a managed process or whether there will be hard landing. A managed process in the sense that we should make an effort to openly discuss the issues, not to hide, not to insist on, let's say, traditional channels, but looking at the new realities brought about by the Internet, the new opportunities, the new risks and how this can be balanced. Or whether we take a wait and see's attitude and then we will see what will happen. Now, personally I would be more in favour of a managed process. On the other hand I know as well that some mass needs to be accumulated first before we can enter into a rational discussion at European level, and I'sm not yet quite sure whether we are there or whether the problems still have to increase. Thank you.

Q: Pertaining to the fact that the distribution of drugs can be readily available throughout Europe, for example I would purchase my drugs in Germany and would get them in France, what would the next step be then for reimbursement? How would we harmonize Social Security Systems throughout Europe to get seamless reimbursement?

A: There are many obstacles and already the assumption that it would be easily possible to send drugs from Germany to France may take some years to happen. It may be easier to, let's say, build a case where this is possible from the UK and from the Netherlands. At least their e-pharmacies are already legally established, whereas in Germany and France it is not even legally possible to run such a company, legally, so this would be the first hurdle. Of course it is clear that only those products can be purchased which are legally authorized under national law, so either you have a European authorization or you have a national authorization. You have to respect all the legal requirements concerning labeling for example, and then if all this has been sourced and you'sre already close to paradise, then of course the last question is, what about reimbursement? And here the question is, this is subsidiarity. This has to be decided by the national authorities. Now in some cases the national health systems insurance companies, or national systems might have an interest to negotiate the conditions under which they are prepared to reimburse also products from other countries. In the case of Germany, for example, 2 or 3 insurance companies have signaled that they would be prepared to reimburse medical products imported from the Netherlands. The reason was simple, they were 20% cheaper. Now, this is however, not necessarily in compliance with national law and these were mainly private insurance companies taking the initiative. Legally there are no constraints. National systems can do whatever they want to do, there is no European law saying, you are not allowed to reimburse products from other countries,'s but this is not what is happening right now. So, the answer is, this will happen only at a moment where the cost pressures are really felt and where insurance companies and health systems believe that this is the most convenient way to contain costs.

Q: It is enlightening to see how well the Commission considers what is happening in the market place, but at the end you left a question, managed process. How can we understand that? Is it a managed, accelerated, harmonized

process in Internet years, or what is the perspective to get some basic things resolved?

A: Sometimes also Internet years can take rather long. I do not believe in speed only and in this case I don'st believe in speed at all, frankly speaking. Managed process is that this discussion shall happen in an open and transparent manner. And just to give you one example, the German Government has decided to organize a workshop on the 13th of December, where representatives from the pharmacies, the pharmaceutical industry, the insurance companies, the European Commission are invited to have a discussion and the first thing to be done is to put things right, to look into the market realities, into the potential risks and benefit, and only then to decide and reflect what needs to be done. This I would consider as a rational, as a managed process. If you carefully assess the different options you have and if you carefully reflect how to balance between public interest, which cannot be ignored and denied in this field and the market dynamics, innovation of new products and the like. This I would call a managed process and I think the European Commission has already contributed to this just by calling for such a managed process, just by providing the market analysis and by approaching member states with the facts. Of course now we have to see how member states will react and in some cases they have reacted with remarkable speed. In the UK for example, the ethical guidelines were changed within 6 months, allowing for e-pharmacies. This may take longer in other countries where the retail pharmacies are strongly represented and where elections are closed, but all this, let's say, has to be balanced and I am rather confident that we can manage this process. It is the beauty of Europe, you see. It's very difficult to argue, it is not possible. You will always find some examples and the approach of bench marking, of best practices, is useful also at political level. And this is the way we are trying to manage the process, just managing by examples, managing by analysis, and then we have to rely on the consciousness and the self responsibility of policy makers in all member states. But I am extremely confident that this will happen.