Another twist in the EU parallel trade saga?

One of the unusual features of the European pharmaceutical market is parallel trade, which involves the cross border trade of a given product in parallel to a manufacturer's official supply chain in that country. Parallel trade has occurred in Europe since the 1970s when trademarks and patents were not viewed as lawful obstacles for the resale of products.¹ As a result, the trade survives because of differing prices between European countries.

Faiz Kermani

Why does parallel trade exist in Europe?

The legalities of parallel trade are dictated by the traders' right to resell products that have already been placed on a particular market by the manufacturer — as it was probably not the intention of the manufacturer for these products to be sold elsewhere by another company. This concept is often referred to as "exhaustion of intellectual property rights." As the manufacturer researched the product, it has certain rights (intellectual property rights) that mean it can benefit financially from its investment in an exclusive manner so that it can recoup its development costs. Thus, when parallel traders resell a particular product that they themselves did not research and develop, this angers manufacturers, who see them as having profited from their discovery.

Much to the annoyance of the pharma industry, the EU operates a system of regional exhaustion, which means that manufacturers' intellectual property rights are exhausted on first sale of the product in any EU member state. Thus for example, if a product is sold by a manufacturer in Spain, a parallel trader has the right to buy that product and then resell it in another EU member state, such as Finland.

The parallel trade of pharmaceuticals, as with other classes of goods, is based upon the EU principle of free trade. This means that there should not be any obstacle to the free movement of goods between individual EU member states. Since 1958, when the Treaty of Rome establishing the European Communities came into force, the EU has had common legislation to protect competition.² Article 81 of the Treaty of Rome prohibits agreements distorting competition, and Article 82 prohibits the abuse of dominant position by companies. This means that companies enjoying a dominant position in the market cannot take actions to damage trade occurring between the member states. Article 86 of the Treaty also states that member states may not adopt any measures that restrict competition, as these will be contrary to European Community rules.

Despite these regulations, the exact conditions necessary for parallel trade are constantly being challenged by pharmaceutical manufacturers. The concept of parallel trade is allowed under European law, but when it comes to the trade of medicines, manufacturers believe that the risks to human health must also be considered. Believing current legislation to be unclear, manufacturers feel that specific conditions must be set out to dictate how parallel trade applies to medicines. For example, a product could arrive from a different member state with the labelling on the pack being in a foreign language, which manufacturers claim would confuse the patient. Parallel traders will often try to solve the problem by relabelling the pack in the local language or repackaging the product, but to manufacturers this amounts to interfering with the product and should thus be considered illegal.

Although the legal environment of the EU allows parallel trade to occur, the scale depends on there being significant price differences for the same product in different markets. In the EU, countries in the north have traditionally been seen as high-price pharmaceutical markets compared with countries in the south. Therefore, it is not uncommon to see parallel traders sourcing products from cheaper countries and attempting to sell them in more expensive European markets. Once a parallel trader has applied for, paid for and received marketing authorizations in the country of destination, the pharmaceutical products are transported to the higher-priced country. Here they are adapted to local requirements according to national law, before being sold to wholesalers or direct to pharmacies in parallel with the same medicine sold by the original pharmaceutical manufacturer or marketing company.

Outside the EU, the situation is different and the issue of exhaustion of intellectual property rights becomes controversial. Although the manufacturer may have exhausted his intellectual property rights on a regional basis, this does not mean that the product can be sold elsewhere; for example, the US. Similarly, a product cannot be brought into the EU that has been sold in another country. Thus, manufacturers retain their intellectual property rights against parallel imports from third countries.

A new set of EU legal battles

Both pharmaceutical manufacturers and parallel traders have attempted to interpret European laws in their favour. This has resulted in numerous, long court cases, both at national level and at European level, particularly at the European Court of Justice (ECJ). Parallel traders believe that national economies benefit from the cheaper drugs they provide and cite the legal cases they have won against manufacturers as evidence of official backing. Very recently, however, there has been a shift in legal and political thinking that may place parallel traders under new pressure.

A frequent complaint by the pharma industry is that parallel trade undermines the ability of companies to invest in R&D. The European Federation of Pharmaceutical Industries and Associations (EFPIA) estimated that parallel trade in the EU reached €4.7 billion in 2007,³ which represents a sizeable drain on company profits. Although parallel traders dispute this figure and its financial impact on R&D, European authorities are concerned about detrimental effects on research and so may reassess how relaxed they want to be over this business practice.

More worryingly, parallel trade is cited as disruptive to pharmaceutical supply chains. In September 2009, the Association of the British Pharmaceutical Industry (ABPI) warned that parallel trade was depriving UK patients of medicines.⁴ Certain medicines were found to be in short supply despite independent analyses confirming there had been sufficient initial distribution to satisfy national demand. For example, Novartis was reported to be providing 65% more than its usual supply of its kidney transplant product, Myfortic (mycophenolic acid) to the UK market, but this was still considered insufficient to meet demand.⁴ According to the ABPI, the cheaper price of such products in the UK market was leading to parallel trade worth £30 million a month to other EU markets.⁴ Parallel traders reject assertions that their business interferes with product supply, but will nevertheless be concerned about consumer reactions to such news stories.

Is the law now favouring pharma?

Reports suggest that the French government is set to introduce a dual pricing system, which will directly dampen the ability of parallel traders to sell products outside France in other EU markets.⁵ The law would allow companies to charge higher prices for products that are exported from the country than those used within France. The change in the law seems designed to protect the pharmaceutical supply chain in France, as well as helping to revitalize the French domestic R&D sector. Regardless of the motives, if the government pursues this policy it will be strongly challenged by parallel traders in the ECJ.

In the past, measures that directly restrict the free flow of goods have allowed parallel traders to build a strong legal case at the ECJ. However, there are signs that the EU's legal environment is also changing. In October 2009, GlaxoSmithKline (GSK) won an important legal case at the ECJ despite previous European Commission (EC) rulings against the company's measures to prevent parallel trade.⁶ In 1998, GSK had introduced special conditions for Spanish wholesalers that involved different product pricing depending on whether a product was to be sold in Spain or exported to other EU markets.⁶ The EC took a dim view of this in 2001, ruling that GSK's measures breached European competition rules. In 2006, the Court of First Instance supported the EC's initial decision, but it did leave grounds for an appeal to the ECJ.⁶ In the most recent development, the ECJ reiterated that agreements that restrict trade are to be considered anti-competitive, but also stated that the EC should have considered whether GSK's measures qualified for an exemption.

The new ECJ ruling gives hope to pharmaceutical companies that measures they devise to restrict parallel trade cannot simply be dismissed out of hand as being anti-competitive. As this legal case develops further, it will be interesting to see if any pharmaceutical company policies to limit parallel trade are eventually deemed to be acceptable.

Outlook

Loathed by pharmaceutical companies, but loved by those in favour of measures that have a downward pressure on pharmaceutical prices, parallel trade has continued because of a general desire for the free movement of goods in the EU. Recent shifts in government policy and certain court decisions suggest that pharmaceutical companies may have gained the edge in the arguments over the technicalities of this business practice. However, parallel trade is far from doomed in the EU as any new judgement is likely to result in a number of appeals. Therefore, a counter-attack from those in favour of parallel trade is to be expected.

The author says...

• Much to the anger of pharmaceutical companies, parallel trade continues because of a general desire for the free movement of goods in the EU.

• Recent shifts in government policy and certain court decisions suggest that pharmaceutical companies may have gained the edge in some arguments against certain trade practices.

• Counter-attack, in the form of an appeal, however, is to be expected from those in favour of parallel trade.

• It would seem likely that parallel trade will continue to thrive as pharmaceutical cost pressures continue to place a burden on healthcare budgets throughout Europe.

Faiz Kermani is a freelance consultant and President of the Global Education Foundation. He is a member of Pharmaceutical Technology Europe's Editorial Advisory Board. faiz@doctors.org.uk

References

1. J. Killick, Brussels Legal (2006). www.brusselslegal.com

2. Europa, Treaty establishing the European Economic Community, EEC Treaty — original text (non-consolidated version) (2007). http://europa.eu

3. EFPIA, Improving Europe's competitiveness (2008). www.efpia.org

4. Manufacturing Chemist, Parallel trade is depriving UK patients of medicines, says ABP (2009). www.manufacturingchemist.com

5. Pharma and Healthcare Insights, Government To Implement Dual Pricing System For Medicines To Combat Parallel Trading (2009). www.pharmaceuticalsinsight.com

6. Norton Rose, European Court rules on Parallel Trade in the Pharmaceutical Sector (2009). www.nortonrose.com