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Feature

Global pharmaceutical parallel trade: Can it ever happen?

Posted on: 15 Oct 03

Summary

One of the most controversial issues in international healthcare is the practice of parallel trade of pharmaceuticals. Parallel trade, sometimes known as the 'grey market', involves the cross border trade in a given product in parallel to a manufacturer's official main supply chain in that country.

One of the most controversial issues in international healthcare is the practice of parallel trade of pharmaceuticals. Parallel trade, sometimes known as the 'grey market', involves the cross border trade in a given product in parallel to a manufacturer's official main supply chain in that country.

 

Why parallel trade occurs

Parallel importation of pharmaceuticals exists where there is a significant price difference for the same product in different markets. For example, a survey by the US non-profit organisation the Consumer Project on Technology revealed that prices for the drug Amoxil (amoxicillin) varied considerably around the world – with the cheapest price being US$8 in Pakistan and the most expensive price being US$60 in Germany. Pricing variations of this kind have angered patients in industrialised countries who are already having to contribute a greater share of their income for healthcare than in the past. Furthermore, governments who fund healthcare systems are eager to stem the ever rising costs of drugs and have seen parallel trade as one means of doing this.

 

Pharmaceutical manufacturers are firmly against parallel importation. As parallel traders reduce their profits, manufacturers claim that they will have less money to spend on R&D. Thus patients will lose out because there will be less opportunity to fund the research necessary for new drugs. The European industry body, EFPIA, put the loss to European R&D at around euro1billion. Manufacturers also often express concern that parallel imports do not meet international standards on safety, quality and efficacy and give rise to counterfeiting. According to the World Health Organization (WHO) up to 5% of drugs on the global market are counterfeits, and the practice is not just restricted to developing countries. Parallel traders do not agree with these arguments and disputes with manufacturers have led to various complex and long-running legal cases. In the European Union (EU) alone, it has been estimated that there have been 24 major legal cases in the last thirty years.

 

Where parallel trade occurs

Within regions such as the EU the large majority of products circulate freely without restriction on parallel supply. Thus the EU has been the main region where parallel trade has flourished. In the EU, countries in the north have traditionally been seen as high-price pharmaceutical markets compared with those in the south. Therefore, it is not uncommon to see parallel traders sourcing products from countries such as Spain and Greece to sell them in the Scandinavian markets. Although, as a whole parallel imports vary widely across the total European prescription pharmaceutical market, they can account for as much as 10% of the total prescription sales in certain European countries. For pharmaceutical manufacturers this represents a substantial loss of profit. According to parallel traders, despite the complaints of manufacturers, there is nothing new about the practice of parallel trade, which they say has occurred in Europe since the 1970s.

 

However, outside the EU, parallel trade may, in principle, be prevented by a manufacturers if such trade occurs without their consent. In particular, any moves to allow parallel trade in the USA have been firmly opposed by the pharmaceutical industry. Despite the importance of the European pharmaceutical market, the USA remains the world’s largest market and consistently shows double-digit growth rates. It is also a region which has traditionally been seen as one which allows pharmaceutical companies to price their products as they wish. However, US consumers are becoming much more aware of prices in other markets and the issue of parallel importation from cheaper markets has been raised by some members of Congress.

 

The legal minefield

The laws relating to parallel trade are complex and are constantly being interpreted by manufacturers, parallel traders, legal experts and politicians. Whether the practice can take place or not depends to a large extent on the right to resell a product that has already been placed on a particular market by the original manufacturer – as it was presumably not the intention of the manufacturer that this product be sold elsewhere by another company.

 

The key issue thus remains the ‘concept of exhaustion of intellectual property rights’ and how it relates to international trade and how the concept is interpreted in international law. Once the owner of the goods has placed his products on the international market, then at some point the owner may no longer be allowed to control the distribution of these goods. In effect, he has ‘exhausted’ his distribution rights by first sale of the goods. The problem is that whilst the exhaustion principle can be more easily defined in a market such as the EU, it remains rather vague in international terms.

 

Outside the EU, the issue of exhaustion of intellectual property rights is very controversial and is constantly being challenged. Although the manufacturer might have exhausted their intellectual property rights on a regional basis, this does not mean that the product can be easily sold elsewhere e.g. bought in the EU and then re-sold in North America. Similarly, a product cannot simply be brought into the EU that after having been sold in another country. Thus manufacturers retain their intellectual property rights against parallel imports from third countries.

 

Will globalisation lead to changes?

Certain politicians favour dramatic changes in this area and wish to see regional exhaustion being extended to embrace the concept of international exhaustion. There are those among the public that believe that increasing globalisation, greater use of the Internet and mass travel have made the idea of specified regions of trade obsolete. In their view, parallel trade of pharmaceuticals should be allowed to occur across the world. This would help reduce prices of products and thus allow freer access to medicines and stimulate competition. A report from Urch Publishing[1], found that parallel trade of pharmaceuticals is taking place in many regions including Canada, Mexico, The Philippines, Japan, Taiwan and New Zealand. In particular, the scale of the AIDS crisis in Africa has led to calls for developing countries to be allowed to import cheaper drugs from other countries. This has expanded the debate about drug pricing from just a financial one to a moral one.

 

However, many believe that that international parallel trade could be dangerous as it will stifle the ability of pharmaceutical companies to invest in R&D and dissuade them from investing in developing countries. What incentive would they have to invest in a certain developing regions, when their products could be bought up at a cheap price and resold at a higher price elsewhere in the world? Furthermore, when Kenya experimented with parallel trade in 2001, an alarming number of counterfeit products and sub-potent products began to appear on the market which greatly concerned the regulatory authorities as they endangered the lives of patients. Thus, safety issues will need to be addressed before parallel trade can be allowed to occur between different global regions.

 

The outlook for international parallel trade

It is clear that the arguments over international parallel trade will not go away and whatever the outcome, it is bound to cause controversy. As well as looking to national governments for guidance much will be expected, by all interested parties, from the World Trade Organization (WTO), as in principle it regulates trade between nations.

 

 

[1] Parallel Trade in Pharmaceutical – Past & present scenarios, Urch Publishing 2003.

Nathan Jessop

Last updated on: 27/08/2010 11:40:18

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