CONSEQUENCES OF PARALLEL TRADE
74. SmithKline Beecham noted in evidence that eight
of their products in the UK were subject to significant levels
of parallel trade and "for three of these between 40% and
55% of prescriptions written by GPs are filled with medicines
imported mainly from France and Spain." The consequence has
been that "SB announced 123 UK posts redundant due to restructuring
required as a result of competition from parallel trade in our
Glaxo Wellcome told us that parallel imports of their products
into the UK amounted to £106 million in 1998. For four of
their leading products parallel imports last year accounted for
between 25% and 43% of UK sales with resulting losses of £42.3m.
From the view of the exporting country, the ABPI told the Committee
that "there are shortages of some of our products in Spain
at the moment because more of it is being exported by the wholesalers
than they should do".
Unfortunately, despite the Committee requesting figures indicating
such shortages, the ABPI were unable to supply them. It is interesting
to note that it is reported that Alliance UniChem, the drug retailer
and wholesaler, has hit back against parallel importers by starting
its own parallel import arm.
75. The API claim that "the research based industry
overestimates the volume and value of the trade using unreliable
data from sources which admit that the figures used are, at best,
The API also listed a number of 'tactics' used by the innovative
pharmaceutical industry to limit parallel imports including: making
products available only in small batch sizes; supplying direct
to pharmacy outlets at reduced prices; applying for licences in
different strengths of drug dosage (for example, 10mg strength
in Spain but 20mg in Germany); and different pack sizes.
Mr Barker told us that making tablets of different colours, shapes
or with different packaging, was "a conscious attempt to
impede the trade which they will privately admit".
76. We have received conflicting accounts over
the extent to which parallel trade brings financial benefits to
the Government through lower wholesale prices. The ABPI referred
to the 'clawback' mechanism which attempts to direct some of the
profits accruing to pharmacists back to the Government, but claimed
"the main beneficiaries of parallel trade in pharmaceuticals
The clawback system is a complicated one that is designed primarily
to reimburse the pharmacist at their net acquisition cost.
Pharmacists and dispensing doctors are reimbursed according to
a UK tariff price.
The NHS pays them a 'headline' price (based on the list published
price of the medicine) less a percentage reduction representing
the average discount obtained against headline prices (calculated
on the basis of discount inquiries). The headline price for proprietary
products is set by the manufacturer.
Wholesalers compete for business on discounts offered to community
pharmacies and dispensing doctors. The MCA told us that the annual
pharmacists' discount inquiry seeks to determine the average discount
attained for proprietary, generic and parallel imported medicines
and to establish a fixed claw-back that is applied to pharmacists
to capture the discount benefits for the NHS. The discount inquiry
indicates that parallel imported products are, on average, supplied
to community pharmacists at a higher discount rate than the equivalent
UK-sourced proprietary products.
Consequently there is some incentive for pharmacists to dispense
parallel imported drugs because their profit levels will then
be higher. The ABPI also told us that "certainly the patients
do not benefit because they pay their flat prescription charge",
and that "for every £6 of reduction due to parallel
trading the Government only sees £1".
The API, on the other hand, told us that the clawback mechanism
"yields a saving of some 2% of the total drug bill to the
Treasury each year".
They also told us that "there are many examples of both where
the original manufacturer has been unable to seek a price increase
and where prices have been reduced as a direct consequence of
the share of the total market being obtained by the imported version."
The evidence suggests while only a small proportion of the
profit of parallel trade in pharmaceuticals accrues to the taxpayer
in the form of lower levels of reimbursement to pharmacists, there
are no overwhelming arguments in public policy to restrain such
77. The innovative pharmaceutical industry maintain
that international exhaustion of intellectual property rights,
particularly patents, would have far reaching effects. SmithKline
Beecham noted that they, and other companies, agree to lower prices
in those countries least able to afford modern medicines and vaccines.
"In essence a virtuous circle exists, which allows the industry
to recoup its investment, 'poorer' countries to benefit from prices
they can afford, and patients across the world to have access
to new medicines".
Glaxo Wellcome stated that their "policy of providing Retrovir
for the treatment of HIV/Aids in developing countries at one quarter
of the price in the developed world would have to be reconsidered,
since it is only the Western price that reflects the R&D investment
We are not convinced that the pharmaceutical companies would be
unable to supply such drugs to third world countries. We accept,
however, that the nature of the pharmaceutical market means that
any move towards international exhaustion of intellectual property
rights could have severe consequences.