Memorandum submitted by the Association
of the British Pharmaceutical Industry |
ABPI represents the majority of research based
pharmaceutical companies trading in the UK and supplying approximately
85 per cent of medicines used by the NHS. The British based research
pharmaceutical industry in the UK discovered 25 per cent of the
top 50 medicines used globally and has a strong reliance on intellectual
property rights including trademark protection. The industry employs
about 80,000 people within the UK, contributes more than £2
billion trade surplus to the UK economy, and is a leading exporter.
The pharmaceutical industry has long been exposed
to parallel trade within the EU. Parallel trade has grown
in recent years to a level which has a significant impact on the
distribution of medicines in the UK. Case law within the EU has
established the circumstances under which free circulation of
medicines can occur with the appropriate safeguards for the supply
However, outside the EU parallel trade
resulting from the abuse of intellectual property rights between
countries outside the EU raises significant concerns with regard
to the adverse effect on the innovative research based industry
which provides new medicines for the future. It also may affect
safety and quality of medicines, and bring about an increased
risk of counterfeiting and piracy.
The pharmaceutical industry is opposed to
international exhaustion of intellectual property rights.
It would be particularly damaging for the pharmaceutical sector.
Key factors particularly affecting pharmaceuticals and not other
efficacy, manufacture and distribution of medicines are strictly
regulated to protect public health;
regulation of pricing and reimbursementgovernments
as monopsony purchasers enforce national control of medicines
within their healthcare frameworks;
in a situation of international exhaustion,
industry would either be forced to price to the lowest global
price and destroy the future of R&D or sell selectively
to developed countries.
The pharmaceutical industry is opposed to parallel
trade in the EU where it causes imbalances in the supply of medicines
in the internal market. Key factors which particularly affect
the need for change in the EU has
been recognised in the Bangemann Round Table discussions, the
Internal Market Conclusions in May 1998 and the Commission Communication
within the EU, parallel trade into
the UK is incentivised but to the benefit of arbitrageurs without
any real benefit to the consumer.
The industry seeks a rebalancing of distortions
in the EU market, and full adherence to international standards
of intellectual property protection in the EU and globally.
In this submission, the industry reviews the
(i) the difference between pharmaceuticals
and other sectors (paras 1, 2.2);
(ii) the background to parallel trade within
the EU and its consequences for the EU rersearch based industry
(iii) parallel trade occurring outside the
EU, the abuse of intellectual property rights and counterfeiting,
and the importance of protection of intellectual property rights
including trademarks (paras 5-6);
2. PARALLEL TRADE
Parallel trade occurs when a product placed
on the market in one country is bought by an intermediary who
exports it to a second country, without the consent of the original
title holder. For parallel trade to exist, the profits available
have to be sufficiently large to be attractive to arbitrageurs,
and this will only occur where there are significant price differences
Within any industrial sector, international
price differences are likely to occur for very many reasons, ranging
from global differences in purchasing power (measured in terms
of GDP/capita) to deliberate price discrimination on the part
of manufacturers. There is a body of economic theory (Ramsey)
which states that, in many circumstances, social welfare is maximised
over the long-term through price discrimination. The theory says
that differing prices can be negotiated at which each group of
purchasers pays the price it is able and/or willing to pay, thus
allowing the good to be made available to the largest number of
purchasers. If, by contrast, a common (median) price is set for
all purchasers (eg as a result of government price setting), the
less well-off could not afford to purchase the good, whilst the
more affluent would receive it at a price lower than they would
have been prepared to pay.
This is the broad basis on which pharmaceuticals
were priced until recently with, for example, developing countries
receiving products at far lower prices than those in the developed
world. This enabled companies to optimise returns in order to
fund R&D and innovation for the future.
The situation has been exacerbated in recent
years, however, due to currency fluctuation and the large number
of governments worldwide who now set prices and can unilaterally
exert downward pressure on prices. International price comparisons
are often used as the basis for setting pricesno country
can now be viewed in isolation since it will often have an impact,
direct or otherwise, on the price obtainable in other countries.
The existence of parallel trade, moreover, means that low, government-controlled
prices in one country are easily exported to other countries.
This occurs particularly in the EU where free movement of goods
is enshrined in EU law.
The pharmaceutical industry is in an almost
unique situation in that, in many countries in the EU and globally,
prices within individual markets are controlled, directly or indirectly,
by purchasers (usually governments) allowing manufacturers little
scope for management of their own international price differentials.
The pharmaceutical industry also differs from
other industries in that there is little opportunity for purchasers
(governments) and consumers (patients) to benefit from the lower
prices implied by parallel trade. Since governments reimburse
at fixed prices (usually a price they have been involved in setting),
and patients pay a co-payment (the prescription charge in the
UK) which is independent of the price the supplier (usually the
pharmacist) paid for the product, any additional benefit realised
by buying in the product at a lower price, accrues to the intermediaries
in the supply chain (distributors and pharmacists). Various mechanisms
are employed, such as the clawback in the UK, which attempt to
redirect some of the profits to government purchasers, but it
remains true that the main beneficiaries of parallel trade in
pharmaceuticals are arbitrageurs.
Under the Paris Convention, Intellectual Property
Rights (IPR) are national rights, so that a title-holder can enforce
his rights in each country separately. Thus, he can prevent the
importation of a product into one country from another country
where it has been sold, either by himself or by an authorised
distributor. Within the EU, the priniciple of free movement of
goods means that there is effectively regional exhaustion; the
title holder exhausts his exclusive right to prevent movement
of a product within the EU once he places it on the market in
any Member State. Parallel trade within the EU is, therefore,
legal and permissible. However, parallel imports into the EU from
non-member states are not allowed.
The example of parallel trade in the EU, and
the series of legal judgments from the European Court of Justice
which have confirmed its legality, are often quoted in support
of the doctrine of international exhaustion. However, the cases
are entirely different since EU law only allows regional exhaustion
and, consequently, parallel trade within the Single Market of
the EU (and is, therefore, akin to national intellectual property
law). This position was confirmed by the judgment of the ECJ in
the "Silhouette" case which has recently been supported
by the Opinion of the Advocate-General in the "Sebago"
3. REVIEW OF
3.1 Tripartite discussion on the single market
The pharmaceutical industry supports the concept
of a single market. However, the industry operates in a unique
environment, in which manufacturers do not have the freedom to
set market prices for medicines. Consequently, the legality of
parallel trade within the context of the pharmaceutical industry
has been tested in the European Court of Justice in a number of
cases over recent years. The ruling of the Court in the case of
Merck vs Primecrown in December 1996 stated that, even if patent
protection was not available in some Member States, by placing
a product on the market anywhere in the EU, the patent holder
had to accept the consequences of possible parallel trade. The
Court did, however, acknowledge the distortions caused by different
price legislation in Member States, but said that these must be
remedied by action taken by the Community authorities.
The inherent conflict between the need to complete
the Single Market in pharmaceuticals and the desire for Member
States to retain control of healthcare expenditure, including
pharmaceutical prices, has been acknowledged by all parties, and
led Commissioner Bangemann to set up a tripartite (Commission,
Member States, industry) dialogue in 1996 to try to resolve this
conflict. After three annual Round Table discussions a solution
does not apepar to be any nearer.
In May 1998 the Internal Market Council, under
the auspices of the UK Presidency, agreed a Conclusion which reasserted
Member States' right to control directly pharamceutical expenditure,
whilst at the same time recognising "the importance of innovation
for the whole pharmaceutical sector and in particular the continuing
need to contribute to research and development costs in prices
paid for in-patient medicines." It concluded that "ways
need to be found within the Treaty to address the question of
price differentials between Member States and the issue of parallel
trade in this sub-sector." The Commission was invited to
prepare a Communication setting out clear steps to address these
The Commission Communication which was published
in November 1998 did not provide the practical response required.
The Commission reasserted the imperative for completing the
Single Market and its complete lack of flexibility in this matter
and placed the onus for resolving the issue of parallel trade
firmly back with the Member States. It sought to use the December
1998 Round Table discussion to seek agreement on the principle
that Member States should move towards deregulation of pharmaceutical
prices, starting with the OTC and off-patent sectors and giving
consideration to the long-term possibilities for the patented
sector. This despite that fact that it was concern over parallel
trade of patented products which gave rise to the original tripartite
Parallel trade of price-controlled pharmaceuticals
within the EU distorts competition and moves Europe further away
from the Commission's stated goal of deregulation of pharmaceutical
prices. National price controls, exacerbated by the existence
of parallel trade, is leading to access to new medicines being
delayed in some price-controlled Member States. This is clearly
contrary to the provisions of the Amsterdam Treaty which reassert
the goal of equal access to healthcare for all EU citizens. Given
the Commission's inability to propose a flexible way of addressing
this problem, industry now seeks to work with Member States to
find the means to manage the distorting effects of arbitrage of
price-regulated products at the national level.
The growth of parallel imports into the UK continues.
Applications for parallel import licences received by the Medicines
Control Agency (MCA) increased by 18 per cent in 1997 over the
previous year. By August 1998, there were 2,726 valid parallel
import licences in the UK, held by 37 licence holders. The UK
is a net importer of parallel traded pharmaceuticals, reflecting
the excessively low government-enforced prices for patented products
in central and southern Europe. Within the UK, higher prices for
innovative products are balanced by an extremely competitive market
for patent-expired products with the highly developed generics
sector driving prices post-patent expiry down far below the EU
average. However, in the wider European marketplace, UK patented
products are vulnerable to parallel trade.
In the short-term, the impact of parallel trade
can be measured in terms of lost sales revenue for companies operating
in the UK. The potential long-term damage to both the UK pharmaceutical
industry and the UK economy as a whole is even more significant.
Some companies may review their long-term commitment to the UK,
with the inevitable consequences for employment.
A recent survey of parallel trade into the UK
by Taylor Nelson Sofres estimated a loss to parallel imports,
measured in terms of prescription volume, of 13.5 per cent. That
is, more than one in eight prescriptions in the UK is filled with
a parallel imported product. This has increased from one in 10
in 1997. The implications of this for patient safety are considered
in a later section.
The main sources of parallel imports into the
UK are France and Spain, followed by Italy and Belgium, all markets
which are subject to direct price control. The currencies of all
these countries weakened considerably against sterling in the
last few years, widening or creating the differential between
the UK price and other EU prices and making parallel imports into
the UK more attractive. Manufacturers are extremely reluctant
to lower prices in the UK to conteract this widening differential
due to currency movements, since it would be impossible to raise
them again should the exchange rate begin to move in the opposite
direction because of government controls.
It should be noted that the price differential
is not the ony driver of parallel trade. Demand for the product
in the recipient market is also important and there is evidence
to show that higher prescription volume products, as well as those
with higher price differentials, are more vulnerable to parallel
imports. Whilst many distributors carry a wide range of parallel
imported products, there are a growing number who specialise in
high volume and/or high profit margin products. This cherry-picking
is in conflict with the EU guidelines for wholesalers and distributors.
Availability of the product in the source market
is also crucial. This explains why most parallel imported products
come into the UK from France and Spain, despite the fact that,
generally speaking, prices are lower in Greece and Portugal but
the supply of products in these smaller markets is insufficient
to satisfy both the local market and the demand for parallel exports.
Supply problems are also beginning to emerge in the larger markets,
in Spain in particular, as the demand for products for export
increases leaving a shortfall in the domestic market.
Another determinant of parallel import penetration
of the UK market for particular products, is the physical similarity
of the product to the UK presentation. Whilst repacking is allowed
under EU regulations so that, for example, a patient in the UK
should always receive an English-language pack, patient acceptability
will be higher if the drug looks the same as the UK sourced variant.
However, supplies of parallel imports are not invariable and it
is by no means certain that a distributor will always be able
to source a particular product from the same country. This can
lead to problems of patient acceptability and compliance.
Parallel trade growth is further driven in the
UK by the fact that, indirectly, UK pharmacists have incentives
to dispense parallel imports. While the clawback mechanism is
limited in recovering the difference between the purchase price
and the reimbursed price from pharamacists, there is an opportunity
for entrpreneurial individuals to benefit financially from buying
and dispensing parallel imported products. In most other Member
States this financial incentive does not exist.
There is a need for all parties to work together
to find a route which moderates and rebalances the supply of medicines
in the UK.
The pharmaceutical industry is responsible for
ensuring the safety and quality of the medicines that it manufactures
and supplies. It is concerned to maintain high standards, not
only within the industry but also in the supply chain to protect
public health. Patient safety is paramount and is protected by
receipt of both a high quality product and clear and accurate
information which will encourage appropriate use of the medicines.
4.1 Product labelling and packaging
The industry wholly supports full and fair competition
throughout the European Community and recognises its responsibilities
to work collaboratively with all parties in the supply chain and
with the MCA to ensure patient safety. The MCA supervises, through
manufacturing and wholesaler licences, products which are imported
into the UK and which are re-assembled or re-packaged to meet
labelling and leafleting requirements. An inspectorate within
the MCA provides a quality check at all stages of distribution
and is responsible for inspection of manufacturing and wholesaling
provisions to ensure compliance with EU law. Guidance has been
issued at European level, emphasising the importance of quality
assurance, appropriate labelling and inclusion of correct patient
information leaflets in the national language.
4.2 Patient safetyissues
Despite these arrangements, there is evidence
of poor practices in certain parts of the supply chain and these,
potentially, compromise patient safety. The particular areas of
concern are as follows:
(i) Poorly labelled and packaged parallel
traded products being supplied to patients
The industry has examples of the following poor
absence of a patient leaflet or a
patient leaflet in a foreign language;
blister pack over-labelling or double-foiling,
resulting in difficulty in removing the medicines. This can additionally
be compounded by misalignment of the over-label, making the information
confusing. Where over-labelling has not been applied the blister
remains in a foreign language, including days of the week/calendar
different appearances of parallel
imported products compared with the UK presentation. There is
potential for confusion and an individual patient could receive
a number of different packs of the same product from a single
pharmacy each month; and
separate (cut) strips of blister
pack enclosed to make up one pack. Some strips contain no information
(ie no product name, batch number, expiry date) which can make
batch recall difficult.
(ii) Inadequate mechanisms for product
recall of parallel trade medicines
It is unclear whether adequate mechanisms are
in place to adequately recall parallel trade medicines. Batch
number recording is not consistently applied throughout the supply
chain and in practice may make comprehensive product recall difficult,
creating a risk to patient safety.
(iii) Potential for counterfeit and diverted
goods (from non EU sources) to enter the UK via parallel import
The industry is concerned that on a global scale
the counterfeiting of medicines appears to be increasing and there
are indications that the UK is at risk of penetration particularly
given the increasingly established parallel import supply channels.
There is evidence of examples of counterfeit goods entering the
UK market which posed a threat to public health.
The industry will continue to collaborate fully
with the MCA and to urge greater scrutiny of the supply chain.
Patient safety is paramount and the industry seeks further intervention
to ensure that consistent and high standards are implemented throughout
the supply chain to promote and protect public health.
Patients should have a legitimate expectation
that they receive a well presented medicine with appropriate labelling
and a patient information leaflet, and be assured that the medicine
has been handled appropriately throughout the supply chain.
5. PARALLEL TRADE
If international exhaustion were introduced,
the title-holder would lose the right to prevent parallel importation
once the product has been made available in the first market anywhere
in the world. There is no international agreement or convention
which supports the concept of international exhaustion. Furthermore,
the WTO agreement on Trade Related Aspects of Intellectual Property
rights (TRIPs) expressly affords the title-holder the right to
The key issue raised by the Silhouette case
(item 2.3) is whether parallel imports of patent-expired trademarked
products from outside the EU should be allowed without the approval
of the trademark holder. Trademarks are an important form of intellectual
property protection for the pharmaceutical industry, especially
in the period after a product's patent has expired.
While the current EU debate relates to international
exhaustion of trademark rights, there are also those who advocate
international exhaustion of patent rights. From what has already
been said, it is clear that the latter would have the most serious
implications for the pharmaceutical industry and for patients.
In brief, it would have the consequences in terms of pricing,
access to medicines and patient safety described above, not merely
for patent-expired products, but for all medicines. In practice,
it would be likely to force companies to seek a single global
price for their medicines and to decline to launch products in
markets where this price could not be obtained. Concessionary
pricing arrangements for developing countries would cease to be
viable if the medicines could be diverted to higher priced Western
markets by parallel traders.
Because of the global nature of the pharmaceutical
market, the pharmaceutical industry worldwide is extremely concerned
about the possibility of international exhaustion. More than almost
any other industry, the pharmaceutical industry relies on intellectual
property protection to enable it to recoup the high sunk costs
involved in research and development of new products. It takes
an average of 10-12 years to bring a new pharmaceutical to market,
at an estimated cost of £350 million per product. The protection
afforded by the product's patent in the years following launch,
and by its trademark throughout the latter part of the lifecycle,
is therefore critical in funding investment in developing new
products for the future.
Illegal trade, using channels opened by parallel
trade, also occurs when counterfeit products are allowed to enter
the supply chain. In many instances the existence of mechanisms
which encourage legitimate parallel trade in the EU can actually
facilitate the distribution of counterfeit products. It becomes
easier to disguise a counterfeit product, for example, in cases
where repackaging is allowed, since this will frequently invalidate
any security devices built in by the manufacturer. While counterfeiting
clearly violates the manufacturer's trademark rights, the greatest
cause for concern is that patient safety can be compromised.
While the pharmaceutical industry retains its
responsibility for ensuring the safety and quality of the medicines
it produces and supplies, it continues to maintain the highest
standards, not only within the industry but also in the supply
chain to protect public health, but it is seriously concerned
that improper parallel trade may compromise patient safety and
bring about an increased risk of counterfeiting and piracy.
The innovative, research based pharmaceutical
industry differs from other sectors in that the safety, quality
and efficacy, manufacture and distributon of its products, medicines,
are strictly regulated to protect public health. In addition,
the pricing and reimbursement of medicines is adminsitered and
controlled by government authorities or agencies within the context
of their own healthcare systems. In the EU, this results in a
disconnect for medicines between national healthcare controls
and EU freedom of movement of goods.
The innovative pharmaceutical industry is highly
dependent on protection of intellectual property which enables
industry to fund future research into new therapies.
Exhaustion of intellectual property rights at
regional level within the EU has created particular imbalances
for pharmaceuticals. International exhaustion on any wider basis
would be damaging to the research based innovative pharmaceutical
industry, and consequently could deny the benefits of future advances
in medicines for patients.
13 April 1999
1 Trade and Price differentials for pharmaceuticals:
policy options, Patricia M Danzon PhD. Back