Select Committee on Trade and Industry Minutes of Evidence


Memorandum submitted by the Association of the British Pharmaceutical Industry

1.  INTRODUCTION

  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 chain.

  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 sectors are:

    —  regulation—safety, quality, efficacy, manufacture and distribution of medicines are strictly regulated to protect public health;

    —  regulation of pricing and reimbursement—governments 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 pharmaceuticals are:

    —  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 (November 1998);

    —  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 following questions—

    (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 (paras 2-4);

    (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

2.1  Background

  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 between countries.

  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[1]) 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.

 2.2  PARALLEL TRADE:  PHARMACEUTICAL

  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 prices—no 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.

2.3  PARALLEL TRADE WITHIN THE EU

  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" case.

 3. REVIEW OF ISSUES IN RELATION TO PARALLEL TRADE IN THE EU

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 issues.

  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 dialogue.

  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.

3.2  PARALLEL TRADE INTO THE UK

  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.

 4.  CONSEQUENCES—PATIENT SAFETY

  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 safety—issues

  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 standards:

    —  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 markings;

    —  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 supply routes

    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 OUTSIDE THE EU—INTERNATIONAL EXHAUSTION

  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 prevent importation.

  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.

 6.  COUNTERFEITING

  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.

7.  CONCLUSION

  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


 
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