Examination of Witnesses (Questions 238
TUESDAY 27 APRIL 1999
DR J PATTERSON,
DR A HESKETH
238. Good morning, gentlemen. It would be invidious
of me to choose between any of these three companies as to which
of you should be the spokesperson in the first instance. Whoever
is going to speak would they please speak now.
(Dr Brickwood) David Brickwood, Managing
Director of Janssen Cilag Limited, and Chairman of the Commercial
Affairs Committee at the ABPI.
(Dr Hesketh) Alan Hesketh, Head of Intellectual Property
at Glaxo Wellcome, and also Chairman of the Intellectual Property
Committee of ABPI.
(Dr Patterson) John Patterson, International Business
Director Zeneca Pharmaceuticals, and also Executive VP and Product
Strategy for Astra Zeneca, and I am Chairman of the International
Committee of the ABPI.
239. We get the impression the United Kingdom
seems to be the only part of the EU experiencing significant parallel
imports, and this is arising from the clawback mechanism of pharmacy
reimbursement. Can you explain how the clawback mechanism has
encouraged parallel trading in pharmaceuticals in the United Kingdom?
Are there any reasons for higher levels of parallel trade in the
United Kingdom than in other EU countriesor is it just
down to the fact you can charge more in Britain than anywhere
(Dr Brickwood) There are several questions in there.
Let us tackle the issue of what we charge in Britain versus anywhere
else. First of all, we are not in control of our prices. The prices
are set by the health authorities, the ministers of health around
Europe; and the methods of setting those are different from country
to country. We have a system whereby the prices are set on entry
into the market, but there is a profit system that kicks in later.
Other countries, such as Greece, France and Spain, work on the
basis of what they call the "reimbursement basis". The
minister sets the price and, therefore, you can have price differences
around Europe. Therefore, the key point there is, unlike other
industries, we are not in control of our prices within the European
(Dr Patterson) Parallel trade does occur between other
parts of Europe. Many northern European countries suffer exactly
the same as the United Kingdom. Germany, Holland the Scandinavian
countries do have parallel imports coming in in significant numbers.
240. When you say you are not in charge of your
prices, how do you explain that there can be major differences
between the branded price of a particular product and the generic
price of the same product, when fairly often you get the situation
where both are manufactured by the same manufacturer but sold
under different labels?
(Dr Brickwood) Can I just correct one or two things
there. In the instance of generics, that is when we have established
our position in the marketplace with our brand in the duration
of our patent life, which is probably ten years after our launch.
At the end of our patent life the generic manufacturer is able
to manufacture the product and it comes into the marketplace at
a lower price, essentially because he is not in the position of
having to do all the research associated with bringing in new
medicine to the marketplace, which is about ten to 12 years of
research and about £350 million for one single product. That
is a very separate case to parallel trade.
241. Can I just press you on that. I remember
some time ago when we introduced a limited list for prescriptions
and one particular product, DF118, was on the banned list as it
were; but it was then promptly sold in the market, as I understand
it, by the same manufacturer as Dihydrocodeinetartrate BP; I understand
it is the same manufacture but at a much lower price. Would you
like to comment on that?
(Dr Hesketh) I think the important point to make is
that during the life of a patent is when we have the exclusive
position we need to provide the return on investment to fund the
future R&D. The exclusive position we are looking for under
a patent is completely different from off-patent products. The
pharmaceutical industry still relies on trademark productsand
it is very important to us to maintain that reputation and not
allow that reputation in our trademarks to be undermined in any
way. There are two completely separate issues: the return we gain
when we have a patented product, and the reputation of the trademark
for the off-patent, post-patent products.
242. In this case it was not post-patent, just
that it was marketed on a different basis. You say the price is
fixed by the minister; clearly in this case presumably the lower
price was fixed for the generic product by the manufacturer, still
under protection of the patent, but a much higher price was being
charged for the trademark product. How does that tie in with the
prices being charged?
(Dr Brickwood) In that situation competitive forces
work, and competitive forces work rather well in the generic area.
If we go back to the parallel trade issue, it is important to
note that 80 per cent. of the parallel trade activity in the United
Kingdom is actually for in-patent molecules as a result of the
price differences between the European countries where the minister
has set the price. The generic market is a very competitive market,
and that is finewe can live with that; but the parallel
trade market is very different, because essentially it is our
243. I understand that. I merely try to establish
which price does the minister setis it the generic price
or the branded price?
(Dr Patterson) In this country the minister does not
set any price. In this country when we introduce the molecule
we are free to choose a price. In most countries in Europe the
price is fixed by ministers of health. Within Europe things move
around very rapidly in parallel trade, but not in this country.
However, what we said to you was, under the PPRS scheme, there
is a profit limitation process; whereby if we set our price too
high and make excessive profits the government simply claws them
244. But it is retrospective, and it does seem
to suggest that, in the first instance at least, the prices here
are higher than in Europe. Is that correct?
(Dr Patterson) I think our prices in the United Kingdom
are, on average, about the same as the average European price
plus or minuswe are very close. There is also an issue
of price volume in Europe. Many other countries use medicines
far more than in the United Kingdom. If you look at the price/volume
equation, although there are some lower priced countries, they
actually use significantly more medicines than we do. I am not
advocating that; I am saying there is a significant difference
245. Could that be because the prices are cheaper?
What comes first, the chicken or the egg? If the prices are cheaper
then they may prescribe more of the goods. If the prices are dearer
then there is less incentive to prescribe more of your molecules.
(Dr Patterson) It is more to do with medical practice,
I believeif the French government says to us, for instance,
"We are high volume users of medicines and, therefore, we
demand a lower price from you, in fact we insist the only way
you can put your product on the market is if you accept a lower
(Dr Brickwood) I think we would advocate rather strongly
you should use what is appropriate for the patient and their disorder,
and not associate it to the price or the volume required.
246. It has been suggested by the Association
of Pharmaceutical Importers that savings are made to the total
health care bill through the clawback element in the pharmacists'
remuneration and through adding a competitive element to the marketplace.
How do you answer the assertion that actually parallel trade leads
to savings in the total health care bill? Does parallel trade
in medicines increase competition? Have you found it necessary
to lower your prices in response to parallel trading?
(Dr Brickwood) We referred to the clawback system
earlier and the clawback system is complicated and it is designed
primarily to reimburse the pharmacist at their net acquisition
cost; but because of the parallel trade situation it has become
out of balance recently, and we would be quite happy to work with
all interested parties to see if we can arrive at a better solution
which would correct that balance with regard to the clawback.
247. You have been critical of the EU communication
of last year when you say it "did not provide the practical
response required". Your evidence states that the industry
is now seeking "to work with Member States to find the means
to manage the distorting effects of arbitrage". What arrangements
do you make? Do you clearly want an end to price regulation?
(Dr Patterson) In an ideal world, yes, I think we
would have the opportunity then to price our goods at an appropriate
rate across the whole of Europe, or across individual markets.
We would then have to take the consequences of any differentials
that we introduced into the market. The problem we have is the
differentials are introduced by governments and then usually compounded
by exchange rate movements and we then have no recourse to change
our prices, other than on a downward spiral. The answer is, yes,
freedom to price would be ideal.
(Dr Brickwood) We would be happy to work in a deregulated
and competitive environment similar to that which exists in the
generic arena, provided that our patent rights and intellectual
property rights are respected to the full so we can have the return
on investment that we can invest in the next R&D molecule
that we bring to the marketplace.
248. The evidence we have had from the ABPI
has stated that the United Kingdom is one of the major sources
of supply for parallel exports. Is this true? We have heard there
is parallel exporting going on across Europe. How many of your
products and how many of your molecules are part of that parallel
(Dr Patterson) Some of our molecules are, because
the prices in the United Kingdom are lower than some other European
countriesdepending on the particular price-setting situation,
the time in the product's life and how the currencies have moved.
We as a company have a net importation of parallel goods not an
exportation. Sometimes up to 50 per cent. of some of our brands
are coming into the United Kingdom.
249. It is not what you would call a "principled"
stand, is it?
(Dr Patterson) I do not understand the question.
250. On the one hand you are decrying parallel
imports, but when it suites your purpose you are indulging
(Dr Patterson) You misunderstandwe do not move
them, it is arbitrage parallel traders who are moving them out
of the country, not us.
251. Could you stop that?
(Dr Patterson) No.
252. Would you want to stop it?
(Dr Brickwood) Within the European Union we cannot.
(Dr Patterson) We would but it seems the European
Union clearly states that a single market does have to move freely.
253. You only move freely because you sell on
to people whom you know will sell them on?
(Dr Patterson) No, we sell them to wholesalers, which
is part of the distribution chain. We cannot refuse to sell to
a pharmaceutical wholesaler. Bayer have been taken to the European
Court for trying to do just that. Our industry is expected to
sell into the chain to the patient.
254. You have fairly good statistics, I would
imagine, on the level of demand in the United Kingdom. You have
already passed comment that it seems the French take more medicines
than we do?
(Dr Patterson) Yes.
255. You know therefore roughly what the demand
will be for your product, but sell it to people who are buying
in excess of United Kingdom demand in the certain knowledge they
will be flogging it abroad?
(Dr Brickwood) We cannot refuse to sell.
(Dr Patterson) Just as in Italy or Spain we sell to
the wholesalers there and we cannot refuse to sell them, even
though we know that some of them will be [parallel traded].
(Dr Brickwood) All three of us have probably been
in that situation, whereby we have had large orders we know are
not justified for the wholesaler in a particular part of the country.
It is not acceptable for us to try and stop that sale.
256. What about reducing the level of production?
(Dr Brickwood) It could be argued that ultimately
we are doing that deliberately. If we wrote down in a document
that we would reduce the level of production in order to reduce
the supply to parallel exporters then, equally, that would be
deemed as illegal.
257. If you were doing it on the basis of saying,
"We know what the British level of demand is and will produce
only that, and we have valuable production resources which we
wish to free up for other areas of activity", frankly, I
think you are wanting the penny in the bun here. You want protection
at the one end, you are hiding behind the EU at the other. There
is, within normal management practices I would imagine, the power
on your part to limit production. Are you saying you have no power
whatever to limit production?
(Dr Patterson) We limit production obviously, but
if we limit artificially, or we limit the importation to one of
the countries in the EU artificially to prevent that product coming
back out again, we will get taken to court and we will lose.
(Dr Brickwood) It is quite clear.
(Dr Patterson) 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, and Spanish patients are
not getting the material.
258. Have you any figures to show this? Could
you provide us with figures, because at the moment it is just
assertions on your part?
(Dr Patterson) We can afterwards.
259. It has been said, or there is a view abroad
I suppose, that the only people who are beneficiaries of parallel
trading, in terms of the lower prices, are the parallel traders
themselves, not the patients or the consumers. Is that a view
you would subscribe to?
(Dr Brickwood) Certainly the patients do not benefit,
because they pay their flat prescription chargeand we are
talking about prescription medicines and not talking about over-the-counter
medicines, that is our primary concern. Patients certainly do
not benefit. Equally, you have to get the systems right so that
the clawback is there for net acquisition costs; and because of
imbalances that is not recovering that. That needs to be corrected
in some way that makes sure the NHS is paying a fair price.
2 See supplementary memorandum submitted by
The Association of The British Pharmaceutical Industry. p. 77 Back