Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 238 - 259)

TUESDAY 27 APRIL 1999

DR J PATTERSON, DR A HESKETH AND DR D BRICKWOOD

Chairman

  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 countries—or is it just down to the fact you can charge more in Britain than anywhere else?
  (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 Community.
  (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.

Mr Butterfill

  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 products—and 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 fine—we can live with that; but the parallel trade market is very different, because essentially it is our in-patent molecules.

  243. I understand that. I merely try to establish which price does the minister set—is 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 back.

Chairman

  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 minus—we 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 there.

  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 believe—if 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 price".
  (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 export business?
  (Dr Patterson) Some of our molecules are, because the prices in the United Kingdom are lower than some other European countries—depending 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 misunderstand—we 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.

Mr Laxton

  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 charge—and 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].



2   See supplementary memorandum submitted by The Association of The British Pharmaceutical Industry. p. 77 Back


 
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