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Parallel trade: is pharma fighting a losing battle?

Published on 08/10/03 at 06:14pm

Parallel trade has become the bete noire of the European pharmaceutical industry, a terrible beast it can only hold at bay but never conclusively defeat. At the heart of the problem, the industry is caught between two seemingly immovable objects - the right of EU member states to set individual price levels, and the European Commissions pursuit of any business that obstructs the free movement of goods. So is the industry fighting a losing battle, and if so, can it learn to live with parallel imports?

Newly released ABPI figures show the UK had improved its balance of trade in medicines in the first six months of 2002 by 12%. However, ABPI Director General Dr Trevor Jones said this was achieved despite a massive 24% increase in import from the EU over the same period, much of which can be attributed to parallel imports.

IMS data show parallel imports into the UK grew 38% in 2001, and its analysts now predict they will account for an incredible 20% by value of medicines dispensed within the branded ethical market.

"The increase in parallel trade, now costing the UK-based industry some £1 billion a year, is severely restricting our trade success in pharmaceuticals", said Dr Jones. "Price differences between countries in Europe are primarily the result of national governments efforts to manipulate healthcare costs. The parallel trade that results damages the pharmaceutical industry and its research programme as well as the UK economy without truly benefiting anyone except the people who truck these medicines backwards and forwards across Europe."

These views have been echoed by many of the highest profile pharmaceutical chief executives, including AstraZeneca's Sir Tom McKillop (also President of EFPIA) and Pfizer's Hank McKinnell, whose Lipitor is one of the most heavily parallel imported product into the UK.

While pharmaceutical lawyers have done well out of the numerous European legal cases, the industry has lost nearly all its battles. At the beginning of the year, European Competition Commissioner Mario Monti re-stated his commitment to pursue anti-competitive tactics. "From the early sixties the Commission has pursued a merciless policy against companies which - one way or another - clipped the wings of parallel traders," he said. "We take the view that the industry is wrong, first and foremost in contending that parallel trade in medicines even harms consumers, and secondly in arguing that the Commission's policy brings no benefits at all for consumers in the high price countries."

The industry's chief objection to parallel trade is that it undermines the often hard-fought pricing agreements achieved in Europe, and erodes the profits needed to fuel the research and development of new, often life-saving medicines.

The Commission carefully examined and then dismissed this argument, put forward in a legal case by GlaxoWellcome in defence of its dual pricing system in Spain. The Commission outlawed the system in May 2001 and found Glaxo's argument flawed. "GW argues first that parallel trade causes losses of revenue, that this reduces its R&D budget (roughly 15% of its costs) and hence that this weakens its capacity to develop new, innovative drugs. In this regard, the Commission observes that any losses of revenue could just as well be accounted for in GW's marketing budget (the remaining 85% of its costs). This does appear to be the more plausible alternative since the pharmaceutical sector is one in which R&D investments are among the highest in the economy and in which innovation  more than price  is the prime parameter of competition."

However idiosyncratic this suggestion - that companies should cut back their marketing budget to compensate for parallel trade - the industry has little choice but to find its own, entirely legal solution to the problem.

The anti-parallel trade tactic most widely practiced by manufacturers is the quota system. Pharmaceutical companies strictly limit the supply of medicines to a market to match normal demand, in an attempt to starve the parallel traders of the surplus stock they need to trade. However, this, like many other spoiling tactics, looks doomed. The European Commission has already indicated it will review the industry-wide practice, and seems certain to curtail it or outlaw it altogether.

The UK

Two of the main reasons why the UK is the number one destination of parallel imports are because it is a relatively high price market but also allows manufacturers to set their own prices within the profit-limiting agreement the Pharmaceutical Pricing Regulation Scheme (PPRS).

In addition, the Government anticipates the savings pharmacists can make on discounts, buying cheaper generics and parallel imports, and claws back just over 11.5% of the NHS list price it pays out. Janice Haigh, an IMS consultant who specialises in the field, says: "The clawback system is not so much an incentive for the pharmacist to buy parallel imports as an absolute imperative. Pharmacists have to work hard sourcing products to ensure they achieve these anticipated savings."

The Department of Health and the Pharmaceutical Service Negotiating Committee's (PSNC) refusal to disclose exactly how much money this generated and put back into NHS coffers makes it difficult to quantify how much money the system - and parallel trade - saves the NHS and the tax payer.

Donald Macarthur, Secretary General of European parallel traders association EAPC, says parallel imports undoubtedly save the NHS money, despite the lack of clarity. "You can't pull out the parallel trade component because neither the DoH or the PSNC will actually give a breakdown, he says. They don't divulge this information so I am guessing about £100 million of a £900 million total."

He claims that the system is a highly important source of revenue for the NHS, generating more money than prescription charges; however, DoH figures show the prescription charge income to be £389 million. Janice Haigh says if we are to accept Donald Macarthurs estimated savings of £100 million from parallel imports, it represents just 1.4% of the total 2001 UK drugs bill of £7.2 billion, and questions its value for money to the health service.

"The NHS should strive to make savings, but what are the administrative costs associated with achieving savings of around 1.4% at most? We found an example in a Dutch pharmacy where an imported product, with an overall price difference of 20% between the local product and the import, produced a saving to the healthcare system of around £1, but allowed 50% additional margin in the distribution chain," says Janice. "Pharmaceutical companies have to ask how much of the potential savings go to the health service and how much actually go to the importers."

Meanwhile, in Europe's biggest pharmaceutical market, Germany, there is more bad news for the industry. Newly introduced laws oblige pharmacists to ensure 10% of drugs they dispense are parallel imports, contributing to a doubling of the parallel imports market there in the last 12 months.

The barely contained anger and exasperation of chief executives of the leading pharmaceutical companies is not so surprising when one considers how the leading companies and their biggest selling products are disproportionately targeted. IMS data show 50% of parallel trade is accounted for by just 12 products, with just four companies bearing the brunt of 60% of all parallel imports.

"In the UK its clear that the top products are those most affected by imports," says Janice Haigh. "For example, the top five best selling products experienced imports of around 34% last year, compared with 14% for the rest of the market. Interestingly, in Germany, the pattern is quite different with some of the leading products being exported."

So what strategies are open to the pharmaceutical companies trying to minimise the effects of parallel trade?

"Remember that business objectives should be to maximise profit or revenue. Just because parallel trade reduces revenue and profits does not mean that by minimising imports we maximise profits," Janice advises. "Scenario modelling can help develop a mix of tactics within a pan-European strategy."

Dr Trevor Jones recently revealed that a group of leading companies is now funding a special investigative taskforce to combat opportunistic cowboys who operate pharmaceutical import businesses on the fringes of the law.

The suggestion that these people represent parallel traders is, however, strongly refuted by Donald Macarthur. "This is a smear tactic - I haven't a clue what they [the ABPI] are talking about. Our members follow the rules to the letter. This nonsense about illegal trade and counterfeits is a complete red herring, these are totally different subjects."

But the reputation of parallel traders was again called into question when cut-price GlaxoSmithKline HIV products intended for Africa found their way back onto the European market. A GSK spokesman said the illegal re-selling of the drugs into Europe was an appalling surprise to the company. It has now taken out a trademark injunction against one of the four parallel importers who received the products, although no criminal action is pending against the traders.

Donald Macarthur said: "These products were bought from recognised traders in France, Belgium and the Netherlands. They were genuine GlaxoSmithKline products in French, EMEA licensed and numbered packs, which means they required no secondary authorisation for sale anywhere in the EU through parallel distribution. They were bought at very slightly less than usual, but within the normal range. In other words, there was nothing to indicate these products were meant for Africa."

How exactly the supplies found their way back into Europe remains unclear; an indicator of the great mutual mistrust between the EAEPC and the industry is that Donald Macarthur suspects GSK was complicit in the foul play. "You can either call it a cock up or a conspiracy, depending on your point of view. There is not enough evidence to go down one side or another."

Chris Viehbacher, Chair of GSK Europe, told the BBC that the company had tried to put measures in place to prevent the re-importation but that different packaging for discounted medicines was awaiting regulatory approval. "I don't think we should kid ourselves that just by differentiating the pack we are going to be able to eliminate the problem entirely," he said.

Donald Macarthur dismisses this argument, saying no regulatory approval is needed for re-labelling in Africa. "There may be some rules in Africa but they certainly don't dictate that they are identical to Europe, that is ridiculous."

This undignified skirmish, while a matter of principle for GSK (rightly applauded for its efforts to tackle Africa's HIV/AIDS epidemic), could ultimately be a distracting sideshow to the central issues of the European market.

The next major battle to be fought will come with the eastwards expansion of the EU, which pharma has long feared could herald a flood of cheap imports from countries like Hungary and Romania into western markets. This time, the industry looks set to have its way, with a derogation (ie, exception) to EU rules banning parallel imports from the 10 new member states for a transitional period of up to 15 years.

The accession treaty does not, however, exclude parallel trade from west to east, and this could in fact be a viable proposition for the importers; the business often confounds simplistic understandings of the internal market.

Clearly, parallel imports are a highly emotive issue, with everyone - the industry, the parallel importers and the Commission - all claiming they are representing the best interests of Europes health systems and economies. Perhaps the most emotive issue for companies to resolve is that these are their own products, seemingly hi-jacked by parallel traders and turned against them.

Regardless of the considerable doubt surrounding its value to European health systems, parallel trade seems here to stay. In the absence of an industry argument that politicians find compelling, individual companies will have to develop the most effective coping strategies available to them.

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