Parallel imports, also called gray-market imports, are medicinal products produced genuinely under protection of a trademark, patent, or copyright, placed into circulation in one market, and then imported by an intermediary into a second market without the authorisation of the local owner of the intellectual property right. Parallel trade exists when there are significant price differences between countries, making this trade attractive, which is the case in the EU, where prices of medicines are not governed by free competition laws, but are fixed by the government.

Overview

'Parallel trade' in the pharmaceutical industry occurs where drug prices vary from country to country due to national price regulation. In such circumstances, a wholesaler in 'lowprice' country A will be able to achieve a better price by selling its product in 'high-price' country B rather than on the domestic market in country A. Price differences can be due to either, national regulations, exchange variations or prices setting strategies by pharmaceutical companies.

Parallel importing is legal within the EU. 

Commission guidelines

In December 2003, the Commission issued a Communication on parallel imports of proprietary medicinal products for which marketing authorisations have already been granted. It aims to give guidance on practical applications of the principle of the free movement of goods to national measures relating to parallel imports, from one member state to another, of proprietary medicinal products for which marketing authorisations have already been granted in the member state of destination.

Parallel imports (within the EU) as a percentage of total pharma sales (data 
from 2001):

Country Parallel Imports
Greece 16.3 %
UK 15 %
Netherlands 9.9 %
Denmark 9.7 %
Sweden  9.3 %
Germany 4.7 %

Issues

For years, parallel trade of pharmaceutical products has been an important issue for the European pharma industry, the Commission, the European Court of Justice and the member states. Even though parallel trade in pharmaceuticals is generally increasing in the EU, the research-based pharmaceutical industry is lobbying for its suppression (parallel trade causes a big revenue losses for these companies) and supports the concept of a single market across the EU. Industry estimates suggest that lost sales in the EU amount to more than 3 billion euro per year.

Cutting health cost vs stimulating innovation:

The core problem with parallel imports is that its benefits are ambiguous. Governments authorise parallel trade in attempts to contain health care costs. Especially in countries in which pharmaceutical prices are high, parallel trade may help cut pharma costs. However, this policy conflicts with another health policy objective, namely to encourage innovation and development of new drugs. Big pharmaceutical companies say that, as their profits decrease due to parallel imports, they are obliged to invest less in R&D

Who benefits from parallel trade?

Nobody really disputes the fact that there are direct savings from parallel imports. The questions to be answered are: what is the size of the savings and who (producer, exporter, importer, wholesaler, pharmacy, consumer) gets what size of these benefits. 

Studies on the issue:

A University of Southern Denmark study (June 2006) on the economic impacts of pharmaceutical parallel trade in the UE concludes that parallel distribution generates considerable savings, both direct saving to patients and health insurers. 

A London School of Economics study (January 2004) on the same issue concludes that there are no direct benefits to patients and recommends a re-evaluation of current practice by policymakers. 

A York Health Economics Consortium study (May 2003) found evidence that parallel imports have indirect competitive effects by forcing down the price of their domestically sourced counterparts and that direct and indirect savings from the parallel trade of pharmaceuticals have helped contain mounting public healthcare expenditure in many European countries. 

Restriction of parallel trade

Parallel Trade in Europe and the US: The challenges facing pharma -study, published by Datamonitor in April 2006, states that the legal framework supporting parallel trade in the EU has restricted the actions pharmaceutical companies' can take to restrict parallel trade. However, the Bayer's legal victory on the Adalat case in 2004 has provided pharma companies with a means to restrict parallel trade without infringing EU law.  

In its landmark Bayer/Adalat judgment of January 2004, the European Court of Justice (ECJ), held that the imposition of a supply quota system – under which Bayer unilaterally limited supplies to exporting wholesalers – did not constitute an 'agreement' to restrict parallel trade and could not, therefore, be prohibited under Article 81 of the Treaty (see EurActiv 7 January 2004).

The Datamonitor report also states that the EU enlargement has not caused a rise in parallel trade yet, "mainly because of the derogation that prevents parallel exportation of many branded drugs from 8 of the new countries". The effect of derogation will, however, "erode over time" and gradual rise in EU parallel trade is expected as a result from the enlargement.  

From G10 to High Level Pharmaceutical Forum

In February 2002, the G10 Medicines Group adopted recommendations to enhance competitiveness in the pharmaceutical industry while sustaining high public health standards. The Group proposed that a member state's authority to regulate prices in the EU should extend only to those medicines purchased, or reimbursed, by the state. This recommendation is being considered by the Commission's new High Level Pharmaceutical Forum, set up in 2006. 

The High Level Pharmaceutical Forum, consisting of relevant ministers from the EU troika, Members of the European Parliament, senior industry representatives and other stakeholders will meet once a year to review progress and give a political mandate for further work. In the meanwhile, steering committees will meet more frequently to prepare the Forum's yearly meeting. 

Positions

The Association of the British Pharmaceutical Industry is opposed to parallel trade because:

  • it causes sales revenue losses for the UK-based pharmaceutical industry of more than £ 1 billion a year (£ 1.3 billion in 2005);
  • consumers benefit relatively little from parallel trade, as the price differences are not substantial.
  • medicines frequently have to be repackaged by parallel importers (so that instructions would be in the local language): importers are interfering with the integrity of the product, potentially affecting its safety and quality, and bringing about an increased risk of counterfeiting and piracy. Other imported products carry printed instructions in a foreign language, causing patient confusion.

The European Federation of Pharmaceutical Industries and Associations, thinks that the Commission has taken an overly formalistic and rigid approach in applying competition rules to protect parallel trade in pharmaceuticals. "The desire to create a single market for nationally price-controlled pharmaceuticals in Europe, through the encouragement of parallel trade, is unrealistic and damaging, as it creates a significant loss to the research-driven pharmaceutical industry. The benefits of unrestricted parallel trade flow through to intermediaries and not to patients or health authorities, which means that valuable resources for research and development of new treatments are diverted to the overall detriment of patients and medical progress."

The European Association of Euro-Pharmaceutical Companies, however, attributes various benefits raising from parallel trade, such as:

  • reduced costs of pharmaceutical spending for consumers, health providers and governments;
  • value added in the form of: several product controls, relabelling/repackaging, creating and inserting information leaflets etc. - all in accordance with national requirements.
  • ensuring competition;
  • pharmaceutical companies make very high profits. With its market share of 2 %, the EU parallel trade can only redistribute small parts of these industry profits towards the consumers in the member states;
  • as parallel trade only offers the original products of the industry itself, their total sales-volumes are not affected.

On the issue of exhaustion of trade mark rights, the European Brands Association (AIM) recognises that it is a highly complex debate. Nevertheless, AIM believes that parallel trade is only good for parallel traders, not for consumers.  

The Competition Commissioner, Neelie Kroes has said that she "fully supports the need for innovative products to enjoy strong intellectual property protection so that companies can recoup their R&D expenditure and be rewarded for their innovative efforts. However, it is not for a dominant company but for the legislator to decide which period of protection is adequate. Misleading regulators to gain longer protection acts as a disincentive to innovate and is a serious infringement of EU competition rules. Health care systems throughout Europe rely on generic drugs to keep costs down. Patients benefit from lower prices."

The Commission Vice-President Günter Verheugen, responsible for Enterprise and Industry: "Our objective [in the Pharmaceutical Forum established in 2006] is to examine the benefits of giving industry more flexibility in establishing prices without sacrificing any capacity of member states to protect their health care budgets. In addition, this reflection should look at the speed of access to the market, lifting of pricing controls for medicines that fall outside the state sector, parallel trade and the impact of the Transparency Directive. Given the importance and sensitive nature of this issue, it is clear that we will not be able to make quick progress. - But that is no reason not to start."

Timeline

  • European High Level Pharmaceutical Forum has been set up to provide a high-level platform for discussion on the effects of pharmaceutical innovation on national health systems in Europe. The Forum is set to concentrate on three core issues: pricing and reimbursement of drugs, information to patients on new drugs and the cost and clinical effectiveness of medicines. The first meeting of the Forum will take place on 29 September 2006.
  • 2006 marked the first year of full application of the new EU pharmaceutical legislation which came into force in November 2005.