Parallel Trade In Pharmaceutical Sector

Zeynep OKUR
ESC Consulting

The aim of this article is to explore parallel trade, its importance and effects on European Union and common market and the issues on parallel trade in pharmaceutical sector. This article mainly consists of two parts; the first part starts with the definition of parallel trade, when and how it occurs. Then, it will continue with the legal foundation of parallel trade in European Union. The second part starts with the nature of the pharmaceutical industry and it continues with the relationship between parallel trade and intellectual property rights, the effects of the parallel trade on European pharmaceutical industry and finally the ways, which can restrict parallel trade in european pharmaceutical industry.

A.Parallel Trade & Its Legal Foundation in European Union

“Parallel trade is a lawful form of trade in goods between Member States of the European Union, which takes place outside or in parallel with the original supplier’s ‘official’ distribution network.� Being a lawful form of trade, parallel trade is different from counterfeit trade of goods in which intellectual property rights are ignored . However, “some argue that parallel trade is a good thing on the grounds that it leads to lower prices for consumers, and others argue that parallel trade undermines intellectual property protection and thereby undermines the incentives to invest in the research and development and marketing of IP-based products, which may harm the consumer in various ways�.

Re-importation or parallel trade occurs when a product that is protected by patent, trademark or copyright entered into a market, and then it is imported into another market without the permission of the patent, trademark or copyright holder. “The re-importer chooses a country where the target product – a recent and innovative drug to ensure maximum profit – sells at a low price compared to the same product sold by the original manufacturer or licensee in the import country�. Therefore, the important part of the parallel trade is to find a suitable place for arbitrage.

In many cases parallel trade offers a trade off between high quality service and the price of goods. “An extensive network of specialised outlets able to provide pre and after sales service can require greater margins to maintain. However, the parallel trade rules make this type of distribution difficult to force upon consumers, even for highly specialised products. Instead of being forced to buy quality of service from the producer’s outlets at a relatively high price, consumers get more choice as to whether they would prefer lower prices even at the expense of, quality of after sales service� . Consumers’ choice or preference is not the reason but a consequence of parallel trade .

“In the European Union, the legal foundation of parallel trade is found at Articles 30 and 36 of Treaty of Rome, which authorize the free movement of goods and confer the right to control the import of goods by national governments, provided the products are not harmful or pose threat to the public� . Parallel trade is encouraged by the Eropean Union because it ensures that end users or consumers are not cut off from wider European market , and therefore consumers are able to obtain goods from different sources. The European Commission together with the European Court of Justice aims to create an integrated single market all over the Europe with more uniform prices and trading conditions for end users. The aim of European Law is to ensure that end users are able to reach dealers in other Member States, and therefore they may able to get better deals . However, the real reason for Commission to encourage parallel trade is to remove national legislations and technical barriers to trade, and consequently to form a common market .. As European Union is a single market, there is no need for the authorization of the patent holder of the product, but the “Parallel Import Product License issued by the relevant national agencies or by the European Medicines Evaluation Agency� .

B.Parallel Trade & Pharmaceutical Industry

“Within European Union parallel imports in pharmaceutical sector are estimated to represent 3.3 billion dollars in 2001 and forecast to rise 7.4 billion dollars in 2006. The same source estimated that re-importation penetration amounted to 7% to 8% of the total prescription market in late 2001 and would rise to 10% by 2006� .

Pharmaceutical industry is the most problematic industry in parallel trade cases because in this sector there are price differential between the member states since the major purchaser of these products is States due to the health and social insurance structures. Therefore, because of their power as being major purchasers, member states control prices of medicines in their own countries. However, this power differs from country to country . Although European Union competiton law predicts the market as an open and single European market, different and conflicting policy objectives of member states make impossible to create a single market in pharmaceuticals. “The pharmaceutical market in Europe is not a free market because of the continuing government controls in most countries� .

As mentioned above, parallel trade particularly affects the pharmaceutical industry. There are many reasons to that, but the most important reason is the nature of the pharmaceutical industry. Pharmaceutical industry is an industry protected by patents, since the drug molecules are easy to copy. It is a “research-intensive industry� because pharmaceutical companies must develop new products to increase thier market share. In pharmaceutical industry R&D costs are high. As mentioned above pharmaceutical industy is an highly regulated industry and it is a competitive industry .

C.Parallel Trade & Intellectual Property Rights

“Intellectual property rights are limited rights conferred by the state for certain ideas and expressions�. Patents, copyrights and trademarks are some examples of intellectual property rights. Patents protect inventions, copyrights protect expression of ideas, and trademarks protect brands .

“Intellectual property rights are conferred by the state, their existance is bound by the geographical limits of each state. Many states apply ‘the principle of national exhaustion’, which means that intellectual property right holders’ exclusive rights are extinct upon first sale within national borders, but international exhaustion terminates rights upon first sale anywhere, and parallel trade is included� .

Policies on exhaustion differ from country to country. The European Union accepts regional exhaustion, which means that once a product purchased, reselling that product is free within the borders of the European Union, but parallel imports from outside the European Union is not allowed . “Parallel imports are goods produced genuinely under protection of a trademark, patent or copyright, placed into circulation in one market, and then imported into a second market without the authorization of the local owner of the intellectual property right� .

D.Parallel Trade in Pharmaceuticals:

As mentioned above, the pharmaceutical sector is one of the most affected sectors by parallel trade in Europe due to the Member States’ power on price control. European pharmaceutical market is not a single market. The problem of national regulation and control on pharmaceutical industry is very important, although national regulations are consistent with the European Union regulations, they bring fragmentation to the European pharmaceutical market .
Although a single European pharmaceutical market is desirable and parallel trade helps to create a single European pharmaceutical market; intellectual property rights are also important part of European economy, and they are important for sectors in which innovation costs are high . So, in this subject the ultimate goal is to find a solution, which encourages both innovation and competitiveness.

The pharmaceutical market is regulated by both supply and demand. On the supply side the price can be set by two different ways. The first way is to set a price for that medicine. This is the direct method because the price can be imposed after the negotiations between the industry and the health authorities. The second way of setting the price of the medicine is an indirect way. “Some regulatory systems do not set the price of certain drugs, however, in order to control public expenditure, the health authorities will reimburse only a fixed amount. As a result, the difference will have to be paid by the patient. The consequence of this is that the price tends to be close to the reimbursement price, especially where there are comparable drugs that are fully reimbursed� .

The European Court of Justice considered that price-setting in pharmaceutical industry does not jeopardize common market, and it does not violate community law. The Court gave this decision in Roussel Laboratoria BV and Ors v. État Néerlandais (Case 181/82, Roussel Laboratoria BV and Ors v. État Néerlandais, [1983] 3849). Therefore, “pharmaceutical market is not a liberalized market because the price is not freely determined by the supply and demand but many other factors. The factors are direct price setting and indirect price setting, including reimbursement policies operated in conjunction with payment schemes� .

As mentioned above, intellectual property rights and parallel trade laws are very important in pharmaceutical sector. However, “the consistent approach of the European Court of Justice has been to reject the recurring arguments put to it by the pharmaceutical industry, including price regulation and the negative impact of parallel trade on innovation� .

The crucial issue in Merck v. Stephar case was “that the product was not patentable in Italy whilst Ducth law provided for a remedy against the patented product being marketed in the Netherlands by a person other than the patentee and without his consent� . In this issue there are two contradictory arguments. The first issue, which is supported by the Court and Stephar, is that once the product entered into the common market with the consent of patentee, it is not important anymore whether the product is patentable in any other member states. “Hence exhaustion of the right does not depend on whether or not the inventor possesses the right in the exporting State� . On the other hand, Merck argued that the product can be entered into the market if only the product is patentable in the exporting country. This argument is also supported by United Kingdom and France. In this case, the Court supported Stephar’s argument, and decided that once the product entered into the common market, free movement rules are in effect .

With decisions like Merck v Stephar, the Court of Justice supports free movement rules over the patent rights, and also it supports parallel trade by encouraging a relaxation of domestic regulatory regimes. National regulations of Member States make difficult to import pharmaceutical products across Member States. The case of de Peijper is an example for this issue, and for the Court’s oppinion that supports free movement rules.

The Dutch legislation required some documents showing the authorization of the manufacturer for pharmaceutical products to be entered into the Holland market. Therefore, the manufacturer is able to prevent parallel imports. “The Court construed the health exception to the rules on free movement narrowly. If the product imported into the Member State is identical to a medicine for which the health authorities of that State already possess all the relevant information, no additional burden may be placed on the parallel importer. However, even if the documents filed by the manufacturer or an undertaking acting under his authority show that there are several variants of the same medicine, it is only where the different variants have different therapeutic effects that the Member State is entitled to require a new authorisation procedure� .

The medicines in the de Peijper were same. The European Court of Justice applied a test to know whether or not the same product had been entered into the market of another Member State. The product is considered same when it has a common origin and it has been manufactured using same formulation, and it has same therapeutic effects .

Re-packaging is a key issue in parallel trade of pharmaceutical products. “A medicine must be accompanied by a leaflet in the language of the country where the product is put onto the market. Furthermore, consumers in the parmaaceutical market are very sensitive to charateristic features of the product which make it recognizable� .

The European Court of Justice has created a consistent case law on the re-packaging, reaffixing and trade mark issues because these issues are very important in parallel trade. The principle of exhaustion of trade marks under the EU law was developed in the Centrafarm v Winthrop case, and then with the Hoffman-La Roche v. Centrafarm case .

“With regard to trade marks, pharmaceutical companies cannot restrict parallel imports by objecting to the remarketing of their own products which have been put on the market, unless there are legitimate reasons�. In this context, the interpretation of ‘legitimate reasons’ is crucial .

“The subject matter of the trade mark is the exclusive right to use the trade mark to market the product for the first time so as to prevent competitors from taking advantage of the status and reputation of the trade mark by selling products which bear the trade mark unlawfully� . The function of trade mark is to guarantee to the consumer or end user the identity of the trade marked product’s origin by enabling him to distinguish it without any risk of confusion from products of different origin� (Pharmacia & Upjohn SA v. Paranova A/S). Because of its structure and function, the Court put limits on the right of trade mark in order to prevent re-packaging. “In principle, re-packaging of trade marks constitutes an interference with the product liable to impair the guarantee of the origin of the goods. However, the use of the trade mark right to prevent the parallel imports is prohibited where it contributes to the artificial partioning of the markets between Member States and repackaging does not adversely affect the original condition of the product. Therefore repackaging and reaffixation of the trade mark cannot be prevented if ‘the repackaging undertaken by the importer is neccessary in order to market the product in the Member State of importation’� .

If the parallel importer prefers to repackage, he must comply with some minimum requirements such as indicating on the package, who manufactured and who repackaged the product. Hence, “if the parallel importer was obliged to add an extra article to the package in order to sell the product, he must ensure that its origin is indicated in such a way as to dispel any impression that the trade mark owner is responsible for it. Also, he must give the trade mark owner advance notice of the product being put on sale and the trade mark owner may also require the parallel importer to supply him with a specimen of the repackaged product before it goes on sale� .

E.Limiting Parallel Trade in Pharmaceutical Sector

There are some ways of restricting parallel imports in pharmaceutical industry. The first way of limiting parallel trade is charge a price which makes arbitrage less profitable. However, this method has two problems.

First of all, pharmaceutical market in Europe is not a free market because of Member States’ control on price. So “manufacturers are not free to set a market price which takes into account the need to limit the parallel trade. Secondly, pricing practices aimed at preventing parallel imports are likely to infringe Articles 81 and 82 of the EC Treaty . The recent decision of EU Commission on the case of Glaxo is an important example for this issue.

Glaxo SA is the Spanish subsidiary of Glaxo plc, and it charges two different prices for the same product, one for Spanish market, and one for the abroad. “The lower price is charged for products financed by the funds of the Spanish social security or by Spanish public funds and sold through Spanish pharmacies or hospitals�. This price has been decided after conclusion of negotiations between pharmaceutical companies and Spanish health authorities . The price is higher for the products which will be marketed other than Spain. The aim of dual price is to restrict the parallel trade in pharmaceutical industry. Glaxo notified its new sales conditions to the Commision to obtain a negative clearance. “The Commission found that Glaxo’s new sales conditions amounted to an export ban and a dual pricing and as a consequence had as their object to restrict competition. Therefore, no exemption could in principle be granted. Considering further the application of Article 81(3), the Commission found that the claimed beneficial effects of the agreements in question did not compensate for the restriction of the competition that they brought about� . However, the case of Glaxo shows that these types of sales conditions may obtain negative clearance if its benefits compensate its effects on competition within the European Union.

The second way that a pharmaceutical company may use to limit parallel imports is to limit supply, but, also this may be considered contrary to European Union Law in two ways. “It may constitute a breach of Article 81(1), if there is an agreemeent between the supplier and the wholesalers which limits quantities of medicines supplied in order to limit parallel imports. If the supplier is a dominant undertaking, it can constitute an abuse of a dominant position under Article 82 of the Treaty� .

Restricting supply, in order to prevent or at least restrict parallel trade, may get permission from the Commission. “A policy, unilaterally implemented by a manufacturer, which limits supply to historical levels of demand, increased by a percentage reflecting the normal growth of the demand in the national market, is not in itself an infringement of the EC competition Law if the undertaking is not dominant� .

The European Union is pursuing its ideological goal, which is to create a single market, even though the policy European Union uses, creates problems in competitiveness of European pharmaceutical industry. Existing policies are creating tension instead of stability in pharmaceutical industry. Especially, parallel imports and re-packaging reduce profitability of pharmaceutical companies and their patented products. However, in order to minimize these negative effects, pharmaceutical companies prefer to use dual pricing, and/or restricting supply, since they may obtain negative clearance for such activities. All these activites, however, create “uncertainity as to future profits and consequently a more cautious approach to investments and possibly, supply shortages in low-price countries and detriment to consumers� .

 

Conclusion

Consequently, parallel trade is a lawful form of trade in goods between Member States of the European Union, which takes place outside or in parallel with the original supplier’s ‘official’ distribution network and it is different than counterfeit trade of goods in which intellectual property rights are ignored. Although some argue that parallel trade is a good thing on the grounds that it leads to lower prices for consumers, others argue that parallel trade undermines intellectual property protection and thereby undermines the incentives to invest in research and development and marketing of IP-based products, which may harm the consumer in various ways. As mentioned above, although parallel trade in pharmaceutical industry creates problems in terms of intellectual property rights, and decreases profitability of pharmaceutical companies, it also enables consumers to reach other dealers, so that they may able to have better deals.