WITNESS STATEMENT TO AN OVERSIGHT HEARING BY THE SENATE COMMITTEE ON
COMMERCE, SCIENCE AND TRANSPORTATION ON PRESCRIPTION DRUG IMPORTATION,
20 NOVEMBER 2003,

**BY DONALD MACARTHUR,**

**SECRETARY GENERAL, EUROPEAN ASSOCIATION OF EURO-PHARMACEUTICAL
COMPANIES**

Concern over rising prescription drug prices in the US and in particular
the heavy out-of-pocket financial demands placed on seniors to maintain
regular drug treatment has led to a surge in cross-border purchases by
patients via the Internet and other means. This in turn has triggered a
debate as to whether parallel importation of prescription drugs from
foreign countries should be legalised. The European Association of
Euro-Pharmaceutical Companies (EAEPC) is delighted to be given this
opportunity to contribute to this important debate. It can best do this
by summarising the European experience of parallel trade with
prescription drugs. This experience -- gained over 20+ years -- clearly
shows that parallel trade is

-   safe,

-   uses only genuine, regulatory-approved products from original brand
    manufacturers,

-   totally free of counterfeit, pirated and substandard products,

-   able to stimulate price competition among otherwise monopolistic
    manufacturers,

-   brings significant savings to payers and patients, and

-   has no impact on the ability of the pharmaceutical industry to
    invest in R&D

It should be emphasised that parallel trade is very different from
personal importation by individual patients, the main cross-border
activity in the US so far. Parallel trade is a large-scale industry, a
highly-regulated and thoroughly professional business-to-business
activity that requires considerable investment in qualified staff,
state-of-the art facilities and equipment, and rigorous quality
assurance procedures. In 2002 alone, an estimated 140 million packs of
medicines were traded across Europe's internal national borders.

EAEPC member companies have more experience of parallel trade in
prescription drugs than any in the world. They enjoy excellent
relationships with national and EU regulatory authorities in Europe, and
would welcome dialogue with the FDA, other US authorities, as well as US
politicians, payer and consumer groups. Visits to EAEPC member company
facilities across Europe can also be arranged.

# EAEPC

Established in 1998 with its registered office in Brussels, Belgium,
EAEPC ([www.eaepc.org](http://www.eaepc.org/)) is the representative
voice of pharmaceutical parallel trade in Europe. Through national
association or individual company membership it encompasses over 70
firms from 15 of the 18 countries in the European Economic Area (EEA\*).
Together these firms account for well over 90% of medicines
parallel-traded in the region.

\* The EEA consists of the current 15 EU member states (i.e. Austria,
Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United
Kingdom) plus Iceland, Liechtenstein and Norway

All products handled by EAEPC members have either national or
pan-European regulatory approval, and are exclusively sourced from and
sold to EEA countries using authorised trade channels. Some EAEPC member
companies have been in business for 20 years and are amongst the top-10
pharmaceutical suppliers to their national markets.

EAEPC's primary aims are to safeguard the free movement of medicines
within the EEA's Internal Market - a principle first laid down in
Article 28 (formerly Article 30) of the European Community's founding
Treaty of Rome and reaffirmed in subsequent Treaties - and to counteract
any attempts to restrict the freedom of choice for the consumer through
trading patterns in breach of EU competition rules (Articles 81 EC & 82
EC).

The Association believes that free trade will lead to improvements in
health standards through the provision of innovative medicines at lower
cost, benefiting statutory healthcare systems, other third-party payers,
and the public as both patients and taxpayers, as well as assisting the
EU to achieve its objective of a single market.

**PARALLEL TRADE: THE BASICS**

# What is Parallel Trade? 

Parallel trade occurs when products are purchased in a country where
they are cheaper and transported for resale to other countries where
they are more expensive, in competition with the same product sold by
the manufacturer or its local licensee. Parallel trade increases the
effectiveness of the market and consumers enjoy lower prices as a
result. It helps to restrain costs in markets that are not very price
sensitive.

Parallel trade will exist wherever there are price differentials. It has
been ongoing worldwide since goods were first traded and is found across
Europe today with a wide range of branded products, including such
diverse items as motor cars/motor cycles, computers, cameras, pianos,
compact disks, clothing, food and ski equipment (table 1).

Table 1: Extent of parallel trade within the EU

  ----------------------------------- -----------------------------------
  footwear and leather goods          \<5%

  musical recordings                  overall 5-10%, some releases up to
                                      20%

  motor cars                          estimates up to 5%

  consumer electronics                around 5%

  domestic appliances                 \<5%

  cosmetics and perfumes              around 13% for upper end of market

  clothing                            5-10%

  soft drinks                         0-15%

  confectionery                       \<10%

  alcoholic drinks                    \<5%
  ----------------------------------- -----------------------------------

Source: NERA & SJ Berwin, 1999^1^

For parallel trade to be possible, four preconditions must be met:

-   there must be unrestricted free trade between the countries
    involved;

-   there must be substantial differences between the prices of
    identical goods in these countries;

-   the costs of transport in relation to the cost of goods must be low;

-   the distribution of goods must be entirely separate from their
    manufacture.

All these conditions are found in the case of prescription medicines in
the EEA. Yet, in the context of the penetration by parallel trade with
other goods, the overall level with medicines is unremarkable. Various
estimates by independent economic consultants^2,3^ on the share of the
prescription pharmaceutical market in the EU taken by parallel-traded
products from 1990 through to 2000 have consistently arrived at a figure
of 2%. EFPIA estimates put the 2002 penetration at 4%..

# Why Do Price Differences with Medicines Occur?

Pricing of prescription medicines and controlling access to
reimbursement via social health insurance schemes are purely national
responsibilities throughout Europe. Today and for the foreseeable
future, these tasks remain in the hands of individual member states,
subject only to the condition that the methods they employ are
transparent and to do not discriminate by country of origin.

Willingness and ability to pay, medical and prescribing practices, the
balance of supply-side versus demand-side cost containment
interventions, and even value judgements in healthcare differ between
countries, and therefore so do prices. Further important factors are
inflation differences and currency fluctuations outside the euro-zone.

An exacerbating issue is a proactive policy of price differentiation
undertaken by many international pharmaceutical manufacturers. As
commercial enterprises, companies naturally aim to obtain the highest
price each national market will bear, and so discriminate between
countries to reflect differences in the ability to pay. Price
differentiation is known to yield higher profits than uniform pricing.
Companies also control the sequence of launches across Europe so as to
limit the opportunities for the authorities to depress these prices in
major markets through application of international price referencing.

A number of surveys, some repeated year-on-year, have shown considerable
inter-state price differences for the same or very similar product. Such
differences are found regardless whether comparisons are made at the
price the manufacturer sells the medicine to wholesalers, or at the cost
that social health insurance has to meet, which includes margins for the
wholesaler and the pharmacy, plus, in most countries, value-added tax.

# Is it Legal?

Yes, parallel trade is completely legal. A core objective of the Treaty
of Rome is the creation of a single, Internal Market through which
goods, services, people and capital -- the 'four freedoms' -- can freely
pass. Article 28 of the EC Treaty provides that:

'Quantitative restrictions on imports and all measures having equivalent
effect shall be prohibited between member states.'

A direct consequence of free movement is the classic Cassis de Dijon
doctrine of the European Court of Justice (ECJ)^4^, that a product
lawfully placed on the market of one member state must be allowed to
circulate freely throughout the EU. This principle was later extended to
the three European Free Trade Area countries -- Iceland, Liechtenstein
and Norway -- that together with the present 15 EU member states makes
up the EEA.

Pharmaceutical parallel trade in Europe is strictly limited - in terms
both of where the products are sourced and where they are finally sold -
to within the EEA. Therefore the term 'parallel import', in a European
context anyway, is now redundant. Trade between EEA member states is no
longer classified as imports or exports, rather it merely represents the
free movement of goods within a single European marketplace having no
internal borders.

The products that are traded may be patented, or marked with the
originator's trade mark or brand name. Such intellectual property rights
attached to goods are regarded as having been exhausted. The principle
of exhaustion of rights (sometimes referred to as 'the first sale
doctrine') is that once a product is legally placed on the market in a
country within the EEA by the owner of the rights, or with the owner's
consent, the owner cannot use these rights to hinder the further sale of
the product elsewhere within the EEA, except in very exceptional
circumstances.

Pharmaceutical parallel trade has been supported by the European
Commission since its outset and by an unbroken series of almost 30 ECJ
judgements^5^.

# How Does it Work?

Parallel traders buy medicines from well-established, authorised
pharmaceutical wholesalers in countries where the products are cheaper.
If the parallel trader has obtained a specific authorisation from the
government in the country of destination for the product concerned, it
can be resold there to wholesalers or direct to pharmacies, in parallel
with the same medicine sold by the manufacturer's subsidiary or its
licensee.

Parallel traders do not manufacture any medicines themselves, but merely
adapt the labelling -- and perhaps the packaging -- to meet local
requirements under government supervision according to national law.
This adaptation process includes removing the original patient package
inserts and replacing them with others giving the same information in
the local language.

Parallel traders do not deal directly with the public. All transactions
are done through authorised trade channels, and the pharmacist -- who
effectively is in the position to buy the same product at two different
prices - dispenses it to the patient in the normal way.

Parallel traders take pride in being reliable, responsible and
professional business partners

for wholesalers and for pharmacists in community and hospital practice.
Great importance is attached to consistently making available a broad
range of products, in all package sizes and strengths, and to ensure
that only the most up-to-date product information is supplied. In some
cases, additional features beneficial to patients, such as Braille
labelling, is added by parallel traders.

The products that enter into parallel trade are surplus to local needs.
Wholesalers in the supplying states are naturally obliged to meet
domestic demand first; if they didn't, given the level of competition
between wholesalers for pharmacy customers, they would not remain in
business long. Most countries also impose, through national law or a
voluntary code of conduct, a so-called 'public service obligation'. This
requires wholesalers to guarantee to keep an adequate range of medicines
in stock and to deliver over the whole of their normal area of operation
all supplies requested within a very short time period.

# What are the Economics?

It is impossible to generalise as to the level of price differential
between member states sufficient to trigger parallel trade. To a trader,
a small margin on a best-selling product may be equally acceptable to a
larger margin on a low volume product. There are also other important
considerations, especially availability and maintenance of supply.
Parallel trade is constrained much more by supply than by demand.

The gross margin for the parallel trader does not, of course, represent
profit. He has first to meet costs associated with regulatory
compliance, purchasing, transport, warehousing, insurance, repackaging,
quality assurance, distribution and promotion.

As with any other supplier, the parallel trader also has to cover the
costs of the distribution chain and provide it with an appropriate level
of profit. The margin structure of pharmacists in many member states is
based on a linear scale. This provides a perverse financial disincentive
to dispensing lower-cost products, and the impact of this has to be
taken into account by parallel traders when negotiating terms with the
trade.

Patients throughout Europe expect to take a doctor's prescription for
any one (or more) of literally thousands of products into their local
community pharmacy and receive it (or them) with minimal delay. Modern
medicines can be very costly and no pharmacy could either afford the
funds or find the space to keep in stock the entire range. The wholesale
network or the parallel trader's own distribution system acts as the
vital intermediary, but maintaining multiple daily deliveries all year
round to tens of thousands of pharmacies is itself associated with high
costs.

# Finally, a large part of the price advantage that the parallel trader has achieved through prudent purchasing must be passed on to whosoever pays the bill -- normally, the social health insurance system or national health service. The price charged for a parallel-traded product is always less than that for the domestic version. If this were not the case, the entire *raison d'etre* of parallel trade would cease to exist, as would the trade itself.

#  

# Just What the Physician Ordered

It is accepted that a part of the medicines market in every member state
-- a part that makes a disproportionately large and growing contribution
to overall costs -- consists of branded preparations under patent, where
there is either no therapeutic alternative at all or only limited
interchangeability in respect of particular patients. Different active
ingredients within the same therapeutic category often affect
individuals in different ways. Moreover, doctors, if persuaded by the
merits of a branded product, are reluctant to switch on cost grounds
alone to even a closely similar variant because of the risk of lower
efficacy, poorer tolerability or allergy. Patients, too, prefer the
familiarity of their usual brand.

A patent confers a monopoly and, by definition, a monopoly denies the
right for the forces of competition to effectively work for the benefit
of consumers. Parallel trade is the only form of competition to any
specific medicine during the life of its patent.

Parallel trade offers a real solution to the funding problem that all
European healthcare systems increasingly face. It provides, along with
guaranteed cost savings, the original products from innovative
research-driven manufacturers, not substitutes or copies. It also
minimises the implementation of other, more interventionist or
market-distorting cost-containment measures.

# Which Countries are Involved?

There are many decades of experience with incoming parallel trade in the
Netherlands, the United Kingdom and Germany. Since the early 1990s,
Denmark followed by most of the other Nordic countries and Ireland have
been added to the list, with a small number of parallel-traded products
appearing most recently on the markets of Austria, Belgium, Italy, Spain
and Greece. As regards supplying states, no one source is dominant,
either as a whole or where any individual product is concerned.

No official figures on the trade are gathered and conjectures about its
size in different member states vary widely. Estimates of the extent
that parallel trade has penetrated national pharmaceutical markets,
obtained from mainly manufacturer sources, are shown in table 2.

Table 2: Approximate parallel trade retail pharmaceutical market
penetration by value, 2002

  ----------------------- ----------------------- -----------------------
  country                 \% share                source

  Denmark                 10.2                    LIF^6^

  Germany                 7.1                     IMS

  Netherlands             13.3                    SFK^7^

  Norway                  6.3                     LMI^8^

  Sweden                  9.3 (2001 figure)       LIF^9^

  United Kingdom          16.5                    IMS
  ----------------------- ----------------------- -----------------------

Some of the tougher recent cost-containment measures have been imposed
in the traditional free markets of Denmark, Germany, the Netherlands and
the UK. At the same time, some former low-price countries, like France,
Italy and Spain, are now awarding higher prices than previously, due to
the authorities referencing against prices in other countries and
because of 'European price corridor' strategies by multinational
companies.

The result is that some prices in a 'low-price' country are higher than
those for the same product in a 'high-price' country. Prices are also
relatively fluid, being affected by exchange rate variations and by
subsequent price movements.

What is certain is that parallel trade with medicines is no longer a
simple south-north process, or even one-way. Almost all EEA countries
are involved, as the product source or the product destination; indeed,
many countries simultaneously act, with different products, as both
source and destination. Attempts by some manufacturers to stifle the
trade by applying supply quotas to wholesalers have, paradoxically, lead
to its spread across Europe. Whereas five years ago a parallel trader in
Germany, for example, might have sourced a particular brand from a
single country, today the figure can be eight or more source countries.

Parallel trade consequently boosts intra-Community trade. Indeed, the
European Commission views it as decisive vehicle for the completion of
the EU Internal Market in medicines^10^:

> *'Parallel trade acts an important driving force for market
> integration where there are important differences in prices between
> Member States'*.

# PARALLEL TRADE: THE SAFEGUARDS

As befits their special position with the maintenance of human health,
all medicines -- including parallel-traded ones -- are strictly
regulated in Europe by either national authorities or by the European
Agency for the Evaluation of Medicinal Products (EMEA).

A number of EU Directives and Regulations have been adopted over the
years with the aim of removing barriers to trade in medicines while
ensuring that public health was not endangered. None has dealt
specifically with parallel trade. It was left instead to the European
Court to play a key role in establishing and regulating this sector.

***De Peijper* Judgement**

The most important test case to establish the regulatory position arose
in the Netherlands in the early 1970s. A Dutch parallel trader, Adriaan
de Peijper of Centrafarm, was prosecuted for importing a medicinal
product from a wholesaler in the UK without the approval of the Dutch
authorities, and without possessing either the product marketing
approval documents or the batch records. De Peijper argued that he was
unable to adduce such evidence because the manufacturer would not give
him access to the necessary data. The product was authorised in both the
Netherlands and the UK, and the Dutch court referred the matter to the
ECJ.

The Court found in favour of the plaintiff; asking him to produce the
records demanded by the Dutch authorities was held restrictive^11^:

> *'National rules or practices which make it possible for a
> manufacturer of the pharmaceutical product in question and his duly
> appointed representative, simply by refusing to produce the documents
> relating to the medicinal preparation in general or to a specific
> batch of that preparation, to enjoy a monopoly of the importing and
> marketing of that product, must be regarded as being unnecessarily
> restrictive.'*

The Court felt that as the relevant documentation was already held by
one set of authorities, they should co-operate in making these available
on a reciprocal basis, and that member states should develop a
presumption of conformity. If the parallel-traded and the domestic
versions were slightly different it was up to the authorities to
investigate whether this was therapeutically significant.

The only measures which a national regulatory authority were justified
in taking as regards parallel trade, the Court said, were those intended
to verify that such products were identical with the version already
marketed in that country by the domestic trade mark owner, or that the
difference had no therapeutic effect.

'Public health authorities should be encouraged 'not to place parallel
imports at a disadvantage, since the effective protection of health and
the like of humans also demands that medicinal preparations should be
sold at reasonable prices.'^11^

This was to guard against unnecessary over-regulation as the products
had all been previously approved by the regulatory authorities. Parallel
trade makes modern, innovative medicines more affordable, while an
unaffordable medicine is neither safe nor efficacious.

# Commission Communication

Following the *de Peijper* judgement, the European Commission produced a
Communication outlining the basic principles for an abbreviated form of
marketing authorisation for parallel-traded medicines^12^.

The Commission recommended that the information supplied to the national
authorities by the parallel trader should just be sufficient to ensure
that the product concerned is effectively covered by an existing
authorisation in the member state of destination.

In relation to the product sold by the domestic holder of the full
marketing authorisation, the parallel-traded version must therefore:

-   contain the same active ingredient(s);

-   be administered to patients through the same route;

-   have the same therapeutic effects; and

-   have a common origin (ie made by, or under licence to, the same
    company, or a member of the same group of companies)

Detailed information is obtained from the authorising authority in the
country of origin to allow full comparison with the domestic version.
The parallel trader is required to provide as a minimum:

-   the product name and where it is sourced;

-   the name and address of the holder of the full marketing
    authorisation, both in the member state of origin and in the member
    state of destination;

-   the name and address of the parallel trader;

-   the product's marketing authorisation number in the source country;

-   the product's summary of product characteristics;

-   specimens or mock-ups of the product in the form in which it will be
    sold in the member state of destination; and

-   the appropriate fee.

A 'reasonable period' (a maximum of 45 days was suggested) after receipt
of such information should be adequate to assess it, the Commission
said. In practice, the assessment period facing parallel traders in
several countries is often very much longer. All EEA countries -- with
the notable exception of France - that are actual or potential
destinations for parallel trade now have national rules based on the
Commission Communication in place. Every parallel-traded product is
required to have its abbreviated marketing authorisation number issued
by the national authority and the name of the owner of that
authorisation clearly labelled on the pack. If the manufacturer makes
any change to the product or its labelling, parallel traders have to
quarantine any stock they hold until they obtain regulatory approval for
the necessary variation. Pharmacists who supply unauthorised products
are open to disciplinary action.

# EMEA Approvals

A compliance check is used by the EMEA on the request of a parallel
trader for high-tech or biotech medicines that have already received
centralised, pan-European marketing approval by the Agency^13^. Such
products are, by definition, identical in every respect across the EU,
with the Community marketing authorisation covering all linguistic
versions of the label and package insert. As a result no further
regulatory approval is necessary before parallel distribution takes
place.

# What Other Regulations Apply?

As one of the conditions for their abbreviated marketing authorisations,
parallel traders are required to keep records of the origin, quantity
and batch numbers of all products they sell, as well as to retain a
sample from every issued lot. An authentic reference sample is also kept
for every presentation against which every incoming batch is checked.

If as is usual they are involved in modifying the outer packaging to
enable the product to enter the local supply chain parallel importers
need a manufacturing authorisation, with all the usual obligations this
entails (e.g. employment of an EU Qualified Person, maintenance of Good
Manufacturing Practice standards, periodic government inspection). Under
manufacturer liability provisions, parallel traders in several countries
are required to maintain substantial insurance cover, yet this has never
once been needed.

In most countries, it is also a requirement for parallel traders to hold
a wholesale dealing authorisation, as well as a manufacturing
authorisation, if pharmacies are supplied direct.

Granting of such an authorisation is conditional upon compliance with a
number of EU-set requirements and Good Distribution Practice guidelines,
including:

-   maintaining suitable premises for the storage of medicines;

-   employment of an EU Responsible Person;

-   restrictions upon the sources and supply of such products;

-   maintenance of the cold chain for temperature-sensitive products;

-   establishment of approved product recall procedures;

-   record keeping requirements, in addition to maintaining measures to
    ensure an audit trail for product traceability

# PARALLEL TRADE: THE SAVINGS

Parallel trade can only be realised in case of demand and demand would
not exist if the parallel trader did not pass on a large part of the
price differential to the payer. Across Europe, payers for prescription
drugs are primarily national social health insurance schemes/national
health services, though, except with the very young, the elderly, the
unemployed and the chronically-ill, there is also usually an element of
patient co-payment.

Direct savings accrue in every member state with incoming parallel
trade. The European Commission, in its 2003 Communication following the
G10 process, described these savings as 'significant'. This is because
national governments and/or their national health providers have
introduced measures to incentivise the use of and guarantee savings from
parallel trade. How these measures apply and how the savings are split
between the statutory healthcare system and patient vary by country.

' The UK reimbursement system with fixed reimbursement fees and its
clawback system de facto provides an incentive for intermediaries and
pharmacies to purchase cheaper parallel-traded drugs. It has also been
shown that other Member States give more specific incentives to parallel
trade, in order to achieve cost savings for the healthcare budget.
Denmark, Germany and Sweden serve as an example.'^14^

An independent study by health economists at the UK's University of York
estimated that direct savings accruing to payers and patients from
pharmaceutical parallel trade in 2002 in the UK, Germany, Sweden,
Netherlands and Denmark totalled the equivalent of \$734 million (at
current exchange rates)^15^. This figure does not include hospitals, the
private sector, or other countries with incoming parallel trade like
Norway, Finland, Ireland and Austria.

In addition to direct savings in all countries that realise incoming
parallel trade, there is also general price erosion, benefiting all
buyers. This is because parallel trade brings an important competitive
element to bear, especially in the notoriously price uncompetitive
patent-protected segment, the part of the market that generics cannot
reach.

'...parallel trade...that is the nearest to price competition in drugs
that Europe gets.' Kenneth Clarke (former UK Health Secretary), UniChem
conference, Mauritius, 2002

> *'For a manufacturer to enjoy a monopoly of the importing and
> marketing of the product must be regarded as unnecessarily
> restrictive.'* ^12^

'Patented medicines enjoy patent protection for at least 20 years. In
cases where only a few alternatives are available, parallel trade will
offer the only source of competition.' ^15^

The availability of parallel-traded products, or even just the threat of
this, can result in lower prices for domestic equivalents than would
otherwise be the case. Market prices are reduced and/or price rises
forgone, and greater discounts or improved terms are offered to
distributors in an attempt to buy their loyalty.

'Parallel trade also generates indirect savings by creating competition,
whereas otherwise there is none, and thus forcing pharmaceutical
manufacturers to reduce the prices of domestically sourced products.
These indirect savings are difficult to quantify but they could be
larger than direct savings.'

Governments which cap reimbursement for multisource products are also
able to set lower reimbursement ceilings when parallel-traded versions
are available.

**What are the Benefits to the Patient?**

Patients as taxpayers or as members of health insurance funds have a
clear interest in seeing their hard-earned contributions well spent by
the statutory healthcare system.

> *'Ultimately, all patients pay for the national health system. Public
> health systems are financed by contributions or by general taxes. Any
> savings made by these schemes via the purchase of cheaper
> parallel-traded drugs indirectly benefit the schemes' members.'* ^15^

In many European countries (eg Belgium, Denmark, Finland, France,
Greece, Luxembourg, Norway, Portugal, Spain, Sweden), the majority of
patients pay a share of the cost of prescribed medicines they consume,
so use of cheaper parallel-traded products will mean lower out-of-pocket
demands.

> *'Patients benefit directly from parallel trade either when they have
> to pay the full amount of the purchase price themselves or when
> reimbursement is only partial and is expressed as a percentage of the
> actual purchase price (in contrast with a flat fee).'* ^15^

Some member states employ forms of reference pricing (similar to
'maximum allowable cost' in the US), in which interchangeable products
are grouped with the amount reimbursed by the statutory healthcare
system capped at some predetermined amount per group. If a
parallel-traded product is dispensed the patient may avoid paying any
excess payment that would otherwise be due.

With the growing use of so-called 'lifestyle drugs' (eg treatments for
erectile dysfunction, smoking cessation aids, hair restoratives,
slimming agents) as well as oral contraceptives -- products that are not
widely if at all reimbursed - the consumer makes a direct saving from
the cash purchase of a parallel-traded medicine on private prescription.

# PARALLEL TRADE MYTHS & REALITY

Against an obvious background of commercial interests, it is the aim of
some international pharmaceutical manufacturers to keep the market share
of parallel- traded products as low as possible by obstructing
inter-state movement. Initiatives taken include:

\- supply quota-fixing measures

\- price corridor strategies

\- dual pricing strategies

\- market segmentation practices

-   variable pack size

-   variable brand name

-   variable form of administration

-   different packaging

\- selective distribution

\- targeting with legal actions

Such attempts are invariably in vain, for, as the Competition
Directorate-General of the European Commission has said^16^:

'On several occasions the Court of Justice has ruled that parallel
imports should not be blocked, irrespective of the factors that
determine price differences. Hence, in the pharmaceutical sector, the
Commission has correctly applied the competition rules to agreement or
conduct which restrict parallel trade in drugs.'

The EAEPC believes that criticism and resistance from some quarters is
based on a misunderstanding of the actual facts. This section aims to
dispel some of the erroneous folklore that has developed around the
topic.

*Myth*: 'The dogma of free movement within the internal market is
incompatible with price-fixing by national governments'

*Fact*: The ECJ has stated quite clearly that existing inter-state price
differences with medicines cannot justify a derogation from the
principle of free movement, even if such differences result from price
controls imposed by member states^17^.

Despite this ruling, manufacturers continue to argue that a correctly
working market entails not just the free movement of products, but also
the freedom to set prices. This viewpoint ignores today's reality:

-   Only a minority of member states still exert direct price control on
    new prescription medicines at the level of the factory gate.
    Instead, the preferred approach, adopted across the entire EEA in
    various country-specific ways, is to limit access to the public
    reimbursement system or curtail payments made under it.

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-   Even where actual price control still exists, the authorities no
    longer price by inflexible formulae, and allow instead a true
    negotiation, by which a company's asking price for its key brands is
    increasingly accepted, sometimes in return for offsets elsewhere.

'\...given the fact that companies actually negotiate the prices with
the Spanish government and manage to achieve price increases by invoking
one or more of the justifications set forth in the relevant Royal
Decree, it is too simplistic to regard pharmaceutical companies as price
takers because the national competent authorities set maximum
prices.'^14^

Payers are primarily concerned with keeping the growth in the total cost
of the drugs bill under control and give considerable commercial freedom
to companies to set individual product prices as long as overall
budgetary limits are respected. Various types of 'deals' concluded by
multinational firms so as to achieve comparable prices for their new
potential blockbusters with those in other countries have resulted.
These may include, for example, provision of the results of a
cost-effectiveness study, volume sales caps, prescribing or advertising
restrictions, delayed price cuts, or immediate price cuts and/or
reimbursement delistings with other, unrelated but ageing products in
its portfolio.

Other arrangements, agreed by national associations on behalf of their
members, make provision for cash paybacks by industry as a whole if the
growth in the drugs budget exceeds pre-set limits. These allow prices
higher than otherwise on individual products to be agreed in an
environment of cost containment. Such schemes are in place in Belgium,
France, Portugal and Spain, and formerly applied in Italy.

*Myth*: 'Patients will be frightened and confused by foreign language
packs'

*Fact*: Labelling of parallel-traded medicines is fully in accordance
with EU and country-specific legislation. This includes provision of a
label and a patient package insert in the local language, whose texts
have been approved by the national regulatory authority.

In some cases, one or more self-adhesive over-labels will be applied to
the original cartons, though in other circumstances the parallel trader
will totally replace the carton by a new one giving the required
information only in the local language. This latter situation might
occur, for example, when the manufacturer markets the product with
different pack sizes in different countries, where the amount of
information to be provided on the label is extensive, or to enhance
patient compliance.

Any repackaging done by the parallel trader is performed under strict
GMP conditions and affects only the outer container; the actual dosage
form is entirely untouched. Almost all solid dosage forms in Europe are
blister or foil wrapped before inclusion by their manufacturer in
patient packs; dispensing from bulk is very rare.

The ECJ has laid down the circumstances under which repackaging can be
undertaken^18^:

-   the product inside the packaging must not be affected;

-   the new packaging must clearly state who repackaged the product and
    the name of the manufacturer;

-   the reputation of the trade mark or its owner must not be damaged;
    and

-   the trade mark owner must be given adequate prior notice before the
    repackaged product is put on sale and, on demand, be supplied with a
    specimen of the repackaged product.

Many parallel-traded dosage forms are identical in appearance with the
domestic version. In other cases, as also happens quite frequently with
generic medicines, the shape and colour may vary. In a very few cases
the additives are different. This may require explanation by the
pharmacist to the patient and checks for intolerance. Some patients may
not be suitable to receive parallel-traded products. As the expert on
medicines, the pharmacist is well qualified to conduct screening, and to
give the necessary advice and reassurance.

The considerable market shares, of well over 50%, achieved and
maintained by certain individual parallel-traded products in certain
countries, provide clear proof of their high level of acceptance by
patients.

*Myth*: 'Doctors would prefer their patients to receive locally-made
rather than foreign products'

*Fact*: Today, in the majority of EU member states, the source of
production of most medicines is in other member states. To save costs,
companies have consolidated manufacturing into a handful of sites to
serve the entire continent. Several are situated outside the EU. Most
specialise as 'centres of excellence' for particular types of dosage
forms. In such cases, 'parallel imports' compete with 'direct imports'
The motivation for the manufacturer is the same as for the parallel
trader -- to exploit lower costs.

*Myth*: 'Manufacturers will withhold new introductions from countries
that supply parallel trade'

*Fact*: There is no evidence of this. It seems unlikely, as the main
supplying countries are typically high-volume users of medicines and
hence attractive markets for industry.

*Myth*: 'Parallel trade will deter the search for new cures'

# *Fact*: There is no link between parallel trade and investment in R&D

European patients are best served not only by having access to the
lowest possible prices for today's first-choice treatments but also by
assuring that a stream of new innovations continues to emerge from
research and development pipelines to tackle unmet medical needs.
Diversion of sales from one European country to another with parallel
trade has not, however, led to the research-based industry cutting back
on R&D. In fact, just the opposite; spend on pharmaceutical R&D in
Europe grew more than three-fold from 1985 to 1999^19^.

With the market share of parallel trade in its peak year of 2002
amounting to only 4% EU-wide, this cannot influence investment in R&D.

'There does not appear to be any causal link between the losses due to
parallel trade and GlaxoWellcome's R&D investments. Moreover, these
losses are too insignificant to affect these investments to a
considerable extent. Finally, it must be stressed that the R&D budget of
pharmaceutical companies, while important, only represents around 15% of
their total budget. Losses stemming from parallel trade could just as
well be deducted from the companies other budget items, such as
marketing costs.

...Any savings they might hypothetically make by preventing parallel
trade would therefore not automatically lead to higher R&D investments.
It is conceivable that these savings might merely be added to the
companies' profits .'^14^

An independent consultant^20^ has put total direct losses to
manufacturers from parallel trade across Europe at about Euro 500
million per year, roughly the same as one company's costs in
discovering, developing and launching a single new active ingredient, he
noted. Manufacturers also incur considerable self-inflicted costs (e.g.
lower sales volume, loss of customer goodwill, legal costs) in their
attempts to prevent parallel trade.

There is no evidence that capital investment or competitiveness is
affected either. Europe's pharmaceutical trade surplus with the rest of
the world increased fourfold between 1985 and 1999^19^.

*Myth*: 'It acts as a channel for counterfeit, pirated or substandard
products'.

*Fact*: Parallel traded medicines are the products of the original
manufacturers, often from the very same plant that produces the domestic
versions. They are either exactly identical, or with very small
differences in colour or inert excipients, differences which the
regulatory authorities verify have no therapeutic consequences. If a
manufacturer criticises a parallel-traded product it amounts to
criticism of its own product.

Handling, transportation and storage of medicines by parallel traders
are strictly in accordance with the conditions given in the product's
marketing authorisation, and this includes adhering to any cold chain or
narcotic requirements.

Counterfeiting is a totally different subject to parallel trade. There
is, in fact, very little evidence that counterfeit medicines are traded
by any means in Europe. A 1999 survey published by the European
Commission found the proportion actually on the market was, after the
US, the lowest in the world^21^. In 2001, the Medicines Control Agency
described the level of pharmaceutical counterfeiting in the UK as
'virtually undetectable'^22^. One of the main reasons is that the system
works effectively in a closed loop: Authorised manufacturers sell only
authorised product to authorised wholesalers, who sell only to
authorised pharmacies, hospitals and dispensing doctors. Parallel
traders use the same distribution channels used by domestic products.

As far as can be ascertained there has never been a single, proven case
of a counterfeit medicine leaving the parallel trade supply chain in
Europe. Certainly, none has been reported in the two largest markets for
incoming parallel trade -- the UK and Germany; in the case of the
latter, the government has recently verified this fact^23^.

Parallel traders take the strictest precautions. For a start, they
source only from authorised, reputable wholesalers/traders in other EEA
countries with whom they have had business dealings for many years. All
incoming batches are compared against authentic reference samples, and
multiple checks against photos of authentic products, package texts and
leaflets are made at different stages of the process. In addition to the
quality assurance procedures agreed between the trader's local medicines
inspectorate and its Qualified Person, voluntary ones are often
instigated, eg UV detection of holograms on some packs from Greece, and
re-assay of vaccines in Germany by the Paul Erlich Institute.

It is not unknown for parallel traders during their routine checks to
detect defects in products and to report these to the manufacturer and
regulatory authority concerned. As the only checks made in practice on a
medicine after it leaves the manufacturer are those conducted by
parallel traders, the likelihood of a patient receiving a counterfeit
product is actually less not more with parallel trade.

*Myth*: 'Parallel trade will damage Europe's industrial base'

*Fact*: For many years, leading manufacturers have predicted they will
be damaged or even eliminated, not only by parallel trade, but by the
likes of price controls, heavy-handed regulation and by generic
competition, but the sector has not merely survived it has flourished.

> *'Conclusive information on the economic effect of this (parallel)
> trade on the British pharmaceutical industry is not available, given
> the uncertainty surrounding such factors as the profits made on sales
> to the country which is the source of imports and other discounts
> offered by manufacturers in the United Kingdom.'*^24^

As well as offering competition to the domestic trade mark owner, the
parallel trade sector is itself highly competitive, with up to 30 active
players per country, each offering different terms. Together they
provide employment to thousands of staff. Management is highly
qualified, with extensive experience often gained in large
pharmaceutical companies or in community pharmacy.

Many firms also have a strong platform to participate in the development
of generic medicines, a sector that - with the active encouragement of
several national governments - is forecast to grow strongly over the
next decade, enhancing price competition with patent-expired molecules
to the benefit of payers and patients. To further extend the continuum,
some parallel traders have evolved into fully-fledged pharmaceutical
companies, with a portfolio that includes original products and
investment in R&D.

Donald Macarthur

Secretary General

EAEPC

4 Boytons Acre

Saffron Walden

Essex CB11 4FS

England

tel: +44 1799 524405

fax: +44 1799 526431

<don.macarthur@eaepc.org>

[www.eaepc.org](http://www.eaepc.org/)

# 

# REFERENCES

1\. NERA and SJ Berwin & Co: The Economic Consequences of the Choice of
Regime of Exhaustion in the Area of Trademarks, Report for DG XV of
European Commission, London, 1999

2\. Burstall M and Senior I: Undermining Innovation: Parallel Trade in
Prescription Medicines, IEA Health and Welfare Unit, London, 1992

3\. Senior I: Parallel Importance, Pharmaceutical Marketing, September
2000, pp 44-46

4\. Cassis de Dijon ECJ case, 1979, ECR 649

5\. Macarthur D, Drawing the lines in parallel trade, Scrip Magazine,
July/August 2002, pp 20-22

6\. Lægemiddel Industri Foreningen (LIF), the Danish Association of the
Pharmaceutical Industry

7\. Stichting Farmaceutische Kengetallen (SFK): Facts and Figures 2002

8\. Legemiddelindustriforeningen (LMI), the Norwegian Association of
Pharmaceutical Manufacturers: Farmastat

9\. Läkemedelsindustriföreningen (LIF), the Swedish Association of the
Pharmaceutical Industry

10.Commission Communication on the Single Market in Pharmaceuticals, 25
November 1998

# 

11\. Officer van Justite vs de Peijper, ECJ case C-104/75, 20 May 1976,
ECR 613

# 12. Commission Communication on Parallel Imports of Proprietary Medicinal Products for which Marketing Authorisations have already been granted, C115/5, Official Journal of 6 May 1982 

13.Procedure for Notifications of Parallel Distribution of
Centrally-authorised Medicinal Products, March 1999, EMEA, London

14\. Commission Decision of 8 May 2001 relating to a proceeding pursuant
to Article 81 of the EC Treaty, IV/36.957/F3 Glaxo Wellcome
(notification); IV/36.997/F3 Aseprofar & Fedifar (complaint);
IV/37.121/F3 Spain Pharma (complaint); IV/37.138/F3 BAI (complaint);
IV/37.380/F3 EAEPC (complaint)

15\. West P & Mahon J, Benefits to Payers and Patients from Parallel
Trade, York Health Economics Consortium, May 2003
([www.yhec.co.uk](http://www.yhec.co.uk/)).

16\. XXVth Report on Competition Policy, European Commission, COM
\[96\]126 final

17\. Merck vs Primecrown, joined ECJ cases C-267/95 & C-268/95

18\. Joined ECJ cases C-427/93 (Bristol-Myers Squibb vs Paranova),
C-429/93 (Boehringer Ingelheim vs Paranova) and C-436/93 (Bayer vs
Paranova)

# 

19\. The Pharmaceutical Industry in Figures, EFPIA, Brussels, 2001
Edition

20\. Senior I, speaking at an open forum 'Parallel Trade in European
Pharmaceuticals', 6 September 2000, Vision in Business Conferences,
London

21\. Communication on Counterfeiting and Piracy in the Single Market, 30
November 2000, European Commission, Brussels

22\. Dr Gordon Munro of Medicines Control Agency, quoted in 'Inspection
and Enforcement under the Medicines Act, Pharmaceutical Journal, 20
January 2001, pp 85-88

23\. Deutsche Apotheker Zeitung, 6 November 2003, p 20

24\. Written reply to UK Parliament by Under Secretary for Health, David
Lammy, 4 November 2002

# GLOSSARY OF ABBREVIATIONS

EAEPC European Association of Euro-Pharmaceutical Companies

EC European Community

ECJ European Court of Justice

EEA European Economic Area

EMEA European Agency for the Evaluation of Medicinal Products

EU European Union

GMP good manufacturing practice

R&D research and development