**WRITTEN STATEMENT TO HHS TASK FORCE ON DRUG IMPORTATION,**

# 14 MAY 2004

# BY

# DONALD MACARTHUR

# SECRETARY GENERAL

# EUROPEAN ASSOCIATION OF EURO-PHARMACEUTICAL COMPANIES

Mr Chairman, members of the HHS task force on drug importation

Thank you for inviting the European Association of Euro-Pharmaceutical
Companies, which I represent, to submit its views. The EAEPC is the
professional representative body for parallel trade in medicines in
Europe. We currently have over 70 firms from 16 European countries as
members, from a region of 28 member states and a population of 450
million that is now the world's largest trading bloc. Several of our
member companies have been in business for over 20 years, and some are
among the top-10 pharmaceutical suppliers to their national markets.

I must emphasise at the outset some of the differences between parallel
trade, as practised in Europe, and personal importation -- whether by
mail order, via the Internet or on foot -- that has been the basis of US
experience to date.

Ours is a mature, highly regulated industry developed with considerable
investment that is strictly business-to-business. EAEPC member companies
have no dealings with the public. We supply only wholesalers and/or
pharmacists, it being the latter group's professional decision whether
parallel trade is dispensed to the patient or not.

All product types are suitable for parallel trade -- any pharmaceutical
dosage form, cold chain products including vaccines, as well as
diagnostics, OTCs, parapharmaceuticals, etc - whereas distance selling
is applicable to repeats of chronic medication only.

With parallel trade the product's origin, quality and storage conditions
can be assured. The chain is a closed one. Only authorised products are
purchased from authorised wholesalers in one European country and sold
to authorised distributors in another. Can the same be said of distance
selling?

Parallel trade is offered as a rewarding alternative to wholesalers and
pharmacies, whereas cross-border E-pharmacy seems to have a strongly
negative impact on the business of local distributors.

## Legal Basis

Parallel trade with prescription medicines is completely legal in
Europe. This was reaffirmed as recently as January 2004 by the European
Commission in a new Communication (COM\[2003\]839). It has been
underpinned by an unbroken series of almost 30 judgements of the
European Court of Justice (ECJ) dating back to the mid-1970s.

It takes its basis from one of the cornerstones of the near 50-year old
Treaty of Rome: the free movement of goods within the Single Market.
This now consists of the 25 member states of the European Union (EU)
plus three former European Free Trade Area states (Iceland,
Liechtenstein, Norway) that together form the European Economic Area
(EEA).

The description 'parallel trade' is preferred, in a European context
anyway, to 'parallel import' or 'parallel export' as our members source
and sell products exclusively within the EEA, a market with no internal
borders

## Regulatory Controls 

A framework for regulatory control was given to national regulatory
authorities across the EEA by the first Commission Communication on the
subject (C115/5, *Official Journal*, 6 May 1982). During subsequent
years almost every member state introduced its own abbreviated marketing
authorisation procedures for incoming parallel trade based on the
Communication and, in 1998, the European Medicines Evaluation Agency
followed with a special procedure for notification of parallel
distribution of centrally-authorised medicines (EMEA/H/30313/98, Rev 2).

To obtain an abbreviated marketing authorisation, the product must

-   be sourced from an EEA country, and

-   have a current full marketing authorisation in the source country,
    and

-   show no therapeutically-significant differences from a product
    covered by a full marketing authorisation in the country of
    destination.

The following are the conditions for authorisation:

-   No parallel-traded product may be marketed until specific
    authorisation is given.

-   The authorisation is valid for five years, but is renewable.

-   It requires an extensive regulatory check and payment of a fee.

-   Authorisation must be for the same indications, contraindications,
    side effects, dosage, route of administration as for the product
    with the full marketing authorisation in the country of destination
    -- patient package inserts are mandatory and must contain identical
    information in the language of the country of destination.

-   The trader must check each incoming lot and record origin,
    quantities received and batch numbers. In certain cases, the
    authority will require batch testing.

-   The shelf life in the country of origin shall apply, though it
    cannot be longer than the shelf life accepted in the country of
    destination.

-   The trader is subject to the normal obligations for all
    authorisation holders as regards adverse reaction, abuse and defect
    reporting, and provision for product recall.

-   The regulatory authority will inform the full marketing
    authorisation holder in the country of destination that a parallel
    trade approval has been granted on his territory and the name(s) of
    its country of origin.

-   The parallel trade authorisation is published in the country's
    official gazette.

-   Any change in the conditions for authorisation require the filing of
    a variation application, with the product quarantined until this is
    approved.

In addition to product-specific marketing authorisations, parallel
traders in all countries of destination have to hold EU manufacturing
authorisations to allow them to conduct relabelling or repackaging
operations (as is usually the case). This means that just as with
main-stream pharmaceutical manufacturers, parallel traders have to
comply with Good Manufacturing Practice guidelines, employ a special EU
'qualified person' (who personally takes legal responsibility for the
safety of the procedures), and be subject to periodic inspection by the
regulatory authorities.

If they supply pharmacies, traders also have to hold an EU wholesale
dealing authorisation. Conditional on this is compliance with Good
Distribution Practice, employment of a responsible person, and periodic
inspection.

Under manufacturer liability provisions, parallel traders in several
countries have to maintain substantial insurance cover. This has never
once been needed.

## Repackaging Issues

Though repackaging is more costly it is generally preferred by parallel
traders as it produces a more professional result than merely
over-stickering the original carton with the essential label information
in the language of the country of destination. Surveys have shown
repackaging is overwhelmingly preferred by pharmacists and it also
improve compliance by patients..

However, it is very common for trademark owners to object to repackaging
or its style, claiming that parallel trades are merely seeking a
commercial advantage through it. The ECJ (linked cases C-443/99 and
C-143/00, April 2002) has concluded that replacement packaging 'is
objectively necessary\...if, without such repackaging, effective access
to the market concerned, or to a substantial part of that market, must
be considered to be hindered as a result of strong resistance from a
significant proportion of consumers to relabelled pharmaceutical
products'. In other judgements (i.e. cases C-427/93, C-429/93 &
C-436/93), the ECJ has defined the allowable conditions for repackaging:

-   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.

## How it Works

Parallel traders purchase surplus medicines from established
pharmaceutical wholesalers in countries where the medicines are cheaper.
In many cases, the business connections between the two parties go back
many years. If the trader holds a marketing authorisation in the country
of destination, he adapts the packaging/labelling to local requirements,
in accordance with national law and ECJ decisions, before selling to
wholesalers or direct to pharmacies, in parallel with the same medicine
sold by the domestic trademark owner (i.e. the manufacturer or its local
licensee).

## Guaranteed Savings from Parallel Trade

Quite simply, parallel trade is a cure for governments and consumers
looking to pay less for drugs. Parallel trade can only be realised in
case of demand and demand would only exist if the prices offered by
parallel traders were clearly lower than those for equivalent domestic
products. As a result, a number of European governments require
pharmacists to inform patients of the availability of cheaper synonyms,
including parallel-traded forms, or to supply these on their own
initiative as long as the prescriber hasn't specifically blocked this
step and the patient doesn't object.

How savings accrue vary by country:

-   In the UK, the National Health Service recovers via the 'clawback'
    mechanism the average saving it estimates pharmacies have realised
    from their total parallel trade purchases.

-   In Austria and Ireland, a parallel-traded product must offer savings
    to the state before it is added to the reimbursement list.

-   The cost difference between the domestic product and its
    parallel-traded equivalent is split between the dispensing
    pharmacist and the payer in both the Netherlands and Norway, and
    between health insurance and the patient in Finland.

-   The German sickness funds, and the Danish, Swedish and Finnish
    governments oblige pharmacists to dispense parallel-traded forms
    when certain levels of savings are possible.

-   

For almost 30 years, parallel trade has delivered with absolute safety
lower prices to payers in a growing number of European nations: the
Netherlands, the UK, Germany, Denmark, Sweden, Norway, Finland, Ireland
and Austria.

Independent experts at the UK's University of York
([www.yhec.co.uk](http://www.yhec.co.uk/)) -- one of the world's
best-known and respected centres for health economics -- estimated
direct savings from parallel trade in 2002 in just 5 EU countries at
€631 million (the equivalent of \$745 million at current exchange
rates).

Even more important, though less easy to quantify, are indirect savings
from parallel trade's competitive effect. The trade is the only form of
price competition with new, innovative but increasingly expensive
medicines that are under patent. 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.

## Common Myths About Parallel Trade

'Pharma should be exempt from EU free movement rules because with
medicines unlike other goods governments set prices, not companies'

Contrary to widespread assumption, companies marketing medicines in
Europe are not entirely at the mercy of prices fixed by the national
payer. Most multinationals in fact pursue a proactive policy of price
discrimination. As commercial enterprises, they naturally aim to obtain
the highest price each national market will bear and so discriminate
between countries to reflect differences in the ability and willingness
to pay. Price differentiation is known to yield higher profits than
uniform pricing.

Manufacturers' selling prices for new drugs are either freely set, as in
the UK and Germany -- the two largest destination markets for parallel
trade -- or negotiated between the manufacturer and the payer with the
company given real input and flexibility. Today no European country uses
inflexible pricing formulae. Companies also control the sequence of
launches across Europe so as to limit the opportunities for the
authorities to depress prices in major markets through the application
of international price referencing.

Drug manufacturers are getting bigger through M&A, and the bigger the
company the stronger its negotiating power. It might even be true to say
that decisions taken in New Jersey have greater weight on drug prices in
Europe today than those taken by governments in its national capitals.

The pharmaceutical industry would like many to believe that strict
government price control impose universally low prices in the likes of
Belgium, France, Italy, Portugal and Spain. That incoming parallel trade
already benefits two of these countries (Belgium and Spain), is about to
start following a change in the law in France, a change which our
Portuguese members would also like to see duplicated in their country,
is proof positive that industry's claim is untrue.

*'It Acts as a Channel for Counterfeit or Substandard Products'*

Parallel traded medicines are the products of the original
manufacturers. They are either identical with the regular domestic
version, or with very small differences in colour, etc. which have no
therapeutic consequences, as verified by the regulatory authorities. If
a manufacturer criticises a parallel-traded product it amounts to
criticism of its own product.

There is very little evidence that counterfeit medicines at all are
traded in Europe, and no evidence whatsoever that any counterfeit
medicine has ever reached a patient as parallel trade. Last July, in a
written parliamentary answer, the German Federal Ministry of Health said
it 'did not know of any case where medicines with counterfeit contents
were brought on the market by an importer since the introduction of
imported medicines'. Pharmaceutical parallel trade has been ongoing in
Germany for over 20 years, and last year its market penetration exceeded
7%.

One isolated but unconfirmed case of a counterfeit in the UK, 15 years
ago and prior to the introduction of Good Distribution Practice, was
found via the normal testing procedures employed by a parallel trader
before product release to pharmacies took place. In practice, the only
checks made on a medicine after it leaves the manufacturer are those
conducted by parallel traders. Hence, if counterfeits are a concern, the
risk is [less]{.underline} with parallel trade than with domestic
products.

### 'Leads to Product Shortages'

There is no evidence of any link between outgoing parallel trade and
product shortages. However, some steps to counter parallel trade
[have]{.underline} precipitated shortages. The problem of shortages is
neither new nor restricted to countries with outgoing parallel trade.

In most EU member states, including the major parallel 'exporting'
markets of France, Spain and Greece, wholesalers have a 'public service
obligation' written into national law. This obliges them to supply all
customers within their territory with a high percentage of orders from
stock within a short time frame. Even in the absence of such a legal
obligation, there are voluntary codes of conduct with the same aim, plus
the real fear that if a wholesaler does not prioritise his local
pharmacy customers, a competitor will move in and take the business,
perhaps permanently.

### 'Loss of Profit Hits R&D Spend'

Diversion of sales from one European country to another has not led to
the research-based industry cutting back on R&D. Capital investment
hasn't been affected either.

After specifically investigating the issue, the European Commission
found no causal link between one major manufacturer's losses from to
parallel trade and its research investments (Commission decision of 8
May 2001 on GlaxoWellcome's dual pricing system in Spain). Moreover, the
Commission added, 'these losses are too insignificant to affect these
investments to a considerable extent...losses stemming from parallel
trade could just as well be deducted from the company's other budget
items, such as marketing costs'. Even manufacturers' own estimates show
parallel trade penetration across the EU in 2002 at only 4-5% of the
total pharmaceutical market, and it has certainly declined since then.
Actual losses are seriously over-estimated.

## Manufacturers' Counterstrategies to Parallel Trade

Many of the large multinational pharmaceutical manufacturers devote
disproportionate efforts to obstruct the free movements of goods in
Europe, with the sole intention to limit if not eliminate parallel trade
with their products.

Whereas in the past, market segmentation moves (inter-state differences
in brand names, formulations, pack sizes or strengths), narrow
pan-European price corridors and even claims of inferior quality of
their own products abroad were common, today's emphasis is on limiting
the availability of stock through the application of supply quotas
systems. According to the European Commission, they have received
notification of these from no fewer than 15 manufacturers, resulting in
over 40 antitrust complaints pending with the Commission .

With the quota allegedly based on historical purchasing levels,
wholesalers in affected countries cannot buy sufficient stock to expand
their market share nationally or to meet sudden surges in demand. In
some cases, they cannot buy any stock at all. Shortages are inevitable,
with consequent risks to public health, extra demands on doctors and
pharmacists, and anxiety amongst patients.

## Summary

European experience shows that parallel trade...

-   makes available original, innovative products at lower cost

-   includes internal supply chain assurances and external regulatory
    checks for patient safety

-   provides both direct and indirect cost savings for third-party
    payers and consumers

-   enhances competition

-   acts as a counterweight to the monopoly situation of patent
    protection

-   gives pharmacists and patients a choice

-   avoids governments implementing other, more interventionist and more
    market-distorting cost containment measures

-   creates new businesses and new jobs, and (unfortunately)

-   provokes an extremely powerful backlash from Big Pharma

Donald Macarthur

Secretary General

European Association of Euro-Pharmaceutical Companies
([www.eaepc.org](http://www.eaepc.org/))

4 Boytons Acre

Saffron Walden

Essex CB11 4FS

England

tel: +44 1799 524405

fax: +44 1799 526431

<don.macarthur@eaepc.org>