Another twist in the EU parallel trade saga?

The free movement of goods across Europe might be beneficial for some, but for pharmaceutical companies, the parallel trade of medicines is not welcomed, and is viewed as a system that can damage patient safety and innovation. Could recent shifts in government policy, however, signal a change in favour of pharma?
Jan 01, 2010

Faiz Kermani
One of the unusual features of the European pharmaceutical market is parallel trade, which involves the cross border trade of a given product in parallel to a manufacturer's official supply chain in that country. Parallel trade has occurred in Europe since the 1970s when trademarks and patents were not viewed as lawful obstacles for the resale of products.1 As a result, the trade survives because of differing prices between European countries.

Why does parallel trade exist in Europe?

The legalities of parallel trade are dictated by the traders' right to resell products that have already been placed on a particular market by the manufacturer — as it was probably not the intention of the manufacturer for these products to be sold elsewhere by another company. This concept is often referred to as "exhaustion of intellectual property rights." As the manufacturer researched the product, it has certain rights (intellectual property rights) that mean it can benefit financially from its investment in an exclusive manner so that it can recoup its development costs. Thus, when parallel traders resell a particular product that they themselves did not research and develop, this angers manufacturers, who see them as having profited from their discovery.

Much to the annoyance of the pharma industry, the EU operates a system of regional exhaustion, which means that manufacturers' intellectual property rights are exhausted on first sale of the product in any EU member state. Thus for example, if a product is sold by a manufacturer in Spain, a parallel trader has the right to buy that product and then resell it in another EU member state, such as Finland.

The parallel trade of pharmaceuticals, as with other classes of goods, is based upon the EU principle of free trade. This means that there should not be any obstacle to the free movement of goods between individual EU member states. Since 1958, when the Treaty of Rome establishing the European Communities came into force, the EU has had common legislation to protect competition.2 Article 81 of the Treaty of Rome prohibits agreements distorting competition, and Article 82 prohibits the abuse of dominant position by companies. This means that companies enjoying a dominant position in the market cannot take actions to damage trade occurring between the member states. Article 86 of the Treaty also states that member states may not adopt any measures that restrict competition, as these will be contrary to European Community rules.

Despite these regulations, the exact conditions necessary for parallel trade are constantly being challenged by pharmaceutical manufacturers. The concept of parallel trade is allowed under European law, but when it comes to the trade of medicines, manufacturers believe that the risks to human health must also be considered. Believing current legislation to be unclear, manufacturers feel that specific conditions must be set out to dictate how parallel trade applies to medicines. For example, a product could arrive from a different member state with the labelling on the pack being in a foreign language, which manufacturers claim would confuse the patient. Parallel traders will often try to solve the problem by relabelling the pack in the local language or repackaging the product, but to manufacturers this amounts to interfering with the product and should thus be considered illegal.

Although the legal environment of the EU allows parallel trade to occur, the scale depends on there being significant price differences for the same product in different markets. In the EU, countries in the north have traditionally been seen as high-price pharmaceutical markets compared with countries in the south. Therefore, it is not uncommon to see parallel traders sourcing products from cheaper countries and attempting to sell them in more expensive European markets. Once a parallel trader has applied for, paid for and received marketing authorizations in the country of destination, the pharmaceutical products are transported to the higher-priced country. Here they are adapted to local requirements according to national law, before being sold to wholesalers or direct to pharmacies in parallel with the same medicine sold by the original pharmaceutical manufacturer or marketing company.

Outside the EU, the situation is different and the issue of exhaustion of intellectual property rights becomes controversial. Although the manufacturer may have exhausted his intellectual property rights on a regional basis, this does not mean that the product can be sold elsewhere; for example, the US. Similarly, a product cannot be brought into the EU that has been sold in another country. Thus, manufacturers retain their intellectual property rights against parallel imports from third countries.