Parallel Trade's Emerging Image Crisis

Parallel trade has frustrated pharmaceutical manufacturers for years and now evidence has linked such trade to drug shortages in Europe. Parallel trade representatives have yet to respond, but will need to react quickly to salvage their reputation.
Jul 01, 2012

Nathan Jessop (Stockbyte/GettyImages)
Parallel trade involves the crossborder trade of a given product in parallel to a manufacturer's official supply chain in that country. With respect to pharmaceuticals, the trade is a controversial issue in Europe and has led to several legal battles. Parallel traders purchase medicines at low prices in one country (often in southern Europe) and then subsequently resell the product at higher prices in another country. Companies seeking to create a profit from price differentials have been active since the 1970s when trademarks and patents were considered not to be lawful obstacles for repackaging and resale (1). However, parallel trade has surged as the EU has widened and created more opportunities for profit. Recently, it was suggested that price differentials of just 10% between EU member states was sufficient enough for pharmaceutical traders to make a profit (2).

Although pharmaceutical manufacturers are firmly against parallel trade, there is little they have been able to do to prevent it. Parallel trade of goods, including pharmaceuticals, is based on the EU principle of free trade (3), which means that there should not be any obstacle to the free movement of goods between individual EU member states. The legalities of parallel trade also depend on what is known as the "exhaustion of intellectual property rights." Basically, commercial exploitation for a given product is considered to have ended in the EU after the product's first sale (4), meaning that the original manufacturer cannot actively prevent another party, such as a parallel trader, selling exactly the same product within the EU and benefiting commercially.

The European Federation of Pharmaceutical Industry Associations (EFPIA) acknowledges the benefits of the EU principle of free trade, but believes that its application to the field of pharmaceuticals is not appropriate (3). Manufacturers have frequently argued that public safety could be compromised through parallel trade because products are not following the intended supply chain with its builtin measures for quality assurance. Indeed, EFPIA has often highlighted examples of safety and quality issues arising from parallel traders' handling of pharmaceutical products (3).

Parallel traders angrily reject accusations by pharmaceutical companies that their activities compromise patient safety. The European Association of EuroPharmaceutical Companies (EAEPC) states that its members add value to society by introducing price competition and that precautions are taken to guarantee product safety (2). They consider arguments from certain pharmaceutical companies as part of a smear campaign to suppress their activities (5). Ironically, the EAEPC has recently collaborated with EFPIA and other parties in the pharmaceutical industry on a joint European stakeholder model to prevent falsified medicines from entering the European supply chain and improve patient safety (6).

Unfortunately for pharmaceutical companies, rulings concerning parallel trade by the European Court of Justice have tended to leave enough room available for parallel traders to continue. Even when decisions appear favourable to pharmaceutical companies, they are not final and appeals can continue. For example, to deal with the issue of parallel importation, GlaxoSmithKline (GSK) adopted a dual-pricing mechanism in its Spanish distributor agreements. The company charged one fixed price for products sold domestically and a higher price for products sold outside Spain. At first, a ruling from the European Commission went against GSK, primarily because its agreement was considered to restrict trade between member states. Appeals led to the European Commission's ruling being partially annulled, leading to optimism among pharmaceutical companies that their views on parallel trade were finally being listened to. However, it turned out that the partial annulment centred mainly on the fact that GSK's arguments for their dual pricing system had not been properly addressed. Consequently the case continues. Although pharmaceutical companies continue to mount legal challenges against parallel trade whenever possible, there is a feeling that success is unlikely.

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