Who's afraid of parallel trade?

January 1, 2008
Morpheus
Pharmaceutical Technology Europe
Volume 20, Issue 1

How much do you know about parallel trade? Perhaps you may have heard someone mention these words and have then switched off. In a sense, it's hardly surprising given the fact that most media coverage centres on interpretation of complex legal cases. By the time you reach the end of these types of articles, you can't work out what the mentioned companies were arguing about in the first place and on which technical details the case was judged. Yet, time after time, a legal ruling on a parallel trade issue rockets to the front pages of the pharmaceutical press and even, occasionally, the mainstream media.

How much do you know about parallel trade? Perhaps you may have heard someone mention these words and have then switched off. In a sense, it's hardly surprising given the fact that most media coverage centres on interpretation of complex legal cases. By the time you reach the end of these types of articles, you can't work out what the mentioned companies were arguing about in the first place and on which technical details the case was judged. Yet, time after time, a legal ruling on a parallel trade issue rockets to the front pages of the pharmaceutical press and even, occasionally, the mainstream media.

If you work for a pharmaceutical company it's probably worth paying a bit more attention to the media's coverage of parallel trade as it could affect your future livelihood. In fact, mention the two little words 'parallel' and 'trade' together and you'll see that they strike fear into the heart of every senior industry executive trying to gauge future profits for their company.

The grey market

Parallel trade is often spoken of as the 'grey market'. It involves the cross-border trade of a given product in parallel to a manufacturer's official main supply chain in that country. If you are unfamiliar with parallel trade, you may be surprised that it can possibly exist — but it does, and is big business to those involved. Whether the practice can take place or not depends largely on the right to resell a product that has already been placed on a particular market by the original pharmaceutical manufacturer — as it is pretty likely they were not intending to allow someone else to sell on their product.

Parallel trade is a complex and controversial issue that infuriates those running the pharmaceutical industry. After all, if they have invested millions of euro in research to bring a product to market, why should someone else benefit by selling it on? Well, unfortunately, in certain areas of the world the practice is considered acceptable depending on what's known as the 'concept of exhaustion of intellectual property rights'. Basically, once the owner of the goods has placed his products on the international market, there may come a point where the owner is no longer allowed to control the distribution of these goods. In effect, he has 'exhausted' his distribution rights by first sale of the goods.

The big problem

Parallel trade is possible in the EU providing certain legal requirements are met; this is a problem particularly when one considers that the EU is the world's second largest regional market. The EU is very keen on the principle of free trade and this effectively means that there should be no obstacle to the free movement of goods between individual Member States of the EU. To aggravate the situation, there are various legal articles prohibiting agreements distorting competition.

This may make little sense to the average person, but it creates enough legal ambiguity for those involved in parallel trade to see a business opportunity. Parallel traders actively seek out a significant price difference for the same product in different markets. They then buy the product in a lower-price market to sell it on in a higher-priced market at a more attractive price to the buyer. In Europe, countries in the north have traditionally been seen as higher-priced pharmaceutical markets compared with those in the south.

Demand for parallel trade

Pharmaceutical companies often complain about parallel traders in derogatory terms, but they cannot be brushed off lightly. First, whether the industry likes it or not, there is a demand for their services. With people becoming increasingly conscious about pharma prices, parallel traded products have become highly attractive. Despite occasional industry cited concerns regarding safety aspects of parallel traded products, and a tenuous link to counterfeiting, there seems to be little evidence that consumers are being put at any significant risk. After all, if parallel traded products did cause major health concerns, the market would fold in a matter of days as the media would jump on the story. Consumers would be up in arms against the organizations concerned and the politicians would outlaw parallel trade to safeguard their voters' health. Second, parallel traders are not shifty individuals operating in the shadows; they are becoming increasingly outspoken about their activities. In Europe, they even have a trade organization to represent them and regularly deal with the media.

Parallel traders believe that their business is a natural phenomenon that will exist wherever price differences occur between countries. In their view, parallel trade increases the effectiveness of the pharmaceutical market. Furthermore, they believe the practice helps restrain costs in a market that is not very price-sensitive. Some optimists among the parallel traders have even suggested that some sort of cohabitation might be possible with the pharmaceutical industry, although this appears most unlikely. The claim that particularly angers parallel traders is any supposed link to substandard products that might endanger patients. They believe that parallel trade is a mature business with a good track record and suitable safeguards to prevent potential counterfeiting.

Uncertain future

The truth is that the pharmaceutical industry is in an awkward position regarding parallel trade and will continue to revert to the law courts to block such activity where possible. The arguments concerning whether parallel traders have the rights to resell products that have appeared on a national market are ongoing and have resulted in many legal cases. None of these cases has either completely blocked parallel trade or given it the green light to continue unchecked, and so we are in for an uncertain future that will be dictated by lawyers and judges. So far, this situation has mainly centred on the EU, but the issue of parallel trade is beginning to surface in markets such as North America, leaving pharmaceutical companies uncomfortable about the future.

The fate of parallel trade lies with the legal profession, but it's fairly clear that even us ordinary folk in the industry need to take notice. Often we are so preoccupied with the activities in our home market that we ignore what is going on elsewhere. Yet, if a product from your company is priced lower in a foreign market and can be parallel traded, you can bet that someone is looking at it as a business opportunity. Parallel trade is perceived as a threat to the profits of the pharmaceutical industry, and we all know how senior executives react in such situations — through job cuts.

We may never understand the legal intricacies of the parallel trade cases appearing in the media, and we may not support some of the decisions that arise from them, but all of us should look ahead to see what this means for us. If not, one of those boring legal stories that you flick past in a magazine may dictate how long you get to stay in a job.