Magazine Article | March 1, 2009

The Rising Problem Of Parallel Trade

Source: Life Science Leader

By Suzanne Elvidge

As the United Kingdom moves into its deepest economic depression since the 1980s and the pound remains low against the Euro, problems seem to arise within the pharmaceutical supply chain, leading to shortages of drugs for UK hospitals and patients. Can the pharmacists no longer afford the drugs? No, it’s not as simple as that. Though the United Kingdom was previously one of Europe’s higher-priced markets, it appears that ‘parallel traders’ are to blame.

What Is Parallel Trade?
The European Union’s principle of free movement of goods within its internal market means that pharmaceuticals can be traded across borders. Parallel trade emerges where markets that can trade freely with each other have the same goods at significantly different prices, so parallel traders buy drugs from countries where the prices are low and resell the drugs in countries where the prices are high.

According to a report released by the European Federation of Pharmaceutical Industries and Associations (EFPIA) in 2008, the value of parallel trade across the EU was estimated at 4.3 billion Euros (about $5.7 billion) in 2006, accounting for as much as 15% of the import market in some countries.

Though marketing authorization in the EU is centralized through the European Medicines Agency (EMEA), individual countries set their own prices, and these can widely differ. Because of variations in exchange rates, though prices in non-Euro-zone countries do not change, the relative value of the goods will change in comparison to the Euro.

Parallel trade can have a two-fold effect on the drug supply by increasing export of drug stocks to higher-value markets and reducing previously relied on low-cost imports. The outcome is a smaller stock of drugs available to pharmacists, causing delays in fulfilling prescriptions and a strain on the drugs budget, as the supply of lower-cost drugs dries up.

Parallel Trading: A Historic View In Spain And Greece
On average, prices paid for drugs are higher in the United Kingdom, Germany, and the Netherlands than in southern European countries. For example, according to the Hellenic Association of Pharmaceutical Companies, Greece had the fifth lowest pharmaceutical prices in the EU in 2005, and Spain had the seventh lowest.

In 2001, GlaxoSmithKline, in an attempt to stop parallel trading causing shortages in Greece, stopped supplying certain drugs to Greek wholesalers and instead supplied directly to pharmacies. This ended up being referred to the European Court of Justice, which ruled that GlaxoSmithKline’s actions were justified, but only when orders from distributors could be judged as ‘out of the ordinary.’

According to Farmaindustria, the Spanish Association for the Pharmaceutical Industry, in 2006 more than 2/3 of Spanish pharmacies had long-term difficulties with supplies of certain medications, with around 90% having to wait three days for delivery and nearly 20% not having drugs arrive at all. Farmaindustria representatives suspected these difficulties were because of parallel trade. In Spain, GlaxoSmithKline, Pfizer, and Novartis have set up, or are planning to set up, a dual pricing scheme that means the companies charge higher prices for drugs for export than for drugs intended for use in the domestic market.

The United Kingdom As A Parallel Trade Market
Historically, as a higher-price market, the United Kingdom has imported a significant level of its prescription drugs through parallel trade within the EU. According to the EFPIA, in 2006, parallel imports accounted for almost 15% of the UK import market, and the Association of the British Pharmaceutical Industry (ABPI) reported that, in 2006, a parallel-imported product filled almost 1 in 17 UK prescriptions.

The UK pharmaceutical market has become vulnerable to parallel exporting to Euro-zone countries. As a result, some pharmacists are reporting delays in obtaining drugs. “We are aware that there have been reports that the falling pound against the Euro could affect the supply of medicines to the United Kingdom. While there are no reported widespread shortages, the situation does need to be closely monitored,” says David Pruce, director of policy at the Royal Pharmaceutical Society of Great Britain (RPSGB).

Some pharmaceutical manufacturers and wholesalers have imposed a quota system to maintain UK stock levels, but according to Sue Sharpe, the CEO of the Pharmaceutical Services Negotiating Committee (PSNC), “Pharmacists are working hard to maintain quotas and ensure the majority of patients can access their medicines straight away. In the rare cases where a medicine is not in stock, pharmacists can place an urgent order directly with the manufacturer. As far we are aware, the quota system is working well.”

If not controlled, parallel trading could have a negative impact on the UK economy, as well as an impact on the availability of drugs. UK hospitals and trusts, used to buying low-cost drugs from parallel imports, may find their drug budgets stretched, as they have to buy drugs imported from higher-cost countries or at full price direct from the manufacturers. This could mean either a reduction in the number of patients treated or an overspend, meaning the money would have to come from public spending elsewhere.

As well as affecting drug budgets, parallel importing also has an impact on drug manufacturers, both from a profit perspective (important for shareholders and investors) and from an R&D perspective, as reduced income means reduced reinvestment in research. Both of these could potentially reduce external investment into the United Kingdom.

Various bodies are looking to the government and regulatory authorities to solve the issue by reducing the levels of parallel trade. “The MHRA [Medicines and Healthcare products Regulatory Agency – part of the UK Department of Health] should restrict the number of wholesaler licenses granted and look into further restricting activities in this area,” says Graeme Hall, UK Clinical Pharmacy Association (UKCPA) professional secretary. Hall adds, “The government needs to work with the pharmaceutical industry and wholesalers to ensure the supply chain is maintained.”

Further, a Department of Health spokesperson commented, “The Department of Health is aware of the issues affecting the supply of medicines, and we are in regular contact with pharmaceutical companies and wholesalers. We are monitoring the situation closely.” Pharmaceutical companies are attempting to circumvent the parallel trade issues by signing direct-to-pharmacy (DTP) agreements with a sole distributor. Pfizer has signed such an agreement with UniChem in the United Kingdom. GlaxoSmithKline, AstraZeneca and Sanofi-Aventis all have DTP agreements.

What Does This Mean For The United States?
Parallel importing has not been a significant issue in the United States to date, but the Pharmaceutical Market Access and Drug Safety Act (S.334) will allow parallel import between the United States and Canada, the EU, Australia, New Zealand, Japan, and Switzerland. Parallel importing has appeared to have an impact in the United Kingdom because of the weakening currency. While the U.S. dollar remains strong, the increase in parallel importing could enhance the risk of counterfeit drugs, posing a risk to patients and to confidence in the U.S. pharmaceutical industry. However, the continuing strength of the dollar is not inevitable. If the dollar weakens compared with other global currencies, the United States could become vulnerable in the same way as the United Kingdom, Spain, and Greece to increasing levels of parallel exports into Europe and elsewhere, potentially reducing domestic stocks of drugs and lowering the amount of money available for investment into pharmaceutical R&D. Thus, the United States should watch closely as the situation develops in the United Kingdom.