Parallel Trade in Pharmaceuticals in the UK - Dissertation Example

? Parallel trade (import) in pharmaceuticals in the UK Table of contents Introduction 3 2. Parallel trade – characteristics and benefits 4 3. Economic effects of parallel trade 8 4. Estimation of the economic loss from parallel trade 9 5. Parallel trade and implications for UK patents 11 5.1 Parallel trade and pharmaceuticals in UK 12 6. Recent cases on parallel trade 14 7. Potential solution for control of parallel trade 16 8. Conclusion 17 Bibliography Appendix 1. Introduction The increase of competition worldwide has led businesses to establish practices that will allow them to improve their position towards their rivals. One of the most common problems of these practices is their failure to fully meet the standards related to the relevant activity. Furthermore, it seems that the willingness of the state to support business initiatives in various industrial sectors is not standardized. The above problem has resulted to the development of practices, which can help businesses to minimize the risks of loss and increase their competitiveness; parallel trade is such practice. Despite its value in increasing business performance, mostly through decreasing prices while the quality of offered products is not affected, parallel trade has been often negatively criticized as of its effects on the economy. On the other hand, there are industries more appropriate for parallel trade and others where parallel trade practices are difficult to be established. In the pharmaceutical industry of Britain, parallel import was used in order to control prices, which are already at a high level – compared to the average prices of similar products in other EU countries. The use of parallel trade in the pharmaceutical industry has been initially related to the reduced prices for patients; however, through the years, the specific activity has been also found to help towards ‘the reduction of costs for the social security system of the importing countries’.1 In practice, it has been proved that the use of parallel trade in the specific case did not manage to significantly support the particular industry – at least, not at the level expected by its initiators. However, important benefits were resulted for the British economy. The effects of parallel trade on the British pharmaceutical industry are examined in this paper. Emphasis is given on the policies used by the British legislators to control parallel trade regarding the pharmaceutical products and minimize relevant risks. It is concluded that parallel trade in the British pharmaceutical industry has helped the industry in increase its competitiveness against its rivals – referring mostly to the pharmaceutical industries of other member states; however, in terms of the performance of British pharmaceutical firms, the benefits of parallel trade are not clear, a fact indicating that additional measures need to be taken in order for the parallel trade in the specific industry to be more effectively controlled. 2. Parallel trade – description, characteristics and benefits Due to its nature, parallel import cannot be clearly defined; rather, reference could be made to its characteristics, as identified in the literature published in the particular field. In accordance with Cheng et al. (1995) the key characteristics of the parallel import are the following ones: ‘a) it relates to goods protected by trademark/ patent or copyright and b) the importer is not the rightholder of the said right but obtained and exported’.2 In terms of their legal status, parallel import goods have been characterized as ‘greymarket goods’, meaning that they are not fully legal;3 this issue is judged each time by reviewing the conditions of the local market but also the economic benefits to which parallel import is related in a particular market.4 In practice, this means that in countries where parallel import highly supports the national economy, its potential alignment with the law (referring to the legal status of the parallel import goods) is not considered as a barrier for the further development of parallel import in the specific market. The above view is made clear through the case law developed in disputes related to parallel import; a significant differentiation is identified in the criteria followed by the judges for evaluating the legal status of the specific trade activity.5 This trend is analytically presented in section 5 below. Commonly, the level at which parallel trade is developed within a particular market reflects the market’s power, meaning its potentials to face the pressures of the international market. From a similar point of view, the expansion of parallel trade within a particular industry reflects the conditions in financial markets worldwide. Indeed, in accordance with Parr et al. (2005) the increased level of parallel trade indicates that ‘there is effective competition from suppliers in other territories’6. At the same time, the level of parallel trade in a particular market reveals important information on market segmentation.7 As for the control of parallel import, this is expected to have two different aspects: from a first point of view, parallel import is related to the Patent law and the Trademark law, reflecting the right of the patent owner to protect his patent;8 at the same time, the parallel import is related to the market competition, showing the level at which importers can equally compete in the local market, meaning that they can proceed to import activities of all types, including parallel import practices. Under these terms, the efforts to ban parallel import, as developed in countries worldwide reflect two different needs: the need of the trademark/ patent owner to protect his trademark/ patent and the need of importers to compete fairly within their market. In this context, parallel import is related not only to the Trademark law and the Patent law but also to the Fair Trade law.9 From this point of view, banning the parallel import would be carefully reviewed by legislators worldwide; measures should be taken so that turbulences in the global market are avoided – due to the simultaneous intervention of parallel import with Trademark/ Patent law and the Fair Trade law. The development of parallel trade is highly supported by the lack of effective mechanisms to control the application of intellectual property rights in markets with different characteristics. However, in many cases, the level at which parallel trade is allowed to be developed within a country is depended on the type of protection provided to the intellectual property rights involved. This problem is highlighted in the study of Macrory et al. (2005) where reference is made to the direct relationship between the development of parallel trade and the legal status of intellectual property (IP) rights. It is explained that the potentials of parallel trade to be expanded within a market are depended on the level of exhaustion of the IP right, which can be described as follows: a) the national exhaustion; in this case, IP rights on a particular product are exhausted on this market; IP rights can be independently developed in other markets, a fact that causes barriers to the development of parallel trade, b) the international exhaustion; the fact whether the product was first sold in the national market or in the international market has no influence on the product’s IP rights; parallel trade cannot be prevented since the owner of a product can sell it in any market worldwide, if ‘the product entered the market with the consent of the right holder’10; in the context of the national market, the official importer cannot prevent the parallel trade of the specific product and c) the regional exhaustion which refers to a particular area, being defined in a Treaty signed between the states involved – referring to the country of the right holder and the country in the market of which the selling of a product is attempted. Parallel trade has been highly supported by governments worldwide mostly because of the range of its benefits. In the pharmaceutical sector, the development of parallel trade, can result to the following benefit: a) competition is secured; reference is made to competition as an element of a particular industry but also as part of the local economy, b) pharmaceutical costs are reduced; reference is made particularly to the prices of medicines and medical services; however, the level of reduction of prices in the pharmaceutical sector needs to be carefully reviewed, focusing on two particular problems: b1) extremely low prices could lead to market instability, b2) parallel trade would not be effective in the long term; its strategies need to be regularly monitored ensuring that all stakeholders are equally benefited, c) another important benefit of parallel trade is the control of the state over the expansion of pharmaceutical firms; these firms have managed to significantly increase their power, a fact that would threaten national economies; through parallel trade, the level of development of pharmaceutical companies is controlled, d) increase of funds invested on the distribution of products – reference is made to the funds spent on packaging, marketing and so on. 3. Economic effects of parallel trade The effects of parallel trade are likely to be differentiated across markets in accordance with certain criteria; in practice, this means that parallel trade may benefit the local market or may harm the specific market being influenced by the market’s elasticity. In accordance with Muller-Langer (2009) the promotion of parallel trade worldwide is directly related to the level of development of each market; it is explained that in well developed countries, where prices are likely to be high, parallel trade is supported in order to help towards the reduction of prices; on the contrary, in countries with market elasticity and low prices, usually the less developed countries, parallel trade is rather avoided, aiming to promote price discrimination.11 In the study of Hoekman et al. (2002) the above phenomenon is explained as follows: in developed markets the support of parallel trade could lead to the increase of price discrimination; this practice could harm the local market, for which a uniform price would be rather preferred. On the contrary, for less developed markets, the benefits of parallel trade would be significant leading to the discrimination of price, a fact that would result to the decrease of prices within the particular market.12 Thus, for developing countries, parallel trade would be considered as an important tool for supporting the local economy under the terms that the parallel trade practices used in these countries should be carefully monitored – ensuring that issues of unfair competition do not appear. The development of parallel trade in markets worldwide has been achieved mostly because of the economic benefits of the specific activity. In accordance with Wilkof et al. (2005) the expansion of parallel trade has been highly supported by the following practice: ‘the parallel importer sets a challenge to the Trademark owner that the latter can control the local market by using his Trademark’ – in the context of an appropriately customized parallel trade scheme. In this way, the Trademark owner and the Patent owner participate actively in the expansion of parallel trade by using their rights on Trademark and Patent; the above practice can result to significant economic benefits for the Trademark owner and the Patent owner – in fact these benefits can be much higher compared to the expected ones from the common use of Trademark and Patent rights. 4. Estimation of the economic loss from parallel trade In Britain, the development of parallel trade in the pharmaceutical industry has resulted to the limitation of the pharmaceutical costs; however, the expansion of parallel trade in the specific industry has been also strongly criticized – mostly because of the economic consequences of the specific practice. In accordance with the Association of British pharmaceutical industry, the annual losses in Britain because of parallel trade have been estimated to ‘more than one million (?1.3 million in 2005)’ (EurActiv 2007). Another argument against the development of parallel trade in the pharmaceutical industry is the fact that the limitation of prices in the particular industry – as a result of the expansion of parallel trade – is not of critical importance, since the relevant reduction of prices is limited, with no particular benefits for customers. At this point, the following issue should be highlighted: the economic loss from parallel trade is not always easy to be measured, or else, it is difficult to be estimated not being directly related to specific financial results; for example, parallel trade is among ‘the life-cycle risks for products and brands’;13 this means, that parallel trade can negatively influence the performance of products/ brands. Therefore, the use of parallel trade as a policy for controlling the performance of market/ power of firms should be carefully review, since there is always the risk that the involvement of parallel trade in a particular industry to have opposite results from those initially expected. Despite the economic losses, parallel trade in Britain is highly supported by the state; in fact, in 2001, the parallel imports of the country reached the 15% - classifying Britain as the second country in the parallel import index (see Table 1, Appendix). The above figure proves that the actual drawbacks of parallel trade are less than initially estimated, so that the potential losses caused because of parallel trade to be ignored. 5. Parallel trade and implications for UK patents In the case of Britain, as in other European countries, the national legislation on parallel import should be aligned with the requirements set by the Commission – referring to parallel trade activities across member states. One of the key problems that the Commission had to face regarding the parallel import is the following one: since the parallel import as a trade activity in member states cannot be avoided, rules should be introduced for its effective control. These rules should secure the legal credibility of parallel import; the terms under which this target would be achieved had to be decided by each member state. In UK, a process has been established through which importers could ask for a license of parallel import, a Product License (PL); this scheme was considered as an effective solution for controlling parallel import in the particular country; in practice, this scheme was proved inadequate being characterized by severe delays in the completion of all its phases - and the granting of the license.14 In fact, it was proved that the average period for the completion of this process reached the 19 months, even 4 years, instead of the six months,15 as the initial time framework for the particular process. Another important implication for parallel import in Britain has been the structure of the relevant process. More specifically, in order for an importer to get a Product License (PL), referring to the license that would allow the importer to develop parallel import activities, it was necessary that certain requirements were met.16 Their requirements were so complex, that the intervention of the European Commission has been considered as unavoidable to confront the crisis. This problem was made clear in the case of Smith & Nephew & Primecrown v Medicine Agency (1996); in the above case, the requirement of the British law for ‘product made by a member of the same group of companies’ in order for a Product License to be granted, was set under examination. 17 5.1 Parallel trade and pharmaceuticals in UK In the pharmaceutical sector, the development of obligations and prohibitions regarding the parallel trade may be differentiated from the similar processes in other sectors. In this context, it is possible for ‘the parallel trade of patented pharmaceuticals to be fully banned’18 even if the requirements of the local or the international rules related to parallel trade are met. This means that, under certain circumstances, the power of pharmaceutical firms to ask for the prohibition of parallel trade of patented pharmaceutical products can be increased, compared to the similar rights of firms in other industrial sectors.19 In order to understand the rules regulating the parallel import in the pharmaceutical sector of Britain, it would be necessary to refer primarily to the criteria on which the level of prices of pharmaceutical products in Britain is decided. Then, the role of parallel import practices in the above country would be made clear helping to evaluate the measures developed in Britain in regard to the parallel trade in the pharmaceutical industry. In accordance with Russo et al. (2010) the level of prices of pharmaceutical products in Britain can be characterized as ‘average to high’20 – in opposition with other countries of the European Union which have managed to keep the prices of pharmaceutical products at low levels – for instance, Spain. The development of parallel trade in the pharmaceutical sector of Britain would help towards the decrease of prices of the sector’s products without negatively affecting the interests of pharmacists – who are compensated by a standard fee on each pharmaceutical product.21 From this point of view, the country’s legislators and authorities should actively support parallel trade in the pharmaceutical sector. Despite the fact that the requirements related to the granting of Product License in Britain are considered as necessary for protecting the Trademark law and the Fair Trade law in the particular country, still, the necessity of these requirements has been often doubted – at the level that the relevant restrictions could possible set limits in the development of trade within the particular market. An indicative example is the case of ‘veterinary pharmaceutical products, which were verified under the mutual recognition procedure’. 22 The Commission has suggested to the British legislators that the particular requirement is eliminated, as causing unnecessary delay on the completion of the relevant process. The above proposal of the European Commission is still under evaluation by British legislators.23 6. Recent cases on parallel trade The promotion of parallel trade in Britain has been closely related to the support provided to the specific activity by the European Commission.24 In fact, as highlighted in the relevant EU case law, parallel trade across the EU is highly promoted; the prohibition of this activity, as can be identified in certain cases of the European Courts is resulted from the failure of the individuals/ firms involved to follow the relevant rules of the European Commission, i.e. to develop their parallel trade activities in accordance with the framework set by the European Union. The ‘Green Paper on Vertical Restraints in EC Competition Policy’,25 published in 1997 by the Commission highlights, again, the importance of parallel trade characterizing the efforts for prohibition of this activity as a violation of the article 85.1.26 However, in practice the relationship between the parallel trade and the violation of the article 81 EC seems to be differentiated; in the case law developed in the specific field it is made clear that in order for an activity that prevents the parallel trade to be considered as violating the article 81 EC it is necessary that this activity also aims to reduce competition.27 The above trend is reflected in the GlaxoSmithKline (2006) case, where the Court held that the use of the article 81 EC requires that ‘an agreement is intended to limit parallel trade in medicines but it also aims to prevent competition within the particular market’.28 In Britain, a similar trend has been developed regarding the protection of parallel trade. In fact, such trends were first identified in the above country quite early; an example is the 1871 Betts v Wilmott case29 where limits were set regarding the potential right of the patentee to prevent parallel imports in the particular market. The Courts evaluate the criteria used by right holders for asking for the prevention of parallel trade by reviewing the conditions in the local market but also the reasons for which parallel trade was attempted in each case.30 In the context of the European Union law, the violation of competition rules is related not just to the prevention of parallel trade but also to the actual effort for restricting competition. 31 In the British case law also, the restriction of competition, as the basis for justifying the claim for prohibiting a parallel trade activity is related to the following criterion: that the particular activity aims to prevent or to cause barriers to the competition in the particular market.32 The right on Trademark and Patent are not ignored; however, in order for barriers or prohibitions to be set in regard to parallel trade it is necessary that an involvement of a parallel trade activity in the limitation of competition within the local market is proved. On the other hand, it is possible that barriers are set to parallel trade not after the intervention of the courts but because of the local market conditions; this issue is highlighted in the study of Parr et al. (2005) where emphasis is given on the role of ‘product standards, trademarks and patents and governmental regulations’33 in the limitation of parallel trade within a particular market. 7. Potential solution for control of parallel trade The control of parallel trade in the pharmaceutical sector would be related to a series of factors; first, the level at which parallel trade affects the profits of firms in the pharmaceutical industry should be taken into consideration; then, the potential contribution of the state in the identification of an effective solution should be also evaluated. Also, the effectiveness of similar measures in other sectors has to be reviewed – having in mind the characteristics and the structure of the market involved. At this point, the following issue should be made clear: the level of involvement of parallel trade in the pharmaceutical sector is rather low – compared to other industrial sectors. This means that the potential banning or limitation of parallel trade regarding pharmaceutical products should be carefully reviewed taking into consideration the characteristics and the needs of the local market but also the level at which the parallel trade can actually affect competition.34 Indeed, in most markets, the influence of parallel trade on the competition among pharmaceutical firms is rather limited; in the case of countries/ members of the European Union this means that for this reason, any problem related to parallel trade in the pharmaceutical sector should be addressed ‘by using appropriate European Regulations and not by prohibiting the parallel trade’35 – which in any case, is not highly developed in the pharmaceutical industry. Moreover, parallel trade in the pharmaceutical industry would be effectively controlled if the rules and the mechanisms of control in the local market were updated. British legislators and authorities could use models and schemes, which have been already tested in foreign markets, in order to control parallel import of pharmaceutical products. The free-trade zone system developed in UAE would be an indicative example of such plan. In the specific country, the introduction of free trade zones helped to attract foreign investment and increase the performance of the national economy. In these zones, no restrictions or barriers on trade activities are set; it is assumed that in such zone, parallel trade would be fully permitted allowing the decrease of prices (even not necessarily) and the increase of sales.36 Such scheme could be also developed in the British market, under the following term: the particular zone should be clearly defined – referring to the trade activities permitted and the level of profits allowed; appropriate policies should be also introduced in order to ensure that the benefits for the national economy would be higher compared to the potential losses and risks – as explained above. 8. Conclusion Traditionally, parallel trade has been considered as a significant trade practice for markets of all sizes; in fact, the development of parallel trade has been often related to the limitation of prices of products available in a specific industry. In the case of the pharmaceutical industry, parallel trade has helped towards the decrease of pharmaceutical costs; in Britain also, parallel trade in the pharmaceutical industry has been used in order for the price of pharmaceutical products to be reduced, resulting to the limitation of the sector’s costs and the increase of its competitiveness towards the similar sectors of other countries. However, the expansion of parallel trade in the British pharmaceutical industry should be closely monitored; measures should be taken so that parallel imports in the particular industry to be kept at specific level, allowing the development of competition but also the Fair Trade. At this point, the key challenge for British legislators when trying to control parallel trade in the pharmaceutical industry would be the following one: parallel imports are not always traceable, a fact that increases their risk. In any case, because the prices of products in the British pharmaceutical industry is high – compared to other countries, the parallel trade has been considered as the only way for controlling pharmaceutical costs and increase the competitiveness of the sector’s organizations. Bibliography Anderson, R., Gallini, N. (1998) Competition policy and intellectual property rights in the knowledge-based economy. Alberta: University of Calgary Press Buttigieg, E. (2009) Competition law: safeguarding the consumer interest: a comparative analysis of US antitrust law and EC competition law. Frederick: Kluwer Law International Cheng, J., Cheng, C., Liu, L. (1995) International harmonization of competition laws. Dordrecht: Martinus Nijhoff Publishers Clarke, R., Morgan, E. (2006) New developments in UK and EU competition policy. Cheltenham: Edward Elgar Publishing Dinwoodie, G., Janis, M. (2008) Trademark law and theory: a handbook of contemporary research. 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Washington: World Bank Publications Case law AAH Pharmaceuticals Ltd & Ors v Pfizer Ltd & Anor [2007] EWHC 565 (Ch) (05 March 2007) Boehringer Ingelheim Kg & Anor v Swingward Ltd. [2004] EWCA Civ 129 (05 March 2004) Forum Bioscience Holdings Ltd v Rowe [2006] DRS 3294 (31 March 2006) GlaxoSmithKline Services v Commission (Competition) [2009] EUECJ C-501/06_O (30 June 2009) GlaxoSmithKline Services Unlimited v Commission [2006] ECR II 2969 Glaxo Group Ltd. v. Dowelhurst Ltd. [2005] ETMR 104 L'Oreal SA & Ors v EBay International AG & Ors [2009] EWHC 1094 (Ch) (22 May 2009) Rimer J in Sockel GMBH v The Body Shop International plc, [2000] EULR 276 Roche Products Ltd & Anor v Kent Pharmaceuticals Ltd [2006] EWHC 335 (Ch) (23 February 2006) Appendix Country Parallel Imports Greece 16.3 % UK 15 % Netherlands 9.9 % Denmark 9.7 % Sweden 9.3 % Germany 4.7 % Table 1 - Parallel trade in medicines in 2001 (Source: http://www.euractiv.com/en/health/parallel-trade-medicines/article-117528) Read More