Fair Exchange
by Sarah Fister Gale
June 2007
Parallel trade of pharmaceuticals in Europe offers minimal benefit to consumers and payers, but the practice may push product development to the United States and other countries where research dollars and less stringent regulations abound.
The free movement of pharmaceutical products across Europe’s open borders might seem to be an issue of little global concern or significance. But as with many issues in a global economy, parallel trade in the European Union (EU) has implications that stretch far beyond the continent’s borders. Some economists have suggested that the legal practice of moving drugs from one European country to another affects drug prices elsewhere and contributes to an increase in research and development investments in other countries.
Parallel imports in the EU are estimated to represent €7 billion in 2008, says Fabrizio Gianfrate, Ph.D., professor of health economics and pharmaceutical management at the University of Ferrara, in Ferrara, Italy. Parallel trade may influence drug pricing outside of the EU, forcing non-European countries to absorb the pharmaceutical companies’ losses through higher drug prices, he says. At the same time, however, non-European countries—particularly the United States—potentially could benefit from the more difficult environment of the European pharmaceutical sector. Those non-European countries have the potential to become the beneficiaries of lucrative pharmaceutical research and development dollars, Gianfrate says.
Trading Up
Although drug prices in the United States are the highest in the world, it’s difficult to pin any direct blame on European parallel trade, says Aidan Hollis, Ph.D., associate professor of economics at the University of Calgary, in Calgary, Canada. Other mechanisms at work in the United States have far more to do with its escalating drug prices than parallel traders in the EU, Hollis says.
“The [U.S.] federal government and [insurers] negotiate drug prices, and because the United States represents such a significant market share, the dealings in Europe have little consequence,” Hollis says. As a result of these negotiations, insurance companies can secure lower prices, but consumers still see higher prices, he says. “It has nothing to do with parallel trade.”
Despite the minimal effect of European parallel trade on American consumers, the U.S. economy appears to be benefiting from the practice, says Eric Noehrenberg, Ph.D., director of public health advocacy and international trade and market policy for the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA), in Geneva, Switzerland. Many pharmaceutical companies are pulling research and development capital out of Europe and instead investing in projects in the United States, where they may see greater benefits and more secure pricing for the early release of blockbuster drugs, he says.
“Europe is less attractive for the pharmaceutical sector, and all companies operating in Europe suffer from this situation,” Noehrenberg says. In addition to an environment that is less innovation-friendly than the United States, Europe’s patchwork of national pricing and reimbursement regulations based on conflicting policy objectives is exploited by parallel traders, further eroding its financial gains, he says.
Research Diversion
While the EU struggles with its web of regulatory restrictions, the United States offers an inviting environment for pharmaceutical research, where the scientific infrastructure is well established and new drugs can be developed and launched more easily, says Heinz Kobelt, secretary general of the European Association of Euro Pharmaceutical Companies (EAEPC), a Brussels, Belgium-based industry group representing professional parallel traders. “It’s not just about the pricing environment,” he says. “Major investment in research funds by the National Institutes of Health in the United States creates significant incentive for big pharma. That kind of investment is lacking in the EU.”
A favorable research environment is luring even large non-U.S. companies to set up significant research operations on North American soil. “The most important research and development big pharma companies are from the United States,” says Gianfrate. “Even European companies such as GlaxoSmithKline and Novartis have great research centers in the United States, and they have been increasing their investments in the United States over the past few years, sometimes diverting them from the EU.”
Although U.S. consumers continue to struggle with the ever-increasing cost of their prescription drugs, the boon to the U.S. economy from increased investment in pharmaceutical research is without question, Noehrenberg says. “Unless the EU makes changes in the way it regulates and invests in its own research and development, that trend is unlikely to change,” he says. “Fundamental policy steps must be implemented to recognize and reward pharmaceutical innovation, and to ensure fast patient access to optimal health care delivery in the EU.”
Parallel Trade and Patients
Pharmaceutical manufacturers and traders have strikingly differing opinions as to whether legal parallel trade of medicines in the EU is a balanced competitive strategy to keep the cost of drugs in check, or a dangerous grey market industry that puts consumers and the future of pharmaceutical research at risk. According to the EAEPC’s Web site, parallel distribution increases the effectiveness of the European medicines market, and often is the only form of competition that a patented brand faces in an otherwise monopolistic market. But Noehrenberg notes that not only does parallel trade deprive the research-based pharmaceutical industry of resources that could fund the development of new products in Europe, it may also put patient safety at risk.
It’s important to note that parallel drug traders are licensed operators who follow strict guidelines for the handling and distribution of these products, and per European law, no trader comes in direct contact with the drugs they resell, Kobelt says. “Our members are regulated as manufacturers and follow guidelines for repacking, relabeling and providing new product information before putting those packages on the market,” he says. “The trader’s name is included with the products, because they are liable if there are any failures as a result of the packaging.” There is no evidence that consumers are at any greater risk in using these drugs if they are handled according to legal guidelines, Kobelt says.
Equally important to concerns about consumer safety are the issues of drug pricing and supply in exporting countries, Noehrenberg says. His biggest concern with legal parallel trade is that it siphons drugs out of EU countries with weaker economies, such as Hungary, Italy and Greece, to be sold in wealthier countries, such as the United Kingdom and Germany. “If you are always moving drugs from low-price to high-price countries, consumers will suffer,” he says. Furthermore, parallel trade causes price increases in the export countries that may shorten the supply of key patented products in those nations, thereby limiting patient access, he says.
Some economic experts disagree with this assessment, however, including Gianfrate. Any price or availability imbalance created by parallel trade is fairly minimal, he says. “In the parallel export countries, where the price of pharmaceuticals are the lowest in the EU, patients don’t feel any impact or consequences, because they are simply not involved in any aspect of parallel trade,” he says. Most pharmaceuticals are paid for by public insurance or national health services, which define the price to the pharmacist, Gianfrate says. “Cheaper drugs are bought from parallel traders, relabeled if needed, and sold in those countries where the level of price is higher,” he says. “Patients don’t play any role in ‘cheaper’ countries.”
The supply of medicines in export countries also doesn’t seem to be a problem, says Keith Maskus, Ph.D., professor of economics at the University of Colorado at Boulder, in Boulder, Colo., USA. “There is enough excess supply of popular drugs in these countries that it doesn’t impact cost or availability,” he says.
Hard Numbers
Assessing the effect of parallel trade on consumers in importing countries was the subject of a report published in 2006 by the University of Southern Denmark’s Centre for Applied Health Services Research and Technology Assessment. The report, The Economic Impact of Parallel Import of Pharmaceuticals, estimates that the United Kingdom, the largest market for parallel imports in Europe, saved approximately €237 million due to parallel importation of drugs in 2004. The report also showed that in 2004 Germany saw a savings of €145 million, and Sweden and Denmark saw €45 and €14.2 million savings respectively.
Maskus’ research further supports these findings. He co-authored a paper published in the Journal of Health Economics in 2004 that looked into the effect of parallel drug trade in Sweden in the five-year period following the country’s 1995 entrance into the EU. The research found that “competition from the entry of parallel traders had a significant effect on the prices of original manufacturers in Sweden.” The researchers estimate that parallel trade was responsible for a 12 to 19 percent reduction in manufacturers’ prices.
However, little data supports the argument that those price reductions trickled down significantly to consumers, Maskus says. “It’s difficult to get this kind of price and volume data in the EU and we can’t be sure what effect it has at the retail level,” he says. “In fact, I’m surprised that not much research has been done to uncover the effect of parallel trade on retail market prices.”
Because there are so many middlemen involved in the cross-border trade of these drugs, by the time they get to patients in importing countries, there is little to be gained, Gianfrate says. “European patients are the group who benefits the least from parallel trade,” he says. “Most of the cost of pharmaceuticals is in charge to the national health services or public insurance.” Although these groups can earn some money through the purchase of cheaper drugs and share that savings with consumers, that is not necessarily happening, he says. “Most of the benefits from parallel trade goes to parallel traders,” he says. “Even the public payers benefit not so much.”
Because parallel trade of medicines in Europe offers little or no benefit to either consumers or national health systems, the overall effect of the practice is minimal. Parallel traders do indeed move a fair volume of blockbuster drugs, but parallel trade itself doesn’t do much other than generate additional trade, Maskus says. “On balance, there’s really not much benefit to anyone.” In fact, in the long term, parallel trade in the EU may indeed lead pharmaceutical manufacturers to invest research money in the United States, which eventually could have a significant detrimental effect on the European economy.
Send us Your Comments
Web Exclusives
- An Unbalanced Burden
-
A Q&A with Dr. Kathleen Squires, director of the infectious disease department at Jefferson Medical College in Philadelphia, illuminates the gender differences in the diagnosis and treatment of HIV.
- Turning the Corner
-
After decades of neglect, leading to a rapid increase in incidence, tuberculosis started gaining attention from industrialized nations over the past 10 years. With this new focus, TB’s incidence has started to decrease—but barely.