Parallel trade or parallel import in pharmaceutical market simply refers to buy medicinal products in a country that sells them at a reasonable price and then to distribute such products outside the distribution channels set up by the drug manufacturer or its recognized distributor in one’s own country of origin. It is named ‘parallel’ as it takes place beside and usually in parallel to the producer’s distribution networks.
The EU Commission’s policy position is that parallel imports increased price competition, and that this in turn increases consumer welfare as the import of goods from a country with lower prices forces sellers in the country of destination to reduce prices. The commission’s overall approach is based on two principles (Competition Policy Newsletter 1, 2007):
- The single market in pharmaceuticals requires the unhindered free movement of products – private companies cannot erect barriers to undermine this without distorting intra-brand competition.
- The efficiency claims defence advanced by the research based pharmaceutical industry is unsubstantiated – i.e. there is no evidence that partitioning the common market would spur on global investment in inter-brand competition.
Parallel Trade in the Pharmaceutical Sector
The Reasons for Parallel Trade in the Pharmaceutical Sector The pharmaceutical industry is a special sector in two respects: Firstly, innovative pharmaceutical companies incur high research and development costs for novel medicines. Secondly, in many cases, the buyer of a pharmaceutical product does not directly pay for it but is reimbursed by a national health system. Prices and reimbursement schemes vary considerably between countries in Europe: Price differentiation allows companies to allocate contributions to research and development costs efficiently among different payers, which improves cost recovery.
1) This results in considerable price differences between Member States. A price comparison of pharmaceuticals in 16 EU Member States in 2013 shows differences between 25% and 100% for two thirds and between 100% and 251% for one third.
2) Such price differences are a strong incentive for parallel trade: An importer, usually a wholesaler, purchases pharmaceuticals in a low-price country and then sells them in a high-price country.
Parallel Trade of Pharmaceuticals and its Problems in the EU
Parallel trade, on the one hand, lowers expenditure on pharmaceuticals for high-price countries which is, of course, welcomed by them. The larger the share of parallel imported medicines, the greater this effect is. On the other hand, parallel trade adds to the non-transparency of price structures and may cause certain difficulties for pharmaceutical companies regarding cost calculations.
1) Shortages of Medicines
Parallel trade is exports of pharmaceuticals from low-price countries to high-price countries, may lead to shortages in the former unless the manufacturer is willing to make up for it and supply higher quantities of the product.
2) Risk to the safety of pharmaceuticals
Parallel trade can increase the potential risk of falsified pharmaceuticals because extra steps are added to the supply chain through parallel imports. Complex supply chains, routes of transport, changes of outer packaging and relabeling make it difficult for national authorities to trace the history of pharmaceuticals bought and sold by intermediaries in different EU Member States. The EU has taken measures against falsified medicines through the Falsified Medicines Directive. So far, however, this has not eliminated the problem completely.
3) Lack of transparency and calculation problems
Prices in the pharmaceutical sector are not transparent. The negotiated prices that health insurers pay are generally not published. Such lack of transparency protects the producers by blocking price signals to other insurers and other countries.
Result
Parallel trade is a form of arbitrage: A product, sold by the manufacturer in country A at a lower price than in country B, is bought by a dealer in country A and sold in country B. It is particularly relevant for pharmaceuticals in the internal market of the EU.
Parallel trade may lead to pharmaceutical shortages in low-price countries and increase the potential risk of falsified pharmaceuticals. It adds to the non-transparency of pricing of pharmaceuticals and can lead to calculation problems for manufacturers.
There are three basic options for addressing parallel trade: the exclusion of pharmaceuticals from the internal market rules, open redistribution among the national health systems by a subsidisation fund, and a unitary price that has to be paid everywhere in the EU.
