Monti set for final ruling in parallel trading controversy

Date:24/07/03

By Karen Carstens

PHARMACEUTICAL firms and their arch-enemies are eagerly anticipating a possible final verdict from EU competition chief Mario Monti on the practice of parallel trade in medicines.

The nemesis of many drugs companies is the parallel trader, a wholesaler who takes advantage of price differentials in pharmaceuticals by buying and repackaging them in one member state where they are cheaper, and selling them in another where they are more costly.

They claim their business embodies the free market ethos lacking in the patented industry, and that they are performing an important public service for national health services, the taxpayer and individual patients.

But pharmaceuticals manufacturers argue the trade is costing them dearly in lost revenue that should be pumped into research and development (R&D), which has allowed the US to pull ahead in the innovation stakes.

In a response last month to a question tabled by a member of the European Parliament, Monti indicated he aims to formulate a clear Commission response by the end of the year on the matter, which has elicited several official complaints from both sides to the European Commission.

More specifically, Monti is looking into the "supply quota system" used by many drugs firms, whereby they set their own quotas of medicines they provide to member states.

The Commission and the parallel traders, however, were thwarted in May by European Court of Justice Advocate-General Antonio Tizzano, who rejected an appeal by the Commission to reconsider a 2000 Court decision on a case involving the German pharma giant Bayer.

The Commission had imposed a fine on Bayer for "impeding exports" of its heart drug Adalat within the EU.

"Price competition in the European drugs market has been dealt a blow by this opinion - European consumers are the big losers," said Edwin Kohl, president of the European Association of Euro-Pharmaceutical Companies (EAEPC), a parallel traders' umbrella group.

Monti said: "Tizzano's conclusions are not favourable to the Commission's position." Still, he added, regardless of the final outcome of the Adalat case, it will not impede the Commission's work on other cases.

But, aside from a clampdown last May on GlaxoSmithKline's (GSK) "dual pricing" system, the Commission has not yet launched any major attacks on drugs companies.

In that case, the Commission said EU rules barred GSK from charging one price to Spanish wholesalers for drugs they sell domestically and a higher price to the same wholesalers for the same drugs exported to the rest of the EU.

One idea being suggested to redress the situation is that of a "single European price" for pharmaceuticals, which one observer said DG Enterprise would like to make a reality, but with which Monti's competition directorate would have "huge problems".

Although it has been discussed by the Commission and drugs firms, it has not been included in a key overhaul of EU pharmaceuticals legislation expected to enter into force sometime next year.

In any case, it is highly unlikely to see the light of day.

Donald Macarthur, the EAEPC's secretary-general, said: "This is really "pie-in-the-sky" - it won't take off."

The European Federation of Pharmaceutical Industries and Associations (EFPIA), meanwhile, claims the Commission "is taking an overly formalistic approach in applying the European Union's competition rules to protect parallel trade".

EFPIA argues that prices in the sector are largely determined by national governments and therefore "do not reflect the normal interactions of supply and demand".

It also estimates that parallel trade costs drug firms more than €3.5 billion - about 5% of the total market - in lost sales annually and knocks €1 billion off their bottom line.

But parallel traders question the industry's mathematics, and say drugs firms make a large enough profit.

They say they help combat the monopoly drug firms enjoy with their patents and offer savings.

A recent study commissioned by the EAEPC and conducted by Britain's University of York found that, in 2002, total estimated direct savings from parallel trade in five EU countries - Denmark, Germany, Sweden, the Netherlands and the UK - amounted to €635 million.

"Pharmaceutical companies make double-digit profits, making it one of the most lucrative industries in the world," said Macarthur. "And there's no evidence that parallel trade hurts R&D."

European Commissioner, Mario Monti, is due to rule on the practice of parallel trade in medicines.