European Union-The European Commission’s ban on GlaxoSmith–Kline’s dual pricing policy in Spain halts one of Big Pharma’s attempts to prevent parallel imports in Europe.

GSK introduced dual pricing in 1998 to prevent drugs sold in the low-priced Spanish market from finding their way into the higher-priced British, German, and Scandinavian markets. Under the dual system, pharmaceuticals sold to Spanish wholesalers in the domestic market had one price, and wholesalers elsewhere paid a higher premium.

Spanish wholesalers felt they had little choice but to go along with GSK’s plan, fearing the company would cut off supply to its products. But in1999, following complaints to the competition directorate from a host of interested parties-Spanish wholesalers, the parallel Spanish and German traders’ associations, and the European Association of Euro-Pharmaceutical Companies (EAEPC)-the commission warned GSK that its policy probably contravened competition rules.

That warning was formally ratified two years later, revealing just how slowly the wheels of the European Union grind. GSK, in the meantime, had already suspended the dual pricing policy. But to the rest of the industry, which had been watching the case with interest, the ruling signified the loss of a potential weapon against parallel imports.

Competition commissioner Mario Monti says the dual pricing system aimed to reduce parallel trade within the unified European Union, restricted price competition, and interfered with the EU goal of integrating national markets. "Pharmaceutical companies cannot put in place distribution arrangements that perpetuate the partitioning of the single market into national markets," he says.

The European Commission noted that GSK did not deny that the dual pricing system was meant to impede parallel trade. The company argued that the system does not restrict competition, because price differences between member states result from national governments’ decisions.

But the European Commission rejected the company’s arguments on legal and factual grounds, citing the European Court of Justice’s 1996 Merck versus Primecrown judgment that the existence of divergent national price regulations in the pharmaceutical sector does not exclude the principle of free movement of goods-nor should that divergence preclude the application of the European Union’s competition rules.

According to the European Commission, GSK did not have prices forced on it. Rather, it argued that the results of negotiations cannot be predicted and that GSK managed to negotiate price increases with the Spanish authorities for four products that are prime candidates for parallel trade. The commission also says the level of parallel trade is affected by currency fluctuations-a fact that GSK did not deny.

According to GSK, the losses it incurs as a result of parallel trade seriously affect its R&D budget, which it needs to develop innovative drugs. But the European Commission saw no merit in that argument, saying there appears to be no causal link between parallel trade and GSK’s R&D investments, claiming that such losses are too minor to significantly affect R&D. The commission stressed that pharma companies’ R&D budgets, although important, represent only about 15 percent of their total budgets. Losses stemming from parallel trade could just as well be deducted from the companies’ other budget items, such as marketing costs. Finally, the commission found no evidence for the company’s contention that parallel trade may lead to a shortage of its products in Spain.

GSK is considering an appeal because it believes parallel imports are increasing and that Germany is a particular target. The European Federation of Pharmaceutical Industries and Associations (EFPIA), which supported GSK’s case, expressed disappointment in the ruling. At a European Commission hearing in December 1999, EFPIA provided evidence that parallel imports were harmful to the industry and of little benefit to European patients and payers.

Brian Ager, EFPIA director-general, says the commission took an "overly formalistic" approach that was unwarranted in the European pharma industry, where prices are determined by national governments and do not reflect the normal considerations of supply and demand. "Against that background," he says, "the desire to create a single market for nationally price-controlled pharmaceuticals in Europe, through the encouragement of parallel trade, is unrealistic and damaging, as it creates a significant loss to the research-driven pharmaceutical industry."

EFPIA says it will still support its members’ search for solutions to what it calls parallel imports’ ongoing damage to industry competitiveness. One estimate puts parallel trade in the United Kingdom at ?750 million, but that is hardly definitive. Another estimate says the European total is 2 percent of the industry’s turnover.

But EFPIA may find that its opponents are not the ragbag bunch of opportunists they are sometimes portrayed to be. The European Association of Euro-Pharmaceutical Companies has changed its structure so that it encompasses individual companies as well as national associations-a move that mirrors EFPIA’s reorganization a few years ago. It now has 18 members in 13 European countries. Following the European Commission ruling, it stated, "This latest decision should serve as a warning to other manufacturers that contingency measures in general are monitored and, if necessary, disallowed by the commission."

EAEPC’s secretary-general Donald MacArthur is a long-time consultant to the pharma industry and an expert in pricing and reimbursement. It’s not surprising that MacArthur welcomes the European Commission’s decision. "Our members are in a more secure legal position than ever," he says.

MacArthur is out to dispel what he says are myths about parallel trade, a practice in Europe since the mid-1970s. He claims parallel trade is a mature, regulated, effective, efficient, and valued form of distribution in several countries and is accepted by many parties.

MacArthur also denies that only middlemen profit from parallel trade. In Denmark, pharmacists are legally bound to inform patients of the availability of the cheapest generic or parallel traded medicine if the savings from the substitution are above a certain level. In Germany, a similar legal obligation is combined with contractual agreements between pharmacists and the Krankenkassen, or "sick funds."

Dutch reimbursement authorities receive two-thirds of the difference between the reference price of a drug and a cheaper, parallel-traded product, and pharmacists retain the rest. In Norway, the difference is split 50–50 between the National Insurance Administration and pharmacists, but Swedish authorities look for a savings of at least 10 percent on parallel-traded products.

Patients benefit, too, according to MacArthur-through greater access to innovative medicines and as taxpayers with an interest in healthcare system savings. Governments often reduce

patients’ co-pays as a result of parallel-trade savings, and the growing number of lifestyle drugs, which are often ineligible for reimbursement, become cheaper.

Despite those benefits, MacArthur says his members are subject to Big Pharma harassment. He cited Bayer’s attempts in the mid-1990s to prevent the parallel trade of Adalat (nifedipine) in the United Kingdom by limiting supplies to wholesalers in Spain and France. Earlier this year, the European Commission launched an appeal with the ECJ, asking it to overturn a lower court’s ruling that Bayer was not acting against the law. Parallel traders’ record of never having lost a case now rides on a successful outcome in the ECJ appeal.

There is also harassment over re-packaging, MacArthur claims: "We are trying to present our products in an elegant way." Yet manufacturers routinely object both to overstickering packs to address local needs and to the alternative: repackaging.

MacArthur refuses to disclose EAEPC’s parallel trade figures but insists that they are "pretty small fry." He believes manufacturers are often less concerned with the overall impact of parallel trade on sales than they are on keeping track of their products so country managers can be appropriately rewarded for sales in their territories. Manufacturers will often make deals with parallel traders, he says, offering discounts so they can at least know which medicines come from where.

Yet MacArthur says there is an "overreaction" to parallel trade on the part of the multinationals, especially those based in the United States. He says, "It’s a soft option to blame all of the industry’s ills on parallel trade."