UK industry is the loser from parallel trade in pharmaceuticals

Main Category: Public Health
Article Date: 23 Mar 2004 - 0:00 PDT

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The shipment of bona fide pharmaceutical drugs into Britain from Europe may cost the UK pharmaceutical industry more than £770million a year.

The net effect on the UK economy as a whole, taking into account the benefit to consumers of lower pharmaceutical prices, may be more than £290million.

In addition it may undermine the long-term viability of R&D on pharmaceuticals, at a time when the Government is trying to promote basic scientific research.

This is the potential impact of parallel trading in pharmaceuticals, according to a new ESRC-funded study. Research led by Dr Stefan Szymanski of Imperial College London investigated the impact of parallel trade on the welfare of consumers, purchasers and producers in UK.

"Our study leads us to conclude that overall parallel trade has a negative impact on the UK economy, notwithstanding the short-term benefits for purchasers," states Dr Szymanski.

"The impact of parallel trade on pharmaceutical markets has been the source of great controversy," argues Professor Szymanski. "On the one hand, the parallel traders view themselves as benign agents promoting competition in markets," he continues.

"By contrast, pharmaceutical manufacturers view the activities of parallel traders as undermining pharmaceutical company profits and thus investment in research and development."

An estimate of the impact of parallel trade from published figures indicates that parallel traded pharmaceuticals account for around 20 per cent of the UK market and some parallel traded products sell at 15 per cent cheaper than non parallel traded goods.

Based on these figures, researchers calculate a gain of up to £480million for the UK economy from parallel trade, assuming all parallel trade profits remain in the UK, against a £770 million loss to UK manufacturers. The net loss is estimated at £290 million.

"Admittedly, this estimate ignores a number of potential influences such as lower prices leading to increased demand," Dr Szymanski points out. "Nevertheless, the significant potential effect of parallel trade on R&D cannot be ignored. UK pharmaceutical R&D is around £3billion a year. If parallel trade leads to losses of £770million then it is possible that a significant fraction of this would otherwise have been spent on R&D. In particular, if parallel trade undermines the profitability of new drugs, then pharmaceutical companies will be less inclined to invest in developing them."

As part of the study, researchers undertook anonymous interviews with those affected by parallel trade. Not surprisingly, parallel traders claimed that their activities did not have a negative impact on the R&D programmes of manufacturers.

Conversely, manufacturers pointed to a number of problems suggesting, for example, that US investors increasingly look on Europe as an unfavourable place to do business and parallel trade adds to this perception. "The manufacturers tend to believe that governments should intervene to stop the activity or that there should be a united approach with Europe," Dr Szymanski points out.

"Certainly, parallel trade in pharmaceuticals is an issue for UK government in terms of health care and industrial policies," he continues. Health care policies involve the enhancement of patient welfare while the industrial policy aims at strengthening the economic efficiency, competitiveness, and innovation of the pharmaceutical manufacturing industry.

"Current government policy appears to be inconsistent," he states. On one hand, the government appears to encourage pharmacists to buy parallel traded goods due to the NHS clawback scheme which factors in an assumed discount on the Drug Tariff in part arising from the purchase of parallel imports. On the other hand, the DTI is increasingly concerned about the impact of parallel trading on the UK pharmaceutical industry.

"We conclude that overall parallel trade has a negative impact on the UK economy, although purchasers may currently enjoy short-term benefits," he says.

If the Government believes that the prices paid for pharmaceuticals in UK represents a fair return for the patent holder (because of the huge R&D costs required to bring these products to the market) then it should not seek to actively encourage parallel trade through the clawback scheme.

Banning parallel trade from the EU into the UK would be illegal. A neutral approach would be to clawback only on the basis of parallel trade discounts actually obtained, which would leave the pharmacists indifferent between purchasing from parallel traders and the recognised distributor of the pharmaceutical companies.

For further information, contact: Professor Stefan Szymanski at Imperial College London on 207-594-9107, 780-324-5981 (mobile) or 208-398-6189 (out of office hours) or email
s.szymanski@imperial.ac.uk

Or Iain Stewart, Lesley Lilley or Becky Gammon at ESRC on 01793-413032/413119/413122

Contact: Becky Gammon
becky.gammon@esrc.ac.uk
179-341-3122
Economic & Social Research Council