Parallel importing and exporting of pharmaceuticals severely limits the options in designing an effective UK drug pricing scheme.

A fundamental principle of the EU is the establishment of a single market where products can be freely imported and exported between member states. In the case of pharmaceuticals this ideal conflicts with the freedom of individual countries to fix the prices of drugs within their domestic markets and to determine which drugs should be approved for use. Various compromises have been reached. Certain exceptions to the normal policy of permitting free trade have been made, mainly to protect intellectual property rights or public safety. For example, the export of a drug from a country where the product has no patent cover to a country with patent cover cannot usually take place without the consent of the patent holder. Repackaging is permitted if necessary to comply with local requirements such as over language.

The import of a product into a country by an intermediary such as a wholesaler without the permission of the marketing authorisation holder is called “parallel importing”.  The term “parallel” is used because this type of distribution operates alongside and competes with the arrangements made by the originator of the product. Parallel importing of pharmaceuticals is permitted between EU member states and occurs when the price difference between the exporting and importing countries is large enough to make parallel trade worthwhile.  A parallel importer of drugs into the UK must hold a wholesale dealer’s licence covering importation, storage and release and a manufacturer’s licence covering assembly to enable the re-packaging and re-labelling of products.  However, the granting of such licences cannot be withheld unreasonably.

The UK Government like other EU countries does not have the luxury of being able to fix drug prices in any way and at any level that it chooses. If the price of a drug in the UK is much higher than in other EU countries, wholesalers may source the product more cheaply by parallel importing from elsewhere in Europe. The importing wholesaler and not the originating company then receives the benefit from the high price. If the price in the UK is much lower than elsewhere in Europe then pharmaceutical companies would prefer not to supply the UK than to see their European price structure undermined through parallel exporting. This point is not an idle threat. For example, Boehringer Ingelheim and its partner Eli Lilly have decided to delay the launch of their new once-daily diabetes treatment Trajenta in Germany, despite winning EU approval in August, because they are unhappy with pricing negotiations with the German Government. In a similar move Novartis has discontinued the marketing of Rasilamlo, a drug for high blood pressure, in Germany. Rasilamlo received EU approval in April 2011 and was launched in Germany during May 2011. Novartis stopped marketing its drug as of 1 September in Germany, but still plans to launch its drug in a wide range of other European countries.

Politicians and advisers like NICE can devise wondrous systems for determining what they think a drug price should be. However, such effort can be severely compromised if other European countries think differently. The freedom to engage in parallel importing and exporting has been protected in a number of rulings by the European Court of Justice. Member states and drug companies cannot introduce measures whose sole purpose is to undermine parallel trade. They cannot supply wholesalers subject to a contractual agreement not to allow exporting. A possible approach might be the introduction of a two-tier pricing structure with a higher price for exports but doubts exist over the legality of such an arrangement.

There are two convincing ways of increasing the ability of the Government to have more control over UK drug pricing. Both involve a more flexible approach by Government than simply fixing the prices of individual drugs. The two ways are:

1. To have a system that allows revenue to be transferred between products. In other words, the Government would not fix the price of each drug individually but rather the total revenue that a company can achieve from all its NHS drug sales. With the right system this policy would not raise NHS costs. In fact, the control of revenue rather than prices would increase the certainty of NHS budgeting. The main benefit is that companies could fix their own prices for each product and would have an incentive to fix prices in a way that will work in the marketplace. If a company earns too much revenue, the excess can be clawed back by suitable price reductions. If a company cannot achieve the permitted revenue because of parallel importing, then at least management can fix its own prices in the way that will enable its total revenue to fall short of target by as little as possible. A system along these lines would incorporate many of the concepts underlying the current UK pricing system (PPRS). The arrangements would need to be subtle enough to calculate sales to the NHS in a way that correctly categorises parallel trade.
2. To encourage transactions at prices or subject to arrangements that are not accessible to wholesalers. Parallel importing or exporting can only occur when wholesalers or retail pharmacies can buy drugs in one country and sell in another. This possibility can be avoided if the NHS buys drugs directly from the original manufacturers as hospitals often do. Another option is for the NHS to receive rebates from manufacturers. These rebates could, for example, reflect volume discounts on NHS purchases or become payable through patient access schemes where manufacturers offer refunds depending on patient outcomes or other qualifying criteria. Some original manufacturers attempt to clamp down on parallel trade by imposing quotas on wholesalers based on estimates of domestic demand or by encouraging retail pharmacies to avoid shortages by buying directly from the manufacturers. However, a quota system is necessarily problematical because parallel trade is legal under EU law and can only be prevented by measures brought into force for a different, legitimate reason. Supply shortages in a country are not good for patients.  Original manufacturers have been successful in arguing that quotas protect the supply chain but in reality an important feature is that they help to protect price structures. Physically moving stock around Europe so as to meet wholesale demand wherever it arises for whatever reasons is not beyond the wit of original pharmaceutical manufacturers. However, they do not wish to do this because the effect would be to lower drug prices throughout the EU towards those in the cheapest country. Such an outcome would be very damaging to R&D and innovation and is not what governments and politicians want. Given the force of the EU drive towards a single market, governments need to organise pricing systems that enable them to give appropriate financial returns to the drug industry without infringing EU competition law. Success is going to require more and better organised patient access schemes and an increased number of direct arrangements between the NHS and manufacturers.

Value-based pricing systems are particularly vulnerable to the effects of parallel trade as the Germans are discovering. There is no objective way of determining value and countries can come up with quite different valuations for the same drug. A pure value-based pricing system that excludes the transfer of revenue between products, outlaws patient access schemes and disallows the negotiation of direct arrangements with pharmaceutical companies lacks the flexibility to come up with pragmatic ways forward.