There Is No Such Thing as a Free Drug

There Is No Such Thing as a Free Drug
From The Wall Street Journal
02 July 2004

By Stephen Pollard

There are two words that, when taken in tandem, are almost guaranteed to induce narcolepsy. Those words are "parallel trade." They may seem dull, but they go to the heart of how the EU single market operates and what it is supposed to achieve. And a new report (of which I am a co-author) calculates that parallel trade in one sector, pharmaceuticals, puts over 42 EU citizens per hour at risk of death.

Step back for a moment. The financing arrangements for health care across the EU may differ but all face funding problems. To deal with those problems, some member states impose price controls on the pharmaceuticals sold within their boundaries. Because health care is dealt with at member state level, those controls -- and thus the prices charged -- vary. A drug that is available in one country for £2 a pill might be available in another for £1 a pill.

The single market ensures that that whatever may be freely bought in one member state must be allowed into any other. Hence an opportunity for the easy money of parallel trading. Buy that drug for £1, take it across the border to the country where it costs £2 a pill, sell it for £1.50 and make an instant 50% gross profit. By the end of 2001, the parallel trade in pharmaceutical products had reached $3.3 billion in Europe and is calculated to reach $7.4 billion by 2006.

None of this is the result of costs being driven down by competition. Lower prices in the exporting countries simply reflect greater regulatory leverage. Prices are lower in countries like Spain than in Britain simply because the Spanish government has decreed that they be lower. And because the rules of the single market as applied by the European Commission do not allow companies to protect themselves by restricting supply to those member states with the most severe price controls, we are now entering a world in which whatever country has the most restrictive price-control scheme will become the largest exporter of pharmaceutical products through parallel trade.

There is some hope of sanity. In January 2004, the European Court of Justice annulled a fine levied against Bayer by the commission. Bayer had been found guilty of preventing parallel imports of the heart drug Adalat into Britain from France and Spain. Between 1989 and 1993, Adalat was sold in France and Spain at prices 40% below the price in Britain. French and Spanish wholesalers simply ordered extra supplies from Bayer and resold the surplus stock to British buyers.

Bayer was unhappy at the wholesalers' assault on its British margins, denying the German company 230 million marks in U.K. sales. Because Bayer could not ask its wholesalers not to sell in Britain, it restricted supplies of Adalat, ensuring that continental wholesalers had no surplus to export. The wholesalers complained. The commission fined Bayer but the ECJ disagreed. It could find no evidence of an agreement to restrict competition. Bayer may have restricted competition, but it had acted unilaterally.

The commission, however, is determined not to allow any limits on parallel trade. It issued a statement saying after the ECJ ruling saying that it would "continue to monitor carefully the behavior of the industry, which is of unparalleled importance to consumers/patients, for government finances and for completion of a European single market." The consequence is obvious, and is already happening. Some drugs are simply not being made available in the EU market.

Now for the added twist. More than 140 million medicines move around the EU every year. Invariably, they need to be opened, the blisters removed and the patient information leaflet exchanged. As such, it is not surprising that the unintended consequences of these arrangements are that product expiry dates are often wrong or missing. Batch numbers on the box often fail to match those on the blisters. And patient-information leaflets are go astray, are out of date, or are simply wrong.

Products marketed by the manufacturers can be tracked through the entire chain from factory to patient by means of elaborate computer systems. Defective products can be identified and recalled with very little difficulty. This is not the case with parallel imports.

Then there is the problem of counterfeiting. The World Health Organisation estimates that at least 7% of pharmaceuticals sold world-wide are counterfeit.

In 1990, it was estimated that an average of 20% of the population of a developed country are on some form of prescribed medication and that half of this figure covers medication that is required for the continuation of life or to avoid a catastrophic decline in quality of life. This being so, we can calculate that 37 million people (in the 15 member states before the May accession) are in more or less desperate need of their medication. The number of people known to have died or been seriously inconvenienced by incorrectly labeled or counterfeit pharmaceutical products in Europe is not significant. However, the numbers of people alarmed by media reports of these problems into suspending use of their medication are very significant.

Assuming, conservatively, that at any particular moment, 1% of patients heavily dependent on their medication are worried into not taking their medication as recommended by their doctors, one arrives at a figure of 370,000 people throughout the EU at any particular moment at risk of death or serious decline in their quality of life. That works out at over 42 people per hour who are at risk because of some of the problems raised by attempts to reduce the price of pharmaceutical products within the EU.

These are conservative assumptions. But even making them more conservative still and confining the populations at risk to the main destinations of the parallel imports -- Britain and Germany -- is worrying. Their population is around 140 million. Further reducing the figure of those not taking their medication as prescribed from 1% to 0.1% still gives us a figure of 14,000 per year -- or a potential death rate of 1.6 per hour.

Maybe these figures are too conservative. Maybe they are too high. Whatever the true figure, the facts cannot be denied. For the commission to defend parallel trade is not merely economically bizarre; it is life threatening.

Mr. Pollard is the author, with Sean Gabb, Cecile Philippe and Alberto Mingardi, of "The Human Cost of Pharmaceutical Price Controls in Europe: A Case for Reform," published by the Centre for the New Europe, a Brussels-based think tank.