28 March 2018

Will Brexit spell the end of parallel trade?


At the convenience store across the road from my office, I sometimes see cans of well-known soda brands with writing in German on them, instead of in English. What has probably happened is that the soda manufacturer sold to a wholesaler in Germany, then that wholesaler decided that instead of selling them in Germany it would prefer to sell them in Britain. So as well as the soda manufacturer’s direct supply chain into the UK, there is a second supply chain, running in parallel, going via Germany (and probably other parts of the EU as well).

Such “parallel trade” is seen as an essential part of the EU’s Single Market. It is protected by several articles of the EU Treaties and by a series of European Court of Justice judgements, in particular various cases regarding the automotive and pharmaceuticals sectors.

For high-value products that are fairly cheap to transport, such as pharmaceuticals, there have been periods in the past when parallel trade, to take advantage of the differences in prices between cheaper Greek and Spanish markets and the higher-priced UK market, were very significant.

At one stage around 20 per cent of the total value of patented medicines sold in the UK arrived through parallel trade. Indeed, at times the ways that pharmacies were funded by the NHS assumed that they would secure a fair portion of their medicines via parallel trade, and, on the other side, Spanish hospitals had parallel trading licences.

In general, the pharmaceutical sector (a sector in which the UK is home to some of the world’s biggest manufacturers) has objected vigorously to parallel trade. Medicines prices around Europe tend to be set by a combination of regulation and a game of bluff-and-delay by the pharma companies as their patent times run down.

This sometimes leads to large differentials between the prices charged in the wealthier markets and those charged in poorer markets, creating strong incentives for parallel trading.

What, though, will happen post-Brexit? One might have expected pharmaceuticals companies to welcome Brexit as an opportunity to separate off one of Europe’s higher-priced markets, allowing higher prices to be charged in the UK in the future and also lower prices and earlier sale in poorer parts of the EU.

Yet different voices in the pharma sector have different interests. European supply-chain managers may well prefer to see the UK stay part of the European Medicines Agency (as Theresa May suggested in her recent Mansion House speech).

But it’s hard to imagine that that is really what those in charge of pharma pricing strategies really want. If we are going to remain in the European Medicines Agency, presumably that means parallel trade in pharmaceuticals would have to continue (after all, current EMA members all permit and enforce parallel trade).

An integral part of parallel trade is what is called “patent exhaustion”. That’s the jargon term for the simple idea that, although there are technically separate patents in different EU member states, the Single Market is one patent zone in the sense that if you sell an item (eg, a particular pill or a particular car) anywhere in the EU your patent protection for that specific item is ended (“exhausted”) across the whole Single Market. So someone else could re-sell it without your patent being able to stop them.

If parallel trade is to continue for pharmaceuticals, then EU regulation (interpreted and enforced by the ECJ) would have to continue for pharmaceuticals.

Similarly, EU competition and merger rules would also have to apply to pharmaceuticals, since they would be trading as part of the Single Market and competing there. And if patent exhaustion and EU competition rules continue to apply for pharmaceuticals, why would they end for other important products such as cars?

Through this route we could rapidly end up importing, wholesale – “parallel importing”, if you like – much of the EU’s panoply of regulation, treaty articles and court judgements.

Even setting aside the implications for other sectors, it is very hard to imagine that the pharmaceuticals sector, having spent decades complaining about parallel trade and attempting ever-more-creative means to attempt to circumvent parallel trade-protecting rules, has now performed a complete about-face and wants the UK to stay under EU rules. For all the noise now, in the end the UK pharma sector will surely prefer to be outside.

Andrew Lilico is an economist and political writer.