Competition and Innovation in the EU Regulation of Pharmaceuticals: the case of parallel trade

Pharmaceuticals are an essential part of modern life. They help satisfy our everyday nutritional, sanitary and medical needs, and represent a primary method for preserving health and treating many diseases and conditions. Their spread, fostered by the progress of pharmaceutical research, created a ‘health revolution’, increasing human life expectancy and improving quality of life. Compared to surgical procedures, drugs represent a very cost-effective means for governments to protect the public health of their citizens. This should help reduce total health care expenditure. However, the cost of pharmaceuticals is accounting for an evergreater proportion of that expenditure. This in turn means that there is increasing scrutiny by governments to tighten budget controls on drugs. These elements have recently generated a renewed interest in the pharmaceutical industry’s practices, and especially in companies’ pricing policies, from both the public and regulators. They frequently claim that drugs are priced too highly and that this may undermine patients’ access to medicines, as well as their right to health. In the absence of effective market mechanisms capable of controlling excessive prices, governments have resorted to a wide variety of different policy tools to help them cap the rise of drug prices and of their health care expenditures. It is the difference between the tools used that has contributed to the presence of large price gaps across countries. Such differences in prices are the basis of what is called ‘parallel trade’. Parallel trade is a form of arbitrage that consists of the cross-border selling of a product protected by an intellectual property right (IPR) without the authorisation of the IPR owner. Parallel trade is an entirely EU phenomenon, because it is based on the principle of free movement of goods, as developed by the jurisprudence in the principle of regional exhaustion of IPRs. Under this principle any protected good that is first marketed in the EU by the IPR owner, or with his consent, shall freely circulate along the supply chain.