EXECUTIVE SUMMARY

  The Select Committee has invited views on parallel trading, counterfeiting and intellectual property (IP) rights. We congratulate the Committee on selecting pharmaceuticals as a sector for particular focus, as the relationship between IP rights and the development of new medicines creates special challenges. The issues under consideration are of great importance—not just to SB and the industry, but also for patients world-wide, and the UK plc. We therefore welcome this opportunity to set out our views and concerns. Our main points are set out briefly in this Executive Summary and expended upon in later sections.

  Effective protection of intellectual property rights is vital for the continued flow of innovative products from the pharmaceutical industry. The objective of IP rights are to protect the public interest in knowing the quality and authenticity of the product they are buying or receiving, to encourage further innovation and to discourage unfair copying. All three facets are critical to the future of innovative pharmaceutical R&D. IP rights strike a balance between society's need for further innovative treatment advances, and the inventor's legitimate concerns to ensure the quality of products reaching patients and to get a return on their investment in R&D. If IP rights are threatened, so too is the future flow of innovative medicines. IP rights are also essential in giving consumers confidence in the quality and authenticity of the medicines they are using.

  We believe that parallel trading in medicines cannot be considered alongside that of other types of product. The essential role of medicines in advancing public health, and the vital part that intellectual property rights play in protecting both the consumer and the innovator, give the pharmaceutical sector and governments a particular set of challenges. Moreover, the causes of parallel trading in medicines are different from other sectors. Parallel trade in medicines is caused by market distortions, not market efficiencies—differences in prices of pharmaceuticals between different countries are primarily the result not of "competitive forces", but of Government regulation of prices.

  A key feature of IP rights and parallel trade going forward will be how the "exhaustion of rights" principle is applied. The principle of "international exhaustion" is that certain IP rights should be regarded as "exhausted" once the owner puts a product on the market anywhere in the world. Pressure is mounting from some developing countries, from the WHO and from activist groups for explicit sanction of international exhaustion in the TRIPs agreement in the belief that it will enable them to obtain medicines at lower prices. This premise is misguided.

  SB believes the global parallel trade in the price-regulated pharmaceutical sector would be extremely damaging. Parallel trading in medicines does not produce for customers (ie patients and governments) the perceived benefits of other types of parallel trade. Indeed, it can act against the interests of these groups. The only real beneficiaries of parallel trading, and the chief impetus to it, are the traders who retain the margin between the manufacturer's price and the selling on price.

  Parallel trade in pharmaceuticals reduces economic welfare by undermining price differentials between markets and forcing price convergence.

  Global parallel trade in medicines will lead to an increase in prices in developing or emerging markets. SB and other companies currently agree to lower prices in those countries least able to afford modern medicines and vaccines. The industry can only continue to do this if these artificially low prices are confined to the countries in which we have negotiated them with the purchasers.

  Research and development of new medicines will be impeded by the spread of parallel trading. When a country takes advantage of lower prevailing prices in poorer countries to import from those countries, it abdicates its responsibility to contribute to global research costs and undermines the industry's ability to discover new medicines. Parallel trade also undermines the intellectual property rights that are essential to continued R&D.

  Parallel trade poses a risk to public health and impacts upon quality of product. When medicines are parallel traded the original manufacturer is unable to maintain quality control throughout the distribution chain so patients may receive sub-standard medicines due to inappropriate storage or handling or, even more seriously, sub-standard counterfeit products. "Trade in counterfeit products is facilitated where: there are extended, relatively unregulated markets and distribution chains, both in developing and developed country systems; where price differentials create an incentive for drug diversion within and between established channels; and where there is lack of effective intellectual property protection" (WHO).

  Parallel trade presents other problems relating to patient safety. Patients can be faced with multiple presentations of the same product, and confusing labelling and packaging of legitimate parallel imported products is common. SB has examples of medicines distributed in the UK without a patient information leaflet, with foreign language packaging and leaflets and no over labelling in English, and with patient information leaflets that have incomplete information or inaccuracies.

  Parallel trading in Europe has also clearly impacted upon the UK's economic well-being and shifted the locus of economic activity. It is depriving the UK and UK-based business of additional manufacturing jobs, warehousing, income from taxation and export earnings.

  The TRIPs agreement will be reviewed as part of the Millennium Round of negotiations of the WTO in the year 2000. SB believes that intellectual property rights for medicines should be strengthened at the Millennium review. Most importantly, international exhaustion of rights should be explicitly disallowed and an effective dispute resolution process should be put in place. With regard to European parallel trading in medicines, we urge the Government to explore the scope to address the problems arising from parallel trade and to continue to press the Commission to deliver proposals in a timely, effective and transparent fashion.

1.   Introduction

  SmithKline Beecham (SB) is a healthcare product and services company focussed on pharmaceuticals. SB discovers, develops, manufactures and markets human pharmaceuticals and vaccines; over-the-counter (OTC) medicines and health related consumer products. We are a UK-registered company and we make a substantial contribution to the UK economy—we employ about 8,500 in the UK; our exports from the UK in 1998 amounted to over £1.3 billion; and we have recently invested £250 million in our R&D facilities at Harlow.

  The UK-based pharmaceutical industry provides a substantial net contribution to the UK economy. It is one of the most successful sectors in Britain, contributing significantly to health and quality of life. As a major contributor to employment, R&D, government revenues and overseas earnings, it also plays an important part in increasing the wealth of the nation. The UK provides a disproportionately large base for both pharmaceutical production and for R&D. The UK-based pharmaceutical industry employs around 75,000 people, a quarter of them graduates, with about another 250,000 people employed in related companies. The pharmaceutical industry is one of Britain's most successful exporters, with exports of around £5.5 billion and a trade surplus of around £2.3 billion in 1998. The industry spent over £2.2 billion in the UK in 1997 researching and developing medicines. A joint Office of Health Economics/Her Majesty's Treasury report in 1995 concluded that the value of the pharmaceutical industry to the UK economy was around £2 billion per annum.

2.   The importance of effective intellectual property (IP) rights to innovation in healthcare

  Effective protection of intellectual property rights is vital for the continued flow of innovative products from the pharmaceutical industry. Development of a new medicine is a huge investment. In 1998 SB spent £910 million on R&D, including about £370 million in the UK. The cost of developing a new product and bringing it to the market is in the region of £400 million. These levels of investment depend on investors having strong confidence that they will have a period of market exclusivity during which they can recoup their investment and generate the revenues required for sustained R&D activity. If IP rights are threatened, so too is the future flow of innovative medicines. IP rights are also essential in giving consumers confidence in the quality and authenticity of the medicines they are using.

3.   Parallel trade in medicines—why it occurs

  We believe that parallel trading in medicines cannot be considered alongside that of other types of product. The essential role of medicines in advancing public health, and the vital part that intellectual property rights play in protecting both the consumer and the innovator, give the pharmaceutical sector and governments a particular set of challenges.

  Moreover, the causes of parallel trading in medicines are different from other sectors. Parallel trade in medicines is caused by market distortions, not market efficiencies—differences in prices of pharmaceuticals between different countries are primarily the result not of "competitive forces", but of Government regulation of prices.

  All Governments wish, legitimately, to contain public expenditure on medicines within the pre-determined budgets of national health and social insurance programmes. Some Governments are able to pay prices for the medicines they purchase which properly reflect the costs of R&D and high quality manufacturing. Other countries have lower national wealth, but have an equal or greater need to provide medicines to their citizens at an affordable price. Such a price does not always cover the costs of R&D or quality manufacturing. In essence a virtuous circle exists, which allows the industry to recoup its investment, "poorer" countries to benefit from prices they can afford, and patients across the world to have access to new medicines.

  However, in recent years, some governments have sought to control pharmaceutical expenditure further within their own health care systems by taking advantage of lower prices in other markets and allowing and, in some cases, encouraging cross border trade. This is unnecessary when governments already have the power to negotiate acceptable prices within their own borders.

4.   International Exhaustion

  The general trend globally has been towards stronger IP rights. However, a key feature of IP rights and parallel trade going forward will be how the "exhaustion of rights" principle is applied. The principle of "international exhaustion" is that certain IP rights should be regarded as "exhausted" once the owner puts a product on the market anywhere in the world. This would mean that once a product is on sale in any market around the world, a third party trader could sell the product in another country without the authority of the originator and regardless of the patent status in that country. This would certainly increase parallel trade. Pressure is mounting from some developing countries, from some members of the WHO and from activist groups for explicit sanction of international exhaustion in the Trade Related Aspects of Intellectual Property (TRIPs) agreement in the belief that it will enable them to obtain medicines at lower prices. This premise is misguided.

5.   Global Parallel Trade—who gains and who loses?

  SB believes that global trade in the price-regulated pharmaceutical sector would be extremely damaging. The only real beneficiaries of parallel trading, and the chief impetus to it, are the traders who retain the margin between the manufacturer's price and the selling on price. Parallel trading in medicines is particularly attractive for traders because of the high value, low volume nature of the products.

  Parallel trading in medicines does not produce for customers (ie patients and governments) the perceived benefits of other types of parallel trade. Indeed, it can act against the interests of these groups.

  Parallel trade in pharmaceuticals does not yield the efficiency gains that are usually expected from international trade. The purpose of reducing trade barriers is to give consumers benefits through price competition. Because prices of medicines in most countries are government controlled, market forces do not apply to the pharmaceutical industry in the way they do to other sectors. Low prices in some countries are achieved through aggressive price regulation rather than through more efficient manufacturing and business processes, and parallel trade therefore actually reduces economic welfare by undermining price differentials between markets and forcing price convergence.

  Global parallel trade in medicines will lead to an increase in prices in developing or emerging markets. Pharmaceutical research produces new medicines that are paid for by countries in proportion to their economies' level of wealth. Pricing of medicines to reflect local economic conditions thus provides access to medicines for populations that are unable to pay the prices needed to fund pharmaceutical research. SB and other companies currently agree to lower prices to those countries least able to afford modern medicines and vaccines. The industry can only continue to do this if these artificially low prices are confined to the countries in which we have negotiated them with the purchasers. Our ability to continue to offer lower prices to developing or emerging markets is therefore directly compromised by parallel trade.

  This is equally true in the UK and the rest of Europe as in developing countries. Several Members States noted in the Bangemann Working Parties that parallel imports reduced industry flexibility to agree lower prices in the less wealthy Member States and that parallel trade in Europe was starting to lead to an averaging of pharmaceutical prices. This has delayed access to medicines in countries where prices are low, and brings higher prices to those countries least able to pay.

  Research and development of new medicines will be impeded by the spread of parallel trading. Parallel trade threatens the very basis on which the pharmaceutical industry is built—research and development. As stated above, pharmaceutical research produces new medicines that are paid for by countries in proportion to their economies' levels of wealth. Pricing of medicines to reflect local economic conditions provides access to medicines for populations that are unable to pay the prices needed to fund pharmaceutical research. When a country takes advantage of lower prevailing prices in poorer countries to import from those countries, it abdicates its responsibility to contribute to global research costs and undermines the industry's ability to discover new medicines.

  Parallel trade undermines the intellectual property rights that are essential to continued R&D. To reiterate, the objectives of IP rights are to protect the public interest in knowing the quality and authenticity of the product they are buying or receiving, to encourage further innovation and to discourage unfair copying. All three facets are critical to the future of innovative pharmaceutical R&D. IP rights strike a balance between society's need for further innovative treatment advances, and the inventor's legitimate concerns to ensure the quality of products reaching patients and to get a return on their investment in R&D.

  Parallel trade poses a risk to public health. When medicines are parallel traded the original manufacturer is unable to maintain quality control throughout the distribution chain so patients may receive sub-standard medicines due to inappropriate storage or handling or, even more seriously, counterfeit products. Bogus products can be ineffective or dangerous, and concerns about counterfeits lead to patients stopping taking their legitimate medicines with serious consequences.

  An inter-governmental workshop of the World Health Organisation (WHO) in 1992 observed that "trade in counterfeit products is facilitated where: there are extended, relatively unregulated markets and distribution chains, both in developing and developed country systems; where price differentials create an incentive for drug diversion within and between established channels; and where there is lack of effective intellectual property protection". This concern was strengthened at a follow-up WHO workshop five years later where a possible connection between free trade zones and counterfeiting was pointed out.

  Parallel trading impacts upon quality of product. It is noteworthy that no counterfeit products were found in the UK NHS distribution system until the application of EU free movement of goods for pharmaceuticals started to accelerate. In the EU, the Commission and Member States have had to introduce extensive mechanisms to minimise the public safety risks posed by such trade. This includes pan-EU mechanisms for licensing wholesalers, anti-counterfeiting regulations, and special regulations for repackaging products. Given that this is creating difficulties within the EU, it will pose immense challenges to developing countries, which already have an acute problem with counterfeits, and an urgent need for reliable supplies of quality medicines.

  Parallel trade presents other problems relating to patient safety. In the event of quality control problems with a parallel imported product, implementation of product recall processes and tracing back through the distribution chain is impeded. Patients can be faced with multiple presentations of the same product, and confusing labelling and packaging of legitimate parallel imported products is common. SB has examples of medicines distributed in the UK without a patient information leaflet, with foreign language packaging and leaflets and no over labelling in English, and with patient information leaflets that have incomplete information or inaccuracies. These lower standards can confuse patients, cause loss of confidence in medicines, and lead to poor compliance with the prescribed treatment and, therefore, sub-optimal treatment.

6.   The Impact of Parallel Trading on the UK

  The UK has seen significant imports of parallel traded medicines, and might therefore be seen to provide important guidelines as to the implications of parallel trading on a global scale. Problems with product quality and product recalls have been referred to above. In addition, parallel trading in Europe has also clearly impacted upon the UK's economic well-being and shifted the locus of economic activity. Eight of SB's products in the UK are subject to significant levels of parallel trade, and for three of these between 40 per cent and 55 per cent of prescriptions written by GPs are filled with medicines imported mainly from France and Spain. The implications have been significant. In June 1998, SB announced 123 UK posts redundant due to restructuring required as a result of competition from parallel trade in our products.

  The unpredictable nature of parallel trade continues to make it difficult to forecast cash flow in the business, thereby discouraging investment in the UK. Parallel trading is therefore depriving the UK and UK-based business of additional manufacturing jobs, warehousing, income from taxation and export earnings. Exporting countries in Europe are gaining at the expense of the UK; and overall pharmaceutical activity is shifting to other parts of the world, notably the US. The industry in Europe has 71,000 employees working in R&D and spends ECU 10.5 billion; in contrast there are 41,000 employees in R&D in the US, spending ECU 13.5 billion, with faster growth than in Europe. Clearly, R&D money is now flowing to the US.

  Parallel trading in medicines is also damaging the UK science base. The UK explicitly calculates a proportion of the cost of research and development to be reflected in the price of NHS medicines, intended to contribute its fair share to the cost of innovation. However, many EU member states do not allow a fair contribution to R&D costs in medicine prices. Parallel trade in a price-regulated sector deprives research-based companies of the fair return on their investment which can be ploughed back into R&D.

7.   Protection of Patient and Customer Interests Going Forward: The Position of UK Government

  International standards of intellectual property (IP) rights are laid down in the Trade Related Aspects of Intellectual Property (TRIPs) agreement of 1984. This agreement, administered by the World Trade Organisation (WTO), was considered necessary because the non-homogeneity of IP laws was causing distortion to trade and impeding the transfer of technology.

  TRIPs provides minimum standards for IP rights which each member of the WTO must incorporate into its national patent law. Effective implementation of the TRIPs agreement and, therefore, protection of IP is vital for the successful future of the pharmaceutical industry and to the development of medicines. The incentive to invest in R&D is directly related to the global strength of IP protection. If R&D investment drops, the availability of innovative medicines that will improve public health will also decline. This is particularly the case given that trans-national trading has become easier during the last 20 years. Tariff barriers have been substantially reduced or eliminated, products are now standardised and widely distributed, fast and accurate communication media such as the Internet facilitate international trading and are overcoming geographical barriers, and cheap and efficient international transportation is readily available.

  On the matter of "international exhaustion", ie the extension of the exhaustion principle upheld in Europe to the global trading arena, the WTO TRIPs agreement is neutral and cannot be relied on to either prevent or allow international exhaustion. Each WTO Member therefore reserves the right to regulate parallel imports in the way it considers appropriate.

  The TRIPs agreement will be reviewed as part of the Millennium Round of negotiations of the WTO in the year 2000. As stated above, pressure is mounting from some developing countries, from the WHO and from activist groups for explicit sanction of international exhaustion in the belief that it will enable them to obtain medicines at lower prices. To reiterate, this premise is misguided because industry can only continue to offer lower prices to some countries if others do not then take advantage of this. Furthermore, this would lead to widespread parallel trade in pharmaceuticals beyond the European Union, with associated risks to public health and damage to the research based pharmaceutical industry. When deprived of IP rights, the owner is unable to regulate or influence the movement of his goods world-wide. The owner cannot, therefore, ensure proper, safe distribution through respectable channels, or even assure consumers of the quality or authenticity of the product.

  To date, the UK Government has supported maintaining effective intellectual property rights and has recognised the impact that international exhaustion of rights would have on patient care and the pharmaceutical industry. We urge continued and vigorous support on this issue. SB believes that intellectual property rights for medicines should be strengthened at the Millennium review of TRIPs. Most importantly, international exhaustion of rights should be explicitly disallowed and an effective dispute resolution process should be put in place.

  SB also believes that allowing uncontrolled global trade in medicines would effectively undermine other provisions of the TRIPs agreement which, when enforced, give protection to individual products, to patients and to the future of the industry.

  With regard to European parallel trading in medicines, the UK government has again acknowledged the concerns of the pharmaceutical industry. During the UK Presidency of the Internal Market Council, the Government expressed their concern and called on the Commission to develop constructive proposals to address the policy tension between nationally-based price control and free movement of goods in Europe. We urge the Government to explore the scope to address the problems arising from parallel trade and to continue to press the Commission to deliver proposals in a timely, effective and transparent fashion.

8.   Summary

  The pharmaceutical industry is amongst the most reliant of industries on IP rights for giving the consumer confidence in the quality and authenticity of the medicines they are using, and for the continued growth and success of the industry. SB believes that allowing uncontrolled global trade in medicines would effectively undermine the protection given to individual products, to patients and to the future of the industry. If he is deprived of IP rights, the owner of a product is unable to regulate or influence the movement of his goods world wide. The owner cannot, therefore, ensure proper, safe distribution through respectable channels, or even assure consumers of the quality or authenticity of the product. The experience of Europe after some forty years of apparently legitimate free movement of goods serves as a warning. The implications of similar developments in medicines on a global basis are clear.

29 March 1999