Parallel Trade in Pharmaceuticals: Trade Therapy for Market Distortions
in Research Handbook on Intellectual Property Exhaustion and Parallel Imports 145-65, eds. I. Calboli & E. Lee, Edward Elgar Pub. (2016)
Pharmaceutical products are developed, approved, manufactured, traded, and used under complex and demanding regulatory schemes. While the intensity of regulation varies substantially among countries, lightly regulated markets are the exception, particularly from an economic standpoint. In this regard, pharmaceuticals are not generally traded in what might be described as a "free market" in the sense of absence of regulation, and this includes import restrictions which are generally consistent with the overall regulatory schemes. A drug that is not approved for marketing in a particular country does not become so because it is imported.
Parallel trade (i.e., imports and exports) in pharmaceuticals takes place in markets that are "distorted" by regulation. Probably the single most significant "distortion mechanism" is the patent. The patent allows its owner to price a pharmaceutical product in the absence of ordinary market competition in the sense that potential competitors may not freely copy the product. The ultimate price may depend on a variety of factors, including the uniqueness of therapeutic effect within a particular class. But, the price of patented pharmaceutical products generally does not represent the cost of reverse engineering plus production.
Substantially but not exclusively because of the effects of patents, many countries place controls on the prices of pharmaceutical products. Originator patented pharmaceutical products and generic products are often subject to controls. In addition, as a result of public health concerns regarding lower income countries, a number of pharmaceutical companies are voluntarily licensing patented products for manufacture and sale in developing countries at significantly lower prices than are charged in high income markets.
This is backdrop to addressing issues concerning parallel trade in pharmaceutical products. It is conducted in what typically are heavily regulated markets, and this may include price controls and voluntary discriminatory pricing. This adds a substantial layer of complexity to analysis of the "exhaustion question."
Today there is no reason for sympathy toward originator complaints about government price controls distorting ordinary international trade mechanisms, if for no other reason than that pricing practices have shown no respect for consumers or public health budgets. If an originator company voluntarily licenses a patented product for distribution in low and middle income countries at prices substantially below the "market" price in the high income countries, it should be able to make contractual arrangements with the licensees that the resulting production and distribution will be limited to designated markets. Government programs that take advantage of such special discriminatory pricing may add the weight of government re-export restrictions on such specifically licensed products.
If a government's pricing control practices become sufficiently distortive such that the conduct is manifestly unfair, a pharmaceutical company may be justified in restricting the quantity of drugs delivered into that market. But, that is not ordinarily the case.
As a general rule, international exhaustion of patent, trademark, and copyright should be a mandatory rule for the international trading system. Political reality may, for the time being, dictate otherwise. This still leaves each government with a choice to adopt international exhaustion. This should help to facilitate price reductions in the global market for pharmaceuticals.
Note: The attached paper is the version transmitted to the editors of the collective work on August 7, 2015. It was thereafter subject to minor adjustments during the editorial process. Per contract with publisher, for the final published version reference should be had to the cited collective work.