PARALLEL TRADE OF PATENTED PHARMACEUTICALS: A DISCUSSION FROM
DEVELOPING COUNTRY PERSPECTIVE
Dr. Nguyen Nhu Quynh
Deputy Chief Inspector
Ministry of Science and Technology
Abstract: Although the legitimacy of parallel trade was established in the Trade-Related Intellectual Property Rights Agreement 1994 (TRIPS Agreement) and re-affirmed in the Doha Declaration on TRIPS Agreement and Public Health 2001 (Doha Declaration), parallel trade in patented pharmaceuticals has so far been one of the most heatedly debated topics. Multi-national pharmaceutical companies complain that parallel trade of patented pharmaceuticals denies them adequate protection of their patent rights and prevents them from recouping the costs of pharmaceutical development including research and development (R&D), regulatory approval and amortization of the cost of unsuccessful drug development. In contrast, the developing (and least developed) countries, suffering from the burdens of high disease levels and lack of resources to pay for high priced medicines, support liberalization of the parallel trade in patented pharmaceuticals to fulfil basic human needs. In addition, developing countries have a greater focus on consumer interests, social welfare and health care policy concerns. The puzzle, therefore, is how to fully understand the differences and how to harmonize the interests of the multi-national pharmaceutical companies with those of developing countries.
This article, discusses the rationale of developing countries’ arguments in favour of parallel trade in pharmaceuticals in conjunction with an analysis of international and national legal frameworks of parallel trade in pharmaceuticals and its two-sided effects of on developing countries. The article also compares the counter-arguments of multi-national pharmaceutical companies as well as the applicable legal treatment of parallel trade in developed countries, particularly the United States (US) and the European Union (EU). The article ends with proposals for developing countries to utilize the parallel trade of pharmaceuticals as a useful tool for access to essential medicines in order to combat the devastation resulting from epidemic diseases, and for building up national pharmaceutical industries. In particular, the questions of how to lessen any negative effects of parallel trade in pharmaceuticals and why it should be combined with the compulsory licensing of pharmaceutical-related patents as well as technology transfer in the field of pharmaceuticals are mentioned in the set of proposals.
As recently reported by the World Health Organization (WHO), access to essential medicines remains a challenge for most people in developing countries (as well as in least developed countries). Researchers have found that the reasons for this situation result from the low availability and unaffordable prices of medicines while, at the same time, people in those countries are seriously suffered by devastating diseases. In 2008, an estimated 33.4 million people worldwide were infected with HIV and that year some 2.7 million people became infected with the virus. Notably, more than 95% of all HIV-positive people are in low-and middle-income countries. In the same year, there were 247 million cases of malaria (resulting in nearly one million deaths) of which most are children living in
Parallel trade in pharmaceuticals has not, so far, been the subject of significant legislation at the international level but it remains one of the most controversial trade-related questions. Developing and least-developed countries, generally, favour international exhaustion regimes and parallel trade in pharmaceuticals because it represents a good solution for the health problems in these countries in terms of lower price and product availability. In a contrast, multi-national pharmaceuticals companies (that are, for the most part, located in developed countries) employ national exhaustion regimes with a ban on parallel imports of patented pharmaceutical based on an argument based upon a need for appropriate recoupment of R&D costs.
Parallel trade in pharmaceuticals consists of the trading of genuine pharmaceuticals that have been placed on the market in another country by, or with the consent of, intellectual property right (IPR) owners into parallel authorized distribution channels in another country. Parallel trade includes parallel imports and parallel exports.
The economic rationale of parallel trade stems from the difference in the price of the product between the country where the parallel trader acquires the product and the country that is the final destination of the product. The difference in price for a particular product has at a minimum to be sufficient to compensate for all the costs and expenses borne by the parallel trader. The flow of parallel trade is generally directed from countries with a comparably low level of costs to countries with traditionally higher level costs. Parallel traders, accordingly, can make a profit by importing or exporting goods in parallel with official channels.
It is widely recognized that parallel imports of pharmaceuticals occur more frequently than with other products because third-degree price discrimination for these products (and luxury goods) is the highest. There are two rationales for this. First, most countries intervene in pharmaceutical markets by their price control policy. Second, the possibility of welfare-enhancing price discrimination is proved by economists “to be higher for goods covered by IPRs that stimulate inventive or creative activities [for example, patented pharmaceuticals] compared with the [goods covered by] other category of IPRs.”
The ability of IPR holders to exclude parallel trade depends on the nature of the exhaustion regime that applies to the importing country’s law. When a national exhaustion regime is adopted, the IPRs of holders are only extinguished with regard to the right to control further distribution within the national territory. In such case no parallel trade is permitted. Under a regional exhaustion regime, IPR holders lose their right to control further distribution within the regional territory. In this case, parallel trade is permitted within the given region; however, in principle, IPR holders can rely on their rights to prevent parallel traded goods coming from outside the region. When an international exhaustion policy is adopted, distribution rights of IPR holders is internationally extinguished when a good or service has been placed on the market anywhere in the world; and parallel trade, is permitted on an international scale.
The legality of parallel trade in pharmaceuticals under the framework of international law is affirmed in Section 2 below by focusing on the two most important international legal instruments, namely the TRIPS Agreement and the Doha Declaration. National laws in several developing and developed countries on parallel trade of patented pharmaceuticals are also discussed in section 2. A complete survey of the issue in all developing and developed countries is beyond the scope of this paper. Section 3 summarizes the theoretical and empirical arguments over the effects of parallel trade of patented pharmaceuticals on developing countries. A short cost-benefit analysis of parallel trade of patented pharmaceuticals for developing countries is made in Section 4. Finally, Section 5 discusses the implications for developing countries (and least developed countries) of applying a policy of parallel trade in patented pharmaceuticals. The conclusion for these countries, is that in the short and medium term, the benefits of pharmaceutical parallel trade outweigh its costs. However, measures must be taken against the negative effects of parallel imports of pharmaceuticals and special attention must be paid to domestic demand as well as trade relations in respect of parallel exports of pharmaceuticals.
2. Legal framework for parallel trade of pharmaceuticals
From an international law aspect, the parallel trade in pharmaceuticals is, in general, no longer a controversial issue after the TRIPS Agreement and the Doha Declaration on the TRIPS Agreement and Public Health. Nonetheless, the legal climate on the issue varies among countries. There is a lack of a unified approach, even among developed countries or among developing countries.
2.1. International law
An international exhaustion regime with recognition of parallel trade is explicitly authorized in the TRIPS Agreement. Article 6 TRIPS stipulates that the rules of the Agreement may not be used to address the subject of exhaustion for purposes of WTO dispute settlement. It is nevertheless silent with respect to determining a specific regime of exhaustion. That stated, the Article per se does not exclude WTO Members from selecting at their discretion their own exhaustion policies. Each Member, therefore, has the freedom to define its own laws governing IPR exhaustion by the legislature and/or the courts conditioned upon their not violating the national treatment and most-favoured nation treatment principles of Articles 3 and 4 of the TRIPS Agreement. The regime of international exhaustion and the legality of parallel trade is completely consistent with the meaning of Article 6.
The argument over the TRIPS flexibility of exhaustion regimes is further supported by the other articles of the Agreement. Article 1.1 states that the “method of implementing” the TRIPS provisions can be freely determined within the “own legal system and practice” of each country. This provision makes clear that the TRIPS Agreement is not a uniform law but it provides minimum standards for its Members and also grants flexibilities to the Members in many areas. Additionally, with the footnote 13 to Article 51, the TRIPS Agreement leaves discretion for WTO Members to decide the legality of parallel trade. Parallel trade of patented pharmaceuticals is lawful, in principle, as a consequence of patent exhaustion.
It is unjustified to rely on Article 28 of the TRIPS Agreement in order to argue that the Agreement mandates patent national exhaustion and prevents parallel trade of patented goods. Article 28 TRIPS Agreement must be read in light of its very important footnote 6 which makes it subject to Article 6 of the Agreement. Footnote 6 to Article 28 implies that the TRIPS Agreement grants exclusive rights to patent holders on one hand but limits their rights in certain contexts on the other hand. IPR holders’ exclusive rights including the right to imports are impaired in cases of IPR exhaustion as stated in Article 6. In other words, in principle exhaustion is a national issue, but Members can enact the principle of international exhaustion by referring to Article 6. Furthermore, Article 28 grants patent holders the right to prevent third parties from importing patent protected goods without their consent. It does not, however, prescribe a rule defining how their consent is to be determined. With Members that have adopted a rule of national exhaustion, consent only exhausts patent rights as to goods placed on the market within the territory of that Member. With Members who have adopted a rule of regional exhaustion, consent affects goods placed on the market in any Member within the regional group. With Members that have adopted a rule of international exhaustion, consent affects goods placed on the market anywhere in the world. TRIPS does not prescribe a rule regarding the geographical basis on which consent is to be determined. Given that, the TRIPS Agreement does not impose any exhaustion principle on WTO Members. Simply put, parallel trade in patented pharmaceuticals is one option provided under TRIPS to its Member States.
The legality of parallel trade in pharmaceuticals was reinforced by the Doha Declaration. At the Doha Ministerial Conference in November 2001, WTO member governments stressed that it was important to implement and interpret TRIPS in a way that supported public health by promoting both access to existing medicines and the creation of new medicines. They, therefore, adopted a separate declaration on TRIPS and Public Health. The adoption of the Doha Declaration reflected the great efforts of the developing countries towards driving the focus of the effect of TRIPS to public health problems. By recognizing the gravity of the public health problem in many developing, and least-developed countries, Members agreed that the WTO Agreement on TRIPS “does not and should not prevent Members from taking measures to protect public health,” and “affirm that the agreement can should be interpreted and implemented in a manner supportive of WTO Members’ rights to protect public health and, in particular, to promote access to medicines for all.” The Declaration also affirms “the right of WTO members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose.” The flexibilities include the freedom to implement an exhaustion doctrine. The Doha Declaration leaves to WTO members the freedom to decide the issue of parallel trade in pharmaceuticals. Paragraph 5(d) of the Declaration states:
The effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion of IPRs is to leave each Member free to establish its own regime for such exhaustion without challenge, subject to the MFN and national treatment provisions of Articles 3 and 4.
With these statements, the
2.2. National laws
There is an abundance of research on parallel trade, particularly on the parallel import of pharmaceuticals. Nevertheless, there is no overall survey of national laws on parallel trade of patented pharmaceuticals in all developing countries. Some studies have included national legal frameworks of parallel trade of a certain number of developing countries’ (that can help to understand national laws on parallel trade of patented pharmaceuticals in developing countries). Nonetheless, flaws and a low unity among those studies are found. The result of my current doctoral research shows that an international regime of exhaustion seems to be a better fit for developing countries. Nevertheless, a developing country may apply a national exhaustion regime instead of a regime of international exhaustion based on its socio-economic context and relevant policy. Furthermore, a developing country may apply a regime of international exhaustion to only certain categories of IPRs. Therefore, it is justified to infer that the regulation of parallel trade in patented pharmaceuticals varies among developing countries.
The South African Government passed the Medicines and Related Substances Control Amendment Act of 1997 to improve access to essential drugs. Parallel trade in patented pharmaceutical is authorized under Article 15(c) of the Act.
With respect to
Countries of the Association of South East Asia Asian Nations (ASEAN) pay significant attention to the policy of allowing pharmaceutical parallel importation.
Most large developing countries with a capacity for exporting pharmaceuticals apply a policy of pharmaceutical parallel trade. These include
Developed countries’ laws regarding parallel trade of patented pharmaceuticals vary extremely. In the
Nevertheless, the opportunity for parallel imports of patented pharmaceuticals into the
Not only parallel importation of pharmaceuticals are strictly barred, importation of pharmaceuticals into the
Due to restrictions on importation, parallel importation and no imposition of pharmaceutical price control, prices in the
In contrast to the
3. Impacts of parallel trade of patented pharmaceuticals on developing countries
Parallel trade in patented pharmaceuticals, to a certain extent, has had an impact on the price of pharmaceuticals; the availability of pharmaceuticals; patent holders’ profits and investment in R&D; foreign direct investment, and technology transfer in the health area; competition; counterfeiting and the quality of pharmaceuticals; and trade relations. In other words, it may have effects on patent holders’ interests, consumers’ interests, the development of local pharmaceutical industry, and the flow of pharmaceuticals crossing borders.
First, the impacts on prices: Generally, developing countries have relied on parallel importation as a good solution to the problems of high prices of pharmaceuticals in their domestic markets. Parallel trade of pharmaceuticals is believed to lead to a reduction in the average price of the goods in importing countries owing to the rise in intra-brand competition. Frederick M. Abbott argues that in theory, the retailer usually maintains a high price and earns more profit, but in a competitive market (where other retailers have access to the same low-cost distributors), this would not be the case. He assumes that parallel trade “allows the retailer to charge a lower price to the consumer, and to better compete with other retailers.” In a report to World Intellectual Property Organization (WIPO) on parallel imports in pharmaceuticals and implications for developing countries, Keith E. Maskus recognizes the benefits of price reduction in parallel importation of pharmaceutical. He concludes that:
By permitting pharmacists, hospitals, and insurance services to procure drugs from cheaper international sources, prices of brand-name drugs are directly reduced. Presumably this reduction is passed on to final consumers (patients) in some degree.
In addition, parallel trade reduces the price gap among markets and can put pressure on the price regulations of different countries, tending toward policy harmonization. Nonetheless, not a few scholars oppose price harmonization. In an article on parallel trade in the pharmaceutical industry, Barfield and Groomberg assume that the ability to discriminate based on price is a common and economically justified practice. For arguing against parallel trade of pharmaceuticals, Singham maintains that:
The economic reality is that price discrimination in the setting of drug prices in different markets, through market segmentation, can have significant positive effects for both producers and consumers.
Furthermore, although Keith E. Maskus recommends parallel imports of pharmaceuticals for developing countries, he also believes in the benefits of price discrimination in competitive markets as a reason to support a restraint of parallel trade. Perceiving the importance of pharmaceutical price discrimination, Andreas Seiter advices governments to apply differential pricing as a likely trend in pharmaceutical pricing policy between 2010 and 2020.
Second, the impact on availability of pharmaceuticals: it is widely assumed that an international exhaustion rule which recognizes parallel trading would result in the increase of a variety of IPR-embodied goods and services and consumers would more easily have access to the products of the creative processes of human beings throughout the world. Thus, parallel trade of pharmaceutical is believed by many researcher to increase access to pharmaceuticals in developing countries. The WHO advocates parallel imports of pharmaceuticals. It states that:
Parallel importing can be an important tool enabling access to affordable medicines because there are substantial price differences between the same pharmaceutical products sold in different markets.
Third, the impact on patent protection and R&D: As already mentioned infra, multi-national pharmaceutical companies’ main argument against parallel trade in pharmaceuticals is that it will result in a weak patent protection and reduction of R&D investment. The concept that parallel trade in pharmaceuticals will undermine patent rights and reduce incentives for investment in R&D for new pharmaceuticals has been regarded as “the orthodox view.” Valletti and Szymanski (2005) analyse the policy implications of parallel trade in a model of vertical product differentiation with endogenous product quality. They conclude that parallel trade destroys incentives to invest in R&D for new products if the national government of a foreign country issues a compulsory license and unilaterally sets a fixed price equal to marginal cost to be paid to the IPR holder. Afterward, Valletti and Szymanski (2006) considered a model of product innovation in which a higher investment in R&D enabled the manufacture to discover products with higher quality. Similarly, Singham assumes that without market differentiation which would be the result of parallel trade, pharmaceutical companies will not be able to recoup the costs of innovative drugs during the life of their patent right. Developing and least-developed countries are cautioned that if drug manufacturers have no economic incentive to work on the R&D of tropical disease remedies, then it will be the poor of the developing world who will suffer. International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) also claims that “without patent protection, the world would have been deprived of the innovative medicines which have saved countless of live. (2008)”
In a contrast, Frederick M. Abbott who supports application of international exhaustion regimes opposes the above argument. He takes the pharmaceutical industry as an example of an R&D heavily-based sector and states that “the originator companies on average invest about 15% of their gross income on R&D. The industry spends a substantially higher percentage of income on advertising, promotion and administration. Much of the advertising and promotion costs are spent on “lifestyle” drugs such as Viagra.” In a discussion on evidence on parallel import and R&D performance, Keith E. Maskus concludes that “[o]verall, there is no detectable relationship between R&D in the pharmaceuticals sector and the permission or extent of parallel imports, at least by country.” Presently, some researchers have argued that patents are not necessary for pharmaceutical R&D and even lead to a reduction in the capacity of pharmaceutical industry to create new products.
Fourth, the impact on foreign direct investment and technology transfer: There is an argument that to some extent, parallel trade of pharmaceuticals may constitute a barrier to foreign direct investment and transfer of technology in the pharmaceutical area. The reason is the investors, the licensor, and the licensee in technology transfer agreements fear that they will not obtain their business purposes due to effects of parallel trade. Interestingly, parallel trade of pharmaceuticals is also regarded as positive effect to build up local pharmaceutical industry. Keith E. Maskus assumes that parallel imports may be a source of technology transfer in that it can make products available on markets where firms could reverse engineer their composition.
Fifth, the impact on competition: International exhaustion gives rise to intra-brand competition in the pharmaceutical area. Restrictions on parallel trade prevent intra-brand competition by conferring on patent owners the right to vertical control over the distribution system of their patented pharmaceuticals. Parallel trade helps prevent abusive price discrimination and collusive behaviour based on private territorial restraints. Nonetheless, opponents of parallel trade counter-argue that “intra-brand competition ought to be prohibited as it detracts from the more appropriate inter-brand competition.” Inter-brand competition is competition among competitors of different brands.
From an economic perspective, both intra-brand competition and inter-brand competition have costs and benefits. If intra-brand competition is reduced, both retailers and consumers will receive more benefits. More specifically, it lowers the cost of investing in pre- and after-sale services for retailers. Accordingly, these retailers can reduce the prices of the products and consumers receive benefits as a result. Inter-brand competition creates a wide range of choice available to consumers. Economists believe that “where inter-brand competition is healthy, concerns about the effects on consumers of reduced intra-brand competition can generally be dismissed.”
Sixth, the impact on counterfeit goods and quality: Theoretically, parallel trade in patented pharmaceuticals leads to weak vertical control by patent holders. As a result, counterfeit and low quality pharmaceuticals have greater access to the market in parallel trade accepting countries. The existence of these goods may put pressure on incipient local industry, affect decisions on investment by foreign patent holders, and cause deleterious impacts on public health as well as social security. Varieties of alternative pharmaceuticals create consumer confusion between genuine pharmaceuticals and counterfeit and low quality pharmaceuticals. With regard to developing countries, the problem may be more serious where laws governing IPR enforcement are unperfected, the capacity of IPR enforcement authorities is inadequate to the requirement of policing the system, and the control over importation of goods is relatively weak. Moreover, the quality control of imported goods may also be questionable. Quality control agencies will not find it simple to prevent importation of counterfeit and low quality goods because less-well developed mechanisms for quality control and the limited working capacity of quality control staff. This requires the countries that adopt parallel importation of pharmaceuticals to be vigilant in combating counterfeit pharmaceuticals and to adequately control repackaged pharmaceuticals.
Finally, the impact on trade relations: Developing countries that allow parallel trade in pharmaceuticals may be confronted with unreasonable pressure and reciprocal conditions by multi-national pharmaceutical companies located in developed countries. A typical example is the three-year campaign against parallel imports (and compulsory licensing) of pharmaceuticals in South Africa court, claiming that the South African 1997 Medicines and Related Substances Control Amendment Act violated the TRIPS Agreement and would destroy patent protections by giving the health minister overly broad powers to produce, or import more cheaply, versions of drugs still under patent. 
The EU shared the burden of developing countries in coping with their health crises by adopting new rules on the tiered pricing of pharmaceuticals, with Council Regulation (EC) No 953/2003 of 26 May 2003 to avoid trade diversion into the EU of certain key medicine. Under Regulation 593/2003, key pharmaceuticals were supplied to developing countries “at heavily reduced prices” in order to help those countries cope with “urgent need of access to affordable essential medicines for treatment of communicable diseases.” In return, recipient countries are required to ensure that “these products remain on the market.” Re-exports of tiered priced products to Community markets are prohibited under Article 2.1 of the Regulation. The objective the Regulation is reflected in its title: “to avoid trade diversion into the EU” and emphasized by the European Commission as follows:
The European Commission announced, amongst other things, that it would work toward introduction the of tiered pricing as the norm for essential medicines destined for the poorest developing countries while at the same time seeking to prevent re-importation of the same product to the EC market.
The above-summary of arguments reflects the endless controversy over the effects of parallel trade in pharmaceuticals. Still, the following conclusions may be made:
4. Parallel trade in patented pharmaceuticals in developing countries: Do the benefits outweigh the costs?
In order to assess accurately and sufficiently the impact of parallel trade in patented pharmaceuticals, we must consider the very specific social and economic context that the policy applies to. The answer to this extremely challenging question can only be arrived at by acknowledging that high prices and low availability are the most widely recognized characteristics of pharmaceuticals in developing countries. The answer is two sided: in the short or/and medium run, the benefits countries obtain from parallel trade in pharmaceuticals exceeds the costs they may pay for the application of the policy. However, in the long run consumer welfare tends to be lower.
First, parallel imports of patented pharmaceuticals help to solve the most serious health concerns of developing countries. They are: reducing the price of pharmaceuticals; increasing the availability of pharmaceuticals; fostering imports in order to sever goals of export; fostering parallel exports; increasing the capacity of domestic manufacturers; and improving the population’s material and spiritual life. Parallel imports can be used by domestic producers to access basic inputs at lower prices than those charged locally by IPR holders. Potentially, consumers may gain much from parallel imports of pharmaceuticals. By increasing the options for alternative supplies of products, parallel imports permit consumers access to the products they need from different markets at lower prices than those charged in the local market. Hospitals, pharmacies, and health insurance companies can potentially lower the price at which they can acquire pharmaceuticals as a result of the lower prices from parallel import sources. Regarding retailers, wholesalers, and traders, parallel imports allow them to obtain IPR protected pharmaceuticals directly from multiple overseas sources. This may offer better prices to consumers than the prices charged by the local authorized distributors.
Second, parallel trade in patented pharmaceuticals has advantages in comparison with other solutions. As aforementioned, TRIPS provides several options to countries to solve the questions of high pirce and low availability of pharmaceuticals such as compulsory licensing, parallel imports, and production of generic drugs under “Bolar” provisions. Benefits from these solutions vary for countries dependent upon their technological development and the capacity of their domestic pharmaceutical industry. However, generally speaking, parallel trade in pharmaceuticals demonstrates benefits for many countries as a good alternative. In order to apply the solution of compulsory licensing, countries must meet the strict conditions listed in TRIPS Article 31 and have a pharmaceutical production capability. Most developing countries have trouble coping with the difficulties of insufficient capacity of technology and raw materials used for producing drugs when compulsory licensing is authorised and production of generic drugs is allowed. Many developing and least developed countries do not have a generic drug industry and thus, may have to rely on imports. Furthermore, almost all countries in the world regulate the prices of pharmaceuticals particularly of patented pharmaceuticals, through review mechanisms or cost-reimbursement limitations or through administratively fixed cost-plus prices. This policy instrument is not prohibited under TRIPS.
Third, negative effects of parallel trade of patented pharmaceuticals may be lessened. Admittedly, parallel trade of pharmaceuticals contains costs to developing countries, particularly the problems of counterfeit, low quality of pharmaceuticals, a shortage of pharmaceuticals in case of parallel exports, and pressures on unreasonable pressure and reciprocal conditions from developed countries. Nevertheless, these effects may be limited by using the tools of policy, law, and technology recommended in the next section.
Fourth, adoption of parallel trade of patented pharmaceuticals is to obtain benefits by parallel exports of the products. The rationales of parallel exports of pharmaceuticals in developing countries are: (i) although most developing countries are unable to lunch any systematic pharmaceutical export system, a handful of them with capacity to produce the goods for export (e.g., China, India, Thailand, Egypt, Brazil, Mexico, and Argentina); (ii) other developing countries as importing countries benefit from parallel exports from larger developing countries (recently, India is proved as an important source of low-cost drugs for other developing countries); and (iii) the exporters of developing countries still “require imports of finished product, intermediates or API(s) [active product ingredients] to provide this export base.”
Finally but yet significantly, parallel trade in pharmaceuticals benefits the entire global community. Increasing access to essential pharmaceuticals for communicable diseases, such as drugs for the treatment of HIV/AIDS, tuberculosis, and malaria, benefits not only developing countries but also the rest of the world. Undoubtedly, “[t]he more available affordable drug treatments are the less risk of infection world-wide.”
5. Conclusion and implications for developing countries
The recent trend of parallel trade of patented pharmaceuticals shows a non-stop activity and an ongoing debate. While parallel trade in patented pharmaceuticals has advantages for developing (and least developed) countries, it is strongly opposed by pharmaceutical multinationals that are, for the most part, located in developed countries. Therefore, the most critical task currently facing the world is to work to solve the urgent health care needs of poor countries while continuing to boost costly and risky investments for R&D for innovative drugs for epidemic diseases as stated in a very recent report on pharmaceutical policy:
Policy markers […] have to balance pressures from the public health side to ensure low-cost supplies of high-quality drugs against the
In such a situation, solutions may only be obtained from compromises between developing and developed countries. Following from the approach of compromise, the following proposals should be taken into consideration by both developing (and least developed) countries in order to utilize parallel trade in pharmaceuticals as a useful tool for access to essential medicines, combating epidemic diseases and encouraging the establishment of national pharmaceutical industries.
* Nguyen Nhu Quynh, LL.B (
** I would like to emphasize my special thanks to Prof. Hans Henrik Lidgard (Faculty of Law, Lund University, Sweden) and Dr. Nuno Pires de Carvalho (Director of Intellectual Property and Competition Division, World Intellectual Property Organization,
 The Agreement on Trade-Related Aspects of Intellectual Property Rights, Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization, signed in
 World Trade Organization Ministerial Declaration adopted on 14 November 2001 at the Ministerial Conference Fourth Session
 The WHO has defined essential medicines as follows: “Essential medicines are those that satisfy the priority health care needs of the population.” The implementation of the concept of essential medicines is intended to be flexible and adaptable to many different situations; exactly which medicines are regarded as essential remains a national responsibility. See WHO, Equitable access to essential medicines: a framework for collective action, March 2004, http://whqlibdoc.who.int/hq/2004/WHO_EDM_2004.4.pdf. p. 1.
 WHO, Essential Medicines: Biennial Report 2008-2009, http://www.who.int/medicines/s16822e.pdf.
 See e.g. A. Cameron, M. Ewen, D. Ross-Degnan and D. Ball, R. Laing, Medicine prices, availability, and affordability in 36 developing and middle-income countries: a secondary analysis, 2008, http://www.who.int/medicines/technical_briefing/tbs/lancetmedprices.pdf; WHO & HAI , Measuring medicine prices, availability, affordability and price components, 2nd edition, 2008, http://www.who.int/medicines/areas/access/OMS_Medicine_prices.pdf.
 WHO, HIV/AIDS Programme: Highlights 2008-09, http://whqlibdoc.who.int/publications/2010/9789241599450_eng.pdf.
 WHO, Malaria Fact Sheet No94, April 2010, http://www.who.int/mediacentre/factsheets/fs094/en/print.html.
 WHO, Tuberculosis Fact Sheet No104, March 2010, WHO/EMP/2010.1, http://www.who.int/mediacentre/factsheets/fs104/en/index.html.
 A. Cameron, M. Ewen, D. Ross-Degnan and D. Ball, R. Laing, supra note 5; WHO & HAI, 2008 supra note 5.
 J.C. Cohen, M. Gyansa-Lutterodt, K. Torpey, L.C. Esmail and G. Kurokawa, TRIPS, the Doha Declaration and increasing access to medicines: policy options for Ghana, Globalization and Health 1:17 (2005), available at http://www.globalizationandhealth.com/content/1/1/17 . The situation is even worse in the poorest countries of Africa and
 Christopher Heath (editor), Parallel Imports in Asia, Kluwer Law International, 2004; Christopher Stothers, Parallel Trade in Europe: Intellectual property, Competition and Regulatory Law, Hart Publishing, 2007; Duncan Matthews and Viviana Munoz-Tellez, Ch. 15.4, Parallel Trade: A User’s Guide in Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices, A. Krattiger, R.T. Mahoney, L. Nelson, and Davis (eds. 2007) available at www.ipHandbook.org; Frank MÜller-Langer, Does Parallel Trade Freedom Harm Consumers in Small Countries, 2008, available at http://www.eizg.hr/AdminLite/FCKeditor/UserFiles/File/CES-2008-muller-langer.pdf.
 Regarding economic rationale of parallel trade, see David Flath and Nariu Tatsuhiko, Parallel Imports and the Economic Welfare, Working Paper No. 61, August 2002, available at http://repository.kulib.kyoto-u.ac.jp/dspace/bitstream/2433/37942/1/61.pdf.
 Casten Fink and Keith E. Maskus (editors), Intellectual Property and Development: Lessons from recent economic research, A co-publication of the World Bank and Oxford University Press, 2005, p. 178 (words added).
 See Article 1.1 TRIPS.
 Article 51 Footnote 13 states:
It is understood that there shall be no obligation [for Customs Authorities] to apply [the] procedures of [suspension of resale] to imports of goods put on the market in another country by or with the consent of the right holder, or to goods in transit.
 Article 28 Footnote provides:
This right, like all other rights conferred under this Agreement in respect of use, sale, importation or other distribution of goods, is subject to the provisions of Article 6.
 UNCTAD-ICTSD Project on IPRs and Sustainable Development, Resource Book on TRIPS and Development,
 Paragraph 4 of the
 Emphasis added.
 Ellen F. M. ‘t. Hoen, The Global Politics of Pharmaceutical Monopoly Power: Drug Patents, Access, Innovation and the Application of WTO Declaration on TRIPS and Public Health, AMB, The Netherland, 2009, p. xvi.
 The most current studies are: Musungu, S. and Oh, C., The Use of Flexibilities in TRIPS by Developing Countries: Can They Promote Access to Medicines?, WHO Study on IPRs, Innovation and Public Health, Geneva: WHO and South Centre, 2006 (cited by Carolyn Deere in Implementation Game: The TRIPS Agreement and the Global Politics of Intellectual Property Reform in Developing Countries, Oxford University Press, 2009, p. 76); Frank MÜller-Langer (2008), supra note 12, pp. 21-22; WIPO, Committee on Development and IP Fifth Session Geneva April 26 to 30, 2010, Patent Related Flexibilities in the Multilateral Legal Framework and Their Legislative Implementation at the National and Regional Levels CDIP/5/4, available at http://www.wipo.int/meetings/en/doc_details.jsp?doc_id=131629 pp. 32-42.
 For example, with respect to
 That is the case with
 That is the case with
 Nguyen Nhu Quynh, Pháp luật về hết quyền sở hữu trí tuệ và nhập khẩu song song ở một số nước ASEAN [Exhaustion of IPRs and parallel imports in some ASEAN countries], Jurisprudence, No. 12/2009, pp. 28-36. See also Steven Anderman, The interface between IPRs and competition policy,
 WIPO, Collection of Laws for Electronic Access, http://www.wipo.int/clea/en/details.jsp?id=3807.
According to the WIPO report,
No other person except the patentee shall have following rights:
(1) where the subject matter of a patent is a product, the right to produce, use, sell, have in the possession for sale, after for sale or import the patented product;
(2) where the subject matter of a patent is a process, the right to use the patented process, to produce, use, sell, have in the possession for sale, offer for sale or import the product produced by the patented process.
The preceding paragraph shall not apply to:
(7) the use, sale, having in possession for sale, offering for sale or importation of a patented product when it has been produced or sold with the authorization or consent of the patentee.”
 For many years, the Vietnamese pharmaceutical market has been dominated by three 100% foreign owned companies, namely Diethelm Vietnam, Mega Lifescienses VN Ltd., and Zuellig Pharma Vietnam Ltd. See Vietnam’s Competition Administration Department, Ministry of Industrial and Trade, Báo cáo Pháp luật cạnh tranh điều chỉnh hành vi phản cạnh tranh trong hệ thống phân phối dược phẩm tại thị trường Việt Nam, [Legal Report on Anti-Competitive Practices in the Distribution Chain of Pharmaceuticals in the Vietnamese Market], 2009, p. 127.
 Decision 1906/2004/QD-BYT of Minister of Health dated 28 May 2004 promulgating the Regulation on parallel import of medicines for the prevention and cure of human diseases.
 Parallel imports of medicines was confirmed in the Decision No. 110/2005/QD-TTg of the Prime Minister dated May 16, 2005 on Approval to the Plan on “National stock of medicine for the prevention and cure of people’s diseases.” See Section 3 of the Decision.
 Warren Kaplan and Richard Laing, Local Production of Pharmaceuticals: Industrial Policy and Access to Medicines: An Overview of Key Concepts, Issues and Opportunities for Future Research, Health, Nutrition, and Population Family (HNP) Discussion Paper of the World Bank’s Human Development Network, January 2005, http://www.who.int/medicines/technical_briefing/tbs/KaplanLocalProductionFinal5b15d.pdf; Keith E. Maskus, Parallel Imports in Pharmaceuticals: Implications for competition and price in Developing Countries, Final Report to WIPO under the terms of Special Service Agreement, (April 2001), http://www.wipo.int/about-ip/en/studies/pdf/ssa_maskus_pi.pdf. According to the India Brand Equity Foundation, as of July 2010
Article 63 of the Chinese Patent Act, modified in 2009, provides a legal basic for parallel trade of patented pharmaceutical.
 See Article 43 IV of the Industrial Property Law No. 9.279 of 14/05/1996 as last amended by Law No. 10.196 of 14/02/2001. Amongst developing countries,
 Articles 68 (1), (2) and (4) of the Industrial Property Law No. 9.279 of 14/05/1996 as last amended by Law No. 10.196 of 14/02/ See WIPO,
 Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008). Quanta involved computer technology patents held by LG Electronics, Inc (LGE). LGE licensed some patents to Intel Corporation (Intel). The License Agreement between LGE and Intel authorized Intel to manufacture and sell microprocessors and chipsets that practiced the LGE patents. However, the License Agreement also provided that no license was granted to Intel’s customers to combine Intel products with non-Intel products. At the same time, the License Agreement purported not to alter the usual rules of patent exhaustion. In a separate agreement (the Master Agreement) between LGE and Intel, Intel agreed to give its customers written notice informing them that Intel’s license from LGE did not extend to any products they made by combining an Intel product with a non-Intel product. This Master Agreement also provided that its breach would not be grounds for termination of the patent license from LGE to Intel. Quanta, a computer manufacturer, purchased microprocessors and chipsets from Intel and received the notice required by the Master Agreement. In spice of this notice, Quanta manufactured computers using Intel parts in combination with non-Intel memory and buses in ways that practiced the LGE patents. LGE, thus, filed suit against Quanta, alleging that Quanta’s conduct infringed the LGE patents.
 In Jazz Photo, the Federal Circuit Court of Appeals clearly stated: “[o]
 The rationale of this argument is under the
 In 2009, four cases were decided in light of Quanta: (i) TransCore, LP and TC License, Ltd., v. Electronic Transaction Consultants Corporation, United States Court of Appeals for the Federal Circuit, 2008-1430, decided April 8, 2009; (ii) Static Control Components, Inc. v. Lexmark International, Inc, Eastern District Court of Kentucky, Filed March 31 2009, Memorandum Opinion and Order; (iii) Monsanto v. Scruggs, No. 3:00CV-161-P-D, 2009 U.S. Dist. LEXIS 20829 (N.D. Miss. Mar. 3, 2009); (iv) LG Electronics v. Hitachi LTD, No. C 07-6511 CW, 2009
 Quanta, supra note 37, para. 2121, citing United States v. Univis Lens Co., 316
 See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992); Monsanto v. McFarling, 363 F.3d 1336 (Fed Cir. 2004).
 Concerning this argument, see Saami Zain, Quanta leaf or much ado about nothing? An analysis on the effect of Quanta vs. LG Electronics, Albany Law Journal of Science and Technology, 20 Alb. L.J. Sci. & Tech. 67, 2010 ; Richard H. Stern, Quanta Computer Inc v. LG Electronics Inc – comments on the reaffirmation of the exhaustion doctrine in the US, European Intellectual Review, E.I.P.R. 2008, 30(12), 528-535.
 LG Electronics v. Hitachi LTD, No. C 07-6511 CW, 2009
 Ib. at *31.
 Regarding this argument, see
 Each NDA contains: pre-clinical and clinical safety, effectiveness data, extensive descriptions of the manufacturing process and controls. See New Drug Application Process, available at http://www.fda.gov/CDER/REGULATORY/applications/nda.htm.
 For instance, the states of
 Moreover, to combat counterfeit drugs, the FDA and pharmaceutical companies are collaborating to identify new and effective anti-counterfeiting technologies, which are undoubtedly costly to implement. For instance, overt technologies such as holograms, color-shifting inks and watermarks may help identify the real drug to consumers. See The National Law Journal, supra note 48.
 See Section 2, The Bill to amend the Federal Food, Drug, and Cosmetic Act with respect to the importation of prescription drugs, and for other purposes, 1st Session, 110th Congress, 2007 (Introduced by the Senator Dorgan).
 See Jacob Arfwedson, Re-importation (Parallel Trade) in Pharmaceuticals, Policy Report 182, Institute for Policy Innovation, July 2004, pp. 16-17, http://www.ipi.org/ipi/IPIPublications.nsf/0/4A9821E11C0B539086256ED60072AB13/$File/PR182-ParallelTrade.pdf?OpenElement.
 The pending legislation are the Pharmaceutical Market Access Act of 2009 S.80 (last introduced January 6, 2009) and the Pharmaceutical Market Access and Drug Safety Act of 2009 H.R. 1298 (last introduced March 4, 2009). The statute of these bills is found at http://www.govtrack.us.
 In the
 According to Commission Dec 2001/791 Glaxo Wellcome  OJ L302/1, para. 162:
 COM(2003) 839 final, the Commission Communication on parallel imports of proprietary medicinal products for which marketing authorizations have already been granted, Brussels, 30.12.2003. Parallel trade in pharmaceuticals has been ruled lawful in many decisions by the
 Margaret K. Kyle, Parallel Trade in Pharmaceuticals: Firm Responses and Competition Policy, in International Antitrust Law and Policy: Fordham Competition Law 2009, (Ed. Barry Hawk) (Jurist Publishing,
 See Xiang Yu, The Regime of Exhaustion and Parallel Imports in
 See e.g. WHO, International Trade and Health: A Reference Guide, 2009, http://www.searo.who.int/LinkFiles/IPT_ITH.pdf;
Frederick M. Abbott, Parallel Importation: Economic and social welfare dimensions, the International Institute of Sustainable Development, (June 2007), http://www.iisd.org/pdf/2007/parallel_importation.pdf; David Flath, Nariu Tatsuhiko supra note 14; Keith E. Maskus (2005), supra note 34; Cheri Grace, The Effect of Changing Intellectual Property on Pharmaceutical Industry Prospect in India and China, (June 2004), http://www.who.int/hiv/amds/Grace2China.pdf; Kouanpoth, J., Patents and Access to Antiretrovial Medicines in Vietnam After World Trade Orgnization Accession, Journal of World Intellectual Property, 10(3-4), 2007, p. 204.
 Frederick M. Abbott (2007),
 Keith E. Maskus (2005), supra note 34, p. 41.
 Mattias Ganslandt and Keith E. Maskus (2008), supra note 28, p. 32.
 See e.g. Claude E. Barfield and Mark A. Groomberg, Parallel Trade in the Pharmaceutical Industry: Implications for Innovation, Consumer Welfare and Health Policy, 10 Fordham Intell. Prop. Media & Ent. L.J. 185, 203 (1999); Shanker A. Singham, Competition Policy and the Stimulation of Innovation: TRIPS and the Interface between Competition and Patent Protection in the Pharmaceutical Industry, 26 Brook. J.Intern.L. 363 (2000); Keith E. Maskus (2005), supra note 34.
 Claude E. Barfiled and Mark A. Groomberg, Id, p. 224.
 Shanker A. Singham, supra note 62.
 Keith E. Maskus (2005), supra note 34.
 Andreas Seiter, A Practical Approach to Pharmaceutical
 Ross Jones, Parallel Imports & Intellectual Property Restraints, The Australian Competition & Consumer – Commission’s Perspective, reported within the Regional Seminar on Competition Law and Policy for Asia Pacific, United Nations, 2000; Frederick M. Abbott (2007), supra note 58; and Nguyen Nhu Quynh, Exhaustion of IPRs under Vietnamese Law, IP Community, Japan, No.11, pp. 43-56.
 WHO, The
 Rafael Pinho Senra de Morais , Compulsory Licensing of Drugs, Parallel Imports and Price Controls, Toulouse School of Economics, 2009, http://www.econ.puc-rio.br/pdf/seminario/2009/article3.pdf
 Tommaso Valleti and Stefan Szymanski, Parallel Trade, International Exhaustion and IPRs: A Welfare Analysis, CEPR Discussion Paper No. 5022, Centre for Economic Policy Research, (
 Tommaso Valetti and Stefan Szymanski, Parallel Trade, International Exhaustion and IPRs: A welfare Analysis, Journal of Industrial Economics, December 2006, 54: 499-526.
 Shanker A. Singham, supra note 62.
 Ellen F. M. ‘t. Hoen, (2009), supra note 24, p. 79.
 Fredrick M. Abbott, First Report (Final) to the Committee on International Trade of the International Law Association on the Subject of Parallel Importation, Journal of International Economic Law 1: 607-36, 1998. See also G. Grossman, G. and E. Lai,
 Frederick M. Abbott, (2007), supra note 58.
 Keith E. Maskus (2005), supra note 34.
 Smith, R. D., Correa, C. and Oh, C., Trade, TRIPS, and Pharmaceuticals’, Lancet, 373, 2009, p. 686 (cited in Poku Adusei, Exploiting Patent Regulatory “Flexibilities” to Promote Access to Antiretroviral Medicines in Sub-Saharan
 See Nuno Pires de Carvalho, The TRIPs Regime of Trademarks and Designs, (Kluwer Law International 2006) p. 163; See also NERA Study, The Economic Consequences of the Choice of a Regime of Exhaustion in the Area of Trademarks, (1999) commissioned by DGXV of the European Commission.
 Keith E. Maskus (2005), supra note 34.
 In a very recent, preliminary study, Keith E. Maskus and Frank Stähler conclude that “[parallel trade] will not occur without vertical control. In other words, parallel trade only cause a reduction of vertical control. See Keith E. Maskus and Frank Stähler, Parallel trade without vertical control, March 2010, http://www.vwl.uni-wuerzburg.de/fileadmin/12010200/user_upload/Docs_Allgemein/Paper_ATW_2010.pdf p. 26.
 George R. Stewart, Myra J. Tawjik, Maureen Irish (editors), International Trade & Intellectual Property: The Research for a Balanced System, (Westview Press, 1994), p.21; Kerrin M. Vautier has the same view on stimulus of vertical control to inter-brand competition, see Christopher Heath, supra note 12, p. 6.
 Derek Ridyard, Intra-and Inter-brand competition – the public policy debate,
 Regarding IPR enforcement in
 WHO, Essential Drug in Brief No. 004-2001, http://apps.who.int/medicinedocs/en/d/Js2229e/1.html; Gumisai Mutame, Health and ‘intellectual property’: Poor nations and drugs firms tussle over WTO patent provisions, 2001, http://www.un.org/ecosocdev/geninfo/afrec/vol15no1/15no1pdf/151aids8.pdf; Krithpaka Boonfueng, , Parallel Imports in Pharmaceuticals: Increase Access to HIV Drugs, Thailand Law Forum, http://www.thailawforum.com/articles/hivdrugs1.html.
 OJ L 135, 3.6. 2003, pp. 5-11.
 EU Commission, Working Document: Tiered Pricing for Medicines exported to developing countries, measures to prevent their re-importation into the EC market and tariffs in developing countries, 22 April, 2002.
 Two typical examples are the trade agreements between the
 Smith, R. D., Correa, C. and Oh, C., supra note 78, p. 688.
 Matthew D. Adler and Eric A. Posner (editors), Cost-Benefit Analysis: Legal, Economic, and Philosophical Perspectives, (The University of
 Duncan Matthews and Viviana Munoz-Tellez, supra note 12.
 “Econometric analysis finds that parallel imports significantly reduced manufacturing prices, by from 12 to 19 percent.” Mattias Ganslandt and Keith E. Maskus, Parallel Imports and the Pricing of Pharmaceutical Products: Evidence from the European Union, The Research
 These options based on TRIPS provisions on exceptions and limitations to patent rights. See WIPO, Standing Committee on the Law of Patents (13th Session, March 23-27, 2009), Exclusions from Patentable Subject Matter and Exceptions and Limitations to the rights, SCP/13/3, available at http://www.wipo.int/edocs/mdocs/scp/en/scp_13/scp_13_3.pdf. Regarding use of TRIPS provisions on exceptions and limitations to patent rights in pharmaceutical sector (namely compulsory licensing, parallel imports, and generic drugs), see WHO, supra note 58, pp. 29-33.
 TRIPS Article 31 permits WTO Members to issue compulsory licensing “in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use” with a series of conditions must be satisfied listed in this article.
 TRIPS Article 6.
 “Bolar” provisions (See Roche Prods. Inc. v. Bolar Pharmaceutical Co., 733 F.2d 858 (Fed. Cir), cert. denied, 469 U.S. 856 (1984), permit the manufacturers of generic pharmaceuticals to use the technology of a patented pharmaceutical to perform work that would assist in the marketing or regulatory approval of the generic product, while the patent is in force. This helps the generic producer to market and manufacture their goods as soon as possible after the patent expires.
 WHO, supra note 58, p. 31.
 One major exception is the
 J. Watal, Access to Essential Medicines in Developing Countries: Does the WTO TRIPS Agreement Hinder It? Science, Technology and Innovation Discussion Paper No.8, Center for International Development, (
 Regarding this argument, see JC Cohen, M Gyansa-Lutterodt, K Torpey, LC Esmail, and G Kurohawa, supra note 10.
 Warren Kaplan and Richard Laing (2005), supra note 34; Keith E. Maskus (2005), supra note 34.
 See Bhaven N. Sampat, Accumulation of Capabilities in
 Warren Kaplan and Richard Laing (2005), supra note 34.
 Krithpaka Boonfueng, supra note 85.
 Andreas Seiter, A Practical Approach to Pharmaceutical
 Moreover, some signals of concessions have presently seen from pharmaceutical companies. “[They] are beginning to accept the reality that patent protectionism and continued confrontation with proponents of pro-access policies will not work. [Therefore, they are making] “concession to promote access to medicines [in developing countries].” These are good signs for developing countries to open further negotiations. See Poku Adusei, Exploiting Patent Regulatory “Flexibilities” to Promote Access to Antiretroviral Medicines in Sub-Saharan
 Solutions for combating counterfeit pharmaceuticals may be learnt from the efforts of the USPTO in fighting piracy and counterfeiting in
 Hans Henrik Lidgard and Jeffery Atik, supra note 88, p. 10.