Washington Goes for the Messenger

The issue of parallel trading seems to have reached the United States, where the US Justice Department has begun demanding that the two largest American couriers, FedEx and UPS, open and report on the contents in the sealed packages of their customers or face criminal charges.

At stake is the delivery of prescription medicines from online pharmacies to customers, according to a report last week by the online news portal WND. FedEx and UPS disclosed last November that they are targets of a federal criminal investigation related to their dealings with online pharmacies. It should be pointed out that strictly speaking these are not parallel imports, since what the Justice Department is after are generics rather than brand names, mostly from Canada.

"At the heart of the investigation are sealed packages that are being sent by, as far as we can tell, licensed pharmacies. These are medicines with legal prescriptions written by licensed physicians," FedEx spokesman Patrick Fitzgerald said in the WND report.

The shipping companies made the disclosures in regulatory filings over the last several weeks. FedEx spokesman Patrick Fitzgerald confirmed the probe in a prepared statement and a phone interview Thursday.

The move has the "potential to threaten the privacy of all customers that send or receive packages" as FedEx has complained, according to the news report.

That issue is pretty straightforward. The other and equally disturbing issue is the motive behind such a move. One may argue that the American patent laws have been such an outrage that they are designed to protect the enormously rich drug companies, to the extent that cheaper alternatives produced in other countries are being denied to the general public, especially in less developed countries.

This is very much like what has gone on in Hong Kong in recent weeks, with draconian fines up to HK$50,000 and two years in jail for the simple act of being caught carrying two tins of instant baby formula. This is restraint of trade in the extreme in a territory that supposedly is famous for its economic freedom.

These "parallel traders," as they are called, are simply finding a need and filling it. They are not selling counterfeit products. They are simply buying legal merchandise and selling it over the border. By contrast, authorities in New Zealand say there are 30,000 mainland Chinese in the country, doing nothing but raiding every commercial outlet for any kind of saleable goods back in China - from royal jelly to any number of other of the other environmentally friendly products that New Zealand is justifiably famous for.

These products are distributed back into China through family connections and sold by people who can vouch for their consumer safety, unlike regular channels, where a long list of "New Zealand-origin" baby formula products are on the market when are none exported from the country itself.

The New Zealand officials, unlike those in Hong Kong, think this parallel trade is perfectly fine. It benefits New Zealand farmers, traders, manufacturers, supermarkets and anyone else dealing with the products, and it benefits consumers in China.

The "problem" now is the Obama administration seems to be denying crisis-and-budget stricken Americans these more affordable medicines and ultimately protecting the interests of large pharmaceutical companies, who often use the subterfuge of changing the formulary of a particular drug by a fraction and "patent" it as an entirely new drug, allowing the patent to run for years longer.

In a landmark case a year ago, India's Patent Office issued the first-ever compulsory license to a generic drug manufacturer, which then ended the monopoly position German pharmaceutical company Bayer has enjoyed in India for the drug sorafenib tosylate, for the treatment of kidney and liver cancer.

The reason? That Bayer has not only not made the drug accessible and affordable but was also unable to ensure sufficient supply of the medicine in India. The result is much a cheaper generic version of the drug is now legally available: at a whopping 97 percent discount.

Within the same year, Swiss pharmaceutical giants Novartis and Roche also suffered the same fate in India - for imatinib mesylate (a blood cancer drug) and pegylated interferon alfa-2a (Hepatitis C treatment), respectively.

Following on India's take on the first-world pharmaceutical industry, China also amended its patent laws last June to allow drug companies to reproduce generic, low-cost versions of expensive, patented drugs, citing the need to bypass drug patents during times of state emergencies and provide for the public interest.

The US Food and Drug Administration (FDA) is well aware of the problem: Generic drugs have exactly the same active ingredients and effects as brand-name drugs, but they can cost 30 percent to 80 percent less, according to the FDA homepage, which added:

"For this reason, the FDA has enhanced the process for the review and approval of generic drugs, and has taken steps to eliminate roadblocks that keep generics off the market."

And "Patent protection gives brand-name manufacturers the right to be the sole source of a drug for a certain time period so they can recoup the money they invested in trying to develop the product. Once the patent protection expires, a generic version of the drug can be marketed."

To be sure, pharmaceutical companies need patent protection to justify and recover their huge costs of drugs invention. But the core of the matter is whether these drug giants are enjoying any excessive patent protection, to the extent that they are granted more insulation from competition than they would need to justify their investment in researching and inventing the drug in the first place.

One prime example of excessive patent protection may be in the software industry. Think Microsoft. Or the more recent Apple versus Samsung litigation matters. The investments in software invention and innovation are nowhere in comparison to those coughed out by the pharmaceutical industry but (American) software giants have been using their dockets of patents to sue their competitors for infringement.

Whatever it is, the consumer is supposed to be king. No court, monopolist or state should interfere with the final equilibrium. Period.

(Vanson Soo runs an independent business intelligence and commercial investigations practice specialized in the Greater China region. Blog: http://vansonsoo.com. A version of this appeared in The Standard of Hong Kong)