Managing the Gray Market in the European Union: The Case of the Pharmaceutical Industry

Abstract

The emergence of significant trade blocks, such as the European Union (EU) and the North American Free Trade Agreement, has established the need for studies on managerial strategies to effectively circumvent gray markets in these regional marketplaces. Therefore, this article reviews the necessary market conditions required to foster gray markets by specifically exploring the regulated price and legal environments of the pharmaceutical industry in the EU. The article addresses the significance of, and relationship between, Articles 30 (promoting the free movement of goods within the EU) and 36 (permitting limits on imports and exports in certain cases) of the EU Treaty. Relevant decisions of the European Court of Justice are summarized and analyzed, with particular emphasis on those applying the Exhaustion of Rights Doctrine established in the 1974 landmark case of Centrafarm v. Sterling Drug. The article also examines the limits that the European courts have placed on the doctrine and suggest possible tactics that may be employed by pharmaceutical managers attempting to curtail the distribution of gray market pharmaceuticals. Also addressed are managerial perceptions regarding gray markets in the EU by means of personal interviews with 13 multinational pharmaceutical firms. Four principal themes emerged in the interviews on the topic of parallel imports: the degree to which a firm's exposure to gray markets varies in the EU; the current consolidation of wholesalers to bolster parallel imports; national governments’ overt or covert condonation of parallel imports to reduce the national drug bill; and the lack of managerial control to prevent gray markets. In this connection, the article concludes with a discussion of various anti-gray marketing strategies to facilitate managerial control in this trade block. In general, the manager must employ strategic links between the regulated price and legal framework governing the pharmaceutical marketing environment in the EU with various anti-gray marketing strategies such as supply interference, product differentiation, and marketing information systems.