Andreas Mohringer owes his success to a bottle of Benadryl. On vacation in England in the early 1970s, the Austrian entrepreneur caught a cold and bought some of the cough syrup, manufactured in those days by Parke-Davis & Co. Benadryl is now known mostly as an allergy remedy.Then a retail pharmacist in his late 20s, Mohringer was struck by the price: about one-third of what it sold for back in Rheinhausen, Germany, where he was then living, Bloomberg Markets reports in its April issue. He checked the ingredients on the bottle’s label. “Sometimes you have a product which has the same name and a different composition, but it was the same product,” Mohringer, 66, says. Clad in olive trousers and a shirt unbuttoned at the collar, he leans against the desk in his spare, white office in Saaldorf-Surheim, Germany. “I thought, This is silly,” he says. “Why do we pay so much compared to the U.K.?” A business was born in the answer to that question. During the next four decades, Mohringer parlayed his simple vacation observation into EurimPharm Arzneimittel GmbH, which buys pharmaceutical products in one European country and sells them in another at a higher price. Last year, his privately held company had sales of about 410 million euros ($538 million), according to Mohringer, who declines to disclose details about his income or net worth. Patchwork of Regulations Mohringer makes his money by exploiting a little-recognized provision in rules and regulations that are supposed to integrate the European Union economically as well as politically. EU countries have separate state-run health systems. They set prices for drugs on the basis of national policies and priorities. Some countries, including Greece, impose price caps on drugs; a few, such as Germany and the U.K., negotiate prices with manufacturers. The resulting patchwork of regulations and price variations is an anomaly that makes the parallel drug trade possible, says David Taylor, a professor of pharmaceutical and public health policy at the University College London School of Pharmacy. “On the one hand, we wanted a single market in Europe and, on the other hand, the member states were damned if they were going to give up their power over prices,” Taylor says. Drug Arbitrage Companies like EurimPharm work much as arbitrageurs do in the financial markets. Instead of trading stocks or bonds, the drug arbitrageurs buy prescription and over-the-counter pharmaceuticals from European countries where they cost less, such as Spain and Greece. They repackage and resell them at a markup in more- expensive European markets, including Germany and the Netherlands. The arbitrageurs’ profit comes from country-to-country price differences that can be hefty. A Europe-wide price survey in 2009 by a Spanish parallel trader showed price differentials that in a few cases topped 200 percent. Mohringer says such margins are unheard of in his industry. “Three-figure differences are unknown regarding parallel imported medicinal products in the real world,” he says. The arbitrageurs don’t need big margins to make money, according to Panos Kanavos, a health policy specialist at the London School of Economics. Not Dodgy “There used to be a rule of thumb that said you can make money on a price difference of 20 to 25 percent,” he says. “Now you can do it with 10 percent.” The contraceptive pill Cilest is sold by the manufacturer, Janssen-Cilag, in packs of 63 tablets to the U.K.’s National Health Service for 7.16 pounds (8.44 euros), according to Janssen-Cilag, a unit of Johnson & Johnson (JNJ), and the NHS. The manufacturer sells the same medicine to German wholesalers for 9.60 euros, says the company, or 14 percent more, allowing parallel traders to take advantage of the price difference. If the practice sounds dodgy, it isn’t. Parallel trade is legal under the 1957 Treaty of Rome, an early step in the creation of the EU. Its Article 30 ensures the free movement of goods within the EU’s single, internal market. The parallel traders have their detractors. The European Federation of Pharmaceutical Industries and Associations, a Brussels-based trade group that represents manufacturers, says importers disrupt supplies in exporting nations. ‘Safety Risks’ One of the world’s largest pharmaceutical companies, London-based GlaxoSmithKline Plc (GSK), says the parallel drug business confuses consumers about just what they’re buying and creates supply shortages in markets where traders such as Mohringer buy them. “GSK believes that parallel trade creates quality concerns as well as significant potential safety risks,” company spokeswoman Claire Taaffe says. The European Medicines Agency, which is responsible for the scientific evaluation of medicines developed by pharmaceutical companies for use in the EU, says it has no evidence showing that parallel traders cause supply shortages. The EFPIA also says that by displacing the supply of medicines in higher-cost markets with ones intended for lower- cost markets, parallel traders are claiming some of the revenue that manufacturers say they need to defray spending on research and development, an expense that most parallel traders don’t incur because they focus on marketing and distribution. ‘It’s Legal’ “We don’t like it, but we can’t do anything about it,” Richard Bergstrom, director general of the EFPIA, says of the parallel drug trade. “It’s legal. These are business people, and they exploit the situation. What’s bad about it is, we lose money from it.” The lean, bearded Mohringer lives with his wife, Friederike, a nutritionist who works in marketing and distribution at EurimPharm, and two teenage children in an exclusive residential district of Salzburg, Austria, a drive of about 20 minutes from company headquarters. Whereas Mohringer is a classic entrepreneur who spotted a business opportunity before others did, one of his neighbors has the stamp of a classic industrialist: Hans-Peter Porsche, whose family founded Porsche Automobil Holding SE. (PAH3) Though Mohringer doesn’t boast about it, one of his possessions has attracted a fair amount of attention: a red 1953 Ferrari convertible that has won awards at antique car rallies in Pebble Beach, California, and Villa d’Este, Italy. Ferrari Fans A YouTube video of Mohringer and the Ferrari at last summer’s Goodwood Festival of Speed in West Sussex, England, was a hit among Ferrari fans. Today, about 140 companies in the EU are registered with the EMA for parallel distribution of prescription drugs, according to the agency’s website. Mohringer’s company is one of the largest, according to a parallel trade group, the European Association of Euro-Pharmaceutical Companies. Six out of every seven companies are based in Denmark, Germany, Ireland, the Netherlands, Poland, Sweden or the U.K. -- northern European countries where patented drugs tend to cost more than in southern Europe. Many of the companies were founded by pharmacists, drug company sales representatives or doctors who saw an opportunity to seize part of a market that IMS Health Inc., a Danbury, Connecticut-based research firm, estimates is valued at 5 billion euros a year. That represents about 3 percent of Europe’s estimated 150 billion euro prescription drug market. Business Idea Mohringer says he returned from his trip to the U.K. eager to try out his new business idea. At the pharmacy in Rheinhausen where he worked, his colleagues were unimpressed. “They said, ‘Forget about it. If that was a good idea, someone else would have thought of it,’” he says. In 1975, Mohringer borrowed the equivalent of 2,500 euros in deutsche marks, then Germany’s currency, from his parents in order to import his first product, the tranquilizer Valium, from the U.K. He repackaged it in his living room. It was an inauspicious beginning. By printing his own labels, Mohringer had failed to heed trademark laws and soon caught the attention of Valium’s maker, then known as Hoffman-La Roche Ltd., now a unit of Basel, Switzerland-based Roche Holding AG. (ROG) “Within a couple of weeks, I got my first injunction from Hoffman-La Roche,” Mohringer says. “At that time, I had no knowledge of the legal framework.” ‘Somewhat Crazy’ He says he accepted his error and from then on made sure his company’s labeling complied with trademark laws. For the first couple of years, Mohringer continued to work out of his living room. Within five years, he had given up his day job at the pharmacy to concentrate on his company. In the early days, EurimPharm faced no competition. It could buy a product in, say, Greece and then sell it in Germany for the same price the original manufacturers were charging there, Mohringer says. It took other parallel traders two or three years to creep up and challenge him, he says. Why? “Because the idea was regarded as somewhat crazy,” he says. Eventually, competition led to pricing pressure. Going head-to-head with other parallel traders wasn’t something Mohringer was used to. He responded by cutting his prices by as much as 10 to 20 percent. “That was a sensation,” he says, between puffs on a cigarette. 500-Plus Employees In the early 1980s, Mohringer relocated EurimPharm to Piding in southern Germany. He wanted to be closer to lower-cost suppliers in Italy and, as the son of an Austrian architect and a German physician’s assistant, felt at home in Bavaria. In 2010 and 2011, Mohringer moved the company to a state- of-the-art, 140,000-square-foot (13,000-square-meter) facility in nearby Saaldorf-Surheim. Last year, the plant repackaged 6 million prescription drug packets and shipped them to customers, mostly in Germany, Europe’s largest market for the parallel traders. EurimPharm has 500-plus employees and a 16 percent share of the German market, Europe’s largest, Mohringer says. Each year, EurimPharm donates about 30,000 to 50,000 euros to local civic projects, Mohringer says. He says the company gives away “hundreds of thousands” of euros in medicines annually to countries where they’re needed. He and his wife make private donations -- “very quietly” -- to other causes, he says. With Mohringer’s help, the parallel trade industry has successfully pushed for laws in Germany that are to its advantage. Big Pharma Backlash Mohringer, who’s president of EAEPC, is also president of the Bundesverband der Arzneimittel-Importeure e.V., or BAI, Germany’s association of parallel traders, which has lobbied for such measures. Until 1991, for example, under what Mohringer says was pressure from big drugmakers, German wholesalers refused to list parallel traders’ prices or distribute their cheaper products. As a result, Mohringer had to sell directly to pharmacies. That year, Mohringer complained to the Bundeskartellamt, the German agency that enforces competition laws. The regulator sued wholesalers, including Anzag AG, which were then forced to buy parallel traders’ stock. Germany now requires that 5 percent of druggists’ sales be made up of parallel-traded medicines. Through lower prices, parallel traders saved German hospitals and patients 300 million euros in 2009, according to a BAI report. Not Playing Fair The biggest beneficiaries of the parallel trade are the traders themselves, according to a 2004 study directed by Kanavos of the London School of Economics and funded by Johnson & Johnson, based in New Brunswick, New Jersey. The study said the benefits to parallel traders outweigh savings to health systems in Denmark, Germany, the Netherlands, Norway, Sweden and the U.K. by as much as eight to one. “Direct savings accruing to statutory health insurance organizations from the conduct of parallel trade are modest,” the study concluded. With the exception of the Hoffman-La Roche intervention, drugmakers initially ignored Mohringer’s company. “They saw me as someone who will go away,” he says. “Then they realized, ‘Oh, we should probably do something about it.’” In taking on parallel traders in Germany, Big Pharma doesn’t play fair, the BAI says. ‘Industrial Espionage’ The parallel trade organization says that last year, three firms -- Gilead Sciences Inc. (GILD) of Foster City, California, Janssen-Cilag and Roche -- hired research firm IMS Health to find out where parallel traders were buying their products. The tactic amounted to “industrial espionage,” Heinz Kobelt, secretary-general of EAEPC in Brussels, says. According to documents that the BAI says it obtained and that Bloomberg News has seen, IMS offered German pharmacists up to 1,340 euros a year to photograph medicines supplied by parallel traders so that IMS could see what the packaging said about the drugs’ origins. IMS sent the pharmacists digital cameras and memory cards and asked them to return the cards once a month in return for payment, according to the documents. Mohringer says that the manufacturers want the information in order to squeeze supplies in parallel traders’ source countries. IMS senior principal Klaus Perera defends the research firm’s methodology and practices. “IMS was informed by the federal cartel office that the office decided not to institute a procedure against IMS in this matter,” IMS spokesman Gary J. Gatyas Jr. says, referring to the Bundeskartellamt. Out of Business Mohringer says Big Pharma could quickly put him and other parallel traders out of business in one easy step by establishing uniform prices throughout Europe. “But they won’t,” he says. The trade association for large manufacturers agrees. The EFPIA’s Bergstrom says Big Pharma is unlikely to agree to uniform pricing because poorer countries can’t afford to pay what richer ones can. Outwitting the drugmakers has been Mohringer’s lifework. It has also made him more successful than he expected. When, as a young pharmacist, he started parallel trading on the side, he never imagined that his company would grow to its present size. “Never, ever,” he says in his office. ‘It Just Happened’ Framed modern art hangs on the walls. Views of southern Bavaria form a picturesque backdrop in the windows behind him.