The Economic Impact of Pharmaceutical Parallel Trade in Europe Panos Kanavos, PhD London School of Economics & Political Science, London, UK FDA oral testimony

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<ul><li><p>The Economic Impact of Pharmaceutical Parallel Trade in EuropePanos Kanavos, PhDLondon School of Economics &amp; Political Science, London, UKFDA oral testimony on Drug Re-importationWednesday, 14 April 2004</p></li><li><p>Research agenda and endpointsThe Research AgendaQuantify economic impact of parallel trade in six major destination countriesFocus on 6 widely used product classes* accounting for 22% of branded retail marketApportion benefits to individual stakeholdersResearch EndpointsExamine direct effects, arising from price differences between locally sourced and PI drugsCompetition effects in destination countries and price convergenceCompetition effects across countries does arbitrage work?* Statins, ACE I and ACE II inhibitors, PPIs, SSRIs, and Atypical antipsychotics</p></li><li><p>The justification for parallel trade in the EU:Prices of most common presentation, in , 2002</p></li><li><p>HypothesesH1: Arbitrage effect: Parallel trade leads to price equalisation or approximation across Member StatesH2: Price competition effect: Increased price competition in destination countries reduces overall pharmaceutical prices, benefiting payers and patientsH3: Aggregate welfare effects: price differences and competition lead to welfare improvements for payers H4: Patient benefits: Patient access to innovative medicines is improved, with lower direct &amp; indirect costsH5: Industry impact: Parallel trade has minimal impact on industry ability to innovate, and indeed, improves overall industry efficiency </p></li><li><p>Direct effects Health Insurance Pharmacy Patients Parallel importers Industry</p></li><li><p>Allocation of benefits (1)</p></li><li><p>Allocation of benefits (2)</p></li><li><p>Indirect effectsCompetition in destination countriesPrices for PT drugs not significantly lower than locally sourced drugsPrice co-movement rather than price convergence over timeNo statistical evidence that there is competitionLittle evidence of competition between parallel tradersCompetition across countriesPrice differences between source and destination countries hold regulation effectNo convergence over timeIntensity of parallel trade in some source countries can cause supply problems and shortages</p></li><li><p>Concluding remarksModest savings to health insurance organisations through direct (price) effectsZero or, at best, marginal benefits to patientsLittle evidence of intra- or inter-country competition effects and price convergenceSome benefits to pharmaciesMost pecuniary benefits accrue to parallel importers and the overall distribution chainTransfer from industry (producer) surplus mostly to the distribution chain and less so to health insurance and patientsEvidence of product shortages in source countries</p><p>Hypothesis 1; This is the standard arbitrage hypothesis suggesting that lower prices, or price equalisation across countries is the result of conducting parallel trade, leading to more efficient market operation. </p><p>Hypothesis 2: </p><p>Hypothesis 3:</p><p>Hypothesis 4:</p><p>Hypothesis 5: SAVINGS TO HEALTH INSURANCE: TAKE HOME MESSAGES</p><p>* Savings to health insurance have two components:Price differencesDiscounts to pharmacies and clawback</p><p>* Few products generate significant total savings and, consequently, profits to PI* Savings to HI are modest in comparison with overall profits from PI</p></li></ul>