The Economic Impact of The Economic Impact of Pharmaceutical Parallel Pharmaceutical Parallel
TradeTrade in Europe in Europe
Panos Kanavos, PhDLondon School of Economics & Political Science,
London, UK
FDA oral testimony on Drug Re-importation
Wednesday, 14 April 2004
Research agenda and endpointsResearch agenda and endpoints
The Research Agenda1. Quantify economic impact
of parallel trade in six major destination countries
2. Focus on 6 widely used product classes* accounting for 22% of branded retail market
3. Apportion benefits to individual stakeholders
Research Endpoints1. Examine direct effects,
arising from price differences between locally sourced and PI drugs
2. Competition effects in destination countries and price convergence
3. Competition effects across countries – does arbitrage work?
* Statins, ACE I and ACE II inhibitors, PPIs, SSRIs, and Atypical antipsychotics
The justification for parallel trade in the EU:The justification for parallel trade in the EU:Prices of most common presentation, in €, 2002Prices of most common presentation, in €, 2002
HypothesesHypothesesH1: 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 patients
H3: 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 & indirect costs
H5: Industry impact: Parallel trade has minimal impact on industry ability to innovate, and indeed, improves overall industry efficiency
Direct effectsDirect effects
1.1. Health InsuranceHealth Insurance2.2. PharmacyPharmacy3.3. PatientsPatients4.4. Parallel importersParallel importers5.5. IndustryIndustry
Allocation of benefits (1)Allocation of benefits (1)Country Cost-sharing
policyImpact on patients
Pharmacy benefits, 2002
% of market
Norway Co-insurance (0%,12%,30%
with cap per script)
Marginal €500,000 0.3%
Germany Pack-related 0 0 0
Sweden Deductible plus fixed fee per
script
0 0 0
Denmark Deductible plus co-insurance up
to limit
Marginal 0 0
UK Flat fee 0 invisible ?
Netherlands No co-pays 0 € 6,382,000 1.2%
Allocation of benefits (2)Allocation of benefits (2)Country Savings to health
insurance, 2002
(1)
Benefits to Parallel Traders (PT), 2002
(2)
Ratio of
(2)/(1)
€ % of market
€ % mark up
Norway € 563,000 0.3% € 12,447,000 46% 22.7
Germany € 17,730,000 0.8% € 97,965,000 53% 5.5
Sweden € 3,770,000 1.3% € 18,453,000 60% 4.9
Denmark € 3,002,000 2.2% €7,371,200 44% 2.5
UK €55,887,000 2.8% € 469,013,000 49% 8.4
Netherlands €19,119,000 3.6% € 43,199,000 44% 2.3
Total impact €100,071,000 1.8% € 648,449 ,000 53% 6.5
Indirect effectsIndirect effects
Competition in destination countries
1. Prices for PT drugs not significantly lower than locally sourced drugs
2. Price co-movement rather than price convergence over time
3. No statistical evidence that there is competition
4. Little evidence of competition between parallel traders
Competition across countries
1. Price differences between source and destination countries hold – regulation effect
2. No convergence over time
3. Intensity of parallel trade in some source countries can cause supply problems and shortages
Concluding remarksConcluding remarks
Modest savings to health insurance organisations through direct (price) effects
Zero or, at best, marginal benefits to patients Little evidence of intra- or inter-country competition
effects and price convergence Some benefits to pharmacies Most pecuniary benefits accrue to parallel importers
and the overall distribution chain Transfer from industry (producer) surplus mostly to the
distribution chain and less so to health insurance and patients
Evidence of product shortages in source countries