The Economic Impact of Pharmaceutical Parallel Trade in Europe Panos Kanavos, PhD London School of Economics & Political Science, London, UK FDA oral testimony on Drug Re-importation Wednesday, 14 April 2004

Research agenda and endpoints The Research Agenda Quantify economic impact of parallel trade in six major destination countries Focus on 6 widely used product classes* accounting for 22% of branded retail market Apportion benefits to individual stakeholders Research Endpoints Examine direct effects, arising from price differences between locally sourced and PI drugs Competition effects in destination countries and price convergence 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: Prices of most common presentation, in €, 2002

Hypotheses H1: Arbitrage effect: Parallel trade leads to price equalisation or approximation across Member States H2: 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 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. Hypothesis 2: Hypothesis 3: Hypothesis 4: Hypothesis 5:

Direct effects Health Insurance Pharmacy Patients Parallel importers Industry

Allocation of benefits (1) Country Cost-sharing policy Impact 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 Sweden Deductible plus fixed fee per script Denmark Deductible plus co-insurance up to limit UK Flat fee invisible ? Netherlands No co-pays € 6,382,000 1.2%

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 2.3 Total impact €100,071,000 1.8% € 648,449 ,000 6.5 SAVINGS TO HEALTH INSURANCE: TAKE HOME MESSAGES * Savings to health insurance have two components: Price differences Discounts to pharmacies and clawback * Few products generate significant total savings and, consequently, profits to PI * Savings to HI are modest in comparison with overall profits from PI

Competition in destination countries Competition across countries Indirect effects Competition in destination countries Prices for PT drugs not significantly lower than locally sourced drugs Price co-movement rather than price convergence over time No statistical evidence that there is competition Little evidence of competition between parallel traders Competition across countries Price differences between source and destination countries hold – regulation effect No convergence over time Intensity of parallel trade in some source countries can cause supply problems and shortages

Concluding 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