1. 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

2. 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

3. The justification for parallel trade in the EU: Prices of most common presentation, in €, 2002

4. 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:

5. Direct effects
Health Insurance
Pharmacy
Patients
Parallel importers
Industry

6. 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%

7. 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

8. 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

9. 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