1. The Economic Impact of Pharmaceutical Parallel Trade: A Stakeholder Analysis Panos Kanavos, PhD London School of Economics, UK AcademyHealth, San Diego, 8 June 2004

2. Agenda Drug pricing and financing in Europe The issue of parallel trade Data and methods Results Conclusions and policy implications

3. Approaches to drug regulation in the EU MeasureIn-patent drugsOff-patent drugs Free Pricing Germany, France(?) Direct price controls Austria, Finland, France, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden Austria, Finland, Greece, Ireland, Netherlands, Sweden International price comparisons Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden Austria, Belgium, Denmark, Finland, Greece, Ireland, Netherlands, Portugal, Spain, Sweden Profit control UK Reference pricing NetherlandsBelgium, Denmark, France, Germany, Italy, Portugal, Spain, UK

4. Price differences per unit in EU countries, DDD-adjusted, in €, 2002

5. Prices of most common presentation, in €, 2002

6. Parallel trade in the EU Regional exhaustion of rights Considerable jurisprudence by the ECJ Significant uptake: 1998 – 2002 Actively encouraged by some member-states

7. Market share of parallel imports, 1997-2002

8. Incentives encouraging the use of PI medicines in Europe United Kingdom 1. Discounts to pharmacy 2. Clawback Germany 1. Quota to pharmacies for PI dispensing 2. Penalties for not adhering to quota Denmark 1. Information on PI use 2. Mandatory substitution The Netherlands 1. 1/3 of price difference accrues to pharmacy 2. Clawback encouraging pharmacies to procure more cost-effectively Sweden 1. Information and PI substitution 2. Aggregate payment to pharmacy for work on generics and PI drugs

9. Research agenda and endpoints The Research Agenda 1. 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 (15-28% depending on country); account for some of the most highly PT products 3. Apportion static benefits to individual stakeholders Research Endpoints 1. Examine direct effects, arising from price differences between locally sourced and PI drugs (list prices and discounts) 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

10. Table 1. CBT market shares of selected drugs products 2002 Norway Germany Sweden Denmark UK Netherlands Atorvastatin 2% 0% 17%5%54%12% Pravastatin 14%1%19%0%38%7% Simvastatin 36%10%0%56% 65% 51% Captopril 3%1%0%7%2%0% Enalapril 24%0%19%5%4%1% Quinalapril 0%8%0%39%8%17% Ramipril 0%3%18%19%0%21% Losartan 0% 72%0% Valsartan 0%5%0% 23%20% Clozapine 58% 0% 74%13%0%10% Olanzapine 11%63%24%0%47%8% Risperidone 42%62%32%25%45%33% Lansoprazole 0%42%0% 31%14% Omeprazole 4%0%16%0%19%11% Pantoprazole 0%6%0% 32%18% Citalopram 6%17%21%19%25%15% Fluoxetine 1%5%20%17%10%34% Paroxetine 9%19%47%43%18%6% Sertraline 0%9%8%25%23%14% Market shares of PI products, 2002

11. A. Direct effects 1. Health Insurance 2. Pharmacy 3. Patients 4. Parallel importers 5. Industry

12. Allocation of benefits (1) CountryCost-sharing policy Impact on patients Pharmacy benefits, 2002 % of market NorwayCo-insurance (0%,12%,30% with cap per script) Marginal€563,0000.3% GermanyPack-related 000 SwedenDeductible plus co-insurance up to a limit Marginal00 DenmarkDeductible plus co-insurance up to limit Marginal00 UKFlat fee 0invisible? NetherlandsNo co-pays 0€ 6,382,0001.2%

13. 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 € 563,0000.3%€ 12,447,00046%22.7 Germany € 17,730,0000.8%€ 97,965,00053%5.5 Sweden € 3,770,0001.3%€ 18,453,00060%4.9 Denmark € 3,002,0002.2%€7,371,20044%2.5 UK €55,887,0002.8%€ 469,013,00049%8.4 Netherlands €19,119,0003.6%€ 43,199,00044%2.3 Total impact €100,071,0001.8%€ 648,449,00053%6.5

14. Costs of parallel importers in destination countries CountryCost of obtaining marketing authorisation DenmarkAnnual fee of DKK 7,950 (€1,071) plus application fee of DKK15,095 (€2,033.4) or renewal fee of DKK13,975 (€1,882.5) Germany€1,380 The Netherlands€1,021 per year SwedenSEK15,000 (€1,637) UK£1,465 (€2,125) NorwayNOK 70,000 – 80,000 (€8,489 - €9,701.8) plus control fee of 0.7% of the turnover of the MA holder

15. Distribution of benefits: comparative presentation by stakeholder (3)

16. B. Competition effects in destination countries

17. Competition effects within countries- Germany

18. C. Competition effects across countries

19. Price convergence with lowest price country, 1997-2002 NORGERSWEDENUKNL AtorvastatinXXX XX PravastatinX0 00X SimvastatinXX000 CaptoprilX 0XX0 EnalaprilX0X0X0 QuinaprilN/A Ramipril00000 Clozapine0 XXX OlanzapineXX000 Risperidone 0 00X

20. Impact on industry  Pharmaceutical manufacturers incur a significant loss of business in destination countries from the conduct of parallel trade.  The conduct of parallel trade reduces manufacturers’ overall profitability (loss of producer surplus), without necessarily increasing societal welfare.  Reduced overall profitability may lead to downsizing in source countries over the medium term.  Threatens European industry competitiveness

21. Concluding remarks – the European experience 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 distributors 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

22. Concluding remarks - Lessons for the USA 1. Safety concerns 2. Exhaustion of rights 3. Savings to stakeholders Insurance Patients Wholesalers 4. Supply issue 5. Competition and Pricing