Drug Importation in the US: Lose-Lose for US and Foreign Consumers

1. Drug Importation in the US: Lose-Lose for US and Foreign Consumers Patricia M. Danzon PhD The Wharton School University of Pennsylvania http://hc.wharton.upenn.edu/danzon/index.htm

2. Effects of Legalizing Drug Importation are Highly Uncertain • Legalizing importation => massive wholesaler/pharmacy involvement => system wide adjustment • Current savings to individual consumers overstate system-wide savings • Aggregate savings to US consumers less than revenue loss to manufacturers • Key issues • Mismatch of products • Supply restrictions on launched products • Foreign price increases or non-launch on new products • Intermediaries capture much of the savings

3. 1. Mismatch of Compounds and Presentations Reduces Potential for Importation Sample = Top 249 molecules, by US Unit Volume Source: Danzon and Furukawa, Health Affairs, Oct. 2003

4. 2. Manufacturer Supply Restrictions of Launched Products • Manufacturers may restrict supply to exporting countries • Supply restrictions are common in EU, and legal • Provided manufacturer acts unilaterally (Bayer Adalat case) • How much of limited supply will wholesalers/pharmacies export? • Some shortages reported in Canada • Even if 20% of EU + Canada volume is shipped to US, would only supply 20-30% of US volume • And only for matching drugs

5. US Dominates Global Sales:Due to High US Volumes, Not Just Prices Source: IMS Health Incorporated

6. Per Capita Unit Volume By Molecule Age: Months Since Global Launch. Relative to U.S. (US = 100) Source: Danzon and Furukawa, Health Affairs Oct. 2003. Note: UK consumption upward biased by a few respiratory products.

7. 3. Manufacturers May Try to Raise Foreign Prices ---But Resistance Is Likely • Foreign price control systems aim to stabilize drug spending and health spending as a percent of GDP • Controls on prices, reimbursement, drug budgets etc. • Health policy is fiscal policy in national/social health systems • Foreign prices are already roughly in line with income in industrialized countries (Danzon and Furukawa, HA 2003)

8. Price Indexes for Top 249 Compounds, by US Volume, 1999 Data. US = 100. Note: United States equals 100%.

9. Price Indexes Relative to Per Capita Income Differentials (1999) Note: United States equals 100%.

10. (b) Delay and Non-launch of New Drugs ex-US if Low Prices • Countries that are unwilling/unable to pay higher prices may see fewer/delayed product launches • If importation threat is large, manufacturers would rationally be less willing to launch ex-US at low prices • US market vs. loss of foreign sales • Feasible pricing range varies by product, importer costs etc.

11. Countries with Lower Prices have Fewer Launches, Longer Launch Lags (Danzon, Wang and Wang 2003) • We estimate the effects of price on launch delay, controlling for market size , per capita income, etc. • Sample: launch of 85 NCEs launched in 1994-1999 • 14 EU countries, plus Australia, Canada, Czech, Japan, Mexico, New Zealand, Norway, Poland, S. Africa, Switzerland, and USA • IMS data on prices and volumes

12. Findings • Countries with lower prices have longer launch lags and fewer launches • EU countries that are major PI exporters have longer delays, controlling for expected price and volume

13. Kaplan-Meier estimates of cumulative launch probability for selected countries

14. Countries with a significantly longer delays/fewer launches, relative to UK, controlling for price and volume

15. c. US Price Pressure from Medicare May Narrow Differentials • Medicare Modernization Act (MMA) to deliver drug benefit through private PBMs • Each PBM must have at least 2 drugs in each class • Medicare to define classes • Broad definition of classes => older drugs compete with newer drugs within a classes • Discounts could be large in crowded therapeutic classes • PBMs may demand same discounts for their private plans

16. 4. Middlemen will Capture Some of Any Savings from Importation • If only a fraction of US demand can be sourced abroad, who will capture the savings? • Pharmacy chains and GPOs that buy direct • PBMs may “clawback” some savings from pharmacies • Cash-paying customers are unlikely to benefit • EU experience confirms that middlemen capture much of the savings from parallel trade

17. The Global Social Welfare Perspective: Differential Pricing Increases Social Welfare, Compared to Uniform Pricing 1. Differential Pricing => Wider Use of Existing Drugs (Static Efficiency) • Low-income markets can only afford drugs at low prices 2. Differential pricing is an efficient way to pay for R&D (Dynamic Efficiency) \ • Higher income countries should contribute more to R&D than low income countries (Ramsey Pricing) 3. Equity • Pricing related to income is equitable, by most criteria • Importation undermines differential pricing => bad public policy

18. Conclusions • Drug importation in the US will yield small savings for US consumers • But loss of access for foreign consumers • Lower industry revenues => less R&D • Affordability of drugs in US should be addressed by insurance with smart benefit design, not importation that undermines differential pricing