The Economic Impact of Pharmaceutical Parallel Trade in Europe

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. 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? Research agenda and endpoints * 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

5. Direct effects • Health Insurance • Pharmacy • Patients • Parallel importers • Industry

6. Allocation of benefits (1)

7. Allocation of benefits (2)

8. 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 Indirect effects

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