The economic impact of pharmaceutical parallel trade

Study demonstrates no direct savings to patients, majority of benefits accrue to parallel traders

A London School of Economics (LSE) study has shown that parallel trade has increased considerably over the period 1997-2002 for many products/therapeutic classes, and particularly those involving novel or patent-protected molecules.With specific regard to the five key hypotheses identified by the LSE, the study's findings are as follows:

Cross-country effect: Parallel trade leads to price equalisation across countries - 'arbitrage' leading to more efficient market operation: There are significant differences between acquisition prices in source countries, and list prices in destination countries, and the average price spread within destination countries between locally sourced and parallel imported products is very small. Parallel traded products are not always offered at a discount in destination countries, and in source countries, concerns have been raised re medicine shortages due to parallel exports (e.g. Greece, which has a parallel export market valued at 20% of the total, and where the regulatory authority has already expressed public concern over export impact). There are also signs of relative un-ease about the extent of parallel trade in some traditionally low-price countries, particularly Spain, Greece and France; all seem to be taking (or to have taken) measures to account for the extent of parallel exports from their territory. By contrast, traditionally high-price countries seem to have mature policies, which also enable them to benefit somewhat from this activity (especially the UK, the Netherlands, Germany, Sweden and Denmark). Overall, the study has found no evidence that arbitrage could lead to price equalisation across borders and to more efficient market operation.

Destination country effect: Increased price competition in destination countries reduces overall pharmaceutical prices, benefiting payers and patients: In destination countries, rather than convergence, increased price variance is seen, with a coefficient varying from 0.04 to 2.4 for the majority of products. There is no evidence of price convergence between source and destination countries, and certainly no evidence of sustained downward convergence in destination countries. Different systems of medicine pricing and reimbursement additionally contribute to this scenario, as does the fact that parallel traders maximise their revenues by offering their products at the same, or just below, the price of locally sourced products. Health insurance organisations accrue only modest direct savings, table 1.

Aggregate welfare effects: If price competition is the result of parallel trade, then the resulting price convergence may lead to overall welfare improvements for payers: Prices of parallel imported and locally sourced products in destination countries show patterns of co-movement over the 1997-2002 period, suggesting that there is no price convergence and indicating that possible competition benefits from parallel trade are non-existent. The study thus shows no evidence of sustainable dynamic price competition in destination countries, with no corresponding indirect cost savings.

Patient benefits: Patient access to innovative medicines is improved, with lower direct and indirect costs: There are limited benefits to government purchasers or health insurance organisations through parallel trade, but where administrative measures are introduced to exploit price differences, these may violate EU competition rules (e.g. Sweden). Pharmacists benefit only where pharmacy margins are not determined by regulation, or in countries where there is a financial incentive from dispensing a parallel-imported medicine. (measurable direct benefits are outlined in table 2 in Euro '000, although the extent of such discounts from wholesalers to pharmacists cannot be known with precision)

With regards to patients, however, no clear benefits through lower prices were found. Even if price differences are visible and significant, the structure of cost-sharing arrangements is such that the patient is not aware of the cost of medicines, or direct savings are marginal. Consequently, patient access to safe, effective or innovative medicines is neither compromised nor enhanced through parallel trade.

Industry impact: Parallel trade has minimal impact on the pharmaceutical industry as a whole, in terms of profitability and potential to innovate, and indeed, improves overall industry efficiency: Finally, the study demonstrates that pharmaceutical manufacturers incur a significant loss of business in destination countries from the conduct of parallel trade. Parallel trade reduces manufacturers' overall profitability, without necessarily increasing social welfare. Reduced profitability affects the ability of industry to innovate and may be a contributory factor to downsizing in source countries over the medium term. The dynamic implications of continued trends in cross-border trade many be that manufacturers will be reluctant to produce and/or launch in countries presenting significant parallel export potential. Over the long term, parallel trade may therefore force industry consolidation and the concentration of manufacturing and R&D into fewer locations

Summary

Overall, the study demonstrates that parallel traders are the main beneficiaries of parallel trade. Their direct (gross) maximum benefits (shown in table 3 in Euro '000) exceed considerably those accruing to statutory health insurance organisations. These benefits are invisible.

The lack of sizeable direct benefits to health insurance organisations, the absence of price competition in individual markets, the existence of reported product shortages in some member states, and the extent of benefits accruing to parallel traders, may force policy-makers at national and European level to re-evaluate the rationale behind parallel trade, the dynamic impact it may have on patients in some member states and on the research-based pharmaceutical industry in terms of location, manufacturing and research.