The Pricing of Pharmaceuticals facing Grey Imports

1
The Pricing of Pharmaceuticals facing Grey
Imports
Toulouse, December 2003 Claude Crampes - Abraham
Hollander
2
Outline

1. What are parallel imports?
2. A normative approach for pharmaceuticals
3. Implementation

3
1. What are parallel imports?
Austria
sunglasses exports
discount chain
Silhouette International
The Silhouette case
Bulgaria
retailer
broker
parallel imports
European Court of Justice, Case C-355/96, 1998
4
Parallel imports are grey

• Not imports of black products
• no piracy, no counterfeiting genuine products
• not forbidden products
• Not totally white
• re-imported against the will of the manufacturer
  and/or of retailers
• IP infringement is controversial

5
Economic and legal literature on grey imports

• Legal literature
• focus on the exhaustion of IPRs
• balancing the utility of local consumers and the
  profit of domestic producers
• Economic literature
• focus on models of competition
• for drugs, unique normative tentative Danzon
  (2001), but assumes that grey imports can be
  banned

6
Economic rationale of parallel trade

• Price arbitrage
• Free riding on other agents promotional effort
• Unauthorized outside sales by retailers
• Discrimination within a single market
• Differences in regulatory regimes

7
Additional arguments for pharmaceuticals

• Big pharmas need high profits to recoup huge RD
  costs
• Price discrimination among geographical zones
  allows high profits without impairing access to
  drugs in low-income countries
• There are high potential gains from arbitrage.
  The Internet-drug-trade from Canada towards USA
  is estimated at 1b/year.

8
2. A normative approach for pharmaceuticals

• Obvious need for a global approach
• Before experimenting alternative policies, we
  need a global view of
• what is feasible?
• what is desirable?
• what is the resulting second best?

9
Model setting

• Two products i D, H
• Two countries j A, E

• Demand functions

10
Model setting (cont'd)

• Net consumers' surplus in country j

• Net profit of firm i

11
The problem

• Characterize the pricing policy that solves

• under alternative set of constraints

12
separate budget constraints



_
_

_


_


13
budget pooling



_


_





14
3. Implementation

• Extra charge for health services in rich
  countries
• Taxes
• Bundling

15
Extra charge for health services in rich countries
16
Taxes

• finance pharmaceutical labs by taxes under the
  constraint that they supply drugs worldwide at
  marginal cost
• on average, it is less easy to do arbitrage on
  the domestic gross revenue of rich countries than
  on their consumption of drugs
• the taxation solution does not require drastic
  institutional reforms.

17
Local bundling in A

• in Africa, H and D cannot be sold separately

• alleviates the former extra charge for H in E

18
Local bundling in A and in E

• does not eliminate arbitrage but potential
  profits from arbitrage are lower

19
Conclusion

• without some form of pooling or bundling, empty
  feasible set is most likely
• need for radical changes in pricing policy
• mixing tools
• use the "Global Fund" for H in A
• no sale of D without H