Title: The Pricing of Pharmaceuticals facing Grey Imports
1The Pricing of Pharmaceuticals facing Grey
Imports
Toulouse, December 2003 Claude Crampes - Abraham
Hollander
2Outline
- What are parallel imports?
- A normative approach for pharmaceuticals
- Implementation
31. 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
4Parallel 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
5Economic 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
6Economic 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
7Additional 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.
82. 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?
9Model setting
- Two products i D, H
- Two countries j A, E
10Model setting (cont'd)
- Net consumers' surplus in country j
11The problem
- Characterize the pricing policy that solves
- under alternative set of constraints
12separate budget constraints
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13budget pooling
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143. Implementation
- Extra charge for health services in rich
countries - Taxes
- Bundling
15Extra charge for health services in rich countries
16Taxes
- 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.
17Local bundling in A
- in Africa, H and D cannot be sold separately
- alleviates the former extra charge for H in E
18Local bundling in A and in E
- does not eliminate arbitrage but potential
profits from arbitrage are lower
19Conclusion
- 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