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

The Pricing of Pharmaceuticals

facing Grey Imports

Toulouse, December 2003

Claude Crampes - Abraham Hollander

Toulouse, December 2003 2

Outline

1. What are parallel imports?

2. A normative approach for pharmaceuticals

3. Implementation

Toulouse, December 2003 3

Austria

Bulgaria

The Silhouette

case

sunglasses exportsdiscount

chain

Silhouette

International

retailerparallel imports

European Court of Justice, Case C-355/96, [1998]

1. What are parallel imports?

broker

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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

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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

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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

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Additional argumentsfor pharmaceuticals

Big pharmas need high profits to recoup huge R&D 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.

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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?

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Model setting

Two products i = D, H

Two countries j = A, E

( , )j j jD HU q qGross utility in j:

,( , ) arg max ( , )

j jD H

j j j j j j j j j ji H H D H D D H H

q qq p p U q q p q p q

Demand functions:

, ,j A E i D H

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Model setting (cont'd)

( , ) ( ( , ), ( , ))

( , ) ( , )

j j j j j j j j j jD H D D H H D H

j j j j j j j jD D D H H H D H

S p p U q p p q p p

p q p p p q p p

Net consumers' surplus in country j:

( , , , )

( ) ( , ) ( ) ( , )

A E A Ei i i j j

A A A A A E E E E Ei i i D H i i i D H i

p p p p

p c q p p p c q p p F

Net profit of firm i:

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The problem

max ( , ) ( , )

( , , , ) ( , , , )

A A A E E ED H D H

A E A E A E A ED D D H H H D D H H

S p p S p p

p p p p p p p p

Characterize the pricing policy that solves

separated budget constraints: 0, ,i i D H

under alternative set of constraints:

or common budget constraint: 0D H and arbitrage constraint: A E

D Dp t p

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separate budget constraints

/ /

1 1

A AAA A A H H H HD DD D D A A A

D D D

pp c p

q

/ /A AA

A A A H D H DHH H D H A A A

D

pp c p

q

/ /

1 1

E EEE E E H H H HD DD D D E E E

D D D

pp c p

q

/ /E EE

E E E H D H DHH H D H E E E

D

pp c p

q

+ + +

+

+

+

_ _

_

+

+

_

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budget pooling/

/ˆ1 1

AA AA A H HD DD D A A A

D D D

p pp c

q

/

/ˆ1 1

AA AA A H DH HH H A A A

H H D

p pp c

q

/

/ˆ1 1

EE EE E H HD DD D E E E

D D D

p pp c

q

/

/ˆ1 1

EE EE E H DH HH H E E E

H H D

p pp c

q

+ + +

+

+

+

+ _

+

+

+

_

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3. Implementation

Extra charge for health services in rich countries

Taxes

Bundling

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Extra charge for healthservices in rich countries

,

( ),

A A E AD D D D

E A EA A E E D D D D HH H H H E

H

p c p c t

c c t q F Fp c p c

q

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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.

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Local bundling in A

in Africa, H and D cannot be sold separately

, ,

( )

A A A E A AD H D D H

E A A EE E D H D D D HH H E

H

p c c p c c t

c c c t q F Fp c

q

alleviates the former extra charge for H in E

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Local bundling in A and in E

A A AD H

E E E D HH D E

p c c

F Fp c c

q

does not eliminate arbitrage but potential profits from arbitrage are lower

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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