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Drug Importation in the US: Lose-Lose for US and Foreign Consumers Patricia M. Danzon PhD The Wharton School University of Pennsylvania

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Presentation on theme: "Drug Importation in the US: Lose-Lose for US and Foreign Consumers Patricia M. Danzon PhD The Wharton School University of Pennsylvania"— Presentation transcript:

1 Drug Importation in the US: Lose-Lose for US and Foreign Consumers Patricia M. Danzon PhD The Wharton School University of Pennsylvania

2 Effects of Legalizing Drug Importation are Highly Uncertain Legalizing importation => massive wholesaler/pharmacy involvement => system wide adjustment Current savings to individual consumers overstate system-wide savings Aggregate savings to US consumers less than revenue loss to manufacturers Key issues –Mismatch of products –Supply restrictions on launched products –Foreign price increases or non-launch on new products –Intermediaries capture much of the savings

3 1. Mismatch of Compounds and Presentations Reduces Potential for Importation Sample = Top 249 molecules, by US Unit Volume Source: Danzon and Furukawa, Health Affairs, Oct. 2003

4 2. Manufacturer Supply Restrictions of Launched Products Manufacturers may restrict supply to exporting countries –Supply restrictions are common in EU, and legal Provided manufacturer acts unilaterally (Bayer Adalat case) How much of limited supply will wholesalers/pharmacies export? –Some shortages reported in Canada Even if 20% of EU + Canada volume is shipped to US, would only supply 20-30% of US volume –And only for matching drugs

5 US Dominates Global Sales: Due to High US Volumes, Not Just Prices 2003% Growth Constant $ World Audited Market US$ Bill% Share2003 CAGR 98-02 Latin America$17.43.7%+5.5-2.8 Asia/Africa/Australia$33.87.2%+9.3+11.0 Japan$52.411.2%+3.4+4.0 Europe (All)$134.528.8%+9.4+8.8 North America$229.549.1%+11.1+15.2 Worldwide$467.9100.0%+9.3+10.4 10 Key Markets$389.283.2%+9.1+11.3 EU (15)$116.324.9%+8.0+8.4 Source: IMS Health Incorporated

6 Per Capita Unit Volume By Molecule Age: Months Since Global Launch. Relative to U.S. (US = 100) Source: Danzon and Furukawa, Health Affairs Oct. 2003. Note: UK consumption upward biased by a few respiratory products.

7 3. Manufacturers May Try to Raise Foreign Prices ---But Resistance Is Likely Foreign price control systems aim to stabilize drug spending and health spending as a percent of GDP –Controls on prices, reimbursement, drug budgets etc. –Health policy is fiscal policy in national/social health systems Foreign prices are already roughly in line with income in industrialized countries (Danzon and Furukawa, HA 2003)

8 Price Indexes for Top 249 Compounds, by US Volume, 1999 Data. US = 100. Note: United States equals 100%.

9 Price Indexes Relative to Per Capita Income Differentials (1999) Note: United States equals 100%.

10 (b) Delay and Non-launch of New Drugs ex-US if Low Prices Countries that are unwilling/unable to pay higher prices may see fewer/delayed product launches If importation threat is large, manufacturers would rationally be less willing to launch ex-US at low prices –US market vs. loss of foreign sales –Feasible pricing range varies by product, importer costs etc.

11 Countries with Lower Prices have Fewer Launches, Longer Launch Lags (Danzon, Wang and Wang 2003) We estimate the effects of price on launch delay, controlling for market size, per capita income, etc. Sample: launch of 85 NCEs launched in 1994-1999 14 EU countries, plus Australia, Canada, Czech, Japan, Mexico, New Zealand, Norway, Poland, S. Africa, Switzerland, and USA IMS data on prices and volumes

12 Findings Countries with lower prices have longer launch lags and fewer launches EU countries that are major PI exporters have longer delays, controlling for expected price and volume

13 Kaplan-Meier estimates of cumulative launch probability for selected countries

14 Countries with a significantly longer delays/fewer launches, relative to UK, controlling for price and volume

15 c. US Price Pressure from Medicare May Narrow Differentials Medicare Modernization Act (MMA) to deliver drug benefit through private PBMs –Each PBM must have at least 2 drugs in each class Medicare to define classes –Broad definition of classes => older drugs compete with newer drugs within a classes Discounts could be large in crowded therapeutic classes PBMs may demand same discounts for their private plans

16 4. Middlemen will Capture Some of Any Savings from Importation If only a fraction of US demand can be sourced abroad, who will capture the savings? –Pharmacy chains and GPOs that buy direct –PBMs may clawback some savings from pharmacies Cash-paying customers are unlikely to benefit EU experience confirms that middlemen capture much of the savings from parallel trade

17 The Global Social Welfare Perspective: Differential Pricing Increases Social Welfare, Compared to Uniform Pricing 1. Differential Pricing => Wider Use of Existing Drugs (Static Efficiency) Low-income markets can only afford drugs at low prices 2. Differential pricing is an efficient way to pay for R&D (Dynamic Efficiency) \ Higher income countries should contribute more to R&D than low income countries (Ramsey Pricing) 3. Equity Pricing related to income is equitable, by most criteria Importation undermines differential pricing => bad public policy

18 Conclusions Drug importation in the US will yield small savings for US consumers But loss of access for foreign consumers Lower industry revenues => less R&D Affordability of drugs in US should be addressed by insurance with smart benefit design, not importation that undermines differential pricing

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