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

Toulouse, December Outline 1.What are parallel imports? 2.A normative approach for pharmaceuticals 3.Implementation

Toulouse, December Austria Bulgaria The Silhouette case sunglasses exports discount chain Silhouette International retailer parallel imports European Court of Justice, Case C-355/96, [1998] 1. What are parallel imports? broker

Toulouse, December 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

Toulouse, December 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

Toulouse, December 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

Toulouse, December Additional arguments for 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.

Toulouse, December 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?

Toulouse, December Model setting  Two products i = D, H  Two countries j = A, E  Gross utility in j:  Demand functions:

Toulouse, December Model setting (cont'd)  Net consumers' surplus in country j:  Net profit of firm i:

Toulouse, December The problem  Characterize the pricing policy that solves  under alternative set of constraints:

Toulouse, December separate budget constraints _ _ _ + + _

Toulouse, December budget pooling _ _

Toulouse, December Implementation  Extra charge for health services in rich countries  Taxes  Bundling

Toulouse, December Extra charge for health services in rich countries

Toulouse, December 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.

Toulouse, December Local bundling in A  in Africa, H and D cannot be sold separately  alleviates the former extra charge for H in E

Toulouse, December Local bundling in A and in E  does not eliminate arbitrage but potential profits from arbitrage are lower

Toulouse, December 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