the pricing of pharmaceuticals facing grey imports toulouse, december 2003 claude crampes - abraham...
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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
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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