The Pricing of
Pharmaceuticals
facing
Grey Imports
Toulouse, December 2003
Claude Crampes - Abraham Hollander
Outline
1. What are parallel imports?
2. A normative approach for
pharmaceuticals
3. Implementation
Toulouse, December 2003
2
1. What are parallel imports?
Austria
discount
Silhouette
chain
International
The
Silhouette
case
sunglasses exports
broker
retailer
parallel imports
Bulgaria
European Court of Justice, Case C-355/96, [1998]
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3
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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4
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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5
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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6
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.
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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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8
Model setting
 Two products i = D, H
 Two countries j = A, E
 Gross utility in j: U j (qDj , qHj )
 Demand functions:
j
j
j
j j
j
j
qij ( pHj , pHj )  arg max
U
(
q
,
q
)

p
q

p
q
D
H
D D
H H
j
j
qD , qH
j  A, E i  D, H
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Model setting (cont'd)
 Net consumers' surplus in country j:
S j ( pDj , pHj )  U j (qDj ( pDj , pHj ), qHj ( pDj , pHj ))
 pDj qDj ( pDj , pHj )  pHj qHj ( pDj , pHj )
 Net profit of firm i:
 i ( piA , piE , p Aj , p Ej ) 
( piA  ciA )qiA ( pDA , pHA )  ( piE  ciE )qiE ( pDE , pHE )  Fi
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The problem
 Characterize the pricing policy that solves
max S A ( pDA , pHA )  S E ( pDE , pHE )
  D ( pDA , pDE , pHA , pHE )   H ( pDA , pDE , pHA , pHE )
 under alternative set of constraints:
 separated budget constraints:  i  0, i  D, H
 or common budget constraint:  D   H  0
A
E
 and arbitrage constraint: pD  t  pD
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separate budget constraints
A
D
 pDA  HA / H
A H /H
p c 
pD A 
1  D

1  D qDA  A
A
D
A
D
+
+
+
A
A
A


p
pHA  cHA  D pHA H A/ D   HA H A/ D
_
qD _

+
E
D
 pDE  HE / H
E H /H
p c 
pD E 
1  D

1  D qDE  E
E
D
E
D
+
+
_
 HE / D
pHE  HE / D
p  c  D p
 E
E
_
qD  E
E
H
E
H
+
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E
H
+
12
budget pooling
pDA
A
A
A

p

p
H /H
D
D
 cDA 

1   ˆDA / D 1   qDA  A

+
p
A
H
c
A
H
+
p
E
D
c
E
D
+
p
E
H
c
E
H
+
Toulouse, December 2003
+
+
p
 pHA  HA / D


A
ˆ
1  H / H
1   qDA  A

+
A
H
_
E
pD
 pDE  HE / H


E
E
1   ˆD / D 1   qD
E

+
_
E
pH
 pHE  HE / D


E
E
1   ˆH / H
1   qD
E

+
+
13
3. Implementation
 Extra charge for health services in rich countries
 Taxes
 Bundling
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Extra charge for health
services in rich countries
pDA  cDA
pHA  cHA
Toulouse, December 2003
pDE  cDA  t
,
,
E
A
E
(
c

c

t
)
q
E
E
D
D
D  FD  FH
pH  cH 
qHE
15
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
p A  cDA  cHA ,
pDE  cDA  cHA  t ,
(c  c  c  t )q  FD  FH
p c 
qHE
E
H
E
H
E
D
A
H
A
D
E
D
alleviates the former extra charge for H in E
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Local bundling in A and in E
p c c
A
A
D
A
H
FD  FH
p c c 
qE
E
E
H
E
D
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
Toulouse, December 2003
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