Drug Importation: Drug Importation: Economic ImpactEconomic Impact

Patricia M. Danzon PhDPatricia M. Danzon PhDThe Wharton SchoolThe Wharton School

U. PennsylvaniaU. PennsylvaniaJune 2004June 2004

Effects of Drug Importation are Effects of Drug Importation are Highly UncertainHighly Uncertain

US legislative proposals differUS legislative proposals differCountriesCountriesPrePre--conditionsconditionsEnforcementEnforcement

Manufacturer responseManufacturer responseUS and exporting countries’ responseUS and exporting countries’ responseLeast bad vs. worst case scenarioLeast bad vs. worst case scenario

Status QuoStatus Quo

Importation into the US is illegal Importation into the US is illegal In practice, individual own use is permittedIn practice, individual own use is permittedHealth plan/payer initiatives cooled by FDA warningHealth plan/payer initiatives cooled by FDA warning

US$650US$650--700m. imported from Canada in 2003 (IMS 700m. imported from Canada in 2003 (IMS estimate) of over $200b. US salesestimate) of over $200b. US salesSafety concerns are a major issueSafety concerns are a major issue

Authorized countries could become conduitsAuthorized countries could become conduitsPolitical pressurePolitical pressure

Consumers, payers and Medicare face rising drug costsConsumers, payers and Medicare face rising drug costsHigher US prices viewed as “unfair”Higher US prices viewed as “unfair”

Importation from Canada, EU, Japan:Importation from Canada, EU, Japan:1. Least Bad Scenario 1. Least Bad Scenario

Aggregate savings to US consumers is smaller than Aggregate savings to US consumers is smaller than revenue loss to manufacturersrevenue loss to manufacturersKey issuesKey issues

Mismatch of productsMismatch of productsSupply restrictions Supply restrictions –– launched productslaunched productsForeign price increases or nonForeign price increases or non--launch launch -- new productsnew productsIntermediaries capture some of the savingsIntermediaries capture some of the savings

a. Mismatch of products a. Mismatch of products Matching on formulation/strength reduces Matching on formulation/strength reduces

matching sample by roughly 50%matching sample by roughly 50%

37% 35%

42%

31% 33%

62% 61%

17%10%

33%

61%

15%21%

16%

33%

14%

35%

0%

10%

20%

30%

40%

50%

60%

70%

CANADA

CHILE

FRANCE

GERMANY

ITALY

JAPAN

MEXICO UK US

Sample percent of sales Matched with US, by presentation

Source: Danzon and Furukawa, Health Affairs, Oct. 2003

40.6440.645656757524.3624.36565637.537.5BelgiumBelgium

19.5319.532828757511.2711.27282837.537.5GreeceGreece

50.9350.936060757530.6930.69606037.537.5PortugalPortugal

58.1458.146060757531.6931.69606037.537.5AustriaAustria

43.0943.096060757525.8525.85606037.537.5NetherlandNetherland

42.242.26060757525.925.9606037.537.5SpainSpain

11.6111.611414757513.313.3282837.537.5ItalyItaly

9.879.87303050506.576.5730302525FranceFrance

60.3960.395050757534.3334.33505037.537.5GermanyGermany

55.0555.055656757533.0133.01565637.537.5United United KingdomKingdom

E/PackE/PackPackPackStrngthStrngthE/PackE/PackPackSizePackSizeStrengthStrengthCountryCountry

Different formulations may limit importation Different formulations may limit importation

b. Manufacturer Supply Restrictions b. Manufacturer Supply Restrictions of Launched Productsof Launched Products

Some manufacturer supply restrictions for Some manufacturer supply restrictions for Canadian pharmacies; common in EU Canadian pharmacies; common in EU

legal so far……legal so far……Will wholesalers/pharmacies forego profitable Will wholesalers/pharmacies forego profitable export opportunity?export opportunity?

Some shortages reportedSome shortages reportedEven if 20% of EU + Canada volume is shipped Even if 20% of EU + Canada volume is shipped to US, would only fill 20to US, would only fill 20--30% of US volume30% of US volume

And only for matching drugsAnd only for matching drugs

US Dominates Global Sales:US Dominates Global Sales:Due to Volume and PriceDue to Volume and Price

+8.4+8.4+8.0+8.024.9%24.9%$116.3$116.3EU (15)EU (15)+11.3+11.3+9.1+9.183.2%83.2%$389.2$389.210 Key Markets10 Key Markets+10.4+10.4+9.3+9.3100.0%100.0%$467.9$467.9WorldwideWorldwide+15.2+15.2+11.1+11.149.1%49.1%$229.5$229.5North AmericaNorth America+8.8+8.8+9.4+9.428.8%28.8%$134.5$134.5Europe (All)Europe (All)+4.0+4.0+3.4+3.411.2%11.2%$52.4$52.4JapanJapan

+11.0+11.0+9.3+9.37.2%7.2%$33.8$33.8Asia/Africa/AustraliaAsia/Africa/Australia--2.82.8+5.5+5.53.7%3.7%$17.4$17.4Latin AmericaLatin America

CAGRCAGR9898--020220032003% Share% ShareUS$ BillUS$ Bill

World Audited World Audited MarketMarket

% Growth Constant % Growth Constant $$20032003

Source: IMS Health Incorporated

Per Capita Consumption, By Molecule Age, Per Capita Consumption, By Molecule Age, Relative to U.S. ConsumptionRelative to U.S. Consumption

Note: United States equals 100%. Source: Danzon and Furukawa, Health Affairs Oct. 2003

26%

65%

91%

2%6%

22%

44%

91%

97%

58%72%

78%

25%

44%

62%

1%5%

53%

4%3%12%

32%

42%

115%

0%

20%

40%

60%

80%

100%

120%

CANADA

CHILE

FRANCEGERMANY

ITALY

JAPAN

MEXICO UK

24 months or less 25 to 60 months Total

c. Decline in Foreignc. Decline in Foreign--US Price US Price DifferentialsDifferentials

Manufacturers will be less willing to sell at low pricesManufacturers will be less willing to sell at low pricesManufacturer control greatest for launch priceManufacturer control greatest for launch priceUS market vs. loss of foreign salesUS market vs. loss of foreign salesFeasible pricing band varies by product, importer costs etc.Feasible pricing band varies by product, importer costs etc.

Countries that are unwilling/unable to pay higher prices Countries that are unwilling/unable to pay higher prices may see fewer/delayed product launchesmay see fewer/delayed product launches=> Loss of access abroad, lower manufacturer => Loss of access abroad, lower manufacturer revenues but little gain for US consumersrevenues but little gain for US consumers

Decline in Median Best Price Discounts for HMOs and GPOs after OBRA 1990 “Best Price”

HMOs GPOs0

10

20

30

14.2

27.8

18.4

15.3

22.124.4 Quarter 1, 1991

Quarter 1, 1992

Quarter 1, 1993

Perc

enta

ge

SOURCE: GAO: Changes in Best Price for Outpatient Drugs Purchased by HMOs and Hospitals, Aug. 1994.

Countries with Lower Prices Have Fewer Countries with Lower Prices Have Fewer Launches, Longer Launch delays Launches, Longer Launch delays

(Danzon, Wang and Wang 2003)(Danzon, Wang and Wang 2003)We analyzed launch of 85 We analyzed launch of 85 NCEsNCEs in 1994in 1994--1999199914 EU countries, plus Australia, Canada, Czech, Japan, 14 EU countries, plus Australia, Canada, Czech, Japan, Mexico, New Zealand, Norway, Poland, South Africa, Mexico, New Zealand, Norway, Poland, South Africa, Switzerland, USASwitzerland, USA55% of the potential launches occurred 55% of the potential launches occurred

most in countries with unregulated pricesmost in countries with unregulated pricesUSA (73), Germany (66) and UK (64)USA (73), Germany (66) and UK (64)

fewest in Japan (13), Portugal (26), New Zealand (28)fewest in Japan (13), Portugal (26), New Zealand (28)

FindingsFindings

Countries with lower prices have longer Countries with lower prices have longer launch lags and fewer launches launch lags and fewer launches

EU countries that are major PI exporters EU countries that are major PI exporters have longer delays, controlling for expected have longer delays, controlling for expected price and volumeprice and volume

KaplanKaplan--Meier estimates of cumulative Meier estimates of cumulative launch probability for selected countrieslaunch probability for selected countries

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Month since Global Launch

Cum

ulat

ive

Laun

ch P

roba

bilit

y

USAGERMANYUKSPAINFRANCEITALYPORTUGALJAPAN

Countries with a significantly longer Countries with a significantly longer delays/fewer launches, relative to UK, delays/fewer launches, relative to UK,

controlling for price and volumecontrolling for price and volume

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Japa

nPort

ugal

New Zea

land

Poland

Czech Ita

lyFran

ceBelg

iumAus

tralia

South

Africa

Spain

Greece

Mexico

Hollan

dNorw

ayCan

ada

Switzerl

and

Haz

ard

Rat

io (v

s U

K)

Price Differentials with Other Countries Price Differentials with Other Countries Largely Reflect Income Differences Largely Reflect Income Differences

Danzon and Furukawa, Health Affairs (Oct, 2003)Danzon and Furukawa, Health Affairs (Oct, 2003)

Sample: 249 leading molecules in US 1999, by volumeSample: 249 leading molecules in US 1999, by volume61% of US sales61% of US sales

IMS data, all products in each molecule, 9 countriesIMS data, all products in each molecule, 9 countriesBrands and generics, all formsBrands and generics, all forms

ManufacturerManufacturer--level prices level prices We adjust for manufacturer discounts in USWe adjust for manufacturer discounts in US

reduces US prices by 8reduces US prices by 8--10 percent on average10 percent on averageUS volume weightsUS volume weights

67%78%

70%86% 87%

127%

80%94%

0%

20%

40%

60%

80%

100%

120%

140%

CANADA

CHILE

FRANCEGERM

ANY

ITALY

JAPAN

MEXIC

O UK

Molecule

Price Indexes, Relative to the US: Price Indexes, Relative to the US: All Matching Products All Matching Products Exchange Rate ConversionExchange Rate Conversion

Note: United States equals 100%.

Price Indexes: Price Indexes: OnOn--Patent Versus Generic DrugsPatent Versus Generic Drugs

Note: United States equals 100%.

64%

94%

76%

101%

61%

102%

72%

124%

61%

195%

138%

205%

76%

130%

74%

113%

0%

50%

100%

150%

200%

250%

CANADA

CHILE

FRANCEGERMANY

ITALY

JAPAN

MEXICO UK

Originator-single source drugs Generic drugs

67%

104%78%

528%

70%93%

86%110% 87%

141% 127% 118%80%

529%

94%125%

0%

100%

200%

300%

400%

500%

600%

CANADA CHILE FRANCE GERMANY ITALY JAPAN MEXICO UK

Price index (molecule-indication) Price index normalized by income

Price Indexes Relative to Per Capita Price Indexes Relative to Per Capita IncomeIncome

Note: United States equals 100%.

Conclusions on Average Price Differences Conclusions on Average Price Differences US Market Basket, 1999 prices and exchange rates US Market Basket, 1999 prices and exchange rates

Most other countries’ prices are 6Most other countries’ prices are 6--33% lower than the US, 33% lower than the US, on averageon average

Price differentials are roughly reflect income differentials, Price differentials are roughly reflect income differentials, except Mexico and Chile except Mexico and Chile

Foreign prices differentials are larger for other medical Foreign prices differentials are larger for other medical services than for drugsservices than for drugs

Foreign countries are unlikely to pay higher drug pricesForeign countries are unlikely to pay higher drug prices

US has relatively high originator prices and high use of new US has relatively high originator prices and high use of new drugs, relatively high generic volume and low generic prices, drugs, relatively high generic volume and low generic prices, compared to countries that regulate pricescompared to countries that regulate prices

d. Middlemen will Capture Some of d. Middlemen will Capture Some of Any SavingsAny Savings

If only a fraction of US demand can be sourced If only a fraction of US demand can be sourced abroad, who will capture the savings?abroad, who will capture the savings?

Pharmacy chains and Pharmacy chains and GPOsGPOs if buy directif buy directPBMsPBMs may “may “clawbackclawback” average pharmacy savings” average pharmacy savings

AWP AWP –– X% X% -- z%z%

CashCash--paying customers are unlikely to benefitpaying customers are unlikely to benefitEU experience EU experience

2. The Worst Case Scenario2. The Worst Case Scenario

US constrains supply limitationsUS constrains supply limitationsAntiAnti--trusttrustLegislationLegislation

US requires registration of foreign formulations US requires registration of foreign formulations Foreign countries apply compulsory licensing ifForeign countries apply compulsory licensing if

high priceshigh pricesNonNon--launchlaunch

Policy Conclusions: Price Differentials Policy Conclusions: Price Differentials for Drugs are Good, Not Badfor Drugs are Good, Not Bad

Free trade and uniform prices crossFree trade and uniform prices cross--nationally are not appropriate nationally are not appropriate policy for products with significant R&D costspolicy for products with significant R&D costs

Charging higher drug prices in high income countries is an efficCharging higher drug prices in high income countries is an efficient ient and equitable way to pay for R&D and equitable way to pay for R&D

R&D is a global joint costR&D is a global joint cost

Current price differentials roughly reflect income differentialsCurrent price differentials roughly reflect income differentials, except , except for Mexico and Chilefor Mexico and Chile

Importation would reduce access abroad, reduce manufacturer Importation would reduce access abroad, reduce manufacturer revenues and reduce R&D, with little or no gain to US consumersrevenues and reduce R&D, with little or no gain to US consumers