Drug Drug Importation: Importation:

Economic ImpactEconomic ImpactPatricia M. Danzon PhDPatricia M. Danzon PhD

The Wharton SchoolThe Wharton SchoolU. PennsylvaniaU. Pennsylvania

June 2004June 2004

Effects of Drug Importation Effects of Drug Importation are Highly Uncertainare Highly Uncertain

US legislative proposals differUS legislative proposals differ CountriesCountries Pre-conditionsPre-conditions EnforcementEnforcement

Manufacturer responseManufacturer response US and exporting countries’ US and exporting countries’

responseresponse Least 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 permitted Health plan/payer initiatives cooled by FDA Health plan/payer initiatives cooled by FDA

warningwarning US$650-700m. imported from Canada in 2003 US$650-700m. imported from Canada in 2003

(IMS estimate) of over $200b. US sales(IMS estimate) of over $200b. US sales Safety concerns are a major issueSafety concerns are a major issue

Authorized countries could become conduitsAuthorized countries could become conduits Political pressurePolitical pressure

Consumers, payers and Medicare face rising drug Consumers, payers and Medicare face rising drug costscosts

Higher US prices viewed as “unfair”Higher US prices viewed as “unfair”

Importation from Canada, EU, Importation from Canada, EU, Japan:Japan:

1. Least Bad Scenario 1. Least Bad Scenario Aggregate savings to US consumers is Aggregate savings to US consumers is

smaller than revenue loss to smaller than revenue loss to manufacturersmanufacturers

Key issuesKey issues Mismatch of productsMismatch of products Supply restrictions – launched productsSupply restrictions – launched products Foreign price increases or non-launch - Foreign price increases or non-launch -

new productsnew products Intermediaries capture some of the savingsIntermediaries capture some of the savings

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

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

Sample percent of sales Matched w ith US, by presentation

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

CountryCountry StrengthStrength PackSizePackSize E/PackE/Pack StrngthStrngth PackPack E/PackE/Pack

United United KingdomKingdom 37.537.5 5656 33.0133.01 7575 5656 55.0555.05

GermanyGermany 37.537.5 5050 34.3334.33 7575 5050 60.3960.39

FranceFrance 2525 3030 6.576.57 5050 3030 9.879.87

ItalyItaly 37.537.5 2828 13.313.3 7575 1414 11.6111.61

SpainSpain 37.537.5 6060 25.925.9 7575 6060 42.242.2

NetherlandNetherland 37.537.5 6060 25.8525.85 7575 6060 43.0943.09

AustriaAustria 37.537.5 6060 31.6931.69 7575 6060 58.1458.14

PortugalPortugal 37.537.5 6060 30.6930.69 7575 6060 50.9350.93

GreeceGreece 37.537.5 2828 11.2711.27 7575 2828 19.5319.53

BelgiumBelgium 37.537.5 5656 24.3624.36 7575 5656 40.6440.64

Different formulations may limit Different formulations may limit

importation importation

b. Manufacturer Supply b. Manufacturer Supply Restrictions of Launched Restrictions of Launched

ProductsProducts Some manufacturer supply restrictions Some manufacturer supply restrictions

for Canadian pharmacies; common in EU for Canadian pharmacies; common in EU legal so far……legal so far……

Will wholesalers/pharmacies forego Will wholesalers/pharmacies forego profitable export opportunity?profitable export opportunity? Some shortages reportedSome shortages reported

Even if 20% of EU + Canada volume is Even if 20% of EU + Canada volume is shipped to US, would only fill 20-30% of shipped to US, would only fill 20-30% of US volumeUS 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

20032003% Growth % Growth

Constant $Constant $

World Audited World Audited MarketMarket

US$ US$ BillBill

% % ShareShare 20032003

CAGRCAGR98-0298-02

Latin AmericaLatin America $17.4$17.4 3.7%3.7% +5.5+5.5 -2.8-2.8

Asia/Africa/Asia/Africa/AustraliaAustralia

$33.8$33.8 7.2%7.2% +9.3+9.3 +11.0+11.0

JapanJapan $52.4$52.4 11.2%11.2% +3.4+3.4 +4.0+4.0

Europe (All)Europe (All) $134.5$134.5 28.8%28.8% +9.4+9.4 +8.8+8.8

North AmericaNorth America $229.5$229.5 49.1%49.1% +11.1+11.1 +15.2+15.2

WorldwideWorldwide $467.9$467.9 100.0%100.0% +9.3+9.3 +10.4+10.4

10 Key Markets10 Key Markets $389.2$389.2 83.2%83.2% +9.1+9.1 +11.3+11.3

EU (15)EU (15) $116.3$116.3 24.9%24.9% +8.0+8.0 +8.4+8.4Source: IMS Health Incorporated

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

ConsumptionConsumption

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%

24 months or less 25 to 60 months Total

c. Decline in Foreign-US c. Decline in Foreign-US Price DifferentialsPrice Differentials

Manufacturers will be less willing to sell at Manufacturers will be less willing to sell at low priceslow prices Manufacturer control greatest for launch priceManufacturer control greatest for launch price US market vs. loss of foreign salesUS market vs. loss of foreign sales Feasible pricing band varies by product, importer Feasible pricing band varies by product, importer

costs etc.costs etc. Countries that are unwilling/unable to pay Countries that are unwilling/unable to pay

higher prices may see fewer/delayed product higher prices may see fewer/delayed product launcheslaunches

=> 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, 1993Percentage

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

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

Launch delays Launch delays (Danzon, Wang and Wang 2003)(Danzon, Wang and Wang 2003) We analyzed launch of 85 NCEs in 1994-1999We analyzed launch of 85 NCEs in 1994-1999

14 EU countries, plus Australia, Canada, 14 EU countries, plus Australia, Canada, Czech, Japan, Mexico, New Zealand, Norway, Czech, Japan, Mexico, New Zealand, Norway, Poland, South Africa, Switzerland, USAPoland, South Africa, Switzerland, USA

55% of the potential launches occurred 55% of the potential launches occurred most in countries with unregulated pricesmost in countries with unregulated prices

USA (73), Germany (66) and UK (64)USA (73), Germany (66) and UK (64) fewest in Japan (13), Portugal (26), New fewest in Japan (13), Portugal (26), New

Zealand (28)Zealand (28)

FindingsFindings

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

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

Kaplan-Meier estimates of Kaplan-Meier estimates of cumulative launch probability cumulative launch probability

for selected countriesfor 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

Cu

mu

lati

ve

La

un

ch

Pro

ba

bili

ty

USA

GERMANY

UK

SPAIN

FRANCE

ITALY

PORTUGAL

JAPAN

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

price and volumeprice and volume

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Ha

zard

Ra

tio

(v

s U

K)

Price Differentials with Other Price Differentials with Other Countries Largely Reflect Countries Largely Reflect

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

Sample: 249 leading molecules in US 1999, by Sample: 249 leading molecules in US 1999, by volumevolume 61% of US sales61% of US sales

IMS data, all products in each molecule, 9 IMS data, all products in each molecule, 9 countriescountries Brands and generics, all formsBrands and generics, all forms

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

reduces US prices by 8-10 percent on reduces US prices by 8-10 percent on averageaverage

US volume weightsUS volume weights

67%78%

70%

86% 87%

127%

80%94%

0%

20%

40%

60%

80%

100%

120%

140%

Molecule

Price Indexes, Relative to the Price Indexes, Relative to the US: US:

All Matching Products All Matching Products Exchange Rate ConversionExchange Rate Conversion

Note: United States equals 100%.

Price Indexes: Price Indexes: On-Patent Versus Generic On-Patent Versus Generic

DrugsDrugs

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%

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 Price Indexes Relative to Per Capita IncomePer Capita Income

Note: United States equals 100%.

Conclusions on Average Price Conclusions on Average Price Differences Differences US Market Basket, 1999 US Market Basket, 1999

prices and exchange rates prices and exchange rates Most other countries’ prices are 6-33% lower than the Most other countries’ prices are 6-33% lower than the

US, on averageUS, on average

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

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

Foreign countries are unlikely to pay higher drug Foreign countries are unlikely to pay higher drug pricesprices

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

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

If only a fraction of US demand can be If only a fraction of US demand can be sourced abroad, who will capture the sourced abroad, who will capture the savings?savings? Pharmacy chains and GPOs if buy directPharmacy chains and GPOs if buy direct PBMs may “clawback” average pharmacy PBMs may “clawback” average pharmacy

savingssavings AWP – X% - z%AWP – X% - z%

Cash-paying customers are unlikely to Cash-paying customers are unlikely to benefitbenefit

EU experience EU experience

2. The Worst Case 2. The Worst Case ScenarioScenario

US constrains supply limitationsUS constrains supply limitations Anti-trustAnti-trust LegislationLegislation

US requires registration of foreign US requires registration of foreign formulations formulations

Foreign countries apply compulsory Foreign countries apply compulsory licensing iflicensing if high priceshigh prices Non-launchNon-launch

Policy Conclusions: Price Policy Conclusions: Price Differentials for Drugs are Differentials for Drugs are

Good, Not BadGood, Not Bad Free trade and uniform prices cross-nationally are not Free trade and uniform prices cross-nationally are not

appropriate policy for products with significant R&D appropriate policy for products with significant R&D costscosts

Charging higher drug prices in high income countries Charging higher drug prices in high income countries is an efficient and equitable way to pay for R&D is an efficient 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 Current price differentials roughly reflect income differentials, except for Mexico and Chiledifferentials, except for Mexico and Chile

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