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Impact of Generic Competition and Parallel Trade on Pharmaceutical Markets in the EU

This study examines generic competition and parallel trade in European pharmaceutical markets under varying regulatory regimes. By analyzing data from major EU countries over 20 years, it explores the relationship between pricing behavior and regulations. The findings suggest that regulations may hinder price competition and cost savings from generic entry. The study highlights differences in pricing dynamics across countries and emphasizes the importance of balancing regulation with fostering innovation. Parallel trade emerges as a strategy to mitigate price differentials, impacting drug prices and market competition.

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Impact of Generic Competition and Parallel Trade on Pharmaceutical Markets in the EU

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  1. Generic Competition and ParallelTrade in EU Pharmaceutical Market BernaTuncayandGuvencKockaya

  2. Overview Main Focus • Most countries regulate pharmaceutical prices, either directly or indirectly, on the assumption that competition is at best weak in this industry. This study: • Focuses on the extent of generic competitionandparalleltradein European countries with different pharmaceutical price regulations and health care structures. • Tests the hypothesis that regulation of pharmaceutical prices undermines price competition. • Uses data from the pharmaceutical industries of the five largest European markets: the United Kingdom, Germany, France, Italy and Spain for 20 years to examine generic competition andparalleltradeunder different regulatory regimes. Contributions • To fill the gap in the link between regulatory regimes and pharmaceutical firms’ pricing behavior in the literature.

  3. What is Parallel Trade? • DIFFERENCES in drug prices across European Union (EU) countries due to variant regulatorymeasures have created arbitrage opportunities. • This practice, known as paralleltrade (PT), parallel importation (PI) or cross-border trade is legal as a result of the presenceof a single market. • Parallel traders can freely buy drugs in any EU country and sell them inanother, where prices are higher. The parallel imported product is exactly the same as thelocally sourced one and is manufactured by the same manufacturer. • The principle of regionalexhaustion of intellectual property rights applies in the EU internal market, thus facilitating PT of in-patent medicines.

  4. Fully Interacted Model • This model includes product fixed effects to control for unobserved drug heterogeneity, and year fixed effects to control for price inflation and for all other unmeasured time effects. • The model is thus;

  5. Table 6Product Level Pharmaceutical Prices: Generic Competition - Log Price Per Unit, Fully Interacted ModelAdjusted R2=0.539; p-values in parantheses. *, ** and *** reflect p < 0.01, p < 0.05 and p < 0.10

  6. CONCLUSION • This analysis focuses on how drug prices change over time as a consequence of generic competitionandparalleltrade. The results suggest that the relationships between the dynamics of drug prices and generic competition are complex and differentiated across EU countries. • The analysis finds empirical evidence that the price lowering benefits from generic competition do not occur in the presence of certain regulations. • When including all five countries in panel data models, this study finds evidence that generic competition is not present in the United Kingdom, as prices increase with generic entry post-patent expiry. • Consistently, in France, Italy, and Spain generic entry does not reduce drug prices but does slow down the increase in these prices. • The only country in which generic entry leads to lower prices is Germany.

  7. In unregulated markets, generic competition provides significant cost savings to health insurers. • However, this situation does not hold in regulated pharmaceutical markets since regulations restrict price competition. • The findings suggest that regulations undermine price competition and sacrifice potential cost savings due to generic entry. • Genericpricecompetition can create strong incentives for innovation within the European pharmaceutical market, allowing higher prices and profits for innovative on patent products. • Not all differences are due to market regulations. The health care services, provisions, and medical traditions vary widely across countries. Surely, this will also affect the effects of generic entry on prices.

  8. THANK YOUberna.tuncay@imtlucca.it guvenc.kockaya@sepd.org.tr

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