KNOWLEDGE PORTAL
on innovation and access to medicines

One of the major discussions in the literature is whether or not parallel trade hampers innovation. Those opposed to parallel trade argue that it weakens intellectual property rights, undermines profits, and therefore hinders investment/innovation (Danzon 1998; Li and Maskus 2006).

 

Along these lines, some then argue that parallel trade reduces welfare. Others, however, argue that parallel trade does not have damaging effects on innovation (Bennato and Valletti 2014), and can even increase the pace of innovation (Grossman and Lai 2008), and can increase a firm’s profit (Pecorino 2002). Other models produce mixed results – i.e. showing how parallel trade can increase or decrease profits depending on a variety of factors (Guo, Hu, and Zhong 2013).

 

Maskus (2001) combined theory and empirical evidence to conclude that parallel exports from LICs to HIC should be prohibited, but that LICs could be open to parallel imports. Some argued that parallel trade would undermine price differentials – therefore reducing profit, and subsequently innovation (Szymanski, Valletti, and Demange 2005; Danzon 1998).

 

For instance, Danzon (1998) argued that parallel trade would make both LICs and HICs worse off since LICs would suffer from higher prices and decreased access to new drugs, and HICs would suffer from less development of new drugs.

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Similarly, there is a debate over whether or not parallel trade implies price convergence, and over the tension between parallel importation and price differentials. Danzon (1998) argued that parallel trade tends to force price convergence across countries, and others found empirical evidence to support ‘convergence to the top’ rather than a convergence to the bottom for EU prices (P. Kanavos, Costa-Font, and Gollier 2005; P. Kanavos and Vandoros 2010).

 

Some studies examined the savings generated by parallel trade. Two reports, a 2003 London School of Economics (LSE) report and the 2002 York report, are viewed by some as influential in the parallel trade of pharmaceuticals debate (P. Kanavos et al. 2004; West and Mahon 2003). These reports draw conflicting conclusions. The LSE report found insignificant savings from parallel trade, whereas the York report found significant savings (over €600 million in 2001). A subsequent study in 2006, however, found that the methodology for computing savings was more appropriate in the York report, and that when this methodology was subsequently applied to 2004  data, direct savings from parallel trade to patients/health insurers amounted to 441.5 million Euro in four European countries (Enemark, Pedersen, and Sorensen 2006).  Other studies examined savings in Sweden (Ganslandt and Maskus 2004), and Finland (Linnosmaa, Karhunen, and Vohlonen 2003).

 

When examining who benefits from parallel trade, one study found that in Europe the parallel distributors benefit most (without any direct benefits to patients) (P. Kanavos et al. 2004, 15). In addition, a study presented evidence that suggests parallel trade does not generate price competition (Vandoros and Kanavos 2014). Panavos and colleagues have concluded that parallel trade is not a suitable long-term solution to cutting prices (P. Kanavos and Kowal 2008; P. Kanavos, Costa-Font, and Gollier 2005).

 

Finally, parallel trade also emerges as a topic in papers discussing multiple pricing policies; for example, Chaumont et al. (2015, S179) described how Mexico’s laws prohibiting parallel trade, including through PAHO's Strategic Fund, limited its ability to lower drug prices.

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RESEARCH GAPS

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• Analysis of estimated or potential savings of parallel trade in medicines and impact on prices, particularly for countries outside of the EU

• Further analysis of the distribution of economic benefits from parallel trade (patients, distributors, etc.)

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CITED PAPERS WITH ABSTRACTS