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Is medicines parallel trade 'regulatory arbitrage'?

Joan Costa-Font¹

¹Department of Social Policy, London School of Economics and Political Science (LSE), Houghton Street, London, WC2A 2AE, UK. j.costa-font@lse.ac.uk.

International Journal of Health Economics and Management

|November 24, 2016

Summary

Parallel trade in medicines is driven by regulatory differences, not just price. This study shows that varying distribution margins significantly influence parallel import flows, suggesting a form of regulatory arbitrage.

Keywords:

Parallel imports Parallel trade Pharmaceuticals Regulatory arbitrage Supply chain

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Area of Science:

Health Economics
Pharmaceutical Distribution
Regulatory Policy

Background:

Parallel trade (PT) involves diverting patented medicines through alternative distribution channels.
While often viewed as common arbitrage, PT may represent regulatory arbitrage with unequal welfare effects.

Purpose of the Study:

To investigate whether cross-country differences in statutory distribution margins, beyond price, drive parallel medicine imports.
To test the hypothesis that parallel trade in pharmaceuticals constitutes regulatory arbitrage.

Main Methods:

Utilized a unique dataset of parallel imported medicine sales (statins) to the Netherlands.
Employed a gravity model and instrumental variable strategy to analyze price and distribution margin impacts.
Focused on a therapeutic group accounting for 5% of the market with no generic competition.

Main Results:

Parallel imports were significantly driven by cross-country differences in statutory distribution margins.
Price differences also contributed to parallel import flows.
Findings support the hypothesis that PT is a form of regulatory arbitrage.

Conclusions:

Statutory distribution margins are a key determinant of parallel medicine trade flows.
Parallel trade in pharmaceuticals functions as regulatory arbitrage, influenced by differing national regulations.
Policy implications include considering the impact of distribution regulations on medicine markets.