Parallel trade of pharmaceuticals: The Danish market for statins

This paper investigates and quantifies the impact of parallel trade in markets for pharmaceuticals. The paper develops a structural model of demand and supply using data on price, sales, and the characteristics of statins in Denmark and simulates outcomes under a complete ban of parallel imports, keeping other regulatory schemes unchanged. There are two sets of key results. The first set focuses on price effects. On average, prices increase more in markets where the molecule has lost patent protection; wholesale prices for both generic and original products increase after competition from parallel importers is removed, but the final price paid by consumers (after deducting reimbursement) increases more for original products than for generics because most changes in wholesale prices are absorbed by the prevailing reimbursement rules. The second set of results reports the effects on market participants. My model takes into consideration consumers' preferences, allowing them to substitute between products. Prohibiting parallel imports induces consumers to substitute towards original products for which they have stronger preferences. In sum, banning parallel imports leads to (a) an increase in variable profits for original producers and a decrease for generic firms, (b) an increase in governmental health-care expenditures, and (c) a decrease in the welfare of Danish patients and firms.