Parallel imports, innovations, and generics: Competition in the German market for oral anti-diabetics

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Pharmaceutical expenses have grown at a pace well exceeding inflation in Germany as well as other OECD countries over the last few decades. Thus, one of the major challenges for regulators and policymakers is to ensure the provision of innovative, yet affordable, pharmaceutical products to an ageing population. In the case of chronic diseases such as diabetes, epilepsy or Alzheimer`s disease, which are becoming increasingly diagnosed in western societies, it is especially important to analyze the continuously changing market dynamics, well understand the existing regulatory interventions and, ultimately, develop appropriate new policy instruments. Patents play a peculiar role in pharmaceutical markets since they grant firms temporary monopolies that incentivize investments in a particularly risky research & development (R&D) environment. Hence, on-patent markets are characterized by low competition with high price-cost margins that, in turn, imply increasing expenditures for the Statutory Health System. In Germany, competition in on-patent markets is introduced through the entry of new products based on similar active ingredients in the same therapeutic market (i.e. the so called generics) and the parallel imports of the original products from other European countries. The effectiveness of this latter policy is quite controversially discussed among policymakers and economists since parallel imports do not increase the industry`s productivity but simply allow traders to exploit price differentials across countries and generate arbitrage gains that might reduce producers' incentives to invest in R&D. Therefore, the ultimate welfare consequences of such a policy are not clear.The primary focus of our research proposal is the empirical evaluation of the competitive impact of parallel imports in on-patent drug markets. The study is based on the estimation of structural econometric models of pharmaceutical competition and the counterfactual simulation of alternative policy scenarios. To this end, we utilize a unique dataset of German and Danish monthly prices and sales in the three therapeutic markets mentioned above for the 2000 to 2010 period. Our approach allows us to investigate the impact of specific regulatory interventions -especially the effect of parallel imports- as well as other related issues such as (i) the effect of the introduction of innovative products; and (ii) the impact of market entry of generic products.