UPTAKE AND DIFFUSION OF PHARMACEUTICAL INNOVATIONS IN HEALTH SYSTEMS - Innovation in the Biopharmaceutical Industry - page 92

In Australia and New Zealand, the growth rate of drug expenditures declined
(Ioannides-Demos et al. , 2002) after the introduction of RP, however the extent
to which this can be attributed to RP is difficult to determine as the scheme was
accompanied by other regulatory changes in the health system (Lopez-Casasnovas
and Puig-Junoy, 2000).
In the US the introduction of RP has been resisted because of fears that it may
adversely effect patients (Kanavos and Reinhardt, 2003). Drawing on the experience
in Germany, the Netherlands and New Zealand, Danzon and Ketcham concluded
that RP in the US Medicare program would disproportionately affect innovative,
“on-patent” products, and discourage R&D investment — which over time could
disrupt the supply of new innovative drugs and erode US competitiveness in phar-
maceuticals (Danzon and Ketcham, 2003).
Cross-country price differentials and parallel trade
Comparison of pharmaceutical prices between countries show drug prices to be
higher in Japan than in the US, which in turn are 6-33% higher than the average
prices in Canada, Chile, France, Germany, Italy, Mexico, and the UK. It is not just
prices that vary. Delayed introduction and low initial-utilisation levels mean that
the consumption of innovative medicines in Canada, France, Germany, and the UK
is about 50% lower than in the US (Danzon and Furukuwa, 2003).
In the European Union (EU) there is no single market for medicines and price
differentials amongst the EU countries have resulted in arbitrage and parallel trade,
with leakage of medicines from low-price countries (e.g. Greece) to high-price
countries (e.g. UK). In Sweden, within three years of accession, parallel imports
accounted for 16% of the sales of top 50 products. On average the prices of drugs
subject to competition decreased by 12-19% (Ganslandt and Maskus, 2004) due to
market entry of a large number of firms. Most of the profits from parallel trade accrue
to “middle-men” rather than to end users or innovators, and this acts to discourage
research investment (Kanavos and Costa-Font, 2005). Thus, Szymanski and Valletti
(2005) showed that in industries with high R&D investment, parallel trade reduces
incentives to invest, and that the positive welfare effects of parallel trade diminish.
Generic entry and price competition
An analysis of seven countries (US, UK, Canada and Germany vs. France, Italy
and Japan) confirms that generic price competition is significantly and negatively
associated with the degree of regulation in health systems (Danzon and Chao, 2000).
In general, entry of generics negatively affects the diffusion of innovative drugs but
the extent of impact varies depending on the regulatory environment (Bae, 1997) In
less regulated systems such as the US, patent expiry is followed by a rapid market