Is medicines parallel trade 'regulatory arbitrage'?

Parallel trade (PT) is a phenomenon that takes place at the distribution level, when a patented product is diverted from the official distribution chain to another one where it competes as a parallel distributor. Although some research regards PT in Europe as a 'common' form of arbitrage, there are reasons to believe that it is a type of 'regulatory arbitrage' that does not necessarily produce equivalent welfare effects. We draw upon a unique dataset that contains source country records of parallel imported medicine sales to the Netherlands for one therapeutic group (statins), that accounts for 5 % of the market at the time of study and it faced no generic competition. We estimate precise differences in prices and statutory distribution margins for each source country/product and, examine whether they drive parallel import flows using a gravity specification and an instrumental variable strategy. Our findings reveal that parallel imports are driven by cross-country differences in statutory distribution margins in addition to price differences, consistently with the hypothesis of PT being a type of 'regulatory arbitrage'.

Citation

Joan Costa-Font. Is medicines parallel trade 'regulatory arbitrage'? International journal of health economics and management. 2016 Sep 23;16(4):321-336

PMID: 27878693

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