Impact of Parallel Imports on Pricing and Product Launch Decisions in Pharmaceutical Industry

31 Pages Posted: 5 Sep 2017

See all articles by Mehmet Sekip Altug

Mehmet Sekip Altug

George Mason University

Ozge Sahin

Johns Hopkins University - Carey Business School

Date Written: August 30, 2017

Abstract

Product launch and pricing decisions in the pharmaceutical industry across different countries are complex. Although introducing a newly developed drug to every country is beneficial for patients worldwide, doing so may have adverse implications for drug developers, such as the emergence of parallel imports. We study a pharmaceutical firm that already introduced a pioneering drug in its home country, where the product is protected by patent rules. The firm decides whether to launch in a second country in the same region, where parallel import between these two countries is feasible and profitable for the parallel importer. We characterize the joint pricing and product launch decision. We show the firm chooses one of three strategies: (i) launch and accommodate parallel import, (ii) launch and deter parallel import, and (iii) not launch. We show that firms are more likely not to launch the drug when the drug price is determined through a negotiation between the firm and the government. We discuss how insurance coverage, market size, quality perception of the parallel imported drug, and valuations affect these strategies. We then study the impact of launch and pricing decisions on social welfare and discuss policy implications for the regulators and potential strategies for the firm to mitigate the negative effects of a parallel import threat. We also study the impact of perfect and imperfect competition among parallel import firms on pharmaceutical firm's price and launch decisions. Finally, we discuss a common practice of distributing rebates in the home country as a post-launch strategy, and characterize the optimal rebate amount to deter or accommodate parallel import.

Keywords: Product launch, pricing, parallel imports, pharmaceutical industry

Suggested Citation

Altug, Mehmet Sekip and Sahin, Ozge, Impact of Parallel Imports on Pricing and Product Launch Decisions in Pharmaceutical Industry (August 30, 2017). Available at SSRN: https://ssrn.com/abstract=3029686 or http://dx.doi.org/10.2139/ssrn.3029686

Mehmet Sekip Altug (Contact Author)

George Mason University ( email )

VA 22030
United States

Ozge Sahin

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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