Indirect savings arise because competition in price decreases (or reductions in price increases below the level expected without competition) or because the potential competition leads to limit pricing (where the manufacturer chooses to reduce the domestic price to a level at which it is less profitable for parallel importers to enter the market). (Ulrika Enemark, Kjeld Moller Pedersen, Jan Sorensen, The economic impact of parallel import of pharmaceuticals, Centre for Applied Health Services Research and Technology Assessment, University of Southern Denmark (June 2006))

Incoming parallel distribution creates general price erosion, benefiting all buyers in all markets, by bringing an important, dynamic competitive element to bear, especially in the otherwise price uncompetitive patent-protected segment, the part of the market that generics cannot reach. There is an absence of competition in the medicines market, especially on price. As such, innovative medicines generally retain a high - even dominant - market share.

The availability of a parallel-distributed medicine, or even the presage of them, can result in lower prices for the domestic equivalent. A 2011 study from the School of Business, Economics and Law at the University of Gothenburg found that drugs facing competition from parallel distribution are found to have on average 17% to 21% lower prices than they would have had if they had never faced such competition. (David Granlund and Miyase Yesim Köksal, EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals What’s to Blame? Derogation or Perception?, School of Business, Economics and Law, University of Gothenburg (May 2011)) The resultant savings are almost certainly much larger than those achieved by parallel distribution directly, but are difficult to measure.

“In principle, indirect savings are calculated from the quantity sold of the original product multiplied by the price differential between the original manufacturer’s product as it would have developed in the absence competition from parallel imports and the actual development after introduction of parallel imports in the market. It is not known, however how prices would have developed in the absence of parallel imports”. (Ulrika Enemark, Kjeld Moller Pedersen, Jan Sorensen, The economic impact of parallel import of pharmaceuticals, Centre for Applied Health Services Research and Technology Assessment, University of Southern Denmark (June 2006))

A 2016 paper from the Melbourne Institute of Applied Economics and Social Research at the University of Melbourne “Parallel Trade of Pharmaceuticals: the Danish Market for Statins” (medicines used in the treatment found for high cholesterol) hypothesized what a ban on parallel distribution would mean for the industry:

“Eliminating parallel trade yields the following results. First, a prohibition of parallel trade reduces unweighted average prices but results in higher prices for both original products and generic products. Second, eliminating parallel trade leads to substitution from parallel imported products towards original products. Third, consumer expenditures as well as government expenditures increase absent parallel trade. Finally, banning parallel imports reduces consumer surplus and increases firm profits, on balance leading to an overall decrease in welfare.”

According to EAEPC’s 2013 report “The Parallel Distribution Industry: A closer look at savings” some of the indirect savings from parallel distribution were generated as follows:

  1. France – In March 2009 the PD competitor version of Fosavance (a medicine that helps prevent osteoporosis) was introduced. At the time the originator product was roughly €87 per pack, by January 2012 this price had gone down to roughly €44.48 per pack. It was also estimated that in 2011 the total indirect savings were as much as €39m.
  2. Poland – In November 2005 the PD version of Cilest (a contraceptive pill) entered the Polish market. At this time the originator drugs was sold at 20PLN (€5) per pack of 21 tablets. By September 2009, downward pressure exerted by the cheaper PD equivalent of the drug had led to a drop in the price of the originator version (as well as the PD equivalent) of the medicine to a price of just over 10 PLN (€2.3) per pack. This marked a total decrease over the four year period of over 50% of the original mark-up. It was also estimated that in 2009 the total indirect savings were as much as €22m.
  3. Ireland – In 2010, the Irish Government forced pharmaceuticals companies to reduce their prices by an average of 10%. Most manufacturers decided to target products and modulate prices that were in competition from the generics and PD industry. Pfizer decreased the price of its Zoton drug (used for decreasing acid build-up in the stomach) by 40% while this particular drug had a PD market penetration of 61%. Pfizer also reduced the prices of Lipitors by up to 47% of the original price, with 47% of the Irish Lipitor market being covered at the time by PD. By making these reductions, it is estimated that the savings on all Pfizer products for the Irish government worked out at almost 16% of pre-reduction costs.
  4. Italy – PD has been shown to have a “stabilising effect” on the price of originator medicines on the Italian market. An example of this is the case of Daflon, a compound produced by French manufacturer Servier to mitigate the effects of varicose veins. Although after the introduction of the PD version of the product was introduced in 2000, the price of the originator product augmented considerably, since 2007, the price increases of the originator have decreased incrementally, due to the impact of the presence of cheaper PD alternatives on the market. Since 2007, there have been no further price increases and the price of the originator product has flattened out. This pattern is true for many Italian products. All of the Italian products covered in the analysis saw no price increases in the period 2007-2011.