Generic Competition and Price Regulation in Pharmaceuticals: Evidence from the European Union

Abstract

The purpose of this paper is to examine the extent of generic competition in European countries, given an understanding of these countries' different pharmaceutical price regulations and health care structures. In particular, this study investigates generic competition among the five largest European pharmaceutical markets; the United Kingdom, Germany, France, Italy and Spain, with comprehensive IMS data set for 10 years (1994-2003), in order to estimate the effect of generic entry on drug prices at the product level. Both within and across these countries, different interventions are being applied to in-patent and off-patent markets during 10 years of the study period. For example, in Germany, markets for on-patent drugs are largely unregulated and prices are set relatively freely; however, once generics enter the market, the German government uses reference pricing to set reimbursement rates. In the UK, originator medicine prices are free from direct regulatory intervention, but are subject to a rate of return regulation. Additionally, once generics enter the market, the UK's government uses price caps. France, Italy, and Spain, on the other hand, use direct price controls for originator drugs and reference pricing system for generic drugs. Accordingly, this analysis finds that generic entry has a negative effect on prices in countries with free pricing originator market, whereas in European Union (EU) countries with strict price and reimbursement regulation, generic competition is ineffective and/or counterproductive. Low regulated prices for originator products do not encourage generic entry following patent expiration. This finding is consistent with less generic firms and less competitive late entrants in regulated environments. Thus, strict price regulation undermines price competition in the off-patent sector, and cost savings from post-patent competition are not realized in countries with strict pricing and reimbursement policies