www.euipo.europa.eu

THE ECONOMIC COST OF
IPR INFRINGEMENT IN THE
PHARMACEUTICAL INDUSTRY

Quantification of infringement in Manufacture of pharmaceuticalpreparations (NACE 21.20)

September 2016

www.euipo.europa.eu

THE ECONOMIC COST OF
IPR INFRINGEMENT IN THE
PHARMACEUTICAL INDUSTRY

PROJECT TEAM
Nathan Wajsman, Chief Economist
Carolina Arias Burgos, Economist
Christopher Davies, Economist

ACKNOWLEDGEMENTS
The authors would like to thank members of the Economics & Statistics Working Group of
the Observatory who provided useful comments on the reports in this series and on themethodology used. In addition, the European Federation of Pharmaceutical Industries andAssociations (EFPIA) has provided information on the pharmaceutical marketplace in the EU.

Contents
Executive Summary

04

1.

Introduction

06

2.

Impact of counterfeiting in the Pharmaceutical Industry

103.

Conclusions and perspectives

22

Appendix A: The first stage forecasting model

23

Appendix B: The second stage econometric model

25

References

31THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRYEXECUTIVE SUMMARY
THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

The European Observatory on infringements of Intellectual Property Rights (the Observatory)
was created to improve the understanding of the role of Intellectual Property and of thenegative consequences of Intellectual Property Rights (IPR) infringements.
In a study carried out in collaboration with the European Patent Office1, the European
Union Intellectual Property Office (EUIPO)2, acting through the Observatory, estimated thatapproximately 39% of total economic activity and 26% of all employment in the EU is directly
generated by IPR-intensive industries, with a further 9% of jobs in the EU arising from purchasesof goods and services from other industries by IPR-intensive industries.
Another study3 compared economic performance of European companies that own IPRs withthose that do not, finding that IPRs owners’ revenue per employee is 28% higher on averagethan for non-owners, with a particularly strong effect for Small and Medium-Sized Enterprises(SMEs). Although only 9% of SMEs own registered IPRs, those that do have almost 32% more
revenue per employee than those that do not.
Perceptions and behaviours of European citizens regarding Intellectual Property andcounterfeiting and piracy4 were also assessed as part of an EU-wide survey. This survey
revealed that although citizens recognise the value of IP in principle, they also tend to justify
infringements at individual level in certain cases.
The Observatory is seeking to complete the picture by assessing the economic impact ofcounterfeiting and piracy.
This exercise is challenging from a methodological point of view, as it attempts to shed lighton a phenomenon that by its very nature is not directly observable. To pave the way towards
quantification of the scope, scale and impact of IPR infringements in the European Union,
as identified in its mandate, the Observatory has developed a step by step approach toevaluate the negative impact of counterfeiting and its consequences for legitimate businesses,
governments and consumers, and ultimately society as a whole.
Several IPR intensive industries whose products are known or thought to be subject tocounterfeiting have been selected. Previous studies have examined the following sectors:
cosmetics & personal care; clothing, footwear and accessories; sports goods; toys & games;
jewellery & watches; handbags & luggage; recorded music, and spirits & wine. This reportpresents the results of the ninth sectorial study, covering the production of pharmaceuticalpreparations5. The EPO/OHIM (2013) study revealed that this industry is intensive in the use of
trade marks and patents.

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1 - “Intellectual
Property Rights
intensive industries;
contribution
to economic
performance andemployment in
the European
Union”, OHIM/EPO,
September 2013.
2 - Until 23 March 2016,
the name of the
Office was Office for
Harmonization in
the Internal Market(OHIM). The namewas changed to
EUIPO as part of the
trade mark reform
legislation whichcame into force onthat date.
3 - “Intellectual Property
Rights and firm
performance inEurope: an economic
analysis”, June 2015.
4 - “European citizens
and intellectual
property: perception,awareness andbehaviour”,
November 2013
5 - The sector analysed
here comprises thefour digit NACE code:
21.20 “Manufactureof pharmaceuticals
preparations” as wellas the NACE code
46.46 “Wholesaleof pharmaceuticalgoods”. NACE is theofficial classificationof economic activity
used by Eurostat, thestatistical office of
the EU.

It is estimated that the legitimate industry loses approximately €10 billion of revenue annually
due to the presence of counterfeit medicines6 in the EU marketplace, corresponding to 4.4%of the sector’s sales.
6 - As defined by the World
Health Organization(WHO), a counterfeit
medicine is one which
is deliberately andfraudulently mislabelledwith respect toidentity and/or source.
Counterfeiting can apply
to both branded andgeneric products andcounterfeit products may
include products with thecorrect ingredients or withthe wrong ingredients,
without active ingredients,
with insufficient /inadequate quantities
of ingredient(s) or withfake packaging. In thepresent report, medicinesand pharmaceuticalpreparations terms areused indistinctly. A similar
definition is contained in
EU directive 2011/62.

These lost sales translate into direct employment losses of approximately 38,000 jobs. This
figure does not take account of the effect of imports, since in those cases the associatedemployment impacts occur outside of the EU. Nor does it include losses suffered by EU
producers as a result of counterfeiting in non-EU markets. Estimated employment losses inthe EU therefore relate to goods produced and consumed within the EU.
If the knock-on effects on other industries and on government revenue are added, when both
the direct and indirect effects are considered, counterfeiting in this sector causes approximately€17 billion of lost sales to the EU economy, which in turns leads to employment losses of about
91,000 jobs and a loss of €1.7 billion in government revenues.
It is important to note that the impact of counterfeit medicines refers to the manufacturing
and wholesale trade stages and so does not include retail trade7. For that reason, the absolute
numbers in this report cannot be directly compared to those previously presented for othersectors.

7 - Although there is a NACE
code for” dispensing
chemist in specialised
stores” (47.73), retailtrade margins have notbeen included in thepresent report. Thisdecision is based on
the fact that, as notedby WHO, counterfeit
pharmaceuticalpreparations can infiltratelegitimate sales channels
and in that case, the retailsector does not suffer
significant lost sales andemployment. Also, aconsiderable proportionof medicines is dispensed
in hospitals and othermedical facilities.

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THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

1. INTRODUCTION
THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

A major problem which has hindered the effective enforcement of Intellectual Property
Rights (IPR) in the EU is related to a lack of knowledge in relation to the precise scope, scale
and impact of IPR infringements. Many attempts to quantify the scale of counterfeiting andits consequences for businesses, consumers and society as a whole have suffered from theabsence of a consensual and consistent methodology for collecting and analysing data on
counterfeiting and piracy across various sectors. Different approaches have been used, suchas surveys, mystery shopping or monitoring of online activities, making it all the more difficult
to aggregate results for the whole economy. The very nature of the phenomenon underinvestigation makes it extremely challenging to quantify reliably, as obtaining comprehensive
data for a hidden and secretive activity is by necessity difficult.
These challenges have in turn hindered the tasks of those involved in enforcing IP rights and in
charge of establishing precise priorities, programmes and targets for enforcement, as they limit
the possibilities to design more focused policies as well as evidence-based public awarenesscampaigns.
To help overcome these challenges while taking fully into account of methodological constraints,
the Observatory developed a specific approach that has so far been applied to the Cosmetics
and Personal Care; Clothing, Footwear and Accessories; Sports Goods; Games and Toys;
Jewellery and Watches; Handbags and Luggage; Recorded Music; and Wine and Spirits sectors.
In the present report the Observatory focuses its attention on the Pharmaceutical Industry
including manufacturing as well as wholesale trade. The industry, as defined by Eurostat,includes the following NACE classes:
2120 Manufacture of pharmaceutical preparations.
This class includes:
Manufacture of medicaments: antisera and other blood fractions, vaccines, diverse
medicaments including homeopathic preparations;
Manufacture of chemical contraceptive products for external use and hormonal
contraceptive medicaments;
Manufacture of medical diagnostic preparations, including pregnancy tests;
Manufacture of radioactive in-vivo diagnostic substances;
Manufacture of biotech pharmaceuticals.

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This class excludes, among others:
Manufacture of herbs infusion (mint, vervain, chamomile, etc);
Manufacture of dental fillings and dental cement;
Manufacture of bone reconstruction cements;
Manufacture of surgical drapes;
4646 Wholesale of pharmaceutical and medical goods; therefore, sales figures in thisreport are based on wholesale prices.
This study aims to estimate the scale of the two major economic impacts of counterfeiting
which cover the direct and indirect costs to industry and the wider costs to government andsociety.

1) DIRECT COSTS TO INDUSTRY

8 - RAND (2012): Measuring
IPR infringements in
the internal market.
Report prepared
for the European
Commission. RAND
proposed to analyse
ex-post the forecast
errors on the level ofindividual companies,
using company-specificexplanatory variables.
However, attempts
at implementing themethodology in thismanner were notsuccessful, mainly due
to the fact that mostcompanies are not ableor willing to provide therequired data on pastbudgeted and actual sales
revenues. Therefore, themethodology has been
modified to allow its use
on sector-level data which
can be obtained frompublic sources.

The costs to industry consist mainly of lost sales due to counterfeiting. Estimation of lost sales
is therefore a necessary first step, both because it constitutes a major economic consequencein itself and because it drives other consequences, for example the loss of public fiscal revenue.
The methodology builds on an adaptation of a methodology developed for the European
Commission8 so that it can be used on a sectorial level rather than on a firm level which proved
very difficult to apply in practice.
Variations in a sector’s sales are analysed using statistical techniques which allow the researcher
to relate them to economic and social factors and thereby estimate the amount of sales lost by
rights holders due to counterfeiting.
Loss of sales also leads to loss of employment in the affected sectors, which can be derived
from European statistical data on employment for the sectors in question.

2) INDIRECT EFFECTS OF COUNTERFEITING
In addition to the direct loss of sales in the identified sector, there are also impacts on othersectors of the EU economy. These indirect effects are a result of the fact that the different
sectors of the economy buy goods and services from each other for use in their production
processes. If one sector’s sales are reduced because of counterfeiting, then this sector will alsowww.euipo.europa.eu |7

THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

buy fewer goods and services from its suppliers, causing sales declines and corresponding
employment effects in other sectors.

3) IMPACTS ON PUBLIC FINANCES
Since the activity in question is illegal, it is likely that those engaged in manufacture of counterfeit
goods do not pay taxes on the resulting revenues and incomes. Therefore, an additional impact
of counterfeiting is the resulting losses of tax revenue by government, specifically income taxes
and social contributions or corporate taxes.
In order to quantify these costs, several relationships are estimated using statistical techniques.
The methodology is fully explained in the Appendices and is briefly outlined below.
Step 1: Estimation of lost sales due to counterfeiting
Predicted sales of relevant sectors are generated and compared with actual sales in eachcountry, as reported in official statistics. The difference can then be partly explained by socioeconomic factors such as GDP growth or per capita income. In addition, factors related tocounterfeiting are considered, such as behaviour of consumers9, and the characteristics ofa country’s markets and its legal and regulatory environments10. The difference between
forecast and actual sales is analysed in order to extract the effect of counterfeit consumption
on legitimate sales.
Step 2: Translation of lost sales into lost jobs and lost public revenue
Since the legitimate industry sells less than it would have sold in the absence of counterfeiting,it also employs fewer workers. Data from Eurostat on employment in this sector is used toestimate the employment lost related to the reduction of legitimate business as a result of lost
sales due to counterfeiting.
In addition to the direct loss of sales in the sector being analysed, there are also indirect
impacts elsewhere in the economy, as this sector will also buy fewer goods and services fromits suppliers, causing sales declines and corresponding employment effects in other sectors.
Furthermore, the reduced economic activity in the private sector has an impact on government
revenue, essentially tax revenue such as household income tax and tax on company profits,
but also social security contributions.

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9 - Results from the IP
Perception Study
published by the
EUIPO in November
2013 are used, suchas the propensity of
EU citizens to buy
counterfeit goods as aresult of being misled.
10 - Worldwide
Governance Indicatorof Regulatory Quality
from the WorldBank is used forthe pharmaceuticalsector analysed in thisreport.

11 - On the other hand, thisreport only estimatesthe effect on sales ofthe pharmaceuticalsector within the EU
marketplace. So, to theextent that counterfeit
products in non-EU
markets displace
exports of legitimate EU
producers, there is afurther employment loss
in the EU which is not
captured here. This ishighly likely to be the casegiven that EU exports ofpharmeceutical products
amounted to €100 billion
in 2013.
12 - Because this penetrationof legitimate channels isthought to be an issueof particular importancefor pharmaceuticals,
economic impacts in theretail stage are excluded
from the present study
to avoid inflating theestimated losses.

It should be noted that the indirect effect of sales lost due to counterfeiting only includes losses
in sectors that provide inputs to the manufacture and distribution of legal products in the EU.
Possible effects of inputs provided for production of illicit goods that could be manufactured
inside or outside the EU, are ignored in this study. In other words, the indirect effect calculated
is a gross effect that does not take into account the long-term effect of sales displacement fromlegal to illegal producers. The net employment effect could therefore be smaller than the grosseffect calculated here11.
Similarly, while illicit activities do not generate the same levels of tax revenue as legal activities,
to the extent that sales of counterfeits happen in the legitimate sales channels, some direct
and indirect taxes are paid, and so the net reduction in government revenue may be smaller
than the gross effect calculated here12. Unfortunately, data currently available do not allow for
calculation of these net effects with any degree of accuracy.
This study, as is the case with the previous sectorial studies, focuses on the economic impactof the presence of counterfeit medicines in the EU marketplace. However, due to the special
nature of pharmaceutical preparations, it is important to point out the very significant healthissues associated with fake medicines. Death or permanent disabilities can result when suchproducts are consumed by the patient, either because they do not contain the active substancethey are supposed to contain, or because the dose of the substance is inadequate, irregular orjust plainly wrong. In some cases the counterfeit products contain other dangerous substancesand can therefore be directly life threatening. Besides the human suffering they entail, theseeffects also have economic consequences for society and notably on the health systems of EU
Member States. Such economic consequences can unfortunately not be taken into accountin the present study due to the difficulty of quantifying them, but they should be kept in mind
when considering the phenomenon of counterfeit pharmaceutical products.
The next section presents the main findings of the study.

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2. IMPACT OF COUNTERFEITING IN
THE PHARMACEUTICAL INDUSTRY
THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

The starting point of this analysis is the estimation of consumption of medicines by Member
State based on official data from Eurostat on production, wholesale margins and intra- andextra-EU trade. As mentioned above, retail trade is not included in the analysis; therefore,
consumption of pharmaceuticals analysed in this report is stated at wholesale prices and thus
does not include the trade margins generated by retailers.

The Pharmaceutical industry in the EU
During 2013, EU production of pharmaceuticals amounted to €180 billion and wholesalemargins to €104 billion, for a total of €284 billion at wholesale prices. EU exports to third
countries were worth €100 billion, and imports from third countries amounted to €46 billion,
resulting in a positive trade balance of €54 billion, and leaving nearly €230 billion (at wholesale
prices) or €450 per capita, for consumption of medicines in the internal market.
In the same year, there were about 1.1 million people employed in the pharmaceutical industry
across the EU, with approximately half a million employed in manufacturing and 600 thousandin wholesale trade.
In previous sectorial studies the different products analysed were directly consumed by privatehouseholds. However, in the case of medicines, the EU Input-Output Table13 shows that they
are used as intermediate goods as well as for final demand (which includes final consumption
expenditure by households and governments as well as exports and changes in inventories).
The use of the pharmaceutical industry’s products is shown in the figure below.
PHARMA INDUSTRY

10%
28%

HEALTH SERVICES

17%

OTHER INDUSTRIESHOUSEHOLDSGOVERNMENTOTHER FINAL USES

5%
23%

10| www.euipo.europa.eu

17%

13 - EU Input-Output
Tables are only
available at divisionlevel so we refer
to NACE 21 ‘Basicpharmaceuticalproducts andpharmaceuticalpreparations’.
Following SBS, class2120 production
represents 86% ofdivision 21 in the
EU28 in 2013.

The use of pharmaceutical products for intermediate consumption is concentrated in healthservices and the pharmaceutical industry itself and accounts for 27% of total value of output
at producer prices (without trade margins or VAT). The final uses of medicines include final
consumption (40%) that can be paid by governments (23%) and households (17%) and also
other final uses, including exports to third countries and changes in inventories. While this is
the structure of the use of medicines on the level of the EU as a whole, it should be noted that
there are significant differences among Member States in this regard.
The biggest producer of pharmaceuticals in the EU is Germany (€41 billion), followed by Ireland(€26 billion), France (€25 billion) and Italy (€20 billion). These countries are also the major exporters
with a trade balance of €25 billion in the case of Germany and €14 billion in Ireland, and total net
exports of 28 EU countries to third countries of more than €54 billion.
The EU pharmaceutical industry consists of more than 40,000 enterprises of which 3,000 are
manufacturers and the rest are wholesalers. The average size of firms differs significantly between
the two groups, with manufacturers at 150 and wholesalers at 15 workers per firm, respectively.

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THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRYCASE 1: COUNTERFEIT CANCER MEDICINES IN GERMANY(source: Apotheke Adhoc, 19/06/2014.
Accessed at: http://www.apotheke-adhoc.de/nachrichten/nachricht-detail/arzneimittelkriminalitaetbfarm-warnt-vor-sutent-faelschungen/)

The Federal Institute for Drugs and Medical Devices (Bundesinstitut für Arzneimittel und
Medizinprodukte, BfArM) issued an appeal to German pharmacies in June 2014, urging them toclosely examine their stocks of parallel-imported Sutent medication. Sutent (active ingredient:
Sunitinib) is a medication used for treatment of certain cancers of the intestines, kidneys andpancreas. It is manufactured by Pfizer, a U.S.-based pharmaceutical company.
Orifarm is the largest supplier of parallel imported medicine in Europe. The company imports
original pharmaceuticals from EU Member States at lower price levels and is then able to sell themat lower prices than the original manufacturers in Member States where prices are higher.
A pharmacy in Hamburg was contacted by a patient in May 2014. The patient had purchased a packageof Sutent from that pharmacy, but brought it back because it seemed to him that it did not contain the
genuine medication. After consultations between Orifarm, which had supplied the medication, andthe authorities, it was decided to recall 64 packages of Sutent from that particular batch.
The fake Sutent originated from a Romanian supplier. As a consequence of this incident, Orifarm
blacklisted that supplier. Another German importer, CC Pharma, had also unwittingly purchased
counterfeit Sutent from a Romanian supplier in the autumn of 2013 and had completely stopped
sourcing Sutent in Romania. In addition, CC Pharma had also blacklisted Sutent suppliers from
Bulgaria, Hungary and Poland for the same reason.

The counterfeit Sutent sourced by Orifarm from Romania(photo by BfArM).

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The BfArM recommended that patients carefully
examine their Sutent capsules. The counterfeits
purchased by the patient in Hamburg were relatively
easily distinguished from the genuine capsules. Not
only were they of a different colour and size, butthey also lacked the Pfizer branding and the dose
indication. The bottle containing the counterfeit
capsules also exhibited subtle differences comparedto the genuine Pfizer bottle. It goes without sayingthat taking a counterfeit cancer medication is likely tohave severe health consequences for the patient.

CASE 2: OPERATION PANGEA VIII, JUNE 2015
(source: http://www.interpol.int/News-and-media/News/2015/N2015-082)

In June 2015, Interpol coordinated a global operation targeting the criminal networks behind thesale of fake medicines via illicit online pharmacies, resulting in 156 arrests worldwide and theseizure of USD 81 million worth of potentially dangerous medicines.
Operation Pangea VIII was the largest ever Internet-based operation focusing on the illicit saleof medicines and medical devices via the Internet, with the participation of 236 agencies frompolice, customs and health regulatory authorities from 115 countries. Private partners from theInternet and payment industries also supported the operation, which saw a record number of 20.7
million illicit and counterfeit medicines seized – more than twice the amount confiscated during
the previous such operation in 2013.
The action resulted in the launch of 429 investigations, the suspension of 550 online adverts forillicit pharmaceuticals and 2,414 websites taken offline.
In addition to interventions on the ground, which included the discovery of an illicit warehousefull of counterfeit and expired medicines in Indonesia, the operation also targeted the main areas
exploited by organised crime in the illegal online medicine trade: rogue domain name registrars,
electronic payment systems and delivery services.
As well as raids at addresses linked to the illicit pharmaceutical websites, some 150,000 packages
were inspected by customs and regulatory authorities, of which 50,000 were seized during theinternational week of action (9 – 16 June).
Among the fake and illicit medicines seized during the operation were blood pressure medication,
erectile dysfunction pills, cancer medication and nutritional supplements. In the case fromIndonesia, authorities uncovered an operation where criminals were altering the expiry date or theamount of the active ingredient on packages of counterfeit, expired and unregistered medicines at
the warehouse and returning them to a pharmacy for sale.

This seemingly regular pharmacy in the UK was in fact
unlicensed and selling illicit medicines online.
It was shut down by UK authorities (photo by Interpol).

In the UK, authorities discovered an illegal online
pharmacy selling unlicensed medicines obtained
from another country. Police and the Medicinesand Healthcare Products Regulatory Agency (MHRA)
raided a premises connected to the website –which was arranged to look like a legal pharmacy– and seized 60,000 units of potentially dangerous
medicines worth an estimated USD 2.4 million.

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THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

Direct impact
Based on country-level consumption data of medicines at wholesale prices, the difference
between forecast sales and actual sales has been estimated for each country (Appendix A), andanalysed using statistical methods (Appendix B), relating the sales shortfall to factors (called
variables in economic parlance) such as:
Growth rates of Per capita Gross Disposable Income of the household sector andthe exchange rate of the Euro vs other currencies (socio-economic variables);The percentage of the population reporting having bought counterfeit
products as a result of being misled as reflected in the IP Perception study andthe World Bank Index of Regulatory Quality14 growth rate (variables related tocounterfeiting).
The rationale behind the selection of explanatory variables lies in the idea that differences
between predicted and actual sales in a given country can be partly explained by economic orsocial factors (including both cyclical factors such as recessions and structural ones such as per
capita income or demographic composition of the population), and partly by the consumers’
propensity to infringe IP rights (sometimes unwittingly), as evidenced by responses to surveys
such as the 2013 IP Perception Study by EUIPO, similar questions from Eurobarometer surveys,
and indices related to corruption and quality of governance published by organisations suchas the World Bank. The specific variables selected for inclusion in the analysis vary slightly fromsector to sector, but inclusion of a variable from each of the two groups has been a common
feature of all previous sectorial studies in this series.
The resulting estimates of the lost sales due to counterfeiting in the pharmaceutical sector, for all
Member States, are shown in the figure below. This is the direct impact of counterfeiting discussed
above, although as noted above, for this sector only the impact on the manufacturers andwholesalers is included, as opposed to wider considerations incorporating the retail trade sector.
For each country, the bars indicate the impact of counterfeiting on the legitimate sector’s sales,
expressed as a percentage of sales revenue at wholesale prices, while the diamonds indicate
the 95% confidence interval of that estimate15. The figures represent an annual average for thesix years 2008-2013.

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14 - The World Bank
Index of Regulatory
Quality captures
perceptions of
the ability of thegovernment toformulate andimplement soundpolicies andregulations that
permit and promoteprivate sector
development.
15 - The 95% confidence
interval is a statistical
calculation whichmeans that there is a
95% probability thatthe true figure lies
between the lower
and upper boundsof that interval. For
example, for the
EU as a whole, theestimated percentage
of lost sales is4.4%, with a 95%
probability that thetrue percentage lies
between 3.7% and
5.1%.

30%

25%

20%

15%

10%

5%

0%

16 - The estimation of themodel was performed
using data from19 Member Statesaccounting for 94% of
total consumption in
EU28. It is therefore
reasonable to apply the
resulting coefficients to
the remaining Member
States for which data on
the dependent variable is
not available.

SEFI DK LU DE FR NL UK EE EU28 IE AT PL

IT BE MT CZ HR ES PTSI

SK LV LT CY EL HU RO BG

For the EU as a whole16, the estimated total counterfeiting effectamounts to 4.4% of sales or €10.2 billion. This is a direct estimate ofsales lost by legitimate manufacturers and wholesalers of medicines inthe EU each year due to counterfeiting.

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THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRYCountry-level estimates of lost sales and associated confidence intervals, expressed both as apercentage of sales and in EUR, are shown in the table below.

Lower 95%

Average

Upper 95%

Lost sales(million EUR)

AUSTRIA

2.4

4.6

6.8

109

BELGIUM

2.7

5.3

7.9

597

BULGARIA

9.8

17.6

25.4

160

CYPRUS

5.8

10.1

14.4

23

CZECH REP.

1.5

5.3

9.2

164

GERMANY

1.3

2.9

4.4

1,053

DENMARK

1.0

2.0

2.9

165

ESTONIA

2.0

4.4

6.7

14

GREECE

6.0

12.0

17.9

684

SPAIN

3.5

5.9

8.3

1,170

FINLAND

0.0

0.0

1.2

0

FRANCE

1.0

3.0

5.0

1,025

CROATIA

2.1

5.6

9.2

64

HUNGARY

7.9

13.1

18.4

416

IRELAND

2.5

4.4

6.4

513

ITALY

2.2

5.0

7.9

1,590

LITHUANIA

3.8

9.1

14.5

58

LUXEMBOURG

0.3

2.0

3.7

2

LATVIA

4.5

8.7

13.0

10

MALTA

2.2

5.3

8.4

6

NETHERLANDS

1.6

3.3

4.9

489

POLAND

0.7

5.0

9.3

363

PORTUGAL

1.5

6.8

12.2

281

ROMANIA

7.8

16.6

25.4

444

SWEDEN

0.0

0.0

1.1

0

SLOVENIA

3.7

7.3

11.0

53

SLOVAKIA

4.5

8.3

12.2

130

UNITED KINGDOM

1.0

3.3

5.7

605

EU28

3.7

4.4

5.1

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The biggest absolute impacts of counterfeiting are observed in Italy (€1,590 million) andSpain (€1,170 million), both countries with relative effects of lost sales due to counterfeiting
in medicines above the EU average (5% and 5.9% respectively). Germany and France present
relative lost sales below the EU average at 3%, with absolute impacts of about one billion EUR
each. Finally, in the United Kingdom, relative effects of counterfeiting in lost sales are below the
EU average (3.3%) and total lost sales are €605 million.
Relative lost sales in Finland and Sweden are not significantly different from zero, meaning that
there is no statistical evidence of sales in those two countries being affected by counterfeiting. It
does not mean, however, that their pharmaceutical industries are not affected by counterfeitingof medicines, since they lose sales in other EU Member States as a consequence of the presenceof counterfeit medicines in those markets.

17 - The total lost sales figureof €10.2 billion is not used
to calculate employment
impacts, since €1.8 billionof this total is attributable
to imports. Therefore, thefigure used to estimate
employment impacts
within the EU is €8.4
billion, representing
the difference between
estimated total lost sales
and imports.

Since the legitimate industry sells less than it would have sold in theabsence of counterfeiting, it also employs fewer workers17. Data from
Eurostat on sectorial employment-to-sales ratios are used to estimate
the corresponding employment lost in the legitimate pharmaceuticalindustry due to counterfeiting, resulting in a total of 37,700 lost jobs
across the EU.
Direct employment impacts are calculated at the country level by estimating lost sales by thatcountry’s sector across the entire EU market. For example, the direct sales lost by the Italianindustry as a result of counterfeit medicines are estimated by adding sales lost in Italy to salesof Italian medicines lost in other EU countries. The latter total is calculated from the differingcounterfeiting rates prevalent within each Member States.
Germany is the biggest producer of medicines and also the country that loses the highest
number of jobs the sector due to counterfeiting, nearly 7,000. Italy, France and Spain present
significant loses in employment in the legitimate pharmaceutical industry, between three andfour thousand jobs lost in each country. It should be noted that for the country-level estimationof lost employment, the losses are attributed to the Member States where the genuine
medicines are manufactured, regardless of where in the EU the sales losses occur. This is whylost employment is higher in Germany than in Italy even though lost sales are €1.6 billion in Italyand €1.1 billion in Germany.

www.euipo.europa.eu |17

THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

Indirect impact
In addition to the direct loss of sales in the pharmaceutical industry, there are also impacts onother sectors of the EU economy, as a sector suffering lost sales due to counterfeiting will also
buy fewer goods and services from its suppliers, causing sales declines and corresponding
employment effects in other sectors.
To assess this indirect impact, data from Eurostat18 are used, showing how much thepharmaceutical industry buys from other sectors in the EU in order to produce what it delivers19.
Final demand for medicines, as estimated in this report, includes imported goods (about 17%
of total consumption) and not only the value of EU production (even though on balance the
EU is a net exporter of medicines). Employment and indirect effects arising from these imports
occur outside the EU and therefore are not included in the calculations. Consequently, of thetotal lost sales figure of €10.2 billion, only the value of domestic production (€8.4 billion) is used
to calculate indirect impacts20.

The total direct and indirect effect in the EU of lost sales due tocounterfeiting, as an annual average for the period 2008-2013, amounts
to €17.3 billion.
Thus, beyond the direct effects on the pharmaceutical industry (€10.2 billion in annual sales),an additional €7.1 billion are lost in other sectors of the economy due to counterfeiting. This is
the indirect effect of counterfeiting21.
Turning to employment, if losses in the supplier sectors are added to the direct employment
loss in the pharmaceutical industry, the total employment loss resulting from counterfeiting isestimated at 90,900.
Total effects (direct plus indirect) are calculated at country level based on ESA 2010 harmonized
IOT published by Eurostat and presented in the table below for the 7 Member States with thebiggest total impacts.

18| www.euipo.europa.eu

18 - Input-Output Tables(IOT) published byEurostat provide thestructure of input
requirements forthe production of acertain final demand
acknowledging whether
the origin of these inputs
is either domestic or
imported. The IOT usedin this report refer toyear 2011 and are basedin the new European
System of Accounts (ESA)2010 methodology.
19 - The IOT are provided
by Eurostat at divisionlevel (2 digit NACE level)
instead of class level (4digit level). This meansthat for calculating theimpact of the sales
reduction in 21.20 and
46.46 NACE classes,
it is necessary to use
the structure of ‘Basicpharmaceutical products
and pharmaceuticalpreparations’ (NACE 21)
and ‘Wholesale tradeservices, except motor
vehicles and motorcycles’(NACE 46).
20 - On the other hand,
this report only estimatesthe effect on sales ofpharmaceuticals within
the EU marketplace.
So, to the extent thatcounterfeit products in
non-EU markets displace
exports of legitimate EU
companies, there is afurther employment loss
in the EU which is not
captured here.
21 - As mentioned
in Section 1, thiscalculation assumes
that the counterfeit
products are produced
outside the EU. If theyare (partly) produced
inside the EU, then theindirect impact would
be less than shown in
the table since thoseillicit producers would
presumably source someof their inputs from EU
producers.

Direct effects
Sales

Total effects

Employment

Sales

Employment

million€%persons%

million €persons

GERMANY

1,053

2.9%

6,951

2.7%

2,225

13,597

ITALY

1,590

5.0%

3,945

3.7%

1,874

10,631

FRANCE

1,025

3.0%

3,667

2.6%

1,851

9,212

SPAIN

1,170

5.9%

3,223

3.9%

1,233

9,911

UNITED KINGDOM*

605

3.3%

2,940

2.9%

1,167

7,747

IRELAND

513

4.4%

699

1.9%

868

1,320

NETHERLANDS*

489

3.3%

1,582

3.9%

705

4,197

EU28

10,188

4.4%

37,695

3.4%

17,33890,880*Based on ESA 1995 harmonized Input-Output Tables

The direct and indirect (and hence the total) effects on sales and employment reflect thestructure and volume of production in each Member State, in particular the use of domestic
inputs as well as different employment ratios.
As the biggest producer in the EU, Germany is the country most affected when total effects
in sales and employment are considered, even though its direct sales losses only rank third,
behind Italy and Spain, due to a comparatively modest relative effect in Germany.
22 - According to WIPO(2010) and OECD (2008),
most of the empirical
work assumes thatcounterfeiting occurs in
informal markets thatusually do not generate
tax revenues.
23 - National Accounts tax
aggregates are publishedby Eurostat and provide
information on total
payments for income
taxes to all levels ofgovernment.

Finally, the reduced economic activity in the legitimate private sector has an impact on
government revenues22 as well. Assuming that illicit producers and distributors do not declaretheir activities and the resulting revenues to the authorities, the lost taxes that sales of
medicines valued at €10.2 billion would have generated can be calculated, as well as the tax
revenues corresponding to the total (direct + indirect) loss of €17.3 billion calculated above.
Two types of taxes have been considered23: taxes on household income and taxes on theincome or profits of companies. In this report, VAT losses are not considered because medicines
are subject to different VAT treatments depending on whether they are consumed at hospitals
or at home, whether they are prescribed or bought over the counter and are sometimes not
subject to VAT at all. To take those different distribution channels into account when calculating
VAT losses would require many assumptions at the Member State level, and it was therefore
decided to omit VAT from the calculation.

www.euipo.europa.eu |19THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

1) The lost household income tax, estimated on the basis of the share of wages corresponding
to lost employment in total wages, considering direct and indirect effects on employment,
amounts to €683 million.
2) The lost tax on corporate profits is estimated from the share of direct and indirect costs
to industry and amounts to €206 million.
In addition, social security contributions linked to the direct and indirect employment losses
are also estimated. Social security contributions data by industry are available in Eurostat,so that social security contributions per employee in each industry can be used to calculate
lost contributions as a consequence of counterfeiting. These lost social security contributions
amount to €802 million.

The total loss of government revenue (household income taxes, social
security contributions and corporate income taxes) can therefore be
roughly estimated at €1.7 billion.
ECONOMIC EFFECT OF COUNTERFEITING AND PUBLIC EXPENDITURE ON HEALTH CARE

LOST SALES DUE TO COUNTERFEITING (%)

Due to the special characteristic of the market for medicines, with public and private expenditure
shares that vary widely across the EU, the relationship between public expenditure on healthcare as a percentage of GDP and lost sales due to counterfeiting of medicines in all EU Member
States has also been analysed. The results of this analysis are presented in the chart below.
20
y= -1.8647x + 16.656
R = 0.3557

BG

2

RO

16

HU

12
CY

LT

LV

8

EE

EU=4.4

MT

LU

0

SI
PT
HR
IE
AT
DE

IT

BE

NL
FR
UK

DK

FI SE

0

2

4

HEALTH GOV. EXPENDITURE / GDP (%)

20| www.euipo.europa.eu

EU=6.6

SK
ES
CZ

PL

4

EL

6

8

10

Public health care expenditure as a percentage of GDP averages 6.6% in the EU, as reflectedin Eurostat statistics, with the lowest ratios in Cyprus and Latvia and the highest in Denmark.
A linear regression of the percentage of lost sales due to counterfeiting and the public healthexpenditure as a percentage of GDP is shown in the chart. There is an inverse relationshipbetween the two, meaning that Member States with the highest public expenditure on healthservices as a share of the GDP in general have smaller losses of sales due to counterfeiting
than do Member States where the public sector share is low. It is not clear which factors lie
behind this relationship.

www.euipo.europa.eu |21

THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

3. CONCLUSIONS AND PERSPECTIVESTHE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

The studies aiming to quantify the scale and impact of IPR infringements in cosmetics andperfumes, clothing and footwear, sports goods, toys and games, jewellery and watches,
handbags and luggage, recorded music, spirits and wine and now pharmaceuticals haveprovided coherent estimates of the size of the problem of counterfeiting for legitimate
businesses and for society in terms of lost sales, leading to lost jobs and loss of public revenue.
These studies have used a common methodology and demonstrated the benefits of working
in cooperation with stakeholders to take advantage of their knowledge of market conditions,while relying on harmonised European statistical data for the analysis.
The nine sectorial studies published to date will be followed in the coming months by othersimilar studies covering additional sectors, applying the same methodology and combining
it with knowledge from industry stakeholders. These sectors include pesticides and othersectors, such as smartphones, depending on availability of data.
In parallel, the Observatory has carried out a joint study with the Organization for Economic
Cooperation and Development (OECD) to estimate the value of counterfeit and pirated goods
in international trade. That study, published in April 2016, estimated the value of international
trade of counterfeit goods in 2013 at €338 billion (USD 461 billion) globally, corresponding to
2.5% of world trade. The corresponding figures for the EU were €85 billion (USD 116 billion),
representing 5% of EU’s imports from the rest of the world.
Taken together, these studies complement each other and provide a complete and objective
picture of the impact of IPR infringements in Europe, in order to help policy makers develop
effective enforcement policies.

22| www.euipo.europa.eu

APPENDIX A: THE FIRST STAGEFORECASTING MODEL
THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

The methodology used for the estimation of the economic effects of counterfeiting is depictedin the following figure and explained in detail in this Appendix and in Appendix B.

B: COUNTERFEITINGRELATED
VARIABLESCONSUMPTIONBY COUNTRYFORECAST MODELFORECASTINGERRORS
A: SOCIO-ECO
VARIABLESThe first stage is comprised of a forecasting model of sales of products in each country.
Assuming that a reasonably long time series of sales by country is available, a model is createdthat explains the trend of this time series and predicts the value of sales in subsequent years.
The simplest available comparable forecasts, across all member states, are produced via theuse of ARIMA modelling. These models only use the past values of consumption to produce aforecast of future consumption. The forecast error, that is, the difference between the ARIMA
forecast and observed sales, represents an estimate of the expected lost sales, notwithstanding
adjustments for the impact of socio-economic factors.
The forecast error is the difference between predicted and actual consumption and for the
purposes of comparability is expressed as a proportion of actual consumption, as shown in
the following equation:

q*it=Ŷit - Yit
Yit

where Yit is consumption in country i and year t (measured in EUR) and Ŷit is the forecast of Yit
obtained from the univariate model using consumption expenditure information up to andincluding the period t-1.

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THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

The relative error q*it measures the extent to which the forecasting model has predicted a higher
or lower value (as a share of actual consumption) versus the actual level of consumption observed
from the Eurostat data.
Step-wise forecast errors for the six years from 2008 to 2013 are constructed for Member States
for which sufficient data is available, a total of 19 countries. It must be underlined that the oneperiod-ahead forecast errors estimated with ARIMA models follow a white noise process that is
stationary and thus uncorrelated in time with zero mean and constant and finite variance.
The forecast errors are presented in the table below. It is evident that these errors exhibit a large
degree of variability. However, the forecast errors are not interesting in themselves. The purposeof this study is not to produce a “good” forecast but rather to generate a set of relative errors
which can then be quantitatively analysed to construct estimates of counterfeiting. Forecasts areproduced using univariate models and using an automatic procedure, which ensures that they arecomparable and “unpolluted” by a priori knowledge of factors influencing changes in demand.
RELATIVE ERRORS (%)

2008

2009

2010

2011

2012

2013

AUSTRIA

5.8

3.7

0.5

7.8

20.0

-5.4

BELGIUM

27.4

-27.8

-45.1

NA

-18.1

-31.8

GERMANY

5.7

-2.2

10.8

-5.7

2.8

-0.2

DENMARK

-3.7

2.0

-29.4

2.5

-13.3

1.1

SPAIN

-7.8

-4.3

13.2

19.0

7.2

4.8

FINLAND

-9.1

4.4

-2.3

5.3

-18.4

-19.8

FRANCE

NA

7.5

7.2

5.7

8.2

-1.3

HUNGARY

-17.4

13.8

-19.4

3.0

10.6

1.5

IRELAND

NA

-0.1

-17.0

18.6

-9.2

NA

ITALY

-2.1

6.9

3.4

11.8

28.8

3.9

LITHUANIA

-9.7

19.7

-10.8

-14.2

6.4

-8.9

LUXEMBOURG

3.1

-17.6

-3.8

-43.7

-9.2

-35.1

LATVIA

-2.9

-3.0

19.2

5.5

3.3

-27.9

NETHERLANDS

-47.9

-11.0

-39.3

-19.5

4.2

-14.6

POLAND

-7.2

26.8

2.2

-0.7

31.9

-8.8

PORTUGAL

-6.8

-5.9

-6.6

2.1

2.5

5.8

SWEDEN

19.2

-13.0

-0.4

-12.8

-38.9

NA

SLOVAKIA

-9.2

-5.9

0.7

16.3

25.2

18.0

UNITED KINGDOM

22.9

35.1

-0.5

55.6

-10.5

-17.0

The second part of the estimation process seeks to determine to what extent these forecast errors
can be explained by economic variables and by variables related to counterfeiting.

24| www.euipo.europa.eu

APPENDIX B: THE SECOND STAGE
ECONOMETRIC MODEL
THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRYCounterfeiting might be one of a number of factors impacting on the level of legal sales of
medicines, but there are, as outlined earlier, a series of other economic factors which can explain
the differential, such as variables related to the economic capacity of households, or consumer
demographics (e.g. population growth) or any other driver of consumption expenditure.
Having accounted for the influence of economic variables on the sales differential, an attempt ismade to assess the extent to which counterfeiting variables, or relevant proxies, can explain thepropensity to purchase fake medicines. These variables might include measures of consumer
and market characteristics, as well as the evolution of a country´s legal environment.
Combining the economic and counterfeiting variables allows for the specification of an
econometric model whose aim is to explain the aggregate differential (forecast errors) between
expected and real sales. The model is specified in the following format:

q*it= α * Xit + β * Zit+ εit
where Xit is a matrix of explanatory variables unrelated to counterfeiting and Zit a matrix ofvariables related to counterfeiting. Finally, εit is the remaining error.
Socio-economic variables considered to have explanatory power, unrelated to counterfeiting,include:1. Gross Disposable Income (GDI) of the household sector: per capita income andgrowth;
2. GDP per capita and GDP growth;
3. Exchange rate of Euro vs. other EU currencies;
4. Population growth.
24 - A list of factors
affecting demandand consumption for
counterfeit goods isavailable in OECD (2008).

The second term of the equation, Zit, contains the matrix of variables thought to be related
to counterfeiting24. These variables include:

1. Population at risk of poverty or social exclusion, as a share of total population andgrowth;www.euipo.europa.eu |25

THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

2. Distribution of income by quartiles (including the share attributed to the lowest
quartile and the ratio between the highest and lowest quartiles);3. Gini coefficient (a measure of income inequality);
4. Several variables selected from the Observatory’s IP Perception study25 and from
Eurobarometer (including counterfeiting and corruption related variables);5. Corruption Perception Index, CPI (level and growth);
6. Intellectual Property Right Index;
7. Worldwide Governance Indicators (World Bank) covering Government Effectiveness,
Regulatory Quality, Rule of Law and Control of Corruption (level and growth);
8. Public expenditure on medicines and health services, as a percentage of GDP, percapita and growth rate.
Variables 1 to 4 in the list are considered to be consumer-related drivers of demand forcounterfeiting. The population at risk of poverty, the share and concentration of income inquartiles of the household income distribution, along with the Gini coefficient, are all variables
that describe degrees of income inequality.
The variables considered for inclusion in the Z matrix from the IP Perception study and theEurobarometer include: the percentage of the population that has bought counterfeit products
intentionally or been misled into the purchase of counterfeit products; the purchase ofcounterfeit pharmaceuticals; and the percentage of the population that considered, in certain
circumstances, buying counterfeit products to be acceptable.
Corruption variables considered for inclusion in the Z matrix from the Eurobarometer survey
include26; the percentage of the population declaring that corruption is widespread, that it isin the business culture, that it is a major problem and the percentage of the population that
believed corruption had increased over the last three years. And from the Tolerance Index
to Corruption, the measure covering the percentage of the population that declares that
corruption in public administration or public service is acceptable was considered.
Variables 5 to 7 are considered to be drivers of counterfeiting related to institutional
characteristics of each country.
The Corruption Perception Index (CPI) is published by Transparency International andmeasures how corrupt public sectors are seen to be by the public in each country. In this study
the updated index is used as a time invariant variable with reference year 2012.
The Intellectual Property (IP) Rights Index used is published by Property Rights Alliance andmeasures the strength of protection accorded to IP. The 2010 index is used in this study andthe same value is used for each country across the six years studied as a time invariant variable.

26| www.euipo.europa.eu

25 - Available at: https://
euipo.europa.eu/
ohimportal/en/
web/observatory/
ip_perception.
26 - In WCO (2012) itis stated that: ‘The
predominance of
the informal is thenassociated withcorruption and thedegree of regulation...’So, to the extent
that counterfeiting ispart of the informal
economy, a measureof corruption could
be considered
explanatory forcounterfeiting.

The Worldwide Governance Indicators reflect the perception of government effectiveness,regulatory quality, rule of law and corruption. They are published annually and range from
2.5 for favourable aspects of governance to -2.5 for poor. These indicators are considered as
potential proxies for the perceived risk of buying or selling counterfeit goods. These indiceshave a high negative correlation with poverty indicators and with the variables from the IP
Perception study and Eurobarometer.
The rationale behind these variables is that in countries where the population exhibits a highdegree of acceptance of counterfeit products and where governance and rule of law areperceived to be weak there is a higher likelihood of consumption of a product to be illicit thanin countries with good governance, strong rule of law and low corruption.
Finally, the public expenditure on medicines and health services reflects market characteristics
that might also be related to counterfeiting. The idea is that in countries where public institutions
purchase a high share of medicines it could be more difficult for counterfeit products toinfiltrate the legitimate distribution channels.
Altogether, 63 different explanatory variables were tested and different econometrictechniques were applied in order to select a model with robust econometric results and aclear interpretation.
Some of the variables considered in the modelling process are clearly correlated with each other.
High correlation coefficients between explanatory variables (referred to as multicollinearity)present a common problem in econometric analysis. If correlated explanatory variables areincluded in the model, the estimated coefficients for these variables could be mistakenly
considered as insignificant (small t-statistics), although possessing a high overall significance forthe model as measured by the F-test. This situation can pose problems when trying to interpretthe meaning and significance of parameter estimates and when testing the significance ofother variables in the model specification.
For instance, per capita GDI of the household sector and per capita GDP are highly correlated
and also per capita public expenditure in health services is highly correlated with misledpurchase of counterfeit goods from IP Perception study.
Therefore only those variables with the greatest explanatory power are included in the modelin order to avoid the problems described above.

www.euipo.europa.eu |27

THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

Different methods have been applied and the preferred model is estimated using Weighted
Least Squares (WLS) with the Standard Errors of forecast errors from ARIMA models used asweights. This method solves problems of heteroscedasticity as stability of variance of estimatedresiduals is a requirement for an acceptable accuracy in the coefficients estimation.
Finally, residuals were analysed to check compliance with the usual assumptions of regression
models27.

MODEL RESULTS
The results of the final estimated model are shown in the table below.
Variable

CoefficientStandardErrort Statistic

95% Confidence
interval

Lower

Upper

Constant-0.11960.0450-2.66 ***

-0.2088-0.0304

Per capita GDI growth-0.00200.0034-0.59-0.00880.0048Euro exchange rate growth1.01650.49222.07**

0.04061.9925IP Perception: buy counterfeit
mislead0.80490.47091.71 *-0.1289

1.7387WB Index: Regulatory Quality(growth)-0.64210.3332-1.93 *

-1.30290.0186R-square between = 11.1%
Wald Chi-2 statistic = 4.3 **** significant at 90% confidence level** significant at 95% confidence level*** significant at 99% confidence level

The econometric model explains 11% of total variance of the stage 1 forecast errors. The
model uses a combination of two economic variables and two counterfeiting-related variables.
For each variable, the first column shows the estimated coefficient, the second column shows
the standard error, while the third column indicates the statistical significance of the parameter
estimates28.
The explanatory variables, not related to counterfeiting are per capita Gross Disposable
Income growth with a negative coefficient (not statistically significant); and the Euro exchange
rate with a positive coefficient, implying that as the euro appreciates, so does the capacity forcounterfeiting outside the Euro zone.

28| www.euipo.europa.eu

27 - All results of thediagnostic tests areavailable on request.
28 - If, for example, anestimated coefficient
is significant at the
95% confidence level,
then one can say thatthe probability thatthe true coefficientis zero and theestimated value wasobtained solely bychance is 5%. The“t-statistic” shown in
the third column is
simply the estimatedcoefficient divided
by its standard error.
The last two columns
show the 95%
confidence interval
for the coefficient;in other words, thetrue coefficient lies in
the interval between
the lower and upperbounds with a 95%
probability.

The remaining two variables relate to counterfeiting and include one variable from the IP
Perception study and one of the Worldwide Governance Indicators from the World Bank. The
variable from IP Perception study is the percentage of the population declaring havingbought counterfeits as a result of being misled and it is a time-invariant variable with apositive coefficient, meaning that the percentage of population declaring having bought fakes
is positively related to counterfeiting.
The Regulatory Quality Index published by the World Bank captures perceptions of the abilityof the government to formulate and implement sound policies and regulations that permit andpromote private sector development. The coefficient estimated for this variable is negative, sothat a higher growth rate of the index in a particular country corresponds to improving qualityof regulation and is related to smaller forecast errors.
As the main objective of the model is to estimate the coefficients of the counterfeiting-related
variables, the characteristics of these coefficients should be investigated. Several models
have been estimated, adding different explanatory variables, using different econometrictechniques and also based on sales at consumer prices. The resulting estimated coefficientsfor the counterfeiting-related variables are presented in the following table, providing a good
indication of its stability.

IP Perception

WB Regulatory
Quality

1 (chosen model)

0.8049-0.64212

1.4298-3

1.0339-0.98764

1.1631-0.93975--0.939760.6038-0.460470.5091-0.50068--0.456490.6819-0.4484100.8489-0.443411

0.6819-0.4484120.5764-

Average 2-120.8365-0.6250

www.euipo.europa.eu |29THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

Based on coefficients estimated for the counterfeiting-related variables presented above, theimpact of counterfeiting is estimated via the following relationship:
C*it = β1 * Z1i + β2 * Z2it
Where C*it represents the sales lost due to counterfeiting in country i in year t (expressed as
the fraction of the sector’s actual sales), Z1i is the value of the IP Perception variable, and Z2itis the value of the World Bank Index growth rate in that country and year29. The β’s are theestimated coefficients from the table at the beginning of this section.
The counterfeiting effect is calculated for all 28 EU Member States, applying the coefficients
estimated in the model above to the values of the explanatory variables.
Interpretation of this specification is made on the following basis: for a country where 3% of
the population declares having bought counterfeit products as a result of being misled and theaverage growth rate of Regulatory Quality index in 2008-2013 is -4%, the effect of counterfeitingon legitimate sales of medicines is a sales decrease of 5% (0.8049*0.03 - 0.6421*(-0.04) =0.0498).

30| www.euipo.europa.eu

29- It should be notedthat in this case, thevalue of Z1i is thesame for all t since
the variable is timeinvariant during theperiod covered bythis study.

REFERENCES
THE ECONOMIC COST OF IPR INFRINGEMENT IN THE PHARMACEUTICAL INDUSTRY

Directive 2011/62/EU on the Community code relating to medicinal products for human use,
as regards the prevention of the entry into legal supply chain of falsified medicinal products
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32011L0062&from=EN
EUIPO/OECD (2016) Trade in counterfeiting and pirated goods: mapping the economic impact.
https://euipo.europa.eu/ohimportal/en/web/observatory/mapping-the-economic-impact
EUIPO (2016) The economic cost of IPR infringement in the recorded music sector.
https://euipo.europa.eu/ohimportal/en/web/observatory/ipr_infringement_music
EUIPO (2016) The economic cost of IPR infringement in the spirits and wine sector.
https://euipo.europa.eu/ohimportal/en/web/observatory/ipr_infringement_wines_and_spirits
OECD (2008) The economic impact of counterfeiting and piracy.
http://www.oecd-ilibrary.org/trade/the-economic-impact-of-counterfeiting-andpiracy_9789264045521-en
OHIM (2013) The European Citizens and intellectual property: perception, awareness andbehaviour.
https://euipo.europa.eu/ohimportal/en/web/observatory/ip_perception
OHIM/EPO (2013) Intellectual Property Rights intensive industries: contribution to economic
performance and employment in the European Union.
https://euipo.europa.eu/ohimportal/en/web/observatory/ip-contribution#1study
OHIM (2015) Intellectual Property Rights and firm performance in Europe: an economic
analysis.
https://euipo.europa.eu/ohimportal/en/web/observatory/ip-contribution#2study
OHIM (2015) The economic cost of IPR infringement in the cosmetics and personal care sector.
https://euipo.europa.eu/ohimportal/en/web/observatory/ip-infringements_cosmetics-personal_care
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THE ECONOMIC COST OF IPR INFRINGEMENT IN
THE PHARMACEUTICAL INDUSTRY
Quantification of infringement in Manufacture of pharmaceutical preparations (NACE 21.20)

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