OBJECTIVES: To analyse the impact of parallel trade of pharmaceuticals on welfare and innovation in the long run and to estimate the impact of costs for pharmaceuticals in some therapeutic areas in the short run. METHODS: Identify arguments for and against parallel trade by use of literature review and by interviewing agens involved in parallel trade of pharmaceuticals. Official data of prices and sales of pharmaceuticals are used to estimate the impact of parallel trade on the drug bill. RESULTS: In Europe the principle of free trade and the harmonization of registration requirements for pharmaceuticals tend to force price convergence across markets, i.e. a uniform 'Euro price'. Parallel trade have reduced annual costs for pharmaceuticals for treating ulcer related diseases by about 19 percent and for the treatment of inhaled steroids of about 8 percent in Sweden. These cost savings are compared with the excess costs for the distribution and storage of parallel-imported products. Comparison shows net cost savings for the ulcer related diseases and inhaled steroids in the short run. CONCLUSIONS: There is a conflict between the principle of free trade and the principle of inellectual property rights (e.g. patent, brand-names, etc.). The purpose of intellectual property rights is to provide economic incentives for the innovative industry to develop new medicines. New medicines are products with relatively high R&D costs, difficult to finance without patent protection and price discrimination.