Pharmaceuticals Market Flashcards
How much total health care expenditure goes to the Pharmaceuticals market?
10-20% ($1,105 billion in 2016)
What did Morton and Kyler (2011) say about OECD pharmaceutical spending?
OECD average spend of 17% of total health care expenditure in the pharmaceutical market
How large is the market worldwide?
41% goes to US
13% to the EU5
11% to China
Percentage of the market made of original brands?
52%
Main type of illnesses the drugs target?
Non-communicable diseases (37%) e.g. stroke, CVD
How much did the industry spend on Research and development in 2015?
$150 billion
Social benefits/criticisms of the industry?
Social: Decline in aids, productivity, casual treatment
Criticisms: Huge profits! Useless/harmful drugs and excessive advertising spend
Role of the regulator in the market?
Advertising regulation Reimbursement scheme Cost containment Safety, efficiency Patent regulation Price regulation
Features of the demand for the market?
- Doctors act as imperfect agents for prescriptions
- Reimbursement for insurance
- Lack of substitutes
- Inelastic demand
Externalities to the pharmaceuticals market?
- Health improvements
- Cost saving
- Tech transfers
- Employment
Features of the supply side of the market?
- High R&D investment
- Innovation
- Monopoly power
- Product discrimination
Breakthrough stages of Pharmaceuticals development?
Need to secure survival through innovation. Optimisation, need MR to cover the expected MC
What is product innovation?
Creates a product with modified or even completely new characteristics.
Why is access to the market so key?
Provides an avenue to sell the product in order to recuperate costs
What is consumption technology?
A combination of the drugs characteristics
What is new demand theory? Papers on it?
Lancaster, 1966 and Becker, 1965: Consumers derive utility not from the good itself but the goods characteristics
What characteristics of drugs do people compare?
- Beneficial principal effect
- Adverse drug reaction
- Convenience of handling
- Storability
Which drugs are guaranteed market access?
Breakthrough drugs (health insurance guarantees success)
Key facts about the pre-clinical stage of drug testing?
Research Discovery.
3-6 Years.
21.5% of the budget.
<0.01% successful
Key facts about the Clinical trials stage of drug testing?
Development, Clinical Trials: 6-7 Years. 65% of the budget.
3 Stages of Main stage drug testing?
Stage 1, 20-100 people, 65% success.
Stage 2, 100-500 people, 40% success.
Stage 3: 1000-5000 people, 50% chance of success
How much of the budget is spent getting market approval?
3.5% of the budget.
What are Phase 4 trials?
Ongoing Checks. 10% of the budget.
How has the cost of marketing a drug changed?
Increase in the cost (average) of a marketable drug. Lower chance of success and a longer development phases
Morton and Kyler (2011) quote on innovation?
Innovation is stochastic
Average costs of marketing a drug?
1950s: $7.5 million. (Bailey)
80s: $200 million.
2003: $800 million (Di Masi)
How is profitability measured?
Net Present Value =
Revenues, costs, interest rate
What is the IRR
Internal rate or return: Interest rate that yields
NPV =0
On average when is the flow of revenues from a new drug positive?
12 years
Average IRR in the 1990s?
11.5% (Grabowski et al, 2002)
What did Joglekar (1986) say the Median IRR was in the 70s?
-5.5% (50% of the innovations launched in the US in 70’s not paid costs even after 36 years)
Average NPV according to Grabowski and Vernon (1994)
$22.2 million
Estimated social returns from drug development?
Add about 200% to the private rate of return
Morton and Kyler (2011) warn about with drug development?
High social costs of a bad drug
What is Arkelofs problem in this field? (1970)
Lemon problem- consumer cannot assess the drugs properly.
Problem with insurance in the market?
Exaggerates peoples willingness to pay and overestimates the social return.
Why do companies want a patent?
To protect the invention, and ensure price remains above MC. Gives a monopoly position
Problem with patents?
Creates a dead weight loss to society
Why did Cohan (2000) say patents are key?
Cost structure, and ease of innovation explain why patents are key.
Push/pull incentives other than patents?
Push: Decrease the costs of R&D. Tax subsidies for clinical trial/research. Grants for academic research
Pull: Increase revenue, patents, data protection and drug pricing.
What was the orphan day act (1983)?
Funding for ‘rare disease’ affecting less than 200,000 people in the US. Federal funding, tax credit (50% of testing costs) and 7-year market exclusivity.
How many drugs approved under Orphan Day Act?
1967-83: 34 drugs approved 1984-2009: 347 approved (Botox has 3 approvals).
What is price regulation?
Due to patent monopoly can create and the elastic demand. Governments have to regulate prices to limit health care expenditure.
Limits to price regulation?
- Co-payments introduce moral hazard into the market. -Global efficiency losses
- Less innovation.
- Is price competition enough?
Morton and Kyler (2011), why is there political pressure to reduce drug costs in the US?
US government buys 50% of drugs in the US (in/directly), huge pressure to reduce the costs.
Pricing structure for manufacturers examples?
UK no VAT
Denmark 25% VAT
France 2.1% VAT
Pricing structure for wholesaler examples?
Mark-up + VAT: 6-12% Mark up in Germany (Vogler, 2008)
Example of the pricing structure for pharmacies?
(Mark-up + VAT): Germany €8.10 + 3%, regressive limit to mark-up
What is the price to the insurer?
Reimbursement price
What is the price to the consumer called?
Co-payment
How does list pricing work?
Payer/commission recommends a list price. In the UK this is binding (NICE). France, negotiation with the agency afterwards
Example of direct price regulation?
Prices of new products and changes in the prices of existing drugs require approval by a public authority (e.g. France, Spain and Italy). Use international prices as a benchmark.
Problems with price regulation?
Doesn’t reflect consumers willingness to pay, negotiations delay payment for small innovators and delay new products.
How does a reference price work?
Group properties of drugs, set a common reference price. In theory can charge consumers the difference but, few do. Ideally, manufacturers lower their prices.
What is the rate of return capped at in the UK?
29.4%, forced to repay NHS if they go over. In reality very hard to prove profits and companies manipulate the figures.
German Health Care Structure, 1993 reforms- did they work?
Budget Control to Doctors: Promising initiative but failed as no physician was sanctioned and opposition from industry/doctors too strong.
How is price competition weakened by health insurance?
Patients only interested in the quality and not the price
How long do Me too drugs take to emerge?
1-6 years
What are generic drugs?
Non-branded imitations, 4x lower price
How do generic drugs affect the original products market share?
Reduce originals market share by 45% no effect on its price really. Competition amongst generic drugs, 1- 10 suppliers, reduces the price by 50%.
Why is price competition better in the US?
More effective in the US (large co-payments) rather than the UK with the NHS.
