Kinh tế học - The pharmaceutical industry - Part 2: Professor vivian ho health economics fall 2009

The Pharmaceutical IndustryPart 2Professor Vivian HoHealth Economics Fall 20091Pharmaceutical Industry ConductPricing Does more intense competition   drug prices?Promotion Does drug advertising promote or impede competition?Product innovationAre large firms necessary for drug innovation?Preview: Empirical evidence indicates that competition is at work, but the industry does not exhibit perfect competition.2Pricing BehaviorCan the brand-name firm maintain its price once its patent expires and generics enter?After patent expiration, each 10% increase in the price differential for brand-name drugs relative to generics resulted in only a .5% drop in market share for the brand-name drug. (Hurwitz & Caves, 1988)Average price differential between brand-name and generic firms = 127%, but brand name market share = 63.4%. 3Pricing BehaviorThe longer the brand-name drug’s effective patent length, the more market share it preserved after patent expiration.The arrival of an additional supplier was estimated to reduce the brand-name drug’s market share by 1.25 percentage points.4Pricing BehaviorBranded drugs’ prices 11% 2 years after generic entry. (Grabowski & Vernon 1992)Yet brand-name drugs lost 1/2 of market share.Average market price fell to 79% of pre-entry price.5Pricing BehaviorBrand-name firms segment the market.Remaining customers relatively price insensitive.Inelastic demand curve allows them to maintain price.These 2 studies suggest that generic drug prices are substantially lower than brand-name prices.6Express Scripts 2007 Drug Trend Report7Promotion StrategiesPromotion Magnitude:Research-based firms spend as much as 20-30% of sales on promotion.70% pharmaceutical salespersons (detailing).27% advertising.3% direct mail.Impact:22,000 drugs on market  timely, valuable information.May impede competition.8Direct-to-Consumer PrescriptionDrug Advertising: Bane or Boon?Richard L. Kravitz, MD, MSPHUC Davis Center for Health Services Research in Primary Care9A brief regulatory history1981: industry shows interest in advertising directly to consumers1983–1985: FDA obtains voluntary moratorium on DTC advertising 1985: moratorium lifted1990: DTC advertising begins in earnest1997: TV advertising made feasible through FDA policy change 10Promotional spending by pharmaceutical manufacturers11Are DTC ads reaching consumers?12Ads are read and acted upon56% of Sacramento-area adults have read a DTC ad carefully from beginning to end35% have asked their doctor for more information because of a DTC ad19% have asked for a prescription due to an ad13Misconceptions abound50% believe ads subject to prior review43% believe only “completely safe” prescription drugs can be marketed DTC; 21% that only “extremely effective” drugs can be so marketed22% believe that advertising of prescription drugs with serious side effects has been banned14Are DTC ads educational?15The Industry Perspective“ By greatly increasing the likelihood that patients will seek help for their medical problems and receive a safe and effective prescribed medicine, DTC advertising willplay a very real role in enhancing public health.”-Alan F. Holmer, President, Pharmaceutical Research and Manufacturers of America, JAMA 281:380,199916A Contrarian View“Extending the scope of already ubiquitous promotions about ‘post-nasal drip,’ ‘unsightly rashes,’ or ‘cures for baldness’ has little to do with educating patients or relieving suffering. It will, however, inevitably drain healthcare dollars, dramatically increase unnecessary prescribing, and strain patient-doctor relationships.”--JR Hoffman and MS Wilkes, BMJ 318:1301, 199917Content analysis of print adsAll DTC ads appearing from 1989 through 1998 in 18 popular magazinesSelection of publications based on circulation18Results19Influence on prescribing decisions: a bi-national studyCross-sectional cluster survey in Sacramento (CA) and Vancouver (CANADA)78 primary care physicians1431 patients (61% of those attending on preset clinic days)20Patient requests and physician prescribingPatients requested prescriptions in 12% of visits (MD report)42% of requests were for advertised products74% of those requesting drugs received them (similar for advertised and non-advertised drugs)Patients requesting a prescription much more likely to receive one (AOR 8.7, 95% CI 5.4-14.2)21Provoking clinical ambivalence“If you were treating another similar patient with the same condition, would you prescribe this drug?”Percent “possibly” or “unlikely”Rx not requested: 13%Any drug requested: 49%Advertised drug requested: 70%22Summary of Katz StudiesDTC ads are reaching consumersEducation is a side effect of promotionDTCA-induced requests influence prescribingA true reckoning of public health benefits and harms has not occurred23Product Innovation24Product Innovation25Product Innovationwww.phrma.org26Product InnovationInnovation is very risky and time consuming.R&D process takes many years.Only a small fraction of new drug discoveries are eventually marketed.75% of NCEs in Phase 1 go to Phase 2.36% of NCEs in Phase 1 go to Phase 3.27Capitalized Cost perApproved DrugR&D costs are capitalized to the date of marketing approvalThe cost-of-capital is based on a CAPM analysis of the pharmaceutical industryAn 11% real cost-of-capital was utilized for the period under study28Out-of-Pocket and Capitalized Costsper Approved Drug121336466282403802J. DiMasi, R. Hansen, and H. Grabowski, “The Price of Innovation: New Estimates of Drug Development Costs”, Jan 200229Pharmaceutical Industry PerformanceDoes the absence of perfect competition higher prices & restricted output?*2000 - 2005 includes prescription drugs and medical supplies.YearAll ItemsPrescription Drugs*1970-797.13.61980-895.69.61990-943.66.919952.81.920003.44.420032.33.120053.43.520072.81.420083.82.5Urban Consumer Price Inflation Rates30DRUG SPENDING INCREASED 5.4% from 2004 to 2005IMS Health31Cautionary note on inflationThe inflation rate calculated by BLS is based on a price index, which may overstate the true  in drug costs.Price indexthe relative cost of purchasing a fixed “basket” of drugs in year t, vs. the costs of same basket in a base period.Price Indext =32Cautionary note on inflationBLS “basket” undersamples new drug products, which generally have smaller price increases than older drugs.BLS treats generics as new products, not as substitutes for more expensive drugs.BLS uses list rather than transactions prices.BLS doesn’t adjust prices to reflect quality improvements.33Are profits in the drug industry “too high?”The Pharmaceutical industry ranked 3 out of 53 industries with an ROA of 11.5. 2008 ProfitsRankCompanyas % of Assets29Johnson & Johnson46Pfizer80Abbott Laboratories103Merck110Wyeth120Bristol-Myers Squibb122Eli Lilly138Schering-Plough168AmgenCompanies in the Fortune 500Return on Assets for Pharmaceutical 7.315.210.011.516.5 6.8 -7.117.811.534Are profits in the drug industry too high?Under standard accounting practices, R&D is written off as a current expense.But R&D affects revenues for years to come.Rate of return on investment is calculated using an asset base that improperly excludes intangible R&D.Should capitalize R&D outlays & depreciate them over appropriate time periods.Accounting figures overstate the rate of return on assets for drug companies.35