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

The Pharmaceutical IndustryProfessor Vivian HoHealth Economics Fall 20091OutlineCompetitiveness of the pharmaceutical industryConductPerformance2Benefits of DrugsReduce mortalityReduce morbidity/improve quality of lifeReduce cost of treating diseases3Industry Structure# and size distribution of sellersBuyers’ side characteristicsBarriers to entryGovernment regulation4 10 U.S. Prescription Drug Sellers, 2008 Company Sales $b Pfizer 20.5 GlaxoSmithKline 18.4AstraZeneca 16.3Johnson & Johnson 16.0Merck & Co 15.5Amgen 13.4Hoffman-LaRoche (incl Genentech) 13.1 Novartis 12.4 Lilly 11.4 Sanofi-Aventis 11.056Can competition be accurate measured at the industry level?Most drugs are not substitutes to the patientThe relevant product market is the therapeutic marketOnly a few major drugs compete in most therapeutic marketsConcentration ratios at this level are higher than for industry as a whole7Express Scripts Drug Trend Report, 2006*Includes “Generics” as a top-4 firm8Firms tend to make most profits from a few key drugs9The Buyer SideExpend. Source($billions)PercentTotal227.4100.0% All private146.664.5 Out-of-pocket47.520.9 Private insurance99.143.6 All government80.835.5 Federal 66.529.2 State14.3 6.3Buyers of Prescription Drugs, 200710www.cms.hhs.gov11How 3rd parties influence drug demandEven if consumers exert little influence over drug choice, 3rd parties are making the market more competitiveFormularies - list of selected drugs physicians may prescribeUsed by hospitals to limit inventories and costsUsed by most HMOs and many PPOsUsed by many state Medicaid programs12Drug utilization reviewUsed by insurers to enforce formularies, identify inappropriate prescribing practicesGovernment influence1990 Omnibus Budget Reconciliation Act - Federal funding provided for drug only if state Medicaid program receives manufacturer rebate agreement13Government influence (cont.)1992 Veterans Health Care Act - price discounts for Federal Supply Schedule, VA, Dept. of DefenseThese programs may restrict costs for government, but drug firms may be forced to raise nonfederal prices14“managed care emphasizes less-expensive, preventive types of treatment”“The rate of growth for drugs to treat high blood pressure and high cholesterol in certain managed-care strongholds on the West Cost has gone off the charts”WSJ 10/17/9615“Consumers in the $94 billion prescription drug market are mostly indifferent to price. What will happen when they all become budget conscious?Forbes 4/5/9916Pharmacy Benefit ManagersGeneral StrengthsIntermediaries that purchase drugs from manufacturers and pharmacies at a reduced price for health insurersPBMs provide drugs at lower costsAchieve econ. of scale in pharmacy benefits by serving multiple plan sponsorsLarge market share on buyer’s side  stronger negotiating power w/ drug companies17Pharmacy Benefit ManagersGeneral StrengthsPBMs can use their patient information to their strategic advantage e.g. Medco’s 60m patientsHow drugs prescribed, used, impact on diseaseCan prevent inappropriate drug interactions, under/over medication18Vertical IntegrationBrand name drug companies were purchasing PBMs19Vertical IntegrationGood or bad idea?Buy the information, not the PBM “Industry consultants and Medco competitors argue that Merck could have bought that information from Medco or others in the field without buying the company.” NYT 8/5/93Critics argue that PBMs will only serve to lower prescription pharmaceutical prices20WSJ 2/2/9821Vertical IntegrationComments from Roy Vagelos, former Merck CEO“In classic terms of competition, we could see that the power of the buyers was growingPBMs werebringing together the person who chooses the drug and the person who pays for the drug.”“Having salespeople visit doctors’ offices does not allow us to reach PBMs, HMOs, or plan sponsors -- the major players in the emerging market.”22Vertical IntegrationMerck bought Medco as a response to managed careStrategic attempt to  market power. How?Followup on patients w/ chronic illness who may stop taking prescribed medsPosition Merck drugs favorably on formularye.g. lower patient copay, or lower cost to plan sponsor23Vertical IntegrationIn 2001, Medco accounted for $26b of Merck’s $46b salesMedco filled 537m prescriptions in 2001But profit margins for Medco <3%24Vertical IntegrationRegulators worried that patients and employers would be hurt by this type of vertical integrationRegulators required separate management of drug sales and PBM operationsMerck spun off Medco in 200325Role of the FDAThe Food and Drug Administration approves a new drug before it can be sold in the marketplaceAlso determines whether drugs require a physician prescription vs. OTC salesThe FDA requires extensive, costly testing before approving a drugWhat is the economic argument for the FDA’s role?26Role of the FDAType 1 error: The FDA rejects the application for a new drug that is truly safe and effectiveType 2 error: The FDA approves a drug that is unsafe or ineffectiveIf you worked for the FDA, which error would you rather make?Why?27Role of the FDAOn Sept 20 2004, Merck announced it was recalling Vioxx, its $2.5b-a-year arthritis medicineWas shown to double the risk of heart attacks and strokes in long-term usersMerck lost 27% of its total market capitalization in the stock market ($27b) in one day28Role of the FDACan we compare the benefits of allowing novel, risky drugs on the market to the costs? (Olson, 2004)“Novel” drugs offer therapeutic gains over existing remedies1st of a kind in a therapeutic area (e.g. Viagra)New additions to an existing class, which are safer or more effective (e.g. Celebrex)29Role of the FDAAdverse drug reactions (ADRs)Severe reactions to drugs that are fatal, life-threatening, permanently disabling or require hospitalizationMost ADRs filed by physicians and other health professionals, reported to drug’s manufacturer or the FDAData is collected in the FDA’s spontaneous reports system30Role of the FDAThe stock of novel drugs introduced 1990-1995 was estimated to result in 1.7m life years saved(Predicted deaths avoided per drug) x (estimated life years gained per drug) x (# novel drugs)137,000 life years lost due to ADR deaths during this time period(Predicted deaths due to ADR per drug) x (life years lost per drug) x (# novel drugs)31Role of the FDALosses due to ADRs may be underestimatedOnly ADR deaths in 1st 2 years after FDA approval were consideredADRs may be underreportedMany ADRs do not cause death, but result in hospitalization or serious disabilityIs the FDA being too lax or too lenient in approving new drugs?32Barriers to entryGovernment patentsBrand loyalty advantageControl over a key input33Government PatentsInnovating firm gains the right to be sole producer of a drug for legal maximum of 20 yearsPreserves incentives for firms to undertake risky and costly research and development (R&D) that is socially valuableRationale: Monopoly restriction of output better than having no output at all34Monopoly power of patents is not always strongPatents granted for chemical composition, not therapeutic noveltyLipitor, Crestor, and Zocor all compete in the cholesterol-lowering drug marketSignificant part of patent life may be spent trying to get FDA approval“effective” patent life = 8 years35Monopoly power of patents is not always strong1984 Waxman-Hatch Act - benefits for both brand-name and generic companiesEffective life of new drug patent can be extended up to 5 years if FDA delayed market introductionFast approval process for generics: eliminated proof of safety & effectiveness36