The Economics of Prescription Drugs

Approach to Analysis

• Structure– Number of firms, market share, historical

antecedents to structure.– Buyer Demand (Pharma Benefits Managers).

• Conduct– Firm behavior (Pricing, Promotion, Innovation)

• Performance– Relative Price Changes, Profits, Innovation

History of Drugs and Regulation

History of Drugs and Regulation

• 1862 USDA Dept of Chemistry• 1906 Pure Food and Drugs Act• 1927 Food, Drug, and Insecticide

Administration• 1930 Food and Drug Administration (FDA)• 1938 Food, Drug, and Cosmetic Act

– Safety

History of Drugs and Regulation

• 1951 Durham-Humphrey Amendment– OTC vs Prescription

• 1962 Kefauver-Harris Amendments– Efficacy and Safety

• 1990 Nutrition Labeling and Education Act

Which is better?

Bio-Pharmaceuticals

• New Chemical Entities (NCEs) – is the basis for Pharma Patents and Regulation.

• Definition: a drug that contains no active moiety that has been approved by the FDA in any other application submitted under section 505(b) of the Federal Food, Drug, and Cosmetic Act.

• “Moiety”- A type of functional group from Organic Chem

Benzyl acetate - has an ester functional group (in red), an acetyl moiety (circled with green) and a benzyloxy moiety (circled with orange). Other divisions can be made.

Government Regulation

• Regulation by the Food and Drug Administration (FDA)

Stages for a NCE• Discovery• Preclinical animal testing• File application for human testing• Phase I: Test on Healthy Volunteers• Phase II: Test on Large sample of disease pop• Long-term animal studies• Phase III: Test for efficacy and side effects• New drug approval• Average Time (~12 Years)

Liberalization of FDA Process

• Generics• Orphan Drugs• Compassionate Use• User fee act of 1992• Requirement of Prescriptions (Rx)• Liberalization of Rx Req.

Cost Benefit Analysis of Regulation

• Issues of agency, and who suffers the costs and benefits.

Safe Drug Unsafe Drug

Accept Correct Decision Type II Error

Reject Type I Error Correct Decision

Cost Benefit Analysis of Regulation

• Effects of regulation on pharmaceuticals success in world markets

Importance of Pharmaceuticals

Demand for Pharmaceuticals

• Effects of increased insurance coverage for prescription drugs

• Effects of direct marketing

Buyers (Payers)

Trends in Promotional Spending for Prescription Drugs, 1996-2007

$4.9$6.0

$6.6$7.2

$8.5

$10.5

$11.9

$13.5

$15.9

$3.0 $3.4$4.1 $4.3

$5.1 $5.5$6.2

$6.9 $7.3 $6.8 $6.7 $6.3

$0.8 $1.1 $1.3$1.8

$2.5 $2.7 $2.6$3.3

$4.0 $4.2$4.8

$3.7

$0.5 $0.5 $0.4 $0.4 $0.4 $0.5 $0.4 $0.5 $0.4$0.5$0.5$0.5$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Retail Value of Sampling Detailing

Direct-To-Consumer Advertising Professional Journal Advertising

Note: NA = Not Available. Numbers may not total due to rounding. Sampling is the value of samples left at sales visits to office-based physicians; the samples are valued at the prices at which they would be sold in retail pharmacies. Sampling data were not available for 2005 and 2006, so Total Spending numbers exclude amounts for Sampling. Detailing is expenses for the sales activities of pharmaceutical company representatives directed to office-based and hospital-based physicians and hospital directors of pharmacies; approximately 85% of detailing is for office-based sales visits. Direct-to-Consumer Advertising is expenses for advertising to consumers through television, magazines and newspapers, radio, and outdoors. Professional Journal Advertising is expenses for advertising appearing in medical journals.

Source: The Kaiser Family Foundation and the Sonderegger Research Center, Prescription Drug Trends, A Chartbook Update, November 2001, Exhibit 17, at http://www.kff.org/insurance/3161-index.cfm, updated by the Kaiser Family Foundation with data from the IMS Health website at http://www.imshealth.com (About Us, Press Room, 2007 Top-Line Industry Data, U.S.).

$27.7 $11.4

$13.9

$16.6 $19.1$12.5

$12.0

$24.2 $21.1$11.0

$9.2Total Spending:

Promotional Spending ($ in billions)

NANANA

$10.4

Gave you the prescription for the

drug you asked about

Recommended a different

prescription

Recommended you make lifestyle/

behavior changes

Recommended any prescription

drug

Recommended an over the counter

drug

Among the 32% who have talked to a doctor as a result of seeing an Rx drug ad: Percent who said the doctor did one or more of the following…

Talking to Doctors as a Result of Prescription Drug Ads, 2008

82%

30%

44%

54%

57%

As a result of seeing an ad for an Rx drug, have you ever talked with a doctor about the specific medicine you saw or heard advertised, or not?

68% 32%

SOURCE: USA Today/Kaiser Family Foundation/Harvard School of Public Health: The Public On Prescription Drugs and Pharmaceutical Companies (conducted Jan. 3-23, 2008)

YesNo

Pricing Issues

• Pricing Differentials between brand name and generic drugs

• Discounts to third party payers

• Pharmacy benefits management firms

• Price differences between countrues

Market Structure• Industry Concentration (RPM – Relevant

Product Market?)

Figure. World Pharmaceutical market

Competition at Product Level

• Within patent competition– Generics after patent expiration– On patent competition from non patent friendly

countries

• Between patent competition– Me Too drugs and the “Gold mine” problem

The Case of ADHD Drugs

Firm Size Effect

• Complicated relationship between – Economies of Scale (Benefits of Large R&D)– Economies of Scope (Spillovers from different

R&D)

Profitability of US Pharma

Profitability of US Pharma

Profitability of Pharmaceutical Manufacturers Compared to Other

Industries, 1995-2006

Note: Percent is the median percent net profit after taxes as a percent of firm revenues for all firms in the industry.

Source: Kaiser Family Foundation and Sonderegger Research Center, Prescription Drug Trends: A Chartbook Update, November 2001, Exhibit 4.11, at http://www.kff.org/insurance/3161-index.cfm, updated with data from Fortune, Fortune 500 Industry Rankings: April 14, 2003, Vol. 147, No. 7, p. F-26; April 5, 2004, Vol. 149, No. 7, p. F-26; April 18, 2005, Vol. 151, No. 8, p. F-28; April 17, 2006, Vol. 153, No. 7, p. F-26; April 30, 2007, Vol. 155, No. 8, p. F-32.

19.6

15.715.814.3

17.018.518.618.618.5

16.117.1

14.4

6.35.95.24.63.13.3

4.55.04.44.95.04.8

0%

5%

10%

15%

20%

25%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Pharmaceutical Manufacturers

All Fortune 500 Firms

International Trade

• TRIPS (Trade Related Aspects of Intellectual Property Rights 1994)

American Public’s Views About Prescription Drugs

SOURCE: USA Today/Kaiser Family Foundation/Harvard School of Public Health: The Public On Prescription Drugs and Pharmaceutical Companies (conducted Jan. 3-23, 2008)

73%

10%

17%

Do you think Rx drugs developed over the past 20 years have

generally made the lives of people in the U.S…?

Better

Haven’t made much

difference/DK Worse

79%

18%2%

Unreasonable

DK

Reasonable

In general, do you think the price of Rx drugs is

reasonable or unreasonable?

Upside Downside

Serious Problems Paying, Not Filling Prescriptions and Skipping Rx Drug Doses

Because of Cost, 2008

29%

23%

16%

40%

In past two years, have ever NOT filled a prescription because of the

cost

Say it is a serious problem for self/family to pay for Rx drugs you

need

In past two years, have skipped doses or cut pills in half to make Rx last

longer

Percent who say yes to at least one of the above

SOURCE: USA Today/Kaiser Family Foundation/Harvard School of Public Health: The Public On Prescription Drugs and Pharmaceutical Companies (conducted Jan. 3-23, 2008)

16% 17%

43%

9%13%

Total HealthServices and

Supplies

HospitalCare

ProfessionalServices

NursingHome Care

PrescriptionDrugs

NOTE: Does not include spending on SCHIPSOURCE: Kaiser Commission on Medicaid and the Uninsured, based on A Catlin et al, “National Health Spending in 2006: A Year of Change for Prescription Drugs,” Health Affairs 27(1)14-29, January/February 2008. Based on National Health Care Expenditure Data, CMS, Office of the Actuary.

Total National Spending(billions)

$2,106

$648 $660 $125

$217

Medicaid as a share of national health care spending:

Medicaid in the Health System, 2006

Problems Paying for Prescription Drugs, 2008

58%

16%

25%

How much of a problem is it for you or your family to pay for prescription medicines that you need?

A problem, but not serious

Not much of

a problem

A serious problem

41%

Source: USA Today/Kaiser Family Foundation/Harvard School of Public Health: The Public On Prescription Drugs and Pharmaceutical Companies (conducted Jan. 3-23, 2008).

Relative Contributions of Utilization, Types of Prescription Drugs Used, and Price to Rising Prescription Drug Expenditures,

1993-1997 vs. 1997-2002

Source: Kaiser Family Foundation and Sonderegger Research Center analysis using National Health Expenditures data for prescription drugs from the Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.gov/statistics/nhe/historical/, Table 2; price data from IMS Health, Pharmaceutical Pricing UPDATE, various years; and utilization data from IMS Health, National Prescription Audit Plus, various years, updated with data from the IMS Health web site at http://www.imshealth.com.

1993-1997 1997-2002

Price (Manufacturer

Price Increases)19% Utilization

(# of Prescriptions Dispensed)

47%Types of

Prescription Drugs Used

34%

Price (Manufacturer

Price Increases)25%

Utilization (# of

Prescriptions Dispensed)

42%

Types of Prescription Drugs Used

34%

Percent of Seniors Who Did Not Fill or Delayed Filling Prescriptions Due to Cost, by Source of Drug Coverage,

2006

NOTES: Did not fill or delayed filling prescriptions due to cost refers to within the past twelve months. VA is Department of Veterans Affairs. Reference group for statistical significance is Part D coverage (*p<0.05).SOURCE: Kaiser/Commonwealth/Tufts-New England Medical Center National Survey of Seniors and Prescription Drugs, 2006.

12% *

8% *

20%

23% *

No Rx Part D Employer VA

(Among Non-Institutionalized Seniors Taking 1 or More Rx)

6 Drugs of the future

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Anti-Addiction Pill

Exercise Pill

Anti-Aging Pill

Smart Pill

Pharma Ads

FDA data

FDA data

FDA data