The Economics of Prescription Drugs

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The Economics of Prescription Drugs
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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

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History of Drugs and Regulation
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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

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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

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Which is better?
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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

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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.
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Government Regulation

• Regulation by the Food and Drug Administration
  (FDA)

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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)

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Liberalization of FDA Process

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

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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
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Cost Benefit Analysis of Regulation

• Effects of regulation on pharmaceuticals success
  in world markets

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Importance of Pharmaceuticals
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Demand for Pharmaceuticals

• Effects of increased insurance coverage for
  prescription drugs
• Effects of direct marketing

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Buyers (Payers)
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Trends in Promotional Spending for Prescription
Drugs, 1996-2007
Promotional Spending ( in billions)
NA
NA
NA
27.7
11.4
13.9
16.6
19.1
12.5
12.0
24.2
21.1
11.0
9.2
Total Spending
10.4
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.imshealt
h.com (About Us, Press Room, 2007 Top-Line
Industry Data, U.S.).
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Talking to Doctors as a Result of Prescription
Drug Ads, 2008
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
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?
Recommended you make lifestyle/ behavior changes
Recommended a different prescription
Gave you the prescription for the drug you asked
about
No
Yes
Recommended an over the counter drug
Recommended any prescription drug
SOURCE USA Today/Kaiser Family
Foundation/Harvard School of Public Health The
Public On Prescription Drugs and Pharmaceutical
Companies (conducted Jan. 3-23, 2008)
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Pricing Issues

• Pricing Differentials between brand name and
  generic drugs
• Discounts to third party payers
• Pharmacy benefits management firms
• Price differences between countrues

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Market Structure

• Industry Concentration (RPM Relevant Product
  Market?)

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Figure. World Pharmaceutical market
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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

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The Case of ADHD Drugs
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Firm Size Effect

• Complicated relationship between
• Economies of Scale (Benefits of Large RD)
• Economies of Scope (Spillovers from different
  RD)

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Profitability of US Pharma
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Profitability of US Pharma
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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.
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International Trade

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

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American Publics Views About Prescription Drugs
Upside
Downside
Do you think Rx drugs developed over the past 20
years have generally made the lives of people in
the U.S?
In general, do you think the price of Rx drugs is
reasonable or unreasonable?
Better
Unreasonable
DK
Havent made much difference/DK
Worse
Reasonable
SOURCE USA Today/Kaiser Family
Foundation/Harvard School of Public Health The
Public On Prescription Drugs and Pharmaceutical
Companies (conducted Jan. 3-23, 2008)
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Serious Problems Paying, Not Filling
Prescriptions and Skipping Rx Drug Doses Because
of Cost, 2008
In past two years, have ever NOT filled a
prescription because of the cost
In past two years, have skipped doses or cut
pills in half to make Rx last longer
Say it is a serious problem for self/family to
pay for Rx drugs you need
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)
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Medicaid in the Health System, 2006
Medicaid as a share of national health care
spending
Total National Spending (billions)
2,106
648
660
125
217
NOTE Does not include spending on SCHIP SOURCE
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.
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Problems Paying for Prescription Drugs, 2008
How much of a problem is it for you or your
family to pay for prescription medicines that you
need?
A serious problem
Not much of a problem
41
A problem, but not serious
Source USA Today/Kaiser Family
Foundation/Harvard School of Public Health The
Public On Prescription Drugs and Pharmaceutical
Companies (conducted Jan. 3-23, 2008).
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Relative Contributions of Utilization, Types of
Prescription Drugs Used, and Price to Rising
Prescription Drug Expenditures, 1993-1997 vs.
1997-2002
1993-1997
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/histor
ical/, 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.
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Percent of Seniors Who Did Not Fill or Delayed
Filling Prescriptions Due to Cost, by Source of
Drug Coverage, 2006
(Among Non-Institutionalized Seniors Taking 1 or
More Rx)
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 (plt0.05).
SOURCE Kaiser/Commonwealth/Tufts-New England
Medical Center National Survey of Seniors and
Prescription Drugs, 2006.
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6 Drugs of the future
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Cancer Vaccine
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Male Birth Control Pill
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Anti-Addiction Pill
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Exercise Pill
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Anti-Aging Pill
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Smart Pill
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Pharma Ads
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FDA data
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FDA data
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FDA data