Transcript GLOBAL AIDS AND PHARMACEUTICAL APARTHEID

Economics of the
Pharmaceutical Industry
Prof. Brook K. Baker
Northeastern University School of Law
Health GAP (Global Access Project)
UKZN – IP and Access to Medicines - 2010
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How Does the Drug Industry Work
How do patents affect prices?
How much money does Pharma make and
where does it go?
How much money and time does it take to
research and develop an new medicine?
How do patent distort R&D?
Is R&D efficient?
Are high profits necessary to future research
and development of life-saving drugs?
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How Patent Monopolies
Affect Price
The right to exclude others creates a power to set
the price so as to maximize profits.
Drug companies prefer to “segment” markets so they
can maximize profits in each segment (Ramsey
pricing, territories and sectors.)
In high-income inequality countries, the profit
maximizing strategy is to sell at a high price to the
rich elite. (Demo.)
To maintain the monopoly and to maximize profits,
the poor lose out – drugs are not affordable.
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How much money does the drug
industry make?
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The Global Pharmaceutical Market
Continues to Grow
2009 Global Pharmaceutical Market
IMS estimate $750 billion
2010 Global Pharmaceutical Market
IMS estimate $825 billion
2013 Global Pharmaceutical Market
IMS Projected $975 billion
Where Does the Drug Dollar go in the US?
Is the distribution likely
to be different in
developing countries
and/or with respect to
generic drugs where the
price is much lower?
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Where Does the Money Go
Inside the Drug Company?
7 Biggest Drug
Companies - 2005
R&D as a % of
Revenue = 13.9%
Profits as a % of
Revenue = 17%
Marketing/Administra
tion = 32%
Other (capital, labor,
materials) = 39%
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Marketing & Lobbying
Advertising to doctors
= $7.2 billion.
The pharmaceutical industry has 100,000
“detailers” in the U.S., one for every 2 ½
prescribing doctors.
Drug samples
= $16 billion.
Direct-to-consumer advertising = $4.8 billion.
From 1998-2006, the pharmaceutical and
health product industries spent $1.1 billion
lobbying the U.S. Congress.
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How Profitable is the
Pharmaceutical Industry?
The pharmaceutical industry was
1st in the world 1995-2002
3rd in 2003-04
5th in 2005
2nd in 2006-07
3rd in 2008
Drug companies earned an after-tax median
profit of 9.6% compared to 6.3% for all other
Fortune 500 companies (2007).
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The Research and Development
Explanation
The drug industry argues it needs to maximize
profits so it can continue to engage in life-saving
research into new medicines.
Industry claims it needs to charge high prices in
developing countries in order to sustain its profit
margins so that it can invest in research and
development for important new drugs.
Does this R&D excuse hold up?
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What does R&D Cost – Is it $802M (Dimasi)
or 2006 Federal Trade Commission estimate -- $868million
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Regardless of actual costs, do
patents distort R&D?
The pursuit of “blockbusters”
“Evergreening”
“Me-too drugs”
• Proliferation of “marketing studies”
“Disease mongering”
Neglect of “neglected diseases”
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“Blockbusters” and
“Evergreening”
Blockbuster drugs are drug with a very high
volume, usually for chronic conditions, that
are prevalent in rich countries, leading to
extraordinary profits.
There were 114 drugs in 2006 that earned
more than $1 billion/year in sales.
Once a medicine is highly profitable it pays
develop minor, but patentable variations that
allow you to extend the patent. This is called
evergreening.
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Blockbuster ARVs
No TB, malaria, or tropical disease blockbusters
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“Me-Too Drugs”
Other companies try to gain market share
from “blockbusters” by introducing a slight
variation, one that doesn’t violate the patents
but is patentable itself.
This results in some competition, but only for
an existing, high cost therapy instead of a
newer more innovative medicine in a
neglected class.
In the resulting “oligopolistic” market, there is
very little price competition.
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“Disease Mongering”
Disease mongering consists of
Over-promotion of a medicines, i.e., over
promotion of anti-depressants and erectile
dysfunction medicines in the U.S.
Creation of a new disease, i.e., restless leg
syndrome, with a new (patented)
medicine.
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Marketing Studies
Drug companies conduct “comparison” trials,
which they publish selectively when they
want to make a marketing claim.
Unless true therapeutic superiority is shown,
these studies have little social value, but add
considerably to the costs of R&D.
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Is Drug Company R&D Truly Innovative
in Terms of Therapeutic Gain?
Not very:
Light found that only 2-3%
of new drug candidates
offered important
therapeutic gains and
another 7-9% offered
modest gains (total 9-12%).
An FDA study from the last
decade found that only
22.5% of all new candidates
received a priority review
standard based a “significant
improvement” standard.
Important nonetheless:
There have been
important new
medicines for heart
disease, diabetes, and
mental illness.
New formulations and
improved compounds
can improve adherence
and result in different
side effect profiles.
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Who Contributes to R& D for
Breakthrough Drugs?
Source: Donald Light (2005)
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No R&D for Neglected Diseases
Because of the lack of
profit incentives for
disease primarily
affecting poor people
(or for vaccines and
antibiotics), there is
very little R&D on
neglected diseases
and very little
research on pediatric
and tropical-country
formulations.
The 14 most NTDs are: Buruli ulcer,
Chagas disease, cholera/epidemic
diarrhoeal diseases, dengue fever,
guinea-worm, endemic treponematoses
(yaws, pinta, endemic syphilis),
sleeping sickness, leishmaniasis,
leprosy, lymphatic filariasis,
onchocerciais, schistosomiasis, soiltransmitted helminthiasis, and
trachoma.
Less than 1% of the 1393 new drugs
registered between 1975-1999 were for
tropical diseases.
The R&D pace is picking up –
multinational companies are currently
working on 41 projects, both in publicprivate partnerships and alone, with at
least four candidates submitted for
approval.
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Does Drug Companies’ Profitability
Ultimately Depend on Sales in
Developing Countries?
Where do drug companies make most
of their sales?
Where are their sales most profitable?
How dependent is overall profitability
on sales in developing countries?
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Global Drug Market Share by Sales
vs. % Global Population - 2007
North America
45.5%
(pop. 5%)
Latin America
Europe
31.1%
(pop. 12%)
Africa, & Asia,
8.3%
(pop. 72%)
Japan & Australia
8.8%
(pop. 2%)
4.8%
(pop. 9%)
Total Global Sales 2007 = $702 Billion
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Poorest Regions - Percentage of Global
Pharmaceutical Sales 2007
Asia
2.7%
Indian subcontinent
1.4%
All of Africa, Asia & Latin Sub-Saharan Africa
America = 13.1%
1.2%
How important are these tiny
markets to R & D incentives?
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But the Market is Tilting
Towards Emerging Markets
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Big Pharma Intentions –
Exploit Tier-1 Emerging Markets
Tier-2 Emerging Markets
Conclusion – The Problem
The R&D excuse simply does not add up.
Drug companies research and invest in order to
maximize profits, mainly in rich country market, for
chronic and deadly diseases affecting rich people,
and secondarily to exploit rich and middle-income
populations in developing countries.
They do not do R&D on diseases primarily affecting
the Global South where there is little prospective
profit.
Because patents form the basis of their monopoly
pricing power, drug companies act to exclude or
delay generic competition.
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Economics of the Generic Industry
Very diverse industry – ranging from companies with
emerging R&D capacity to mom & pop shops.
Quality is variable
Marketing varies from local to global
R&D of generics typically focuses on manufacturing
efficiencies and formulations, including unfortunately,
therapeutically inappropriate fixed-dose combinations
(to avoid price controls).
Focus is on large-production runs at efficient
economies of scale.
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What is the cost structure of generic
manufacturing?
Capital costs of building a pharmaceutical
plant (1/7 in India vs. U.S.)
Building in quality (GMP), human capital,
physical plant, and operating procedures.
Utilities and transportation (expensive in
many developing countries)
Labor costs (again 1/7 in India compared to
U.S.)
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The key role of APIs (Active
Pharmaceutical Ingredients)
APIs comprise 70% of the cost of manufacturing a
medicine.
Therefore, lowering the price of APIs is very
important
The cost of APIs is primarily lowered through
economies of scale and competition among API
producers
When Brazil entered the market in 1996 to buy APIs
and manufacture 3TC, the global price of the API fell
from over $20,000/per kilo to less than $300/per kilo
because of new economies of scale.
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Incentives vs. Disincentives for
Generic Competition
Market aggregation,
esp. small and poor
country markets with
middle-income markets.
Large, profitable
markets incentivize
multiple entry, efficient
production, and lowmark-up sales.
Guaranteed payment.
Eight entrants produces
competitive pricing.
Patent status, DE, and
fear of Big Pharma
lawsuits.
Costs of product
development ($1.5
million) and multiple
registrations ($1.5
million).
Risks re loss of market
share, too many
competitors.
Costs of developing
supply systems.
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The Economics of local production
Added costs: poor infrastructure, lack
of human resources, lack of
manufacturing/operational know-how,
high utility costs, developing
marketing/distribution systems.
Often cannot reach efficient economies
of scale – must go regional or even
global.
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Local Production v. Lower-Cost Imports
Local production
promotes technology
transfer, industrial
development,
associated industries
Local production must
meet GMP standards
Patient safety
Funder requirements
Multiple and local
sources of supply are
important to prevent
stock-outs and price
shocks.
India (and now China)
have achieved
significant cost
advantages and
technical competence.
The major cost items –
active pharmaceutical
ingredients – are mainly
produced in India and
China.
Many local producers
are just finishers
(Mozambique)
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The Future of the Generic Industry
Big Pharma is outsourcing manufacturing
and clinical trials to
India and China.
Big Pharma is buying up
major generic
companies to access
their distribution
systems and to stop
competition.
If the generic
industry sells out to
Big Pharma, what
will we do?
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