Transcript Health Economics ch9-2

Pharmaceutical Industry Conduct




Pricing
 Does more intense competition   drug
prices?
Promotion
 Does drug advertising promote or impede
competition?
Product innovation
 Are large firms necessary for drug
innovation?
Preview: Empirical evidence indicates that
competition is at work, but the industry does not
exhibit perfect competition.
Pricing Behavior

Can 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%.
Pricing Behavior

The 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.
Pricing Behavior

Branded 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 preentry price.
Pricing Behavior
 Brand-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.
Express Scripts 2007 Drug Trend Report
Promotion Strategies

Promotion Magnitude:
 Research-based
firms spend as much as
20-30% of sales on promotion.
 70% pharmaceutical salespersons
(detailing).
 27% advertising.
 3% direct mail.

Impact:
drugs on market  timely, valuable
information.
 May impede competition.
 22,000
Direct-to-Consumer Prescription
Drug Advertising: Bane or Boon?
Richard L. Kravitz, MD, MSPH
UC Davis Center for Health Services
Research in Primary Care
A brief regulatory history
1981: industry shows interest in
advertising directly to consumers
 1983–1985: FDA obtains voluntary
moratorium on DTC advertising

 1985:
moratorium lifted
1990: DTC advertising begins in earnest
 1997: TV advertising made feasible
through FDA policy change

Promotional spending by
pharmaceutical manufacturers
Are DTC ads reaching
consumers?
Ads are read and acted upon



56% of Sacramento-area adults have read a
DTC ad carefully from beginning to end
35% have asked their doctor for more
information because of a DTC ad
19% have asked for a prescription due to an
ad
Misconceptions abound
50% believe ads subject to prior review
 43% believe only “completely safe”
prescription drugs can be marketed
DTC; 21% that only “extremely
effective” drugs can be so marketed
 22% believe that advertising of
prescription drugs with serious side
effects has been banned

Are DTC ads educational?
The 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 will…play a very real role in
enhancing public health.”
-Alan F. Holmer, President, Pharmaceutical Research
and Manufacturers of America, JAMA 281:380,1999
A 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, 1999
Content analysis of print ads
All DTC ads appearing from 1989
through 1998 in 18 popular magazines
 Selection of publications based on
circulation

Results
Medical
Condition
Codes
Condition Name
Symptoms
Precursors
Prevalence
Misconceptions
Mechanism of Action
Competing Treatments
Supportive Behaviors
Onset of Action
Treatment Duration
Success Rate
Treatment
Codes
0%
20%
40%
60%
80%
100%
Influence on prescribing
decisions: a bi-national study
Cross-sectional cluster survey in
Sacramento (CA) and Vancouver
(CANADA)
 78 primary care physicians
 1431 patients (61% of those attending
on preset clinic days)

Patient requests and physician
prescribing




Patients requested prescriptions in 12% of
visits (MD report)
42% of requests were for advertised products
74% 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 5.414.2)
Provoking 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%
Summary of Katz Studies
DTC ads are reaching consumers
 Education is a side effect of promotion
 DTCA-induced requests influence
prescribing
 A true reckoning of public health
benefits and harms has not occurred

Product Innovation
Product Innovation
Product Innovation
www.phrma.org
Product Innovation

Innovation 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.
Capitalized Cost per
Approved Drug

R&D costs are capitalized to the date of
marketing approval

The cost-of-capital is based on a CAPM
analysis of the pharmaceutical industry

An 11% real cost-of-capital was utilized
for the period under study
Millions of 2000 $
Out-of-Pocket and Capitalized Costs
per Approved Drug
900
800
700
600
500
400
300
200
100
0
802
466
403
336
282
121
Pre-Clinical
Clinical
Out-of-Pocket
Total
Capitalized
J. DiMasi, R. Hansen, and H. Grabowski, “The Price of
Innovation: New Estimates of Drug Development Costs”, Jan
2002
Important Institutional Features of
Pharmaceutical R&D
Estimated mean R&D cost per new
chemical entity estimated to be US$802
million (2000$). (DiMasi, Hansen, and
Grabowski 2003)
 Long time involved in developing new
drug
 High failure rates in drug discovery and
development

29
Patents to Promote Investments in
R&D
What is a patent?
 Conceptually, how do patents promote
R&D?
 Why do you think patents are used
much more widely than are other public
policies to promote pharmaceutical
R&D?

30
Effective Patent Life (EPL)
EPL=Nominal Patent Life – Time Lost
Prior to Regulatory Approval
 Nominal Patient Life now fixed at 20
years
 Priority review can increase EPL by a
year (Ridley, Grabowski, Moe 2006)
 Passage of Hatch-Waxman Act
increased EPL by 2.3 years (Grabowski
31
and Vernon 2000)

Pharmaceutical Industry Performance
Does the absence of perfect competition
higher prices & restricted output?
Urban Consumer Price Inflation Rates
Year All Items Prescription Drugs*
1970-79
7.1
3.6
1980-89
5.6
9.6
1990-94
3.6
6.9
1995
2.8
1.9
2000
3.4
4.4
2003
2.3
3.1
2005
3.4
3.5
2007
2.8
1.4
2008
3.8
2.5
*2000 - 2005 includes prescription drugs and medical supplies.
DRUG SPENDING INCREASED
5.4% from 2004 to 2005
6.00%
5.00%
5.4%
Price Inflation
4.1%
4.00%
3.00%
2.3%
2.00%
Utilization &
Mix
TOTAL
1.00%
0.00%
-1.00%
-1.1%
-2.00%
2004-2005
IMS Health
New Drugs
Cautionary note on inflation
The inflation rate calculated by BLS is
based on a price index, which may
overstate the true  in drug costs.
 Price index

 the
relative cost of purchasing a fixed
“basket” of drugs in year t, vs. the costs of
same basket in a base period.

Price Index =

t
N
p
x
it
io
i 1
N
i 1
pio x io
i  1,.... N drugs
Cautionary note on inflation

BLS “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.
Are profits in the drug industry “too high?”
Return on Assets for Pharmaceutical
Companies in the Fortune 500
2008 Profits
Rank Company
as % of Assets
29 Johnson & Johnson
15.2
46 Pfizer
7.3
80 Abbott Laboratories
11.5
103 Merck
16.5
110 Wyeth
10.0
120 Bristol-Myers Squibb
17.8
122 Eli Lilly
-7.1
138 Schering-Plough
6.8
168 Amgen
11.5
The Pharmaceutical industry ranked 3 out of 53 industries with
an ROA of 11.5.
Are 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.
Drug payment across the world
Drug payment (Medicare)

Since 2006, Medicare offers Part D (plans for
pharmaceuticals)

Deduction +Copayment
Drug payment (Germany)
Fee for services
 Free pricing
 Copayment (10%), Min (5 euros), Max (10 euros)

Drug payment (England)
Fee of services
 Free pricing but control the profits for brand product
 Clawback: discount according to the quantity of use



Approximately 5.63%-13.2%(2006.9.1) 。
Copayment ：fixed (per drug item: ￡6.5, but no
copayment for 85% of drugs)
Drug payment (Japan)
Fee for services
 Standard for drug payment
 Copayment

年齡
未滿3歲
三歲以上至未滿七十歲
七十歲以上
老人
一般
高所得者
部分負擔之
比例
20%
30%
10%
20%
Drug payment (Korea)
Fee for services
 NHI agency sets up the upper limit for drug payment
 Drug payment is set according to the average
transaction price (ATP) in the last quarter
 Co-payment (30-50%)

Drug Payment (Taiwan)

Fee for services


NHI agency sets up the reimbursement price for drug
payment
Standard of drug payment。
Package payment EPO( hemo-dialysis treatment)
 Daily Payment Clinics 25/50/75, Chinese Medicine
30/60/85
 DRGs

Drug Payment (Taiwan)
Co-payment 10-20% (cap at NT200)
 80% of outpatient visit do not need to bear copayment
 Conditions for no copayment






Catastrophic illness
Mountainous area
Drug payment less than 100
Chronic illness
Case payment
How to set up the standard of drug
payment?
Market
Average transaction prices
Regulated prices
Transaction prices
Upper limit
Transaction prices ＝paymen
ΔM=Transaction prices -costs
Payments
Price differences
(profits)
No change in
drug expenditure,
just transfer the
margins to drug
companies
Transaction prices—Korea’s experience
Since 1977, Korea used the standard of drug paymenmt
for reimbursement price. Starting from 1999, the
standard changed to average transaction price (ATP) 。
 ATP regulates the upper limit of each drug. The drug
payment is calculated according to a weighted average
of drug price.
 At the start of ATP, the price of drugs reduces by
30.7% 。
 Now the ATP is approximately 99.56% of the upper
limit

Health and drug expenditure in Korea
50
45
35%
31.4%
30.2%
27.7%
40
兆
韓
元
25.8%
27.8%
27.6%
27.9% 27.6%
30%
27.4%
百
25%
分
比
25.1%
35
年平均成長率 年平均成長率
(1999-2004) (1995-1998)
30
25
醫療費用
11.6%
8.2%
藥費
13.5%
1.4%
20%
15%
20
15
10%
10
5%
5
0
0%
1995
1996
1997
1998
1999
醫療費用
2000
藥費
2001
藥費佔率
2002
2003
2004
資料來源： OECD Health 200
Standard of drug payment (Taiwan)
PaymentHealth provid
Average difference
16.2%-18.7%
ΔP=Payment –Transaction prices
ΔM=Transaction price－cost
Transaction price Price su
(Profits)
Real cost
Payment
Price difference
Price
difference
Price
difference
can return
to the NHI
Outpatient drug expenditure and health
expenditure (2004)
800
USA(752)
700
FRA(379)
每
人 600
每
年 500
藥
費 400
美
元 300
ITA
ISL
SWL(587)
CAN(537)
JPN(509)
NOR
AUT
LUX
(
(476)GER
SPA
SWE(436)
FIN
IRL
DNK
PTG
BEL(340)
GRC
)
AUS(279)
KOR(216)
200
NLD
TWN(189)
y = 0.0892x + 132.97
R2 = 0.6767
HUN
POL
CZE
MEX SLV
100
0
0
1,000
2,000
3,000
4,000
Health Expenditure per capita, US dollars
5,000
6,000
7,000
資料來源： OECD Health 200
Outpatient drug expenditure ratio and GDP
(2004)
40
SLV(38.5%)
35
門
診 30
藥
費 25
佔
醫 20
療
費 15
用
百
分 10
比
POL
HUN
y = -0.0004x + 29.101
R2 = 0.7015
KOR(27.4%)
PTG
MEX
ITA
CZE
TWN
(21.6%)
GRC
SPA
FRA
CAN
JPN(18.9%)
FIN
(14.6%)GER
(14.2%)AUS AUTSWE
(11.3%)BEL
ISL
IRL
(﹪)
NLD USA
(12.3%)
SWL
DNK
40,000
50,000
NOR
LUX
(8.5%)
5
0
0
10,000
20,000
30,000
60,000
70,000
80,000
GDP per capita, US dollars 資料來源： OECD Health 200
藥費成長因素分析3
1.69%
憂鬱症
21.21%
精神病
-1.05%
2.78%
17.49%
-6.73%消化性潰瘍
3.71%3.03%
25.06%
23.91%
12.17%
-4.18%
糖尿病
11.26%
高血壓
-15%
-10%
-5%
8.32%
0%
5%
人數
3.73%
8.10%
10%
平均每人總給藥天數
3.68%
15%
29.58%
13.75%
20%
平均每日藥費
19.29%
25%
30%
35%
Trend of ratio of outpatient drug expenditure
1,800 億
30%
1,600 億
25.3%
24.5% 24.8% 25.4% 25.4% 24.8% 24.4% 24.6% 24.9% 24.8% 25.0% 24.7% 25.1%
25%
1,400 億
1,170
1,094 1,121 1,141
1,200 億
1,000 億
800 億
600 億
640
723
804
12.9%
829
847
11.3% 調
906 945
調
價
調
價
15%
6.9%
6.9%
3.1%
20%
10%
400 億
200 億
調
價
調
價
1,322
調
價
調
價
價
15.8%
1,250
4.4%
2.2%
0億
2.5%
1.8%
5.8%5%
2.5%
0%
1997年 1998年 1999年 2000年 2001年 2002年 2003年 2004年 2005年 2006年 2007年 2008年 2009年
整體而言，歷年藥費占率皆能維持於25
2011/6/03
HWF/YMU ％。
56
Drug expenditure across countries (2009)
1000
900 871
每 800
人
每 700
年 600
藥 500
費 400
725 719
689 666
650 636 628
604
569 568 547
539 526 525
456 427
402 397
(
318 318 301
300
美
元 200
273
234
191 172
136
)
100
0
美國 加 法國 比 希臘 冰島 德國 瑞士 義
奧 瑞典 挪威 日本 西 芬蘭 澳洲 丹麥 盧
藥費指處方藥及成藥藥費(台灣含中藥及指示用藥)
2011/6/03
HWF/YMU
葡 韓國 匈
斯
紐 捷克 台灣 波蘭 墨
資料來源： 1.OECD Health Data 2009 57
2.衛生署統計室(Taiwan)
Drug prices across countries
(Top 20 Brand products with international prices)
450%
409%
400%
350%
300%
250%
250%
224%
212%
203%
201%
200%
160%
144%
150%
139%
130%
116%
100%
100%
50%
0%
美國
德國
瑞士
2011/6/03
日本
加拿大 比利時
HWF/YMU
法國
瑞典
英國
澳洲
韓國
台灣
58
Top 20 Pharmaceutical Companies
in Taiwan, 2007 (NT$: Million)
百萬元)
(YSP)
(CCPC)
(TTY)
2011/6/03
(Standard)
59
HWF/YMU
Pharmaceutical Market Structure in Taiwan
Unit: NT$1M
Year
2003
2004
2005
2006
2007
Local companies
24,866
26,923
27,855
27,009
25,561
MNC/Imported
69,680
76,229
76,469
81,028
84,141
Total
94,546
103,152
104,324
108,037
109,702
Market share of
local companies
26.3%
26.1%
26.7%
25.0%
23.3%
2007 Market Structure
Unit:NT$1M

100%
3021
80%
60%
70843
10249
Foreign 
40%
Local
5916
20%
14716
0%

Hospitals
2011/6/03
Hospital segment the major
market (78%)，Drugstores
the next (14%), the rest are
clinics (8%)
Foreign companies: local
companies by values - 7:3。
Foreign companies: local
companies by quantity - 3:7
4957
Clinics
HWF/YMU
Source：2008 Biomedical industry Almanac
60
歷年藥價調整結果
調整日
調整項目
期
調整重點
每年節省
金額( 億)
85.11.1 藥價
86.12.1 藥價
國際比價及學名藥與原廠藥比價
6
國際比價及學名藥與原廠藥比價
6.5
89.4.1
藥價
藥價調查(r=30%)
90.4.1
藥價
藥價調查(r=16%)及Grouping
91.1.1
日劑藥費 日劑藥費(3天100元→3天75元)
32
92.3.1
藥價
57
藥價調查(r=16%)及Grouping(r=0%)
5
46
93.11.1 藥價
監控方案，方法同92.3.1
0.68
94.9.1
藥價
監控方案，方法同92.3.1
23.6
95.1.1
日劑藥費 日劑藥費(藥局3天90元→3天75元)
95.11.1 藥價
藥價調查(r=15%)及Grouping(r=0%)
6.8
90
274億
Price survey and growth of drug expenditure
1,600
1,400
1,200
未調藥價預估年平
8.47%
均成長率(86/95)
實際藥費年平均成
6.68%
長率(86/95)
1,247
1.79%
1,000
817
735
800
647
600
804
846
1,088
1,001
906
829
1,094
899
1,285
1,344 未調藥價預
估藥費支出
實際藥費支出
1,121 1145
945
847
723
640
400
200
7
13
13
16
86年
87年
88年
89年
52
96
90年
91年
143
153
163
92年
93年
94年
199 藥價調整於各
年度影響金額
0
註：95年藥費以95.1-10月成長率2.1%及94年藥費計算推估
95年