Transcript 3 Basic Steps in Economic Evaluation

The Pharmaceutical Industry
Part 2
Professor Vivian Ho
Health Economics
Fall 2009
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
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.