Transcript No Slide Title

ECONOMICS OF THE
PHARMACEUTICAL
INDUSTRY
25th March 2004
Jon Sussex
Office of Health Economics
www.ohe.org
Agenda
1.
2.
3.
4.
The supply side – R&D
Demand for medicines
NICE – the cost-effectiveness ‘4th hurdle’
Regulating medicine prices
Characteristics of Medicines Markets
• Supply is R&D intensive, which implies:
– Intellectual property rights (patents)
– Long lead times
– High risk
– Dynamic competition as important as static
– Generic competition after patent expiry
• Demand is regulated – governments and social
insurers are major buyers of medicines
• Prices are regulated
Supply Side – Main Characteristics (1)
• Patents are an incentive for dynamic efficiency –
by promising temporary monopoly if successful
• Patents last 20 years; first 9-11 of which are spent
getting the medicine to market, i.e. research &
development (R&D)
• Commercial success in R&D-based companies
depends on finding ‘blockbusters’
Supply Side – Main Characteristics (2)
• Average R&D cost of a new medicine up to launch
is $800 million
• Includes costs of failures
• Out of pocket costs ≈ 50%
• Opportunity cost of capital ≈ 50%
• Only ≈ 30% of launched medicines earn revenues
that exceed their lifetime costs
Discovery and Development of a New Medicine
Regulations
Final patent
application
1990
Time
(years)
Phase
III
1993
Development research
Discovery research
Phases of
drug
development
Basic
research
Marketing
approval
Marketing
application product launch
Investigational new
drug application
Phase
Synthesis
I
Biological testing &
pharmacological 50-100
voluns
screening
Phase
II
1999
2001
Regulatory Post-mktng
devel
review
Phase
IV
3000 + patients
200-400
patients
Long-term animal testing
Clinical
phases
Toxicology and pharmacokinetic studies
Chemical development
Pharmaceutical development
Attrition
rates
Cost
5,000
0
Source: CMR International
8-15
4-8
2-3
1
1
$800M
Cash Flow for a Successful Medicine
£ p.a.
+
0
Launch
Patent
expiry
_
Time
Supply Side – Main Characteristics (3)
• R&D costs are sunk (global) joint costs
• R&D costs ≈ 17% of pharmaceutical sales p.a.
But ≈ 31% of costs on net present value basis
• => (even long-run) marginal cost << average cost
• => Price discrimination (based on Ramsey rule?) if
non-linear pricing is impractical
•  Parallel trade
Pharmaceutical Sales as % of GDP 1998-2002
1.88%
USA *
1.34%
France
1.34%
Spain
1.32%
Japan
1.12%
Italy
1.10%
Canada
1.02%
Germany
0.95%
Sweden
Australia
0.88%
United Kingdom
0.84%
Switzerland
0.74%
Netherlands
0.00%
0.50%
1998
1.00%
1999
2000
1.50%
2001
2002
2.00%
Types of Medicines
Original brand
Branded
Unbranded OTCs*
On-patent Off-patent generics generics
NHS
Private
* OTCs = over the counter (i.e. non-prescription) medicines
Demand Side Characteristics
Chooses
Consumes
Pays
Normal
market
Consumer
Consumer
Consumer
Prescription
medicines
market
Prescriber
Patient
Government
/ insurer
Measures Affecting Prescriber Price
Sensitivity
• Primary Care Trust budgets
• Practice budgets and prescribing incentive
schemes
• Provision of information (PACT, NICE guidance,
pharmaceutical advisers, etc.)
• Generic prescribing targets
National Institute for Clinical Excellence
•
Covers England & Wales
•
Two main outputs:
1. Technology appraisals
2. Clinical guidelines
Technology Appraisal Criteria
•
The Institute and Appraisal Committee will have regard to:
– the broad clinical priorities of the Secretary of State for Health
and the Welsh Assembly Government
– the degree of clinical need of patients with the condition
– the broad balance of benefits and costs
– any guidance from the Secretary of State for Health and the
Welsh Assembly Government on the resources likely to be
available and on such other matters as they think fit
– the effective use of available resources
NICE’s Guide to Methods of Technology Appraisal
•
Below a most plausible incremental cost-effectiveness ratio
(ICER) of £20,000/QALY, judgments about the acceptability of a
technology as an effective use of NHS resources are based
primarily on the cost-effectiveness estimate.
•
Above a most plausible ICER of £20,000/QALY, judgments about
the acceptability of the technology as an effective use of NHS
resources are more likely to make more explicit reference to
factors including:
– the degree of uncertainty surrounding the calculation of
ICERs
– the innovative nature of the technology
– the particular features of the condition and population
receiving the technology
– where appropriate, the wider societal costs and benefits
•
Above an ICER of £30,000/QALY, the case for supporting the
technology on these factors has to be increasingly strong
Completed Appraisals (- Jan 2004)
• 75 (including re-appraisals), of which 52 have been of
pharmaceuticals:
– restrictions in 32 appraisals
e.g. Alzheimer’s drugs recommended in patients with mini
mental state examination>12
e.g. zanamivir, oseltamivir recommended in at-risk
patients with influenza
– a technology has been rejected in 13 appraisals
e.g. MS drugs
anakinra for rheumatoid arthritis (except in a controlled
long term clinical study)
• NICE has also issued 21 clinical guidelines (11 inherited)
Economic Evaluation Elsewhere
•
Focused on pharmaceuticals
•
Fourth hurdle i.e. reimbursement decisions:
– Public reimbursement: Australia, Baltic countries, Belgium,
Canada (British Columbia, Ontario), Czech Republic, Denmark,
Finland, France, Hungary, Netherlands, New Zealand, Norway,
Portugal, Russia, Slovenia, Sweden
– US managed care formularies
•
Pricing negotiations
– Australia, France, Italy, New Zealand
•
Advice to health service
– England and Wales (NICE), Scotland
•
Risk sharing arrangements
– Australia, New Zealand, UK (only MS drugs to date)
Why Regulate? - Market Failure
• Public goods and the free-rider problem (e.g.
research)
• Externalities
– E.g. your vaccination reduces my risk of
catching an infection
– E.g. the caring externality: I’m happy if you’re
cared for
• Incomplete or asymmetric information
– Moral hazard (= ‘hidden action’)
– Selection problem (= ‘hidden information’)
– Principal/agent problems
Monopoly Power
• Economies of scale and/or scope – but NB contestability
• Natural (local) monopoly
• Input constraints
• Patents: dynamic efficiency vs static monopoly
Net Value of the Pharmaceutical Industry
– Economic Rent
Estimates for 2000:
Producer rents (exports & overseas)
Labour rents
R&D spillovers to other sectors
Total rent
Terms of trade effect
£ million p.a.
500-1,500
80-160
120-360
700-2,000
?
Source: Pharmaceutical Industry Competitiveness Task Force (2001) ‘Value of the
Pharmaceutical Industry to the UK Economy’
Options: Types of Regulation
• ‘No regulation’ = Competition Act only
• Profit, i.e. rate of return, control:
– Unbanded
– Banded
• Price control:
– Baskets of products, as with ‘RPI-X’ control of
utilities’ prices
– Individual products, e.g. via reference prices, or
‘cost-plus’, or related to therapeutic benefit
1998 Competition Act
• Came into force March 2000
• Based on EU Treaty - Articles 81 & 82
• Prohibitions:
– Chapter 1 – Agreements preventing, restricting
or distorting competition
– Chapter 2 – Abuse of a dominant market
position
• Fines up to 10% of turnover; 3rd parties may sue for
damages
Banded Rate of Return Regulation
%RoR
▲
▲
Outturn RoR > threshold => repay excess
▲
▲
Target RoR
▲
Outturn RoR < threshold => may increase prices
▲
0
£ capital
employed
RPI-X Regulation of a Basket of ‘n’
Products
w1p11 + w2p12 + w3p13 + …….. + wnp1n
--------------------------------------------------- -1
w1p01 + w2p02 + w3p03 + …….. + wnp0n
{
{
x 100 ≤ ΔRPI - X
Where:
wi = weight for product ‘i’ (e.g. quantity sold in period 0)
pti = price of product ‘i’ in period t = 0,1
ΔRPI = % change in retail price index between period 0 and
period 1
X = efficiency factor
Regulation Criteria
• Static efficiency:
– Productive efficiency
– Allocative efficiency
• Dynamic efficiency
• Benefit to UK plc – economic rent
• Regulatory (administrative) burden
• Equity/other social policy objectives
Exercise
•
What, if anything, to regulate?
– On- and/or off-patent?
– Branded and/or unbranded?
– Prescribed and/or over-the-counter?
– Sales to NHS only, or all UK sales?
•
If so, how?
– Rate of return control, unbanded
– Rate of return control, banded
– Price control – basket, RPI-X
– Price control – individual products, reference prices
•
From 3 perspectives:
– General public: patients & taxpayers
– Government
– Industry
Key Questions
1. How price-sensitive are the people making the consumption
choices?
2. How much competition is there between one medicine and
another, or between medicines and alternative treatments?
3. Do producers have incentives to keep costs down?
4. Will production and consumption choices become
increasingly distorted over time?
5. Do producers have incentives to invest in the UK, especially
in R&D?
6. Would the regulatory system be costly for the regulator to
administer and the companies to comply with?
Pharmaceutical Price Regulation Scheme
1999
• Have been variants of PPRS since 1960s
• Department of Health acts as regulator for whole UK
• Objectives of 1999 PPRS:
– Secure the provision of safe and effective
medicines for the NHS at reasonable prices
– Promote a strong and profitable R&D-based
pharmaceutical industry
– Encourage efficient and competitive development
and supply of medicines
• Voluntary – but (unspecified) statutory alternative
scheme for firms that opt out
PPRS 1999 (continued)
• Covers all branded medicine sales – on-patent &
branded generics – to NHS by companies selling >
£1m p.a. to NHS (≈80% of total sales to NHS)
• Return on capital ≥ 29.4% => repay excess to DoH
• Return on capital ≤ 8.5% => may apply for price
increase(s) to take RoC to 13.6%
• R&D costs allowed up to 20% of sales
• Promotion costs allowed up to 7% of sales
• Free pricing at launch but no increases then
allowed unless company’ RoC falls to ≤ 8.5%
Multilateral, Ex-manufacturer, Price Comparisons
at Market Exchange Rates
Index
UK=100
1998
2000
2002
2002 at 5-yr
av ex rates
France
85
83
83
83
Germany
109
94
94
94
Italy
88
82
86
86
Spain
77
70
77
77
UK
100
100
100
100
USA
188
241
194
197
Source: Department of Health (2003) PPRS 7th Report to Parliament
Understanding the methodological
issues
• Manufacturers’ prices or final selling price to the payer?
• Brands or generics or molecules?
• Sample size and selection (value versus volume, degree
of market coverage)
• Bilateral versus multilateral
• Match single pack, match product form or price per unit
(tablet, DDD, IMS SUs, Kg)?
• Volume weights: unweighted, own country (Paasche) or
foreign weights (Laspeyres)?
• Choice of exchange rate
• What exactly is the question you are trying to answer?
Pharmaceutical Price Regulation Scheme
1999
• Have been variants of PPRS since 1960s
• Department of Health acts as regulator for whole UK
• Objectives of 1999 PPRS:
– Secure the provision of safe and effective
medicines for the NHS at reasonable prices
– Promote a strong and profitable R&D-based
pharmaceutical industry
– Encourage efficient and competitive development
and supply of medicines
• Voluntary – but (unspecified) statutory alternative
scheme for firms that opt out
PPRS 1999 (continued)
• Covers all branded medicine sales – on-patent &
branded generics – to NHS by companies selling >
£1m p.a. to NHS (≈80% of total sales to NHS)
• Return on capital ≥ 29.4% => repay excess to DoH
• Return on capital ≤ 8.5% => may apply for price
increase(s) to take RoC to 13.6%
• R&D costs allowed up to 20% of sales
• Promotion costs allowed up to 7% of sales
• Free pricing at launch but no increases then
allowed unless company’ RoC falls to ≤ 8.5%