The Pharmaceutical Industry Part 2

1
The Pharmaceutical IndustryPart 2

• Professor Vivian Ho
• Health Economics
• Fall 2009

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.

3
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.

4
Pricing Behavior

• The longer the brand-name drugs 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 drugs market
  share by 1.25 percentage points.

5
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 pre-entry
  price.

6
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.

7
Express Scripts 2007 Drug Trend Report
8
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
• 22,000 drugs on market ? timely, valuable
  information.
• May impede competition.

9
Direct-to-Consumer PrescriptionDrug Advertising
Bane or Boon?

• Richard L. Kravitz, MD, MSPH
• UC Davis Center for Health Services Research in
  Primary Care

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A brief regulatory history

• 1981 industry shows interest in advertising
  directly to consumers
• 19831985 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

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Promotional spending by pharmaceutical
manufacturers
12
Are DTC ads reaching consumers?
13
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

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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

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Are DTC ads educational?
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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 willplay a
  very real role in enhancing public health.
• -Alan F. Holmer, President, Pharmaceutical
  Research and Manufacturers of America, JAMA
  281380,1999

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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 3181301, 1999

18
Content analysis of print ads

• All DTC ads appearing from 1989 through 1998 in
  18 popular magazines
• Selection of publications based on circulation

19
Results
20
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)

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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 5.4-14.2)

22
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

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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

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Product Innovation
25
Product Innovation
26
Product Innovation
www.phrma.org
27
Product Innovation

• Innovation is very risky and time consuming.
• RD 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.

28
Capitalized Cost perApproved Drug

• RD 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

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Out-of-Pocket and Capitalized Costsper Approved
Drug
802
466
403
336
282
121
J. DiMasi, R. Hansen, and H. Grabowski, The
Price of Innovation New Estimates of Drug
Development Costs, Jan 2002
30
Pharmaceutical Industry Performance
Does the absence of perfect competition? higher
prices restricted output?
2000 - 2005 includes prescription drugs and
medical supplies.
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DRUG SPENDING INCREASED 5.4 from 2004 to 2005
IMS Health
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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 Indext
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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 doesnt adjust prices to reflect quality
  improvements.

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Are profits in the drug industry too high?
15.2
7.3
11.5
16.5
10.0
17.8
-7.1
6.8
11.5
The Pharmaceutical industry ranked 3 out of 53
industries with an ROA of 11.5.
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Are profits in the drug industry too high?

• Under standard accounting practices, RD is
  written off as a current expense.
• But RD affects revenues for years to come.
• Rate of return on investment is calculated using
  an asset base that improperly excludes intangible
  RD.
• Should capitalize RD outlays depreciate them
  over appropriate time periods.
• Accounting figures overstate the rate of return
  on assets for drug companies.