Lecture Health economics - Chapter 12: The pharmaceutical industry (Part 2)

Lecture Health economics - Chapter 12: The pharmaceutical industry (Part 2). This chapter presents the following content: Pharmaceutical industry conduct, pricing behavior, promotion strategies, Are DTC ads reaching consumers? Ads are read and acted upon, misconceptions abound,...

The Pharmaceutical Industry

Part 2

Professor Vivian Ho Health Economics

Fall 2009

Pharmaceutical Industry Conduct

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

Express Scripts 2007 Drug Trend Report

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

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

0% 20% 40% 60% 80% 100%

Success Rate Treatment Duration Onset of Action Supportive Behaviors

Competing Treatments

Mechanism of Action

Misconceptions Prevalence Precursors Symptoms Condition Name

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

drugs)

Patients requesting a prescription much more likely to receive one (AOR 8.7, 95% CI 5.4-

14.2)

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

Out-of-Pocket and Capitalized Costs

per Approved Drug

0 100 200 300 400 500 600 700 800 900

403

802

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?

*2000 - 2005 includes prescription drugs and medical supplies.

Year All Items Prescription Drugs*

DRUG SPENDING INCREASED

Utilization & Mix

TOTAL

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

drugs N

i x

Price Index t =

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?”

The Pharmaceutical industry ranked 3 out of 53 industries with

an ROA of 11.5

2008 Profits

10.0

11.5 16.5

6.8 -7.1 17.8

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