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The Economics of Prescription Drugs. Approach to Analysis. Structure Number of firms, market share, historical antecedents to structure. Buyer Demand (Pharma Benefits Managers). Conduct Firm behavior (Pricing, Promotion, Innovation) Performance Relative Price Changes, Profits, Innovation.

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The Economics of Prescription Drugs


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    1. The Economics of Prescription Drugs

    2. Approach to Analysis • Structure • Number of firms, market share, historical antecedents to structure. • Buyer Demand (Pharma Benefits Managers). • Conduct • Firm behavior (Pricing, Promotion, Innovation) • Performance • Relative Price Changes, Profits, Innovation

    3. History of Drugs and Regulation

    4. History of Drugs and Regulation • 1862 USDA Dept of Chemistry • 1906 Pure Food and Drugs Act • 1927 Food, Drug, and Insecticide Administration • 1930 Food and Drug Administration (FDA) • 1938 Food, Drug, and Cosmetic Act • Safety

    5. History of Drugs and Regulation • 1951 Durham-Humphrey Amendment • OTC vs Prescription • 1962 Kefauver-Harris Amendments • Efficacy and Safety • 1990 Nutrition Labeling and Education Act

    6. Which is better?

    7. Bio-Pharmaceuticals • New Chemical Entities (NCEs) • is the basis for Pharma Patents and Regulation. • Definition: a drug that contains no active moiety that has been approved by the FDA in any other application submitted under section 505(b) of the Federal Food, Drug, and Cosmetic Act. • “Moiety”- A type of functional group from Organic Chem

    8. Benzyl acetate - has an ester functional group (in red), an acetyl moiety (circled with green) and a benzyloxy moiety (circled with orange). Other divisions can be made.

    9. Government Regulation • Regulation by the Food and Drug Administration (FDA)

    10. Stages for a NCE • Discovery • Preclinical animal testing • File application for human testing • Phase I: Test on Healthy Volunteers • Phase II: Test on Large sample of disease pop • Long-term animal studies • Phase III: Test for efficacy and side effects • New drug approval • Average Time (~12 Years)

    11. Liberalization of FDA Process • Generics • Orphan Drugs • Compassionate Use • User fee act of 1992 • Requirement of Prescriptions (Rx) • Liberalization of Rx Req.

    12. Cost Benefit Analysis of Regulation • Issues of agency, and who suffers the costs and benefits.

    13. Cost Benefit Analysis of Regulation • Effects of regulation on pharmaceuticals success in world markets

    14. Importance of Pharmaceuticals

    15. Demand for Pharmaceuticals • Effects of increased insurance coverage for prescription drugs • Effects of direct marketing

    16. Buyers (Payers)

    17. Trends in Promotional Spending for Prescription Drugs, 1996-2007 Promotional Spending ($ in billions) NA NA NA Total Spending: $9.2 $11.0 $12.5 $13.9 $16.6 $19.1 $21.1 $24.2 $27.7 $11.4 $12.0 $10.4 Note: NA = Not Available. Numbers may not total due to rounding. Sampling is the value of samples left at sales visits to office-based physicians; the samples are valued at the prices at which they would be sold in retail pharmacies. Sampling data were not available for 2005 and 2006, so Total Spending numbers exclude amounts for Sampling. Detailing is expenses for the sales activities of pharmaceutical company representatives directed to office-based and hospital-based physicians and hospital directors of pharmacies; approximately 85% of detailing is for office-based sales visits. Direct-to-Consumer Advertising is expenses for advertising to consumers through television, magazines and newspapers, radio, and outdoors. Professional Journal Advertising is expenses for advertising appearing in medical journals. Source: The Kaiser Family Foundation and the Sonderegger Research Center, Prescription Drug Trends, A Chartbook Update, November 2001, Exhibit 17, at http://www.kff.org/insurance/3161-index.cfm, updated by the Kaiser Family Foundation with data from the IMS Health website at http://www.imshealth.com (About Us, Press Room, 2007 Top-Line Industry Data, U.S.).

    18. Talking to Doctors as a Result of Prescription Drug Ads, 2008 As a result of seeing an ad for an Rx drug, have you ever talked with a doctor about the specific medicine you saw or heard advertised, or not? Among the 32% who have talked to a doctor as a result of seeing an Rx drug ad: Percent who said the doctor did one or more of the following… Recommended you make lifestyle/ behavior changes Recommended a different prescription Gave you the prescription for the drug you asked about No Yes Recommended an over the counter drug Recommended any prescription drug SOURCE: USA Today/Kaiser Family Foundation/Harvard School of Public Health: The Public On Prescription Drugs and Pharmaceutical Companies (conducted Jan. 3-23, 2008)

    19. Pricing Issues • Pricing Differentials between brand name and generic drugs • Discounts to third party payers • Pharmacy benefits management firms • Price differences between countrues

    20. Market Structure • Industry Concentration (RPM – Relevant Product Market?)

    21. Figure. World Pharmaceutical market

    22. Competition at Product Level • Within patent competition • Generics after patent expiration • On patent competition from non patent friendly countries • Between patent competition • Me Too drugs and the “Gold mine” problem

    23. The Case of ADHD Drugs

    24. Firm Size Effect • Complicated relationship between • Economies of Scale (Benefits of Large R&D) • Economies of Scope (Spillovers from different R&D)

    25. Profitability of US Pharma

    26. Profitability of US Pharma

    27. Profitability of Pharmaceutical Manufacturers Compared to Other Industries, 1995-2006 Note: Percent is the median percent net profit after taxes as a percent of firm revenues for all firms in the industry. Source: Kaiser Family Foundation and Sonderegger Research Center, Prescription Drug Trends: A Chartbook Update, November 2001, Exhibit 4.11, at http://www.kff.org/insurance/3161-index.cfm, updated with data from Fortune, Fortune 500 Industry Rankings: April 14, 2003, Vol. 147, No. 7, p. F-26; April 5, 2004, Vol. 149, No. 7, p. F-26; April 18, 2005, Vol. 151, No. 8, p. F-28; April 17, 2006, Vol. 153, No. 7, p. F-26; April 30, 2007, Vol. 155, No. 8, p. F-32.

    28. International Trade • TRIPS (Trade Related Aspects of Intellectual Property Rights 1994)

    29. American Public’s Views About Prescription Drugs Upside Downside Do you think Rx drugs developed over the past 20 years have generally made the lives of people in the U.S…? In general, do you think the price of Rx drugs is reasonable or unreasonable? Better Unreasonable DK Haven’t made much difference/DK Worse Reasonable SOURCE: USA Today/Kaiser Family Foundation/Harvard School of Public Health: The Public On Prescription Drugs and Pharmaceutical Companies (conducted Jan. 3-23, 2008)

    30. Serious Problems Paying, Not Filling Prescriptions and Skipping Rx Drug Doses Because of Cost, 2008 In past two years, have ever NOT filled a prescription because of the cost In past two years, have skipped doses or cut pills in half to make Rx last longer Say it is a serious problem for self/family to pay for Rx drugs you need Percent who say yes to at least one of the above SOURCE: USA Today/Kaiser Family Foundation/Harvard School of Public Health: The Public On Prescription Drugs and Pharmaceutical Companies (conducted Jan. 3-23, 2008)

    31. Medicaid in the Health System, 2006 Medicaid as a share of national health care spending: Total National Spending (billions) $2,106 $648 $660 $125 $217 NOTE: Does not include spending on SCHIP SOURCE: Kaiser Commission on Medicaid and the Uninsured, based on A Catlin et al, “National Health Spending in 2006: A Year of Change for Prescription Drugs,” Health Affairs 27(1)14-29, January/February 2008. Based on National Health Care Expenditure Data, CMS, Office of the Actuary.

    32. Problems Paying for Prescription Drugs, 2008 How much of a problem is it for you or your family to pay for prescription medicines that you need? A serious problem Not much of a problem 41% A problem, but not serious Source: USA Today/Kaiser Family Foundation/Harvard School of Public Health: The Public On Prescription Drugs and Pharmaceutical Companies (conducted Jan. 3-23, 2008).

    33. Price (Manufacturer Price Increases) 19% Price (Manufacturer Price Increases) 25% Utilization (# of Prescriptions Dispensed) 42% Utilization (# of Prescriptions Dispensed) 47% Types of Prescription Drugs Used 34% Types of Prescription Drugs Used 34% Relative Contributions of Utilization, Types of Prescription Drugs Used, and Price to Rising Prescription Drug Expenditures, 1993-1997 vs. 1997-2002 1993-1997 1997-2002 Source: Kaiser Family Foundation and Sonderegger Research Center analysis using National Health Expenditures data for prescription drugs from the Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.gov/statistics/nhe/historical/, Table 2; price data from IMS Health, Pharmaceutical Pricing UPDATE, various years; and utilization data from IMS Health, National Prescription Audit Plus, various years, updated with data from the IMS Health web site at http://www.imshealth.com.

    34. Percent of Seniors Who Did Not Fill or Delayed Filling Prescriptions Due to Cost, by Source of Drug Coverage, 2006 (Among Non-Institutionalized Seniors Taking 1 or More Rx) NOTES: Did not fill or delayed filling prescriptions due to cost refers to within the past twelve months. VA is Department of Veterans Affairs. Reference group for statistical significance is Part D coverage (*p<0.05). SOURCE: Kaiser/Commonwealth/Tufts-New England Medical Center National Survey of Seniors and Prescription Drugs, 2006.

    35. 6 Drugs of the future

    36. Cancer Vaccine

    37. Male Birth Control Pill

    38. Anti-Addiction Pill

    39. Exercise Pill

    40. Anti-Aging Pill

    41. Smart Pill

    42. Pharma Ads

    43. FDA data

    44. FDA data