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Yet brand-name drugs lost 1/2 of market share. ... BL

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Yet brand-name drugs lost 1/2 of market share. ... BLS treats generics as new products, not as substitutes for more expensive drugs. ... – PowerPoint PPT presentation

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Title: Yet brand-name drugs lost 1/2 of market share. ... BL


1
The Pharmaceutical IndustryPart 2
  • Professor Vivian Ho
  • Health Economics
  • Fall 2007

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 Drug Trend Report, 1998
8
Promotion Strategies
  • Promotion Magnitude
  • Research-base 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

10
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

11
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

14
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

15
Are DTC ads educational?
16
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

17
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)

21
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

23
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

24
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

29
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 onwards includes prescription drugs and
medical supplies.
31
DRUG SPENDING INCREASED 5.4 from 2004 to 2005
IMS Health
32
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
33
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.

34
Are profits in the drug industry too high?
The Pharmaceutical industry ranked 7 out of 74
industries with an ROA of 9.9.
35
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.
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