Jon Sussex

Office of Health Economics

MSc Module ‘Economics of Health Care’@ City University

The Market for Medicines13th December 2002

Jon Sussex


Agenda

1. Characteristics of the market for medicines

– Demand side

– Supply side

2. Regulating the market

– Market failure

– What and how to regulate: options

3. Exercise - Regulating the UK pharmaceutical industry

4. The Pharmaceutical Price Regulation Scheme and international comparison of medicine prices


Pharmaceutical Sales as % of GDP

1.04%

1.11%

1.19%

1.26%

1.37%

1.39%

1.45%

1.58%

1.86%

1.86%

1.92%

2.56%

1.09%

1.11%

1.18%

1.21%

1.40%

1.40%

1.38%

1.54%

1.69%

1.85%

1.96%

2.29%

0.95%

1.00%

1.08%

1.02%

1.14%

1.30%

1.15%

1.29%

1.51%

1.82%

1.85%

1.79%

Netherlands

Switzerland

UK

Australia

Canada

Sweden

Germany

Italy

Spain

Japan

France

USA

1995

2000

2001Note:Includes prescription and hospital medicinesSources:IMS World Review 2001, 2002OECD http://www.oecd.org/std/nahome.htm downloaded August 2001 and Jun 2002


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


Generics’ Market Shares, 2001 (Retail Market)

% of retail market (in value) % of retail market (in volume - Standard units)

Original/ Licensed

Branded generics

Unbranded generics

Others TotalOriginal/ Licensed

Branded generics

Unbranded generics

Others Total

France 64.4 24.2 3.0 8.5 100 33.4 38.6 5.3 22.6 100

Germany 47.8 34.9 7.3 10.0 100 22.8 44.4 14.0 18.8 100

Italy 67.1 26.2 1.5 5.2 100 42.2 43.6 2.0 12.3 100

Netherlands 70.5 13.7 13.0 2.9 100 37.7 20.0 32.3 9.9 100

Spain 65.8 25.3 4.8 5.1 101 44.5 34.9 5.1 15.6 100

Sweden 65.4 25.6 3.3 5.7 100 32.9 48.1 8.2 10.8 100

U.K. 64.2 21.4 10.3 4.1 100 29.5 29.7 28.7 12.1 100

Switzerland 65.2 25.6 1.7 7.5 100 33.4 39.7 3.6 23.4 100

Japan 62.3 28.9 1.8 7.0 100 33.0 49.3 2.2 15.5 100

Canada 64.4 23.9 7.5 4.2 100 23.4 46.4 14.8 15.3 100

USA 74.2 14.9 6.5 4.4 100 23.4 25.7 24.2 26.7 100

Source: IMS


Demand Side Characteristics

Chooses Consumes Pays

Normal market

Consumer Consumer Consumer

Prescriptionmedicines 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


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’


Phase III

Development research

Discovery and Development of a New MedicineDiscovery and Development of a New Medicine

Final patent application

Marketing application

Attrition rates

Cost

Post-mktng devel

3000 + patients

Phase IV

5,000

8-15 4-8 2-3 1 1

$800M

0

Chemical development

Pharmaceutical development

Long-term animal testing

Toxicology and pharmacokinetic studies

Source: CMR International

1993

Discovery research

Investigational new drug

application

1990

Phase I

Phase II

SynthesisBiological testing

& pharmacological

screening

50-100 voluns

200-400 patients

1999

Marketing approval product launch

2001

Regulatory review

Regulations

Time (years)

Phases of drug

development

Basic researc

h

Clinical phases


Supply Side – Main Characteristics (2)

• 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


Net Value of the Pharmaceutical Industry– Economic Rent

Estimates for 2000:

£ million p.a.

Producer rents (exports & overseas) 500-1,500

Labour rents 80-160

R&D spillovers to other sectors 120-360

Total rent 700-2,000

Terms of trade effect ?

Source: Pharmaceutical Industry Competitiveness Task Force (2001) ‘Value of the Pharmaceutical Industry to the UK Economy’


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


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

Target RoR

Outturn RoR > threshold => repay excess

Outturn RoR < threshold => may increase prices

%RoR

£ capital employed

0

▲

▲

▲

▲

▲

▲


RPI-X Regulation of a Basket of ‘n’ Products

w1p11 + w2p1

2 + w3p13 + …….. + wnp1

n

--------------------------------------------------- -1 x 100 ≤ ΔRPI - X

w1p01 + w2p0

2 + w3p03 + …….. + wnp0

n

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 Comparisonsat Market Exchange Rates

Index UK=100

1996 1998 2000 2000 at 5-yr av ex rates

France 112 85 80 96

Germany 124 108 91 103

Italy 91 81 79 90

Spain 88 71 64 74

UK 100 100 100 100

USA 183 174 209 189

Source: Department of Health (2001) PPRS 5th 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?

Jon Sussex

Documents

Transcript of Jon Sussex