PRESCRIPTION DRUGS: BACKGROUND AND BASICS

Medicare & Medicaid BriefingsNational Health Policy Forum

January 30, 2009

Jim HahnCongressional Research Service

PRESCRIPTION DRUGS FAQS• What is the price of drug Z?

• Are drug prices higher in the U.S.? Why?

• Are drug industry profits too low, appropriate, or excessive?

• How to keep prices down while preserving safety and innovation?

• It depends.

• Maybe — it’s complicated.

• Yes.

• No one knows for certain.

MARKET FOR PRESCRIPTION DRUGS, 1998-2007

0

200

400

600

800

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

89 105 121 138 158 174 189 200 217 227

298331 356

390427

497559

602643

712

Global ($ billions) U.S. ($billions)

U.S. PRESCRIPTION DRUG EXPENDITURES, 1980–2007

$0.00

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

$700.00

$800.00

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Pres

crip

tion

Dru

g Ex

pend

iture

s pe

r Cap

ita

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Pres

crip

tion

Dru

g Ex

pend

iture

s as

% o

f Nat

iona

l Hea

lth E

xpen

ditu

res

$ Drugs per capita Drugs as % of NHE

PUBLIC AND PRIVATE PER CAPITA DRUG EXPENDITURES

198019821984198619881990199219941996

1998

2000

2002

2004

2006

Public

$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

$450.00

$500.00

Year

LIFE CYCLE OF DRUGS

• Research & Development

• Filing/Granting of Patent

• Clinical testing and FDA approval

• Market introduction

• Competition

• End of product life/steady state

LIFE CYCLE OF DRUGS

Time

$

R&D/Lab Testing

RESEARCH AND DEVELOPMENT

• Drug development process typically takes 10+ years

• ~ 5-10,000 compounds to produce one approved drug

• Expensive to bring a drug to market (~ $500 - $800 million?)

INNOVATION AND PATENTS

• Economic rationale: Innovation might be reduced if new ideas/products are easily copied.

• Patents provide incentive to innovators to assume risk.

• Patents provide the inventor with the sole right to exploit the invention (monopoly) for a given number of years.

LIFE CYCLE OF DRUGS

Time

$Clinical Trials

FDA NEW DRUG TESTING PROCESS OVERVIEW

Phase Synopsis Time (approx)

Lab testing Pharmacology & mechanism of action;animal tests for safety ~3–4 years

CT: Phase I Small group (20-80) healthy volunteers to establish a drug's safety and dose range ~ 1 year

CT: Phase II Larger groups (100-300) of patient volunteers to establish safety & assess effectiveness parameters ~2 years

CT: Phase IIILarge controlled trials (1000-3000); establish

effectiveness, safety for all proposed indications & adverse reactions

~ 3 years

LIFE CYCLE OF DRUGS

Time

$Clinical Trials

LIFE CYCLE OF DRUGS

Time

$

Introduction of productMonopoly position

TOP BRAND DRUGS BY RETAIL SALES, 2007

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,0000 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,0000 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000

$6,165,531

$4,355,901

$3,390,766

$3,315,740

$3,082,712

$2,863,326

$2,518,409

$2,464,396

$2,304,364

$2,229,333

$2,136,899

$1,938,882

$1,837,388

$1,790,436

$1,781,562

$1,732,827

$1,717,429

$1,579,252

$1,433,000

$1,416,084

Lipitor

Nexium

Advair Diskus

Prevacid

Plavix

Singulair

Seroquel

Effexor XR

Lexapro

Actos

Protonix

Vytorin

Topamax

Risperdal

Abilify

Cymbalta

Lamictal

Zyprexa

Levaquin

Celebrex

TOP BRAND DRUGS, PRESCRIPTIONS 2007

0 15,000 30,000 45,000 60,000

Lipitor

Nexium

Advair Diskus

Prevacid

Plavix

Singulair

Seroquel

Effexor XR

Lexapro

Actos

Protonix

Vytorin

Topamax

Risperdal

Abilify

Cymbalta

Lamictal

ZyprexaLevaquin

Celebrex

LIFE CYCLE OF DRUGS

Time

$

Competition /Expiration of Patent

TOP GENERIC DRUGS BY RETAIL SALES, 2007

$0 $250,000 $500,000 $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $2,000,000

$1,736,101$1,302,635

$1,295,036

$1,253,324$1,000,754

$938,642

$927,435

$894,163

$864,380

$835,112

$832,601$728,916

$687,256$603,436

$570,726

$554,672

$538,282$524,247

$501,413$476,739

Hydrocodone/APAP

Azithromycin

Simvastatin

Oxycodone ER

Sertraline

Fentanyl Transdermal

Amlodipine BesylateFexofenadine

Amoxicillin/Pot ClavOmeprazoleGabapentin

Fluticasone NasalLisinopril

Oxycodone w/APAPMetoprolol Succinate

MetforminNovoLog

Amlodipine Besylate/Levothyroxine

Zolpidem Tartrate

TOP GENERIC DRUGS, PRESCRIPTIONS 2007

0 37500 75000 112500 150000

Hydrocodone/APAP

Azithromycin

Simvastatin

Oxycodone ER

Sertraline

Fentanyl Transdermal

Amlodipine Besylate

Fexofenadine

Amoxicillin/Pot Clav

Omeprazole

Gabapentin

Fluticasone Nasal

Lisinopril

Oxycodone w/APAP

Metoprolol Succinate

Metformin

NovoLog

Amlodipine Besylate

Levothyroxine

Zolpidem Tartrate

LIFE CYCLE OF DRUGS

Time

$

End of Product Life /Steady State

TOP PHARMACEUTICAL FIRMS BY GLOBAL SALES, 2006

Sales Based/

Rank Company $ (m) Headquartered in

1 Pfizer 45,083 US

2 GlaxoSmithKline 36,947 UK

3 sanofi-aventis 35,605 France

4 Novartis 28,868 Switzerland

5 Hoffman-La Roche 26,560 Switzerland

6 AstraZeneca 25,741 UK/Sweden

7 Johnson & Johnson 23,267 US

8 Merck & Co 22,636 US

9 Wyeth 15,683 US

10 Eli Lilly 14,816 US

Source: Wood Mackenzie's Productview™ March 2007

DRUGS VS. BIOLOGICS

• Small molecule with defined structure, physical and chemical characteristics

• Synthetic organic compounds

• Stable

• FDC Act

• Large, less well-defined molecule with complex tertiary structure

• Protein/carbohydrate based product from living entity

• Heat and shear sensitive

• PHS Act

LIPITOR & ERYTHROPOIETIN

MEDICARE AND MEDICAID BENEFICIARY MARKET SHARE

7451.9 51

2648.1 49

0%10%20%30%40%50%60%70%80%90%

100%

Recipien

ts

Prescri

ptions

Rx Spen

ding

Medicare & MedicaidOther

Source: NACDS Economics Department August 2003

CURRENT AND EMERGING POLICY ISSUES

• Medicare Part D lessons

• Non-interference

• Reimportation

• Follow-on biologics

• Drug safety and adverse event reporting

• Direct-to-consumer (DTC) advertising

• Industry: New Product Pipeline / Consolidation

LESSONS FROM MEDICARE PART D

• Incentives

• Tiered Formularies

• Generics

• Spending

• Variance in Prices

• Choices and changes

MMA IMPOSED RESTRICTION

• SSA section 1860D (i): “NONINTERFERENCE. -- In order to promote competition under this part and in carrying out this part, the Secretary --

(1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and

(2) may not require a particular formulary or institute a price structure for the reimbursement of covered Part D drugs.”

DRUGS BY THERAPEUTIC CATEGORY ACROSS COUNTRIES, 2006

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000

US

Japan

Germany

France

UK

Italy

Canada

Spain

Brazil

Mexico

Aus/NZ

Argentina

Cou

ntry

US$ (millions)

CARDIOVASCULARCENTRAL NERVOUS SYS

ALIMENTARY/ MET.

RESPIRATORYANTI- INFECTIVES

MUSCULO-SKELETAL

GENITO- URINARYCYTOSTATICS

BLOOD AGENTS

DERMATOLOGICALS

SENSORY ORGANSDIAGNOSTIC AGENTS

SYSTEMIC HORMONES

MISCELLANEOUSHOSPITAL SOLUTIONS

PARASITOLOGY

Source: IMS Health - Retail Drug Monitor

+

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