Economic
characteristics
of
pharmaceuticals.
Jamasoft2017
1
Jamasoft2017
2
Generally, medicines reflect:
1. Their value as an
economic category,
and
2. Their benefit (use)
value.
Jamasoft2017
3
Therefore,
there exist
Specific attributes of
medicines.
Jamasoft2017
4
Aside from the obvious characteristic
of having health benefits,
medicines have certain
four traits
that set them apart from
most other consumer
products.
Jamasoft2017
5
First,
when patients purchase a
medicine,
they do not gain an “asset"
in an economic sense.
Jamasoft2017
6
In most countries,
the patient cannot legally resell the medicine.
Its value rests in the knowledge that went into its
development and the testing that determined the
correct way to use it, such as dose, course of
treatment, and contraindications.
Particularly for recently introduced innovative
medicines, the economic value of the
pharmaceutical to the producer lies in this
intellectual property rather than in the chemical
constituents of the product.
Jamasoft2017
7
Second,
the patient is not a consumer in the
traditional sense.
She or he is usually directed
by a third party
(a doctor or other health
professional),
to purchase a medicine.
Jamasoft2017
8
The doctor, as gatekeeper to the
pharmaceutical market,
does not pay for the medication and may not
even know how much the prescribed
medication will cost the patient.
Thus, transmission of price signals between
those who initiate demand for the medicine
and those who supply it is blurred.
Jamasoft2017
9
Third,
without the expert advice of an intermediary,
few consumers have sufficient information to make rational
choices between using and not using s medicine, using a
brand-name medicine versus a generic, or using a
prescription medicine versus an alternative
(nonpharmaceutical) therapy.
This asymmetry of information affects the pricing mechanism because
the consumer is not in a position to make informed choices.
The pricing mechanism can be further distorted if the
intermediary is influenced
by pharmaceutical promotions.
Jamasoft2017
10
Fourth,
Health services are a form of investment:
investing in health services today is
expected to have a return later.
Medicines are a form of investment
because people do not receive their
benefits until some point in the future.
Jamasoft2017
11
Furthermore,
some individuals' pharmaceutical investments
may have no obvious return at all, as in the
case of vaccines.
These characteristics make estimating the
monetary value of medicines difficult for the
individual.
Jamasoft2017
12
For example,
statin drugs can reduce the risk of heart disease
in later life.
In terms of seeing these medicines as an
investment, individuals must assess the
benefits from this protection without
experiencing what the heart disease actually
feels like, and they must judge the possible
consequences of not taking the statin drugs.
Jamasoft2017
13
The level of competition
among different pharmaceutical product
categories
is important in understanding medicine pricing
strategies.
The three main product categories are:
patented medicines, generic medicines, and
branded off patent medicines.
Jamasoft2017
14
Patented medicines
This group can be further categorized into:
• Patented, innovative, essential medicines where no
alternative medicine or intervention can provide the same
therapeutic outcome. These medicines are sometimes
referred to as single-source medicines (such as Herceptin for
the treatment of breast cancer).
• New medicines protected by patents, but
for which alternative therapies are
available (such as Tamiflu for the
treatment of influenza).
Jamasoft2017
15
The distinction between the two
types is important
because it reflects the degree of market power
held by the seller and the price elasticity of
demand. Demand for single-source medicines
that are considered essential is likely to be
inelastic, and combined with patent
protection, the seller is in a strong market
position compared to situations where
alternative therapies are available.
Jamasoft2017
16
A recent example
is the breast cancer drug Herceptin.
Because alternatives to this drug do not
currently exist, the manufacturers have set a
very high price in the knowledge that patients
and their insurers (including governments) will
be under heavy pressure to pay.
This is a classic example of a single-source
product with price inelasticity because of
patent protection.
Jamasoft2017
17
The effect of patents on the market
stems from monopoly rights that, to different degrees,
are conferred for the life of the patent.
These rights allow the monopolist to charge higher
prices than would be possible under more
competitive conditions, although the extent of the
monopolist’s price-setting power is not unlimited.
Jamasoft2017
18
For example,
the state can counter the monopolist's pricesetting power by establishing price
regulations, forming a monopsony to
purchase medicines on behalf of all residents,
issuing a compulsory license to another
producer, or using policy instruments such as
restrictions on pharmaceutical company
profits.
Jamasoft2017
19
Markets can also limit the
monopolist’s price structure.
The potential profits the monopolist can make from an
essential single-source patented medicine should
simulate other firms to develop medicines that have
the same heath outcome because patents are
granted for the chemical compound rather than the
therapeutic indications.
The arrival of competitor products restricts the pricesetting power of the monopolist, but their arrival on
the market is not necessarily immediate.
Jamasoft2017
20
When a large number of competitor
products enters a particular market
segment-more than is needed to
satisfy clinical need and introduce
genuine price competition
- the term "me-too" medicines is often
applied.
Jamasoft2017
21
Many examples exist,
including gastric acid inhibitors, statins, and
angiotensin-receptor antagonists.
Although a degree of competition is desirable,
the development and aggressive marketing
of patented me-too medicines may consume
pharmaceutical budgets and divert resources
and development efforts away from
treatments for less common diseases.
Jamasoft2017
22
From a societal point of view,
whether the incremental benefit from me-too
medicines is worth the cost of development is
questionable.
Jamasoft2017
23
Generic medicines.
Generic or multisource medicines are
not under patent and can be
produced
using the same compounds found
in the originator product using
either the same
or a different process.
Jamasoft2017
24
Multisource pharmaceutical products
are pharmaceutically equivalent products
that may or may not
be therapeutically equivalent.
Products may not be therapeutically equivalent
because of differences
in product performance.
Jamasoft2017
25
Because patents are country specific,
some countries can produce generic medicines using compounds
that are still protected by patents in other countries.
Where patents operate, generic medicines are allowed to enter
the market only when the patent expires.
Under special circumstances, such as a public health emergency,
countries are allowed to manufacture patented medicines
under compulsory licenses, which are sanctioned by the
World Trade Organization’s Agreement on Trade-Related
Aspects of Intellectual Property Rights.
Jamasoft2017
26
In general,
The absence of patent protection
lowers the barrier to entry into the market,
because generic companies
do not have to bear the high costs of
research and development (R&D),
including rigorous clinical trials to prove
quality, safety and efficacy
of the medicine.
Jamasoft2017
27
Reduced R&D costs enable multiple companies to enter
the market, resulting in a high level of competition.
However the expiration of patents does not mean
that barriers to market entry disappear.
As noted, the originator company develops
significant marketing leverage while protected
by the patent, which must be overcome by new
generic medicines.
Buyers may not always be aware of the availability
of lower-priced generic medicines, they may be
persuaded by promotional efforts not to change
medicine brands, or they may view the generic
product as inferior or of poor quality.
Jamasoft2017
28
Although the absence of patent
protection
can encourage the entry of generic medicines, strict
regulation of medicine prices has been associated
with a lower penetration of generic medicines
into the market, because reduced profitability
keeps generic firms from covering the costs of
market entry.
In countries with relatively little price regulation,
such as Germany and the United States, generics
have a greater market share than in the more
heavily regulated markets of Australia, France
and Italy.
Jamasoft2017
29
The entry of generics can be delayed
for other reasons.
Patent holders use a number of techniques
to extend their period of market exclusivity,
including making legal challenges to generic
manufacturers trying to enter the market
and developing minor variations in product
characteristics
that are sufficient to generate a new patent
(known as ever greening).
Jamasoft2017
30
Another approach
is for governments to grant data exclusivity rights
to the manufacturers who introduced
the pharmaceutical product.
Such rights prevent pharmaceutical regulators from
using the originator's data to make registration
decisions about generic equivalents for a defined
period (such as five years), thereby slowing the
introduction of generic competition.
Increasingly, such provisions are being guaranteed
as part of bilateral trade agreements.
Jamasoft2017
31
The process of allowing generic medicines
onto the market
differs among countries.
The United States passed a law designed to
allow faster entry, of generic medicines
when patents expire.
However, it also provides a significant
penalty if generic companies enter the
market too early.
Jamasoft2017
32
In Europe, the entry of generics
was made easier by forgoing the requirement of trials
demonstrating safety and efficacy
as long as the generic medicine is the bioequivalent
of the originator and the originator was sold in the
same market.
Some patent-holding companies responded by removing the
patented medicines from the market before the entry of the
generic and then releasing a modified form of the original drug.
This strategy effectively prevents generics from claiming
bioequivalence of an existing medicine sold in the European
market, thereby delaying entry of the generic product.
Jamasoft2017
33
In general,
Introducing generic competition is
the most effective way
to lower medicine prices.
The effect is not only because of the lower-priced
generic products,
but also because originator companies often
respond by lowering prices of their
patented products.
Jamasoft2017
34
Branded off-patent medicines.
A complicating issue on the generic
market is
when well-known branded medicines
go off patent and the originator company
produces generic versions of its own
products and retains the brand names
that are recognizable through extensive
marketing campaigns.
Jamasoft2017
35
Apparently, when the brand-name generic has a larger share
of the generic market, the brand-name medicine will be
more expensive.
In addition, a higher market
share held by the brand-name
generic will result in higher
generic medicine prices-from
all companies.
Jamasoft2017
36
The market entry of
brand-name generic medicines,
if combined with a large market share for the
manufacturer,
will prevent prices falling to levels reached with
more diverse competition.
Therefore, by entering both branded and
generic segments,
large companies can exercise
considerable market power.
Jamasoft2017
37
Consequences
The international and domestic systems that
determine the selling prices of
pharmaceutical products are extremely
complex.
Although covering all the issues in depth is
difficult,
one can draw a number of important
conclusions.
Jamasoft2017
38
• Patented medicine prices tend to be high,
and a competitive market for generic products is
the most important mechanism for ensuring
the affordability of essential medicines.
• Governments can intervene effectively in the
pharmaceutical market by becoming large
purchasers on behalf of their communities
and by regulating the different markups along
the supply chain, which can greatly affect the
costs to consumers.
Jamasoft2017
39
Governments can also
eliminate or reduce taxes
on important medicines.
Therefore we speak about regulated prices
of medicines.
To encourage the supply of generic medicines,
governments can work to minimize barriers
to their entry into the market.
Jamasoft2017
40
Health insurance
that covers a core list
of essential medicines with minimal
consumer co-payments
can be a major force in improving access
to essential medicines.
An insurer can use purchasing power and
other techniques that reduce
medicine prices.
Jamasoft2017
41
A number of mechanisms exist
to control pharmaceutical prices, including tendering,
generic substitution, reference pricing, international
benchmarking, and pharmacoeconomic analysis.
No one mechanism will meet all of a country's needs,
and the country must determine which mechanisms
are best,
based on assessing the context and monitoring it for
change over time.
Within a particular country, different methods may be
appropriate for different market segments (for
example, public versus private procurement).
Jamasoft2017
42
The total costs
of medicines depend not only on selling prices
but also on volumes of use.
Unnecessary medicine use contributes to both
costs and adverse clinical outcomes.
The demand side of the
pharmaceutical market is just as
important as the supply side.
Jamasoft2017
43
Three types of pricing policies
can be recognised:
•reference pricing,
•product price control,
•and profit control.
Jamasoft2017
44
Reference pricing
A reference pricing system is a system that
establishes a common reimbursement level or
reference price for a group of interchangeable
medicines, i.e. the reference group.
This is a system that establishes a reimbursement level or
reference price for a group of interchangeable medicines.
If a medicine is priced above the reference price, the
patient pays the difference between the price of the
medicine and the reference price, in addition to any
other co-payments, e.g. prescription fee, percentage copayment .
Jamasoft2017
45
Reference pricing
is not a form of price regulation.
It is a means of limiting expenditure on the
reimbursement of drugs by making use
of the existence of equivalent drugs on
the national market and setting a
reimbursement tariff (called reference
price) for groups of drugs which are
considered to be “interchangeable”.
Jamasoft2017
46
In many therapeutic fields
one encounters a series of alternative marketed
products which, while not identical, essentially
serve the same purpose.
Nevertheless, the prices of the drugs in the
“interchangeable” group may vary very
greatly,
with the newest products often being
considerably more expensive than the others.
Jamasoft2017
47
Rather than agreeing that public funds should cover the
costs irrespective
of which product in the group a physician prescribes, a
reference price system sets an acceptable price level.
This may be the mean of the various prices, or may
reflect the price of one of the lowest-cost items in the
class or an average of various low prices; alternative it
may be the price of the product considered to be the
most cost-effective in its category.
If the physician wishes to prescribe a more expensive
drug within the group, he may be called upon to
provide special justification or the patient may be
required to cover the extra costs.
Jamasoft2017
48
Reference pricing
is based purely on a comparison of prices
in the home country.
However, there is also an alternative type of reference
pricing which can be applied, in which the prices
charged for drugs in other countries are also taken
into consideration.
Jamasoft2017
49
Where a country has a system requiring
official approval for drug prices,
a comparison with prices in other countries is
often used in determining the price which can
be charged nationally.
In that situation, lower prices encountered in
other countries can be also used as references
for setting reimbursement prices.
Jamasoft2017
50
Reference pricing
is used by many European countries as one element of
governments’ strategies to contain public healthcare
expenditure.
It puts pressure on pharmaceutical companies to compete with
the reference priced product but also reduces competition
beyond this reference price.
It also makes patients sensitive of drug prices, as an increased
use of drugs priced at or below the reference price level was
observed.
Jamasoft2017
51
Reference Pricing Systems
• Reduce medicine prices but not always below the reference price, increase
the use of medicines priced at or below the reference price, generate
savings in pharmaceutical expenditure that tend to be limited to the short
term, and do not seem to adversely affect health outcomes.
• Reference pricing is in many European countries combined with other
policies such as prescribing by international non-proprietary name or
generics substitution, as this combination of policies seems to positively
influence each other.
• Reference pricing can help governments to contain public pharmaceutical
expenditure as it controls the reimbursement level of medicines.
A reference pricing system may also promote generic medicine use
because originator medicines priced above the level of the reference price
are likely to lose market share as a result of the additional patient copayment.
Jamasoft2017
52
The Phenomenon
of the parallel imports
of proprietary medicines.
Jamasoft2017
53
The European Commission
has published a
Communication clarifying
how the principle of free movement of goods
within the EU applies in practice
to parallel imports of medicinal products.
Jamasoft2017
54
Parallel imports are products
imported into one Member State
from another and placed on the market in the destination
Member State, outside the manufacturer's or its licensed
distributor's formal channels.
In the case of medicines, such imports are allowed if the
product imported is identical or sufficiently similar to one
already authorized for sale in the Member State of
destination. Aiming to help businesses and national
administrations take full advantage of the internal market in
medicinal products, the Communication covers the rights
and obligations of the parties concerned and the guarantees
to which they are entitled according to EU law.
Jamasoft2017
55
The prices of medicines differ
among the EU member states,
and this fact
-combined with the basic principles of the free movement of
goods –
makes parallel import of medicines interesting, even
though this trade is subject to many restrictions.
All distributed pharmaceuticals must for example be
approved by the national medicine regulatory
authorities or by the European Medicines Agency
(EMA).
Jamasoft2017
56
Parallel importation
is the cross-border importation of the
cheapest-priced drug
from another country.
Jamasoft2017
57
Thanks for your
attention.
Jamasoft2017
58