Pharmaceuticals

Brian King | Brett Kohorst | Ting Li | Brennan Mach

Overview● R&D

o Timingo Uncertaintyo Cost

● The Industry● FDA Regulation● Patents● Pricing● Access for Patients

Characteristics

● Long Development Cycleso 10-15 years (Girotra, Terwiesch, Ulrich 2004)

● Significant Levels of Uncertainty● High Costs

o Successful: up to $800M (Girotra, Terwiesch, Ulrich 2004)

o Failures + Capital: $2.6B (Tufts 2014)

Timing

(Tufts 2014)

Uncertainty - Probabilities

(Tufts 2014)

Uncertainty - Future Sales

● Same-Therapeutic Class Competitors● New/Unforeseen Technological Developments● General Market Conditions● Political Dynamics (New Regulations or

Policies)(Abbott, Vernon 2005)

History● 1950-1990’s: Testing synthesized/naturally

occurring compoundso 1970: >700,000 culture/animal screening tests

→1,000 had significant results for further testing o “Me Too” variants

● Present: random screening → “rational drug design”

(Scherer 2000)

Process

(PhRMA 2015)

Spending Over Time

(Tufts 2014)

Costs

(Tufts 2014)

Funding

● New products → Future Profits with Considerable Lags (Abbott, Vernon 2005)

● Firm Funds = Cheaper Source of Financing than External Debt or Equity (Abbott, Vernon 2005)

● National Institutes of Healtho Basic Research and Some Applied Work (Scherer 2000)

o $4.8B spending and grants in 1991 (Scherer 2000)

Future of Drugs

● Highly Targeted Drugs for Specific Genotypes o ↑ cost of developmento ↓ potential market for each producto → ↑ price of personalized medicines

(Abbott, Vernon 2005)

The Industry Overview

● The Industry past and present● Mergers and Acquisitions● FDA● Patents● Orphan Drugs

Industry - Past ● Multinational Enterprises (MNEs)● The US Industry is very concentrated ● Emergence of Biotech firms in early 80s

(Grabowski, 2011)

● 640 companies in 1987 in the US.o Top 8 responsible for 36% of US

sales.o Top 20, 65% of US sales.

(Scherer, 2000)

● Growth and new drug introduction peaks in the 90s

● Industry growth is starting to decline beginning in ‘00

(Demirel and Mazzucato, 2010)

Industry - Present● US leads world in

Pharmaceutical production (39%)o Followed by UK, GER, FRA,

and JAP● US consumption in ‘09 was $300

billiono 40% World wide share, ↑

37% since ‘03● US imported $81 billion in ‘09

o 65% ↑ since ‘03● US companies look to expand in

emerging markets (BRIC)

Industry Mergers and Acquisitions

● Becoming a big part of today's Pharmaceutical Industry

● Happen for a few different reasons:o Vertical Mergerso Horizontal Mergerso Production and Processes streamlined (Po, 1998)

o ↑ innovation due to cross-fertilization of ideas

(Ornaghi, 2009)

Industry Mergers and Acquisitions

● Short Run Effectso Higher Consumer prices

● Long Run Effectso Less incentive to innovateo Creation of massive pharmaceutical conglomerates

● International Regulation and Antitrust laws(Ornaghi, 2009)

Government Regulation FDA● Pharmaceutical regulation varies widely from

country to country● Pure Food and Drug Act of 1906● Food, Drug, and Cosmetic Act 1938● Kefauver-Harris Act of 1962● Orphan Drug Act of 1983● Hatch Waxman Act of 1984

Patents

● Brand Name Drugs: a drug that has a trade name and is protected by a patento Right to exclude others from making/selling a drug for 20

years o File early on in the development processo Time to conduct clinical trials + obtain necessary

approval → ↓ patent protected market window of a drugo Early to mid-1990s - 11 to 12 years

other industries - 18.5 years (Girotra, Terwiesch, Ulrich 2004)

Industry - Orphan Drugs

● Orphan Drugs are used to treat rare diseaseo Classified in America as any disease with a prevalence of less than

200,000 Americans (equivalent to .063 percent of U.S. population) ● Orphan Drug Act in 1983

o Created incentives for pharmaceutical companies willing to create orphan drugs

● Prior to the ODA, only 10 products to treat rare diseases were available, now 352 are available

(Wellman-Labdie, 2010)

Pricing Overview

● Brand Name Drugso Monopoly Issue

● Generic Drugso Hatch-Waxman Act

● Brand Name vs Generic Drugso Market shareo Price o Result

Brand Name Drugs

● Costo Over $335 million on

development. An additional $467 million on clinical (Reiffen and Michael 1990s)

Brand Name Drugs

● Price Differences:o Innovation and Non-innovation drugs

■ Innovation drugs takes 11 to 12 years + cost $200 million(CBO 1998)

■ 1958-1975 ,NMEs’ study in US market show innovation drugs with high price (Reekie,1978)

■ Why innovation cause more ?● Quality - adjusted prices (Weston,1982)

Brand Name Drugs Monopoly Issues

● The industry itself a monopoly● Price above production cost ● The Government (FDA) is still able to

regulate drug prices

Brand Name Drugs

● Price Different o Skimming pricing

Higher the price first New drug has significant different from existing drugs(Dean,1969)

● Acute (Rao,1984)

o Penetration pricing Build the demand before increasing the price Introduce price should be low,higher regular price

(Schmalensee,1982)● Pioneering brand-reputation (Schmalensee,1982)

● Chronic (Rao,1984)

Generic Drugs

● Bioequivalent● Cost

○ 1/4 of BD, retail prices(CBO,1998)

○ 30-50% lower (Morton,1999)

● Process(Mossinghoff,1999)

o 3-5 yearso ANDA: 18-30 months

Generic Drug Price

Hatch-Waxman Act (1984)

● Facilitated generic entry(Gerald 1999,Henry etl,2011)

o Demonstrate bioequivalence (no clinicals).o Encourage competition prior to brand name patent

expiration Paragraph III Paragraph IV

● Possibility for 180 day exclusivity.

Hatch-Waxman Act (1984)

● Brand name(Gerald 1999,Henry etl,2011)

o Patent restoration● 5 years● 14 years

o Data exclusivity ● 5 years after NCE● 3 years after existing drug

Hatch-Waxman Act

Market sharing

● Brand nameo During 1991 to 1992, CBO examined 21 brand-

name drug, after their patent expired, they lost 44 % market share to generic drugs (CBO, 1998)

● Generic (Grabowski and Vernon 1996)

o One month, share 30%o One year, share 60%

Brand Name Pricing after Generic Entry

● The price of brand name fall 12% every year before generic entry (Regan,2007)

● Generic drugs entry have NO significant effect on brand-name drugs(Richard 1992):○ Brand name companies ↓ quantities of the contest

drug ○ Customer seek for substituted drugs○ Companies reduce the cost of advertising the dugs

Brand Name Pricing after Generic Entry

● Brand-name price rise (Frank and Salever, 1992)

○ Generic price far below○ Price discrimination story

● Brand-name price will be increase to 2%, every generic entry (Grabowski and Frank 1997)

Brand Name pricing after Generic Entry

Price of Brand-name

Why?● Demand inelastic

○ Loyalty & taste ○ Positive net surplus(Salop 1979)

● Physicians

Access to Pharmaceuticals for Patients

-Private Insurance-Publicly insured

-Medicare (before and after part D)-Medicaid

-Uninsured

Private Insurance

-Prescribed medications overall is one of the fastest-growing components of the U.S. health care budget(Centers for Medicare and Medicaid Services, 2006)Reasons for increase:

-Larger population -More medications on the market-Higher costs per medication-More medications per person

Private Insurance

- Private insurance cover 48% overall spending on prescription drugs

-reflects major change in past 4 years-Copayments have Increased

-2000-2003 -Prefered: $13→$19-Non-prefered:

$17→$29 (Rand Health Care,

2005)

Medicare-Part D 2006

Before Part D- High out-of-pocket spending- ~50% beneficiaries lacked coverage- Lower drug utilization & spending by

minorities vs. whites- 44% elderly did not have prescription

coverage in 2001- Drug Adherence

- Skip routine pill taking- Do not get prescriptions refilled on

time or delay time between refills

After Part D- 13-18% decrease out of pocket

spending- Increased access & affordability →

37 million beneficiaries enrolled- Low income & high prescription

seniors most affected- 7% elderly did not have coverage in

2009- Reduced drug adherence

- Mail order drugs ↑ nonadherence

Publicly Insured: Medicare after part D-Recent changes in A.C.A decrease “donut hole”

-Medicaid pays 75% first $2,250 → coverage ↓ zero until beneficiary reaches $5,100 → Medicaid pays 95% cost

-Donut hole → ~$3,000 Average monthly prescription drug plan premium increased by 55% from $25.93 in 2006 to a projected $40.18 in 2013 (Hoadley, Cubanski,

Hargrave, Summer, & Huang, 2012).

Publicly Insured: Medicaid

-Enrollment ↑ 8 million since open enrollment in 2013

- Shows 14% ↑ monthly enrollment - Enrollment ↑ 20% in states that had Medicaid expansion

-Medicare part D → beneficiaries of Medicaid still pay more than private insurance

-In 2010 the average prescription drug spending per person under age 65 was $1,024 (Daemmrich and Mohanty 2014)

Uninsured- Biggest problem → access to medical care & pharmaceuticalsWhy people are uninsured:

-High cost → can’t afford insurance- ↑ Unemployment at 16.7%; stay unemployed for 5+ years

-No offer Problems with being uninsured:

-High medical bills -Medical bills debt-Delay or forgo care

-Drug adherence (Kaiser Family Foundation,2014)

UninsuredWho are they?-~1/3 uninsured adults in 2013 went without needed medical care/prescription drugs due to high cost-Most of the uninsured are in low-income working families

- ~8/10 uninsured are U.S citizens- ~2/10 uninsured are non-citizens

-lawfully present & undocumented

immigrants - 46% White, non-Hispanic; 32% Black; 32%

Hispanic; 6% Asian/ Native Hawaiian; 3% other

(Kaiser Family Foundation,2014)

Questions

What do you think about the length of the current patents? Should it be longer or shorter? Why?