Financial risk of the Biotech Industry versus the Pharmaceutical Industry

The biotech industry now accounts for a substantial and growing proportion of total R&D spending on new medicines. However, compared with the pharmaceutical industry, the biotech industry is financially fragile. This article illustrates the financial fragility of the biotech and pharmaceutical industries in the US and the implications of this fragility for the effects that government regulation could have on biotech firms. Graphical analysis and statistical tests were used to show how the biotech industry differs from the pharmaceutical industry. The two industries’ characteristics were measured and compared, along with various measures of firms’ financial risk and sensitivity to government regulation. Data from firms’ financial statements provided accounting-based measures and firms’ stock returns applied to a multifactor asset pricing model provided financial market measures. The biotech industry was by far the most research-intensive industry in the US, averaging 38% R&D intensity (ratio of R&D spending to total firm assets) over the past 25 years, compared with an average of 25% for the pharmaceutical industry and 3% for all other industries. Biotech firms exhibited lower and more volatile profits and higher market-related and size-related risk, and they suffered more negative stock returns in response to threatened government price regulation. Biotech firms’ financial risks increase their costs of capital and make them more sensitive to government regulations that affect their financial prospects. As biotech products grow to represent a larger share of new medicines, general stock market conditions and government regulations could have a greater impact on the level of innovation of new medicines.     

On international cost-sharing of pharmaceutical R&;D

Ramsey pricing has been proposed in the pharmaceutical industry as a principle to price discriminate among markets while allowing to recover the (fixed) R&D cost. However, such analyses neglect the presence of insurance or the fund raising costs for most of drug reimbursement. By incorporating these new elements, we aim at providing some building blocks towards an economic theory incorporating Ramsey pricing and insurance coverage. We show how coinsurance affects the optimal prices to pay for the R&D investment. We also show that under certain conditions, there is no strategic incentive by governments to set coinsurance rates in order to shift the financial burden of R&D. This will have important implications to the application of Ramsey pricing principles to pharmaceutical products across countries.      

Do cost-sharing and entry deregulation curb pharmaceutical innovation?

This paper examines the role of both cost-sharing schemes in health insurance systems and the regulation of entry into the pharmaceutical sector for pharmaceutical R&D expenditure and drug prices. The analysis suggests that both an increase in the coinsurance rate and stricter price regulations adversely affect R&D spending in the pharmaceutical sector. In contrast, entry deregulation may lead to higher R&D spending of pharmaceutical companies. The relationship between R&D spending per firm and the number of firms may be hump-shaped. In this case, the number of rivals which maximizes R&D expenditure per firm is decreasing in the coinsurance rate and increasing in labor productivity.     

Drug innovation,price controls,and parallel trade

We study the long-run welfare effects of parallel trade (PT) in pharmaceuticals. We develop a two-country model of PT with endogenous quality, where the pharmaceutical firm negotiates the price of the drug with the government in the foreign country. We show that, even though the foreign government does not consider global R&D costs, (the threat of) PT improves the quality of the drug as long as the foreign consumers’ valuation of quality is high enough. We find that the firm’s short-run profit may be higher when PT is allowed. Nonetheless, this is neither necessary nor sufficient for improving drug quality in the long run. We also show that improving drug quality is a sufficient condition for PT to increase global welfare. Finally, we show that, when PT is allowed, drug quality may be higher with than without price controls.     

Orphan drug legislation: lessons for neglected tropical diseases

In the last 20 years, orphan drug legislation (ODL) has been adopted in several countries around the world (USA, Japan, Australia, and the European Union) and has successfully promoted R&D investments to develop new pharmaceutical products for the treatment of rare diseases. Without these incentives, many life-saving new drugs would have not been developed and produced. For economic reasons, the development of medicines for the treatment of diseases prevalent in the developing world (or tropical diseases) is lagging behind. Among several factors, the low average per-capita income makes pharmaceutical markets in developing countries appear relatively unprofitable and therefore unattractive for R&D-oriented companies. The case of ODL may offer some useful insights and perspectives for the fight against neglected tropical diseases. First, the measures used in ODL may also be effective in boosting R&D for neglected tropical diseases, if appropriately adapted to this market. Second, small-sized companies, which have played a successful role in the development of orphan drugs for rare diseases, may also represent a good business strategy for the case of tropical diseases.     

台湾地区医保药品的采购模式和支付价格

目的:分析台湾地区医保药品在采购和支付方面的做法和经验,为大陆地区推进药品采购模式和支付价格改革提供参考。方法:系统梳理台湾地区在医保药品采购和支付方面的政策文件和相关文献,并与大陆地区药品采购和支付政策进行对比分析。结果:台湾地区医疗机构根据自身用药需求,自主采购药品,采购价格由供需双方直接谈判形成。政府仅对医保药品的价格进行管理,对新药采用国际参考定价办法;原厂药、BA/BE学名药、一般学名药的支付价以国际参考价格为上限,依次降低。药品质量也在医保支付标准考虑之列。此外,药品的支付价格依据采购价格实行动态调整,当二者差值大于30%时,健保署便会调整支付价格以减小二者的差价。结论:台湾地区通过制度设计和调整,较好地统筹了药品采购和补偿两个环节,形成了合理的药品采购价格和支付价格,这些经验可为中国大陆地区完善药品采购和支付政策提供参考。     

How excluding some benefits from value assessment of new drugs impacts innovation

Payers often assess the benefits of new drugs relative to costs for reimbursement purposes, but they frequently exclude some drugs' option‐related benefits, reducing their reimbursement chances, and making them less attractive R&D investments. We develop and test a real options model of R&D investment that shows that excluding option‐related benefits heightens drug developers' incentives to avoid high‐risk (volatile) R&D investments and instead encourages them to focus on “safer” (positively skewed) investments. Our model and empirical results could partly explain the decline in the number of risky new molecular entities.     

Balancing health and industrial policy objectives in the pharmaceutical sector: lessons from Australia

INTRODUCTION: Policy-makers worldwide struggle to balance health with industrial policy objectives in the pharmaceutical sector. Tensions arise over pricing and reimbursement in particular. What health plans view as necessary to maintain equitable access to medicines, industry views as inimical to R&D and innovation. Australia has grappled with this issue for years, even incorporating the goal of "maintaining a responsible and viable medicines industry" into its National Medicines Policy. METHODS: This case study was conducted via a narrative review that examined Australia's experiences balancing health and industrial policy objectives in the pharmaceutical sector. The review included electronic databases, grey literature and government publications for reports on relevant Australian policy published over the period 1985-2007. RESULTS: While pharmaceutical companies claim that Australia's pricing and reimbursement policies suppress drug prices and reduce profits, national policy audits indicate these claims are misguided. Australia appears to have secured relatively low prices for generics and "me-too drugs" while paying internationally competitive prices for "breakthrough" medicines. Simultaneously, Australia has focused efforts on local pharmaceutical investment through a variety of industry-targeted R&D incentive policies. DISCUSSION: Despite the fact that policy reviews suggest that Australia has achieved balance between health and industrial policy objectives, the country continues to face criticism from industry that its health goals harm innovation and R&D. Recent reforms raise the question whether Australia can sustain the apparent balance.     

Impact of Cross-Reference Pricing on Pharmaceutical Prices

Objective

Several EU countries are determining reimbursement prices of pharmaceuticals by cross-referencing prices of foreign countries. Our objective is to quantify the theoretical cross-border spill-over effects of cross-reference pricing schemes on pharmaceutical prices in the former EU-15 countries.

Methods

An analytical model was developed estimating the impact of pharmaceutical price changes in Germany on pharmaceutical prices in other countries in the former EU-15 using cross-reference pricing. We differentiated between the direct impact (from referencing to Germany directly) and the indirect impact (from referencing to other countries that conduct their own cross-reference pricing schemes).

Results

The relationship between the direct and indirect impact of a price change depends mainly on the method applied to set reimbursement prices. When applying cross-reference pricing, the reimbursement price is either determined by the lowest of foreign prices (e.g. Portugal), the average of foreign prices (e.g. Ireland) or a weighted average of foreign prices (e.g. Italy). If the respective drug is marketed in all referenced countries and prices are regularly updated, a price reduction of € 1.00 in Germany will reduce maximum reimbursement prices in the former EU-15 countries from €0.15 in Austria to €0.36 in Italy.

Discussion

On one side, the cross-border spill-over effects of price reductions are undoubtedly welcomed by decision makers and may be favourable to the healthcare system in general. On the other side, these cross-border spill-over effects also provide strong incentives for strategic product launches, launch delays and lobbying activities, and can affect the effectiveness of regulation.

Conclusions

To avoid the negative effects of cross-reference pricing, a weighted index of prices from as many countries as possible should be used to determine reimbursement prices in order to reduce the direct and indirect impact of individual countries.     

Examining the link between price regulation and pharmaceutical R&D investment

This paper examines the link between price regulation and pharmaceutical research and development (R&D) investment. I identify two mechanisms through which price regulation may exert an influence on R&D: an expected-profit effect and a cash-flow effect. Using established models of the determinants of pharmaceutical R&D, I exploit a unique fact to quantify firm exposure to pharmaceutical price regulation: relative to the rest of the world, the U.S. pharmaceutical market is largely unregulated with respect to price. Using this fact within the context of a system of quasi-structural equations, I simulate how a new policy regulating pharmaceutical prices in the U.S. will affect R&D investment. I find that such a policy will lead to a decline in industry R&D by between 23.4 and 32.7%. This prediction, however, is accompanied by several caveats. Moreover, it says nothing about the implications for social welfare; therefore, these issues are also discussed.     

Drug Prices and Value of Oncology Drugs in Italy

ObjectiveThe main objective of this study was to evaluate the potential role of efficacy data and other information available at the time of price and reimbursement (P&R) decision-making process within the definition of oncology treatment costs in Italy.MethodsThe study included all P&R dossiers submitted to the Italian Medicines Agency between July 2015 and December 2017. It prospectively collected the data of the P&R process starting from dossier submission up to the Italian Health Service reimbursement decision. The cost of treatment per patient was estimated using both the list price (“gross cost”) and the confidential net price (“net cost”) of drug packages and applied to the median duration of treatment. A 2-sample stage Heckman decomposition model was used to evaluate the potential role of efficacy data and other information available at the time of P&R decision making on the gross and net cost.ResultsA total of 37 oncology drugs related to 58 therapeutic indications were analyzed. The multivariate model showed that the variation of progression-free survival is the only variable predictor statistically associated with treatment cost, but this effect was observed only when confidential net prices were used (P=.026).ConclusionsConsidering the perspective of a developed country having a public healthcare service with a central reimbursement negotiation is determined a relevant reduction in the treatment cost purchased by public payers. This is a useful approach to guarantee the affordability of innovative oncology drugs and to contain public expenditures on healthcare. Furthermore, the negotiation of confidential discounts and agreement clauses in managed entry agreements seemed to reward oncology drugs displaying an added therapeutic benefit.     

Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents

This paper reviews the economic case for patents and the potential for differential pricing to increase affordability of on-patent drugs in developing countries while preserving incentives for innovation. Differential pricing, based on Ramsey pricing principles, is the second best efficient way of paying for the global joint costs of pharmaceutical R&D. Assuming demand elasticities are related to income, it would also be consistent with standard norms of equity.To achieve appropriate and sustainable price differences will require either that higher-income countries forego trying to import low drug prices from low-income countries, through parallel trade and external referencing, or that such practices become less feasible. The most promising approach that would prevent both parallel trade and external referencing is for payers/purchasers on behalf of developing countries to negotiate contracts with companies that include confidential rebates. With confidential rebates, final transactions prices to purchasers can differ across markets while manufacturers sell to distributors at uniform prices, thus eliminating opportunities for parallel trade and external referencing.The option of compulsory licensing of patented products to generic manufacturers may be important if they truly have lower production costs or originators charge prices above marginal cost, despite market separation. However, given the risks inherent in compulsory licensing, it seems best to first try the approach of strengthening market separation, to enable originator firms to maintain differential pricing. With assured market separation, originators may offer prices comparable to the prices that a local generic firm would charge, which eliminates the need for compulsory licensing.Differential pricing could go a long way to improve LDC access to drugs that have a high income market. However, other subsidy mechanisms will be needed to promote R&D for drugs that have no high income market.     

Drug consumption and health equity in the Metropolitan Area of Buenos Aires, Argentina]

OBJECTIVE: To assess the level of equity in drug consumption patterns in the Metropolitan Area of Buenos Aires, Argentina, given the transformation of the Argentine pharmaceutical market since the deregulation of the country's economy in 1991. Methodology: For this study, data from secondary statistical sources were processed and analyzed. The secondary sources used were two household surveys that contained a module on the utilization of health services and the associated expenditures. The surveys had been designed by the Ministry of Health and were applied in the Metropolitan Area of Buenos Aires in 1989 and 1995. RESULTS: There was a socially regressive increase in out-of-pocket expenditures on drugs between 1989 and 1995, in a market where average drug prices doubled in the midst of relaxed price controls and more open imports. The regressive character of drug expenditures was shown in the growth in direct spending for drug purchases, the increase in the proportion of private health expenditures devoted to drugs, and the unequal increase among the different economic strata in the proportion of family income going toward drugs. CONCLUSIONS: Out-of-pocket expenditures on drugs are an efficient indicator of equity for studying the financial protections that urban Argentines have when they become ill. This kind of indicator of financial equity could help improve the regulatory framework of the pharmaceutical market by incorporating social evaluation criteria along with analyses of pharmaceutical safety and therapeutic efficacy.     

Future European health care: cost containment, health care reform and scientific progress in drug research

The cost of the development of a new pharmaceutical product from its conception and synthesis through to the regulatory approval process has more than quadrupled in the last 20 years. Both clinical and total development times have increased substantially. To amortize the costs incurred, the pharmaceutical industry has taken an international dimension. The incentives for pharmaceutical firms to discover and develop new drugs depend on the length of the development and regulatory review process plus the potential market size. Recent regulatory, economic and political changes may have significant implications for the future of new drug developments in Europe. The European Union industrial policy felt that there is a need for convergence in the area of pricing. It is recommended that the policy should aim to contain growth in pharmaceutical expenses by means specific to reimbursement rather than direct price controls. By encouraging doctors to prescribe and customers to use generics, competition is enhanced to bring down drug prices. More emphasis is being laid by government in educating customers to cost-awareness and cost-benefit ratios with regard to pharmaceuticals. Concerning clinical trials, European harmonization has been achieved by significant developments: the rights and integrity of the trial subjects are protected; the credibility of the data is established; and the ethical, scientific and technical quality of the trials has improved. Future European health care forecasts a whole change in the pharmaceutical business. Important issues in cost and outcome measurement should be carefully planned and considered in drug development. Due to important mergers and acquisitions, the pharmaceutical sector will consist mainly of important multinational corporations. In this way, valuable new products may be brought to the market.     

Has the European union achieved a single pharmaceutical market?

This paper explores price differences in the European Union (EU) pharmaceutical market, the EU’s fifth largest industry. With the aim of enhancing quality of life along with industry competitiveness and R&D capability, many EU directives have been adopted to achieve a single EU-wide pharmaceutical market. Using annual 1994–2003 data on prices of molecules that treat cardiovascular disease, we examine whether drug price dispersion has indeed decreased across five EU countries. Hedonic regressions show that over time, cross-country price differences between Germany and three of the four other EU sample countries, France, Italy and Spain, have declined, with relative prices in all three as well as the fourth country, UK, rising during the period. We interpret this as evidence that the EU has come closer to achieving a single pharmaceutical market in response to increasing European Commission coordination efforts.     

The changing structure of the pharmaceutical industry

Rising research and development (R&D) expenditures by pharmaceutical companies are, in part, a consequence of changing industry structure, particularly the rise of the biotechnology sector. The creation of a market for biomedical science and increased vertical competition within the industry are likely to spur innovation and raise productivity, but they also could induce socially wasteful spending and weaken academic science. With innovation increasingly dependent on financially vulnerable firms and complex contractual arrangements, R&D investment might be becoming more sensitive to price controls or other cost containment measures.