History, politics, Economics, ethics, law, psychology, Corporate Social Responsibility, technology ......

Teaching weeks 13 to 18

lem 3 Prob

The problem takes six weeks of classroom and on-line work to complete During this time your participation in groupwork is assessed by your seminar tutor through observation in class and your contributions online. You also gain marks by attempting the on-line tests. You must contribute to and be named on the Group Report to be credited with any Problem marks. Problem 3 marks count for up to 40% of your overall module mark.

Pharmaceutical Industry
This 6 week 'problem' is essentially a group role playing exercise. In these investigations the members of the group act the role of business consultants offering a solution to a particular question. The question to be investigated here focuses on the operation of the global pharmaceutical market and the potential difficulties a new firm might face. The analysis requires that you investigate the difference between the cost structure of typical pharmaceutical firm and the the abstract firm in economic theory, how these firms attempt to keep their business secrets and the ethics of their commercial operations..

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Tips

Your group is required to produce a report or presentation which explicitly analyses one of the six questions. Your answer to the group question must show that you have researched the 'core' question.

The development cycle for a prescription drug takes more than a decade, is very costly and is not explicitly covered in the standard 'theory of the rm. To protect their intellectual property (IP) the pharmaceutical rm will patent the medicine at the start of the development process - thus reducing their 'monopoly production time' once the product is on the market. The 'clinical development' phase involves extensive trials when the medicine is given to volunteers and patients - this may cause ethical dilemmas to occur. Core research question Explain how economic theory can be applied to costs and prots in the prescription drugs market, paying particular attention to the the risk associated with the research and development cycle, the signicance of legal protection through patents and the effect this has on the prescription drug market. What ethical and market considerations are involved in the pricing of prescription drugs? Group Presentation/Reportquestions (each group does a presentation or writes a report on one of these questions) 1. What determines the research and development costs for innovative new prescription drugs, how might legal and ethical considerations affect the cost of developing a new prescription drug? 2. Advise a new pharmaceutical company on the process for developing a new prescription drug, and the factors that will affect the price of the drug and its availability on the market. 3. Consider how the demand for prescription drugs differs from other products and the economic and legal factors that may restrict the availability of a new prescription drug. 4. What constraints should there be on a pharmaceutical rm that is developing a new prescription drug? 5. How difcult is it for a company to enter the pharmaceutical market and compete successfully in producing a prescription drug?

drug tion p escri cess he pr T t pro pmen evelo d

'normal' production costs begin here Start

Profitable Blockbuster drug

Based on a diagram from ABPI 'The Development of medicines' document

high failure rate high Fixed Cost

Note:
The development cycle for a prescription drug takes more than a decade, is very costly and is not explicitly covered in the standard 'theory of the firm' To protest their intellectual property (IP) the pharmaceutical firm will patent the medicine at the start of the development process - thus reducing their 'monopoly production time' once the product is on the market. The 'clinical development' phase involves extensive trials when the medicine is given to volunteers and patients - this may cause ethical dilemmas to occur.

l industry Extract from EU investigation into the Pharmacuetica

The pharmaceutical sector is R&D driven and highly regulated. On the supply side, there are two types of companies. So-called "originator" companies are active in research, development, manufacturing, marketing and supply of innovative medicines. These are usually subject to patent protection, needed to provide a reward for innovation and incentives for future research. When patent protection expires, the originator companies lose their exclusive rights to manufacture and market these medicines and generic manufacturers can enter the market with medicines that are equivalent to the original medicines, but typically at significantly lower prices. This helps contain public health budgets, contributes to an increase in consumer welfare and creates incentives for further innovation. Originator companies and R&D: During the period 2000 2007 originator companies spent on average 17% of their turnover from prescription medicines on R&D worldwide (approximately 1.5% of turnover was spent on basic research research to identify potential new medicines, the rest mostly on (pre-)clinical trials and tests). Expenditure on marketing and promotional activities accounted for 23% of their turnover, thus about one third more than they spent on R&D as a whole. The inquiry confirms that a few "blockbuster" medicines (i.e. where annual global turnover for that medicine exceeds US $ 1 billion) account for a substantial part of the sales and profits of large originator companies. A number of blockbuster medicines have lost patent protection in recent years and more will do so in the coming years. Combined with other factors, this has given originator companies incentives to extend the period during which they enjoy blockbuster revenues. Generic companies: Generic companies are in general smaller in size than originator companies and often more regional in nature. Large generic companies are active with a significant range of products. They generate a large part of their turnover from medicines equivalent to blockbuster products whose exclusivity has expired. Their activity in R&D is limited. Demand for Pharmaceuticals: On the demand side, the pharmaceutical sector is unusual in that for prescription medicines, the ultimate consumer (the patient) is not the decision maker (generally the prescribing doctor and in certain Member States the pharmacist). Nor does the ultimate consumer usually directly bear the costs, as these are generally met by a national health scheme. Because of this unique structure, there is usually limited price sensitivity on the part of decision makers and patients. Pricing and Reimbursement In almost all Member States the pricing and reimbursement status of a prescription medicine must be determined before launch if funded under the social security system. The underlying objective is to maintain control over national health budgets. A number of Member States apply policies supporting the sale of generic medicines by combining demand and supply side pricing practices, such as obliging pharmacists to always dispense the cheapest product. In certain Member States health insurers have recently become active in controlling prices for medicines, e.g. through tender procedures.

Reference
Pharmaceutical Sector Inquiry Preliminary Report (DG Competition Staff Working Paper) November 2008 EU Commission Competition DG __________ ___ Pages 6/7/9

Document is available on the Information Website

utical Industry' Extract from 'Research and Development in the Pharmace

Reference
Research and Development in the Pharmaceutical Industry
Congress of the United States Congressional Budget Office October 2006 __________ __ Pages 19 - 21
Document is available on the Information Website

Primary Determinants of R&D Costs A frequently cited 2003 study by Joseph DiMasi, Ronald Hansen, and Henry Grabowski (DHG) estimated that the average cost of successfully developing a new molecular entity, including R&D spending on failed drug projects, was $802 million in 2000.1 Although that estimate suggests that new drugs can be very costly to develop, it is an average that reflects the costs of successes and failures alike. It also reflects the research strategies and drug-development choices that firms make on the basis of their expectations about future revenue. If companies expected to earn less revenue from future drug sales, they would adjust their research strategies to reduce their average R&D spending per drug. Research and development costs for new drugs are highly variable. Although the DHG study surveyed drugs from a representative set of therapeutic classes, it excluded some types of new drugs that have lower average R&D costs, such as those that do not introduce new active ingredients but rather are modifications of existing drugs. In addition, the estimate may not be representative of R&D costs for smaller pharmaceutical firms, which did not participate in the survey on which the study was based. However, by focusing on new molecular entities, the DHG study did base its cost estimate on the types of drugs that have been the source of most pharmaceutical breakthroughs.2 The average successfully developed NME in the studys sample required 4.3 years for discovery and preclinical development and another 7.5 years for clinical trials and FDA approval.3 (Approval itself took an average of 1.5 years.) Thus, developing an NME and bringing it to mar- ket required 11.8 years, on average (see Table 3-1). For those various phases of research and development, the DHG study estimated average out-of-pocket (or direct) costs and fully capitalised costs (assuming a capital cost rate of 11 percent per year). The difference between the two represents opportunity costs. For the drug projects in the DHG survey, opportunity costs constitute about half of the total average cost of developing a drug. Those costs would make up a smaller percentage of the total cost for shorter projects. But in all cases, opportunity costs constitute a greater share in the preclinical phase than in the clinical-trial phase because investments made in the ear- lier phase are tied up longer. Why Have R&D Costs Risen for Innovative New Drugs? Various surveys conducted between 1976 and 2000 suggest that during that period, the average amount that surveyed firms reported spending on reearch and development of new molecular entities increased nearly sixfold in real terms (see Figure 3-1). DiMasi, Hansen, and Grabowski estimate that average R&D costs, including opportunity costs, rose at an annual rate that was 7.4 per- cent above inflation during the 1980s (the most recent decade for which they have made such an estimate) and 9.4 percent above inflation during the 1970s.10 Observers attribute the continuing growth in R&D costs for innovative new drugs to several factors:

1. An increase in the percentage of drug projects that fail in clinical trials; 2. A trend toward bigger and lengthier clinical trials as well as a possible rise in the number of trials that firms are conducting (including trials for marketing purposes, such as to differentiate a product from its competitors); 3. A shift in the types of drugs that companies work on, toward those intended to treat chronic and degenerative diseases. 4. Advances in research technology and in the scientific opportunities facing the pharmaceutical industry; 5. The increased commercialisation of basic research, as firms more often pay for access to basic research findings that in earlier years might have been freely available 6. A lengthening of the average time that drugs spend in preclinical research.

Sources of information and help

The module information website - click on the Problem 3 link. Check the links and , videos etc. in the Background and Theory learning modules. Work through the learning modules and attempt the self test questions - these will be available from the start of teaching in the January term. The other members of your group and your seminar tutor. Remember you and your group have 5 weeks to learn and teach each other about the pharmaceutical business and to 'solve' the problem.

1. An increase in the percentage of drug projects that fail in clinical trials; 2. A trend toward bigger and lengthier clinical trials as well as a possible rise in the number of trials that firms are conducting (including trials for marketing purposes, such as to differentiate a product from its competitors); 3. A shift in the types of drugs that companies work on, toward those intended to treat chronic and degenerative diseases. 4. Advances in research technology and in the scientific opportunities facing the pharmaceutical industry; 5. The increased commercialisation of basic research, as firms more often pay for access to basic research findings that in earlier years might have been freely available 6. A lengthening of the average time that drugs spend in preclinical research.

Sources of information and help

The module information website - click on the Problem 3 link. Check the links and , videos etc. in the Background and Theory learning modules. Work through the learning modules and attempt the self test questions - these will be available from the start of teaching in the January term. The other members of your group and your seminar tutor. Remember you and your group have 5 weeks to learn and teach each other about the pharmaceutical business and to 'solve' the problem.

1. An increase in the percentage of drug projects that fail in clinical trials; 2. A trend toward bigger and lengthier clinical trials as well as a possible rise in the number of trials that firms are conducting (including trials for marketing purposes, such as to differentiate a product from its competitors); 3. A shift in the types of drugs that companies work on, toward those intended to treat chronic and degenerative diseases. 4. Advances in research technology and in the scientific opportunities facing the pharmaceutical industry; 5. The increased commercialisation of basic research, as firms more often pay for access to basic research findings that in earlier years might have been freely available 6. A lengthening of the average time that drugs spend in preclinical research.

Sources of information and help

The module information website - click on the Problem 3 link. Check the links and , videos etc. in the Background and Theory learning modules. Work through the learning modules and attempt the self test questions - these will be available from the start of teaching in the January term. The other members of your group and your seminar tutor. Remember you and your group have 5 weeks to learn and teach each other about the pharmaceutical business and to 'solve' the problem.

1. An increase in the percentage of drug projects that fail in clinical trials; 2. A trend toward bigger and lengthier clinical trials as well as a possible rise in the number of trials that firms are conducting (including trials for marketing purposes, such as to differentiate a product from its competitors); 3. A shift in the types of drugs that companies work on, toward those intended to treat chronic and degenerative diseases. 4. Advances in research technology and in the scientific opportunities facing the pharmaceutical industry; 5. The increased commercialisation of basic research, as firms more often pay for access to basic research findings that in earlier years might have been freely available 6. A lengthening of the average time that drugs spend in preclinical research.

Sources of information and help

The module information website - click on the Problem 3 link. Check the links and , videos etc. in the Background and Theory learning modules. Work through the learning modules and attempt the self test questions - these will be available from the start of teaching in the January term. The other members of your group and your seminar tutor. Remember you and your group have 5 weeks to learn and teach each other about the pharmaceutical business and to 'solve' the problem.