Pharmaceutical Companies In Southern California - This analysis is part of the USC-Schaeffer Initiative for Health Policy, a partnership between the Schaeffer Center for Health Policy and Economics at the University of Southern California. The initiative is part of the national health care debate at USC and .
Paul B. Ginsburg Nonresident Senior Fellow - Economic Studies, USC-Schaeffer Initiative Senior Fellow in Health Policy - USC Schaeffer Center for Health Policy and Economics
Pharmaceutical Companies In Southern California
When it comes to buying prescription drugs, drugmakers often argue that price-cutting measures will lead to less innovation in the future. This response may relate to market-activating policies such as shortening approval times and speeding up generic approvals, as well as regulatory tools such as price controls.
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The manufacturers' argument is correct that lower profit expectations lead to lower investment in research and development (R&D). But we doubt that innovation is always a good thing. The fundamental principle of economics is the law of diminishing returns. In this case, the additional resources spent on innovation lead to several important gains. At a certain point, perhaps achieved, the gains from R&D from additional resources no longer support the higher price society will pay to support it.
Pharmaceutical innovation has generated a large amount of social value. The evidence on this point is strong and comes from many sources. Cost-of-illness studies of prescription drugs, large-scale comparisons in the United States, and international comparisons have shown high public gains in longevity and functional health outcomes. These advantages of pharmaceutical innovation derive from patent policies and the granting of marketing exclusivity to new drug products.
Economists call the pharmaceutical industry a low-cost, low-cost industry. This means that the cost of bringing a new drug to market is high and the process is risky, and the cost of producing an additional unit of product to market is often "pennies per pill." There is considerable disagreement about the exact cost of bringing a new drug to market, but it is widely accepted that the cost is at least several hundred million dollars per new drug product.
In addition, for many drugs, the cost of imitation is low. It is easy and cheap for a company that did not make the drug to make a copy of the new drug. This means that if free competition were allowed, firms spending hundreds of millions of dollars to bring a new drug to market would be unlikely to recoup that investment because competition would drive prices down to production costs ("penny pills").
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These economic aspects of new drug development make the establishment of intellectual property rights through the patent system and control of marketing exclusivity so important to promoting prescription drug innovation. Establishing a temporary licensing authority for manufacturers of new prescription drug products would allow innovative companies to raise prices above the level of production costs and obtain economic benefits to offset investments in pharmaceutical R&D.
Just because patents are granted and new drugs are marketed does not mean there is no competition. Competition occurs between patented drugs that treat similar medical conditions, but based on the drugs' clinical characteristics and very limited pricing. This is called "differentiated" product competition. Another aspect of such competition is that producers can raise prices above the cost of the product.
In the face of fragmented competition, prescription drug manufacturers tend to invest in R&D where market size and price-cost margins can be very large. Because pharmaceutical manufacturers are uncertain about the investments their competitors are making and because it takes a long time to bring a new product to market, there are incentives for rival companies to chase all the big markets, such as dementia or advanced cancer. for a big profit.
The result of this type of "equipment race" is "over-investment" in certain clinical areas and a lower-than-expected return on investment. This situation is likely to continue forever, bypassing traditional market instruments thanks to widespread and pervasive prescription drug insurance (see below) and public sector drug plans that are often passive consumers.
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In a market economy where the government acts only to provide patent protection and exclusivity to allow innovation to work, drug prices are set by supply and demand. Because most of the cost of manufacturing a drug involves research and development to make it (as opposed to the cost of manufacturing a pill), the amount you can get will affect the amount invested in developing new drugs. However, higher prices on the demand side result in fewer units of the drug being sold. This constraint on demand leads to cost-sensitive investment - what the medicine achieves medically for patients and how much it costs. To the extent that health insurance pays a larger portion of drug costs, manufacturers can charge higher prices and invest more in developing new drugs.
But three major events in recent years have shifted the demand curve. First, more people have access to drugs thanks to the implementation of Medicare Part D and the expansion of coverage under the Affordable Care Act. Second, drug insurance largely coincided with the proliferation of benefit plans that set an out-of-pocket amount for the enrollee to pay.
Third, the price of some new drugs, especially specialty drugs used to treat complex, chronic conditions such as cancer, arthritis, and multiple sclerosis, is a factor that affects demand and interacts with various insurance coverage design factors. If a patient uses a $50 drug and a new drug, perhaps a better drug that comes in at $100, insurance reimbursement plans will often allow the patient (with the doctor's support) to use the new drug, but at an additional cost. . Although the difference in cost per patient is usually less than the price difference between the drugs, only patients who experience better outcomes are switched.
But that all changes if the price is $100,000 a year or $200,000 a year. Many patients who have to pay most of the cost for these drugs cannot afford the drug at all. However, higher out-of-pocket prices make drugs more affordable and at the same time reduce patient sensitivity to price differences. Thus, a $100,000 drug and a $200,000 drug cost the patient the same amount – their out-of-pocket rate. This means that increasing the price to this level does not cause a limitation of demand from patients.
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Thus, the combination of current profit projections and expensive drugs means that further price increases will not result in fewer units. The likely result is higher profits and more investment in the development of new drugs as they become more effective.
A variety of evidence has been gathered on the relationship between profitability and innovation in the pharmaceutical industry. One of the main lines of evidence includes empirical studies of industry responses to market size increases. The logic of this approach is simple: Capital markets generate large profits that generate expected profits for manufacturers, who expand investments in new drugs to achieve those profits.
This study uses factors that lead to varying prescription drug market sizes, such as an aging population (Acemeglu and Lin), increased insurance (Blume-Kohout and Sood; Dranove, Garthwaite, Hermosilla), and demographic changes by country. -differences in disease prevalence by market size for specific drugs to measure differences and changes in market sizes (Dubois, de Mouzon, Scott-Morton, Seabright; Kyle and McGahan). They then evaluate the industry's new opinions. Innovation is measured in several different ways. Some studies measure the number of clinical trials, R&D expenditures, or the number of new drugs produced; while others try to measure the quality of newly introduced drugs.
A review of the literature on the impact of market size differences on innovation suggests two broad conclusions. First, increased market size and potential profits have a strong positive effect on innovation activity, whether measured by clinical trial activity, R&D spending, or the number of new drugs launched. The second conclusion is less consistent but represents the weight of the evidence: innovation grows disproportionately with market size.
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Together, these findings are consistent with several explanations. Another thing is that the science required to develop new drugs in 2017 is more difficult than it was a decade or two ago, so the "low-hanging fruit" was chosen. A second explanation mentioned above is that differentiated competition creates excessive penetration and duplication of R&D effort, leading to overinvestment in certain clinical areas. Two authorities
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