Economics of the Market for Medicines in the UK (2013)

Economics of the Market
for Medicines

Jorge Mestre-Ferrandiz
Director of Consulting

City University London
21 March 2013

Agenda

1. The supply side – R&D
2. Demand for medicines
3. NICE – the cost-effectiveness ‘4th hurdle’
4. Regulating medicine prices

Economics of the Market for Medicines. City University. March 2013
2

Structure
Nature of competition
£ • Follow-on compounds
(dynamic)

Supply Issues
• R&D process
• Cost of an NME Competition in the
• Public/private off-patent segment
collaborations
• R&D incentives
• Capital market
Patent
Launch expiry
Time
t0 t1 Demand / Regulation t2 t3
• Role of HTA
• Uptake drivers
• Prescribing Incentives
• Demand vs. Supply
controls

3

Characteristics of Medicines Markets
• Supply is R&D intensive, which implies:
• Intellectual property rights (patents)
• Long lead times
• High risk
• Dynamic competition is as important as static
• Generic competition after patent expiry

• Demand is regulated – governments and social insurers are
major buyers of medicines

• Prices are regulated

4

Supply Side – Main Characteristics (1)
• Patents are an incentive for dynamic efficiency – by
promising temporary monopoly if successful

• Patents last 20 years; first 9-11 of which are spent
getting the medicine to market, i.e. research &
development (R&D)

• Commercial success in R&D-based companies has
depended on finding ‘blockbusters’

5

• Average R&D cost of a new medicine up to launch
c£1.2bn

• Includes costs of failures

• Out of pocket costs ≈ 50%

• Opportunity cost of capital ≈ 50%

• Only ≈ 30% of launched medicines earn revenues that
exceed their lifetime costs

6

Discovery & Development of a New Medicine
Marketing
Final patent Investigational new Marketing approval/
REGULATION product launch
application drug application (US) application

TIME (YEARS) 1999 2002-7 2008 2010

Regulatory Post-mktg
Discovery research Development research
review research
PHASES OF
Basic Synthesis Phase Phase II Phase III Phase
DRUG
research Biological testing & I IV
DEVELOPMENT
pharmacologic
screening

Short-term animal testing

Long-term animal testing

Toxicology and pharmacokinetic studies

Chemical development

Pharmaceutical development
ATTRITION 1
RATES
5,000 8-15 4-8 2-3 1
$800M
COST 0

7

The Cost of an NME is Rising

8

Understanding the R&D process: Basic concepts
1. Most new medicines are developed simultaneously

2. The innovation race stimulates competition

3. Being the first in class does not imply being the best in class

4. The market (clinical practice) determines the ‘winners’

5. Spillovers in the R&D process

6. Alliances have an important role to play

9

Cash Flow for a Successful Medicine
£ p.a. +

Launch
0
Patent
expiry

_

10

• R&D costs are sunk (global) joint costs
• R&D costs ≈ 17% of pharmaceutical sales p.a.
But ≈ 31% of costs on net present value basis
• => (even long-run) marginal cost << average cost
• => Price discrimination (based on Ramsey rule?) if non-linear
pricing is impractical
•  Parallel trade

11

% of ‘World’ Pharmaceutical Industry R&D Spend

Source: EFPIA (2010) The Pharmaceutical Industry in Figures

12

Agenda


13

Types of Prescription Medicines
Original brand Branded Unbranded OTCs
On-patent Off-patent generics generics
NHS

Private
• In 2007, generics accounted for more than 60% of the total number of
prescriptions dispensed by pharmacies in England, compared with fewer
than one in six as recently as 1982
• Proportion of prescriptions written generically (80% in 2005 vs. 35% in
1985)
• Source: OHE Compendium (2009)
[OTCs = over the counter medicines]

14

15

16

17

18

Source: EGA

19

Demand Side Characteristics

Chooses Pays Consumes
Normal Consumer Consumer Consumer
market

Prescription Prescriber Government Patient
medicines / insurer
market

20

Measures Affecting Prescriber
Price Sensitivity
• Primary Care Trust budgets
• Practice budgets and prescribing incentive
schemes
• Provision of information (PRODIGY, PACT,
NICE guidance, pharmaceutical advisers,
etc.)

21

Agenda

3. NICE – the cost-effectiveness ‘4th
hurdle’

22

National Institute for Health and Clinical Excellence

• Covers England & Wales
• Two main outputs
1. Technology appraisals
2. Clinical guidelines

23

Technology Appraisal Criteria - April 2004
• The Institute and Appraisal Committee take into account:
• The broad clinical priorities of the Secretary of State for
Health and the Welsh Assembly Government
• The degree of clinical need of the patients with the
condition under consideration
• The broad balance of benefits and costs
• Any guidance from the Secretary of State for Health and
the Welsh Assembly Government on the resources likely to
be available and on such other matters as they think fit
• The effective use of available resources

24

NICE’s Guide to Methods of
Technology Appraisal, April 2004
• Below a most plausible incremental cost-effectiveness ratio (ICER) of
£20,000/QALY, judgments about the acceptability of a technology as an effective
use of NHS resources are based primarily on the cost-effectiveness estimate.
• Above a most plausible ICER of £20,000/QALY, judgments about the acceptability
of the technology as an effective use of NHS resources are more likely to make
more explicit reference to factors including:
• The degree of uncertainty surrounding the calculation of ICERs
• The innovative nature of the technology
• The particular features of the condition and population receiving the
technology
• Where appropriate, the wider societal costs and benefits
• Above an ICER of £30,000/QALY, the case for supporting the technology on these
factors has to be increasingly strong

25

Use of Thresholds?

Source: Rawlins and Culyer, 2004

26

Economic Evaluation Elsewhere
• Focused on pharmaceuticals
• Fourth hurdle i.e. reimbursement decisions:
• Public reimbursement: Australia, Baltic countries, Belgium, Canada
(British Columbia, Ontario), Czech
Republic, Denmark, Finland, France, Hungary, Netherlands, New
Zealand, Norway, Portugal, Russia, Slovenia, Sweden
• US managed care formularies
• Pricing negotiations
• Australia, France, Italy, New Zealand
• Advice to health service
• England and Wales (NICE), Scotland (SMC)
• Risk sharing arrangements
• Australia, New Zealand, UK (few cases)

27

HTAs – Some Issues
What products to All vs. limited
evaluate?

When to evaluate? How to evaluate?

Pre-launch (i.e. pre-requisite • Clinical effectiveness &/or
to launch) vs. post-launch cost effectiveness
• Additional modelling
For what purpose? • Independence of agency
• Information sources: RCT
P&R vs. prescribing guidelines/use vs. other
• Mandatory vs. advisory…

28

Agenda


29

Why Regulate? - Market Failure
• Public goods and the free-rider problem (e.g. research)
• Externalities
• E.g. your vaccination reduces my risk of catching an
infection
• E.g. the caring externality: I’m happy if you’re cared for
• Incomplete or asymmetric information
• Moral hazard (= ‘hidden action’)
• Selection problem (= ‘hidden information’)
• Principal/agent problems
• Government procurement
30

Monopoly Power
• Economies of scale and/or scope
• Natural (local) monopoly
• Input constraints
• Patents: dynamic efficiency vs static monopoly

31

Options: Types of Regulation
• ‘No regulation’ = 1998 Competition Act only
• Profit, i.e. rate of return, control
• Unbanded
• Banded
• Price control
• Baskets of products, as with ‘RPI-X’ control of utilities’
prices
• Individual products, e.g. via reference prices, or ‘cost-
plus’, or related to therapeutic benefit

32

1998 Competition Act
• Came into force March 2000
• Based on EU Treaty - Articles 81 & 82
• Prohibitions:
• Chapter 1 – Agreements preventing, restricting or
distorting competition
• Chapter 2 – Abuse of a dominant market position
• Fines up to 10% of turnover; 3rd parties may sue for
damages

33

Banded Rate of Return Regulation
%RoR

Outturn RoR > threshold => repay excess

Outturn RoR < threshold => may increase prices

0 £ capital
employed

34

RPI-X Regulation of a Basket of ‘n’ Products

{w1p11 + w2p12 + w3p13 + …….. + wnp1n
--------------------------------------------------- -1
w1p01 + w2p02 + w3p03 + …….. + wnp0n
{ x 100 ≤ ΔRPI - X

Where:
wi = weight for product ‘i’ (e.g. quantity sold in period 0)
pti = price of product ‘i’ in period t = 0,1
ΔRPI = % change in retail price index between period 0 and period 1
X = efficiency factor

35

Regulation Criteria
• Static efficiency
• Productive efficiency: making the right choice between
different ways of achieving the same outcome
• Allocative efficiency: doing the things that people want
and ensuring that the right people get them
• Dynamic efficiency
• Benefit to UK plc – economic rent
• Regulatory (administrative) burden
• Equity/other social policy objectives

36

(How) Should Pharmaceuticals
Be Regulated in the UK?
• What, if anything, to regulate?
• On- and/or off-patent?
• Branded and/or unbranded?
• Prescribed and/or over-the-counter?
• Sales to NHS only, or all UK sales?

• If so, how?
• Rate of return control, unbanded
• Rate of return control, banded
• Price control – basket, RPI-X
• Price control – individual products, reference prices

• From 3 perspectives
• General public: patients and taxpayers
• Government
• Industry

37

Key Questions
1. How price-sensitive are the people making the consumption
choices?
2. How much competition is there between one medicine and
another, or between medicines and alternative treatments?
3. Do producers have incentives to keep costs down?
4. Will production and consumption choices become increasingly
distorted over time?
5. Do producers have incentives to invest in the UK, especially in
R&D?
6. Would the regulatory system be costly for the regulator to
administer and the companies to comply?

38

Two Forms of Price Regulation in UK
1. Pharmaceutical Price Regulation Scheme (PPRS) regulates
manufacturers’ profits earned on sales to the National Health
Service of branded medicines (on- and off-patent)

2. Schemes M and W control the reimbursed price of generic
medicines paid to dispensing pharmacists and doctors

39

The PPRS (2009)
• Have been variants of PPRS since 1960s
• Department of Health acts as regulator for whole UK
• Objectives of 2009 PPRS:
• Deliver value for money
• Encourage Innovation
• Promote access and uptake for new medicines
• Provide stability, sustainability and predictability
• Voluntary – but statutory alternative scheme for firms that
opt out

40

The PPRS (2009)
• Covers branded pharmaceuticals sold to the NHS
• Negotiated every 5 years or so between the ABPI and
the Department of Health
• Current scheme commenced 1/1/09
• Scheme applies to all companies supplying BRANDED
medicines to the NHS ≈ 80% by value of pharma
sales to NHS
• Indirectly controls price by regulating profits earned
by these firms

41

The PPRS (2009)
• Freedom of pricing at launch, subject to constraints
• 21% target return on capital (ROC)
• Margin of tolerance:
• Scheme members will be able to retain profits of up to 140% of the ROC
target.
• Companies will not be granted price increases unless they are forecasting
profits less than 40% of the ROC target
• Limits on ‘allowed’ marketing and information expenses and R&D
expenses
• Potential to introduce generic substitution
• Price adjustments:

42

The PPRS 2009
• Flexible Pricing Schemes: a company can increase or decrease
its original list price in light of new evidence or a different
indication being developed
• Patient Access Schemes: will facilitate earlier patient access
for medicines that are not in the first instance found to be
cost- and clinically-effective by NICE within a framework that
preserves the independence of NICE

43

Flexible Pricing Schemes
• Flexible pricing recognises that the initial launch indication price of a
medicine may not fully reflect its longer term value to patients in the NHS
• There are two circumstances under which a flexible approach to pricing
would be relevant:
1. When significant new evidence is generated that changes the value of
an existing indication
2. Where a significant new indication is launched
• Flexible pricing will only apply when medicines are subject to NICE
appraisal, as a review by NICE will be required to determine whether the
revised price provides value to the NHS.
• No proposals for price changes submitted under the flexible pricing
provisions (PPRS, 11th Report to Parliament)

44

Patient Access Schemes (1)
• Patient Access Schemes are schemes proposed by a
pharmaceutical company and agreed between the
Department (with input from NICE) and the pharmaceutical
company in order to improve the cost-effectiveness of a drug
and enable patients to receive access to cost-effective
innovative medicines
Note: only relates to England and Wales, as different HTA arrangements
are in place in Scotland and Northern Ireland

45

(Some) key principles
• Arrangements must respect the role of NICE
• Schemes are to be discussed first and agreed in principle by the Department and
the company
• Schemes should be clinically robust, clinically plausible, appropriate and able to
monitored
• Any scheme should be operationally manageable for the NHS without unduly
complex monitoring, disproportionate additional costs and bureaucracy
• Schemes should be consistent with existing financial flows in the NHS and with
local commissioning
• The more systematic use of such schemes will need to be reviewed in light of
experience. The timing of such a review will be jointly agreed but will be initiated
not later than two years after the commencement of this agreement

46

Financially Based Schemes

• The company does not alter the list price of the drug, but offers effective discounts or rebates linked to
various parameters

Outcome-Based Schemes

• Proven value: price increase: The company seeks agreement to a later increase in price subject to a re-
review of the drug in the light of additional evidence collection as agreed with NICE. The company will
normally be responsible for the collection of the additional evidence.

• Expected value: rebate: The company seeks agreement to a price subject to the collection of additional
evidence as agreed with NICE. Such an arrangement will be subject to a rebate and subsequent reduction
in list price in the event of the additional evidence not supporting the current price in a re-review in the
light of the additional evidence. The company will normally be responsible for the collection of the
additional evidence.

• Risk Sharing: Outcomes are measured, be these patient reported outcomes or clinical outcome measures;
price adjustments and/or cash transfers are made in one or both directions (between the company and
the NHS) in the light of the outcomes identified relative to those anticipated in line with the terms of the
scheme.

• Outcome based schemes, particularly risk sharing schemes, are likely to be more burdensome and
only to be appropriate in exceptional circumstances

47

• 17 PAS have been incorporated as part of 20 pieces of NICE
appraisal guidance and these schemes are operational in the
NHS
• PAS can impose additional administrative requirements and it
is important that any such burdens are minimised
• PAS have proven a useful tool within the 2009 PPRS in
facilitating patient access to some medicines that might not
otherwise have been recommended by NICE
Source: PPRS 11th Report to Parliament

48

But Prospect of Big Change…

July 2010 December2010
Implementation of Value Based Pricing (VBP) replacing the PPRS
by 2014 (when current PPRS expires)

49

Generics: M and W Schemes (2005)
• The reimbursed price (the Drug Tariff price) is the volume-
weighted average price charged by manufacturers
• Manufacturers and wholesalers are required to submit
quarterly data to the Department of Health on, among other
things, net sales values and net acquisition costs, on a
product-by-product basis, i.e. including discounts
• Greater reliance on competition to control prices, but the
generics market is more closely monitored than ever before

50

But International Price Comparisons
are Sensitive to ….
• Manufacturers’ prices or final selling price to the payer?
• Brands or generics or molecules?
• Sample size and selection (value versus volume, degree of market
coverage)
• Bilateral versus multilateral
• Match single pack, match product form or price per unit (tablet, DDD, IMS
SUs, Kg)?
• Volume weights: unweighted, own country (Paasche) or foreign weights
(Laspeyres)?
• Choice of exchange rate

• What exactly is the question you are trying to answer?

52

Recommended Reading
Cockburn, I. and Henderson, R. (1994) Racing to invest? The dynamics of competition in ethical drug discovery. Journal of Economics and Management
Strategy. (3)3, 481-519.
Danzon, P. and Chao. L. (2000) Prices, competition and regulation in pharmaceuticals: A cross national perspective. London: Office of Health Economics.
Danzon, P. and Chao. L. (2000) Cross-national price differences for pharmaceuticals: How large and why? Journal of Health Economics. 19(2), 159-195.
Danzon, P. and Chao. L. (2000) Does regulation drive out competition in markets for pharmaceuticals? Journal of Law and Economics. 43(2), 311.
Danzon, P. and Kim, J. (2002) The life cycle of pharmaceuticals: A cross-national perspective. London: Office of Health Economics.
Di Masi, J., Hansen, R. and Grabowski, H. (2003) The price of innovation: New estimates of drug development costs. Journal of Health Economics. 22(2), 151-
185S
Garau, M. and Sussex, J. (2007) Estimating pharmaceutical companies’ value to the UK economy: Case study of the BPG. London: Office of Health Economics.
Grabowski, H., Vernon, J. and DiMasi, J. (2002) Returns on research and development for 1990s new drug introductions. Pharmacoeconomics. 20(Suppl 3),
11-29.
Henderson, R. and Cockburn, I. (1996) Scale, scope and spillovers: The determinants of research productivity in drug discovery. RAND Journal of Economics.
27(1), 32-59.
Kettler, H. (1999) Updating the cost of a new chemical entity. London: Office of Health Economics.
Mason, A., Towse, A., Drummond, M. and Cooke, J. (2002) Influencing prescribing in a primary care led NHS. London: Office of Health Economics.
Mestre-Ferrandiz, J. (2006) The faces of regulation. Profit and price regulation of the UK pharmaceutical industry after the 1998 Competition Act. London:
Office of Health Economics.
Mestre-Ferrandiz, J., Mordoh, A. and Sussex, J. (2012) The many faces of innovation. London: Association of the British Pharmaceutical Industry.
Mestre-Ferrandiz, J., Sussex, J. and Towse, A. (2012) The R&D Cost of a New Medicine. London: Office of Health Economics.
Pharmaceutical Industry Competitiveness Task Force (PICTF). (2005) Available at http://www.advisorybodies.doh.gov.uk/pictf/publications.htm
PPRS documents available at: http://www.dh.gov.uk/en/Healthcare/Medicinespharmacyandindustry/Pharmaceuticalpriceregulationscheme/DH_494
Sussex, J. and Marchant, N. eds. (1999) Risk and return in the pharmaceutical industry. London: Office of Health Economics.
Towse, A., Pritchard, C. and Devlin, N. eds. (2002) Cost-effectiveness threshold: Economic and ethical issues. London: Kings Fund and Office of Health
Economics.
Danzon, P. and Towse, A. (2003) Differential pricing for pharmaceuticals: Reconciling access, R&D and patents. Journal of Health Care Financing and
Economics. 3(3), 183-205.
Wertheimer, A. Levy, R. and O’Connor, T. (2001) Too many drugs? The clinical and economic value of incremental innovations. In Farquhar, K.S. and Sorkin,
A. eds. Investing in health: The social and economic benefits of health care innovation (Research in human capital and development, volume 14). Boston, MA:
Emerald Group Publishing Limited. 77-118.

53

To enquire about additional information and analyses, please contact Jorge Mestre-
Ferrandiz at jmestre-ferrandiz@ohe.org

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