Lecture 19 (Final)

What were pharmaceutical and biotech firms allowed to say to consumers in direct ads after 1997?

Ads could mention both the drug's name and the condition that it treats. Ads had to highlight the major benefits and risks. Patients were encouraged to speak with a physician, call an 800#, or visit a website for more information

Explain the marketing-to-sales ratio for companies selling experience goods.

Companies primarily selling experience goods have a high marketing-to-sales ratio. Consumers need to try the product to determine its value to them.

Explain the marketing-to-sales ratio for companies selling search goods.

Companies primarily selling search goods (commodities) have low marketing-to-sales ratios. Price is the most important characteristic.

Why is most marketing spending focused on physicians rather than on patients?

Marketing is primarily directed at physicians because they are the ones who prescribe the drugs

What happens once a patent expires?

Other firms are allowed to produce their version of the drug after completing an abbreviated application with the FDA. These generic/copying firms just need to prove bioequivalence to the original drug - they do not need to run their own Phase I, Phase II, and Phase III trials. About 80% of patients switch to the generic drug.

What are three examples of methods that countries with national health systems use to regulate drug prices?

(1) Cost effectiveness analysis (CEA) - Used by United Kingdom to establish the most it is willing to pay for drug. If the cost effective ratio is too high, they wait until the company drops its price or the drug gets excluded (2) Reference price reimbursement - Used by Germany, Netherlands, New Zealand. Government pays pharmaceutical firms the same price for all drugs in the same group (e.g. drugs to treat depression). If a firm charges more than this amount, the patient pays the difference. (3) Direct price regulation - Used by France, Italy, Spain, Canada. Price of a new drug is pegged to its price in other specific countries (e.g. Canada uses the median of seven other countries).

What are some reasons why having a patent is important?

(1) Patents prevent other firms from producing a nearly identical (i.e. generic) copy of the drug for the life of the patent - 20 years from when the patent is first filed. Without patent protection, firms could take a pill (i.e. Tarceva), reverse engineer it, and start selling the same product without having invested millions of dollars developing it. (2) Patents allow a firm to charge a price above its production cost, and therefore make a profit. In this sense, they are essential to recoup the large research and development costs.

What were pharmaceutical and biotech firms allowed to say to consumers in direct ads before 1997? Why?

Ads could either talk about the brand name or condition name, but not both. The FDA restricted what the firms could say to consumers because they wanted to promote/emphasize a conversation between the patient and physician and did not want to give false marketing.

Explain the product life cycle.

Before a drug is approved by the FDA, companies spend $30-50 million per year to develop the drug, so they are losing money. When the FDA approves the drug and the company thus sells the drug, revenue grows steadily. It takes 10 years for sales to peak and the revenue eventually drops sharply when the patent expires.

Why do pharmaceutical firms spend about $30 billion per year on marketing/advertising?

First, there is a window of time from FDA approval to patent expiration for the company to make money. Once the patent expires, the company has no reason to market the drug. Thus, they need to sell as much as possible before the patent expires. Second, it takes a long time (10 years) to reach peak savings.

In descending order, what is the percentage of personal health care spending by type of service today?

Hospitals - 38% Physicians services - 24% Other - 18% Pharmaceutical drugs - 12% Home care/nursing home - 9%

Explain the marketing strategies of pharmaceutical firms.

In detailing, a pharmaceutical sales representative visits and attempts to educate a doctor about a product and persuade a doctor to prescribe the company's products more often. Detailing costs ~$15 billion per year. In sampling, the doctor receives samples of the product from the company, which they can then give to patients for free. Samples cost ~5.6 billion to make per year.

Why do patients switch from the branded (formerly patent-protected) drug to the generic drug?

Patients switch to the generic drug because they want to save money. A generic drug is much less expensive than a branded drug.

What has been the trend in health care spending by pharmaceutical drugs, physician services, hospitals, and home care/nursing home since 1980?

Percentage of spending by pharmaceutical drugs has increased most rapidly. In 1980 it accounted for 6% of all health care spending, and today it accounts for 12%. Percentage of spending by physician services has slightly decreased since 1980. In 1980 it accounted for 22% of all health care spending, and today it accounts for 24%. Percentage of spending by hospitals has decreased since 1980. In 1980 it accounted for 47% of all health care spending, and today it accounts for 38%. Percentage of spending by home care/nursing home has slightly decreased since 1980. In 1980 it accounted for 10% of all health care spending, and today it accounts for 9%.

What would happen if it were legal to import drugs from Canada, where prices are about 20% less than in the US?

Pharmaceutical firms would probably take one of three actions: (1) Raise drug prices in Canada, sell fewer drugs there, and eliminate the incentive to import. (2) Ship only enough drugs to Canada for their population, thereby limiting/preventing imports. (3) Stop selling drugs altogether in Canada

What would happen if the US government set the Medicare and Medicaid prices below today's "free market" prices?

Pharmaceutical firms would respond by investing less in research and development of new drugs, because the expected profit of a drug would be lower. 5-10 years from now, fewer drugs would be launched as a result. Overall, controlling/regulating prices in the US would involve a tradeoff between saving money now and having less innovation (and presumably worse health) in the future.

What has been the trend in the generic drug share of total prescriptions?

Since the 1980s, the generic share of total prescriptions has been increasing. Generic drugs now account for 88% of all prescriptions filled.

Has the increased use of prescription drugs been worth the costs?

Yes. Some of the increased use of prescription drugs has clearly improved health, as there are cases in which spending is giving us good returns. Examples include sharp reduction in HIV mortality and 25% drop in heart attacks.

What has been the general trend in pharmaceutical costs since 1980?

The growth in spending on pharmaceutical drugs has been greater/faster than other sector (hospital, physician, nursing home/home care) spending. This has caused pharmaceutical expenditure share to double.

Why do some patients still buy the branded drug?

These patients may be hesitant to switch to another drug if the one they have been using is working well, may not respond as well to the other drug, and may not be aware that they can save a lot of money by switching

Why does the US pay higher prices for prescription drugs than other countries?

US drug prices are set in the market by pharmaceutical firms. Pharmaceutical firms negotiate with dozens of private health insurers (but not with the US government). In other words, the US government does not directly negotiate prices, but instead relies on competition/negotiation by private health insurers.