The dangers and opportunities of the pharmaceutical market

Eloise Ramsden (WHS), Emma Bradshaw (OHS), Myah Kenth (OHS)

The pharmaceutical industry is one of the largest growing sectors in many modern economies. It is an opportunity for medical innovation but is also an industry which is heavily regulated. In the UK, it is a leading sector, contributing £13.8 million a year to Gross Value Added to the UK, closely following the Motor Vehicle industry. The pharmaceutical industry is very lucrative and has the largest average profit margin of around 19% compared to all other industries.

International regulatory bodies for the pharmaceutical industry include the WHO (World Health Organization), the FDA, and the MHRA (Medicines and Healthcare Products Regulatory Agency). It is important for companies in the pharmaceutical industry to follow the policies set by these organizations. Pharmaceutical companies are heavily regulated to ensure they follow the laws of the country. For example, the Pharmaceutical Pricing Regulation Scheme controls the amount the NHS spends on medicines and helps strike the right balance between making sure the patients can get access to the medicines they need without over-supplying. The government intends to use its power to limit the price of unbranded medicines where competition in the market fails and companies charge the NHS unreasonably high prices for generic medicine. The government has the right to step in and eradicate what it describes as an unreasonable increase in price. Non-compliance or non-payment of this could result in large fines. The United States is an exception in that it does not regulate or negotiate the prices of new prescription drugs when they come onto the market.

The pharmaceutical-biotechnology industry is a highly competitive industry. It derives from patents that are legal grants of monopoly power which enable the originator firms to reobtain their research and development. However, whilst patents provide a barrier against equivalent products for the patent’s duration, they do not stop similar products from entering the market which could potentially be therapeutic competitors. In this way, patents do not provide a rationale for the regulation of prices, nor does natural monopoly. Where the rationale for price regulation actually comes from insurance or third party payment. This means that patients are insensitive to drug prices which leads to incentives for suppliers to charge more than they would if insurance was present. Government funding, using taxpayer’s money, has been a driving force in engineering many new drugs and medicines. However, many of these drugs, once ownership has been transferred to private companies, are then sold to the NHS at excessively high prices. Some believe the UK taxpayer is effectively paying for medicines twice: initially for the development and research and then for the cost of the NHS buying the drug from the private companies. Pharmaceutical companies may argue that they provide thousands of jobs and must bear some costs of development and litigation risks. However, considering the ten figure profits they are making, one may argue that they are overpricing their drugs at the expense of the NHS and the UK taxpayer.

In conclusion, the pharmaceutical industry has emerged as one of the most lucrative yet easily exploited industries. It is undeniable that this sector has added significant value to the UK economy, however this is partly due to exorbitant prices demanded by some companies. Even with the government’s price regulations, many argue that the prices are still extortionate, considering production costs. Some of these drugs were initially developed using government funded research and once created, were effectively sold back to the NHS at excessively high prices, which some have depicted as “daylight robbery”. Even considering the extensive research and development costs, as well as litigation risks the companies must bear, it could be said that the pharmaceutical companies are profiteering at the expense of the UK taxpayer and the NHS. Patient co-payments are a weak antidote, if insurance is to retain its value as financial protection. For example, assuming linear demand, if patients have insurance with a 50 percent co-insurance rate, then firms would charge drug prices twice as high as if patients were uninsured. To counteract this supplier moral hazard that applies to all insured health services, including drugs, both private and public insurers limit the prices that they will pay for all insured health services. Private sector pharmacy benefit managers (PBMs) in the United States negotiate price discounts as a condition of preferred formulary status. Public payers in other countries limit either the price the firm may charge or the amount the public payer will reimburse, or both. The fact that a firm may launch an approved drug without price approval if it is unreimbursed confirms that price regulation of drugs is best viewed as a response to insurance. Drug price regulation differs across countries and is multidimensional in its structure and effects, making generalization hazardous. For example, some countries include a limit on aggregate annual drug spending, with a reduction in prices to offset any overshooting of target volume. Depending on the specifics of a drug price regulation scheme, it may affect drug prices, availability, utilization, R and D level and location, and factor productivity.

Reference Pricing

Although the stated purpose of therapeutic RP is to stimulate price competition, the theory and evidence suggest that -- at least as implemented in these countries - it is ineffective. Unless physicians or patients have incentives to choose cheaper drugs, the RP tends to become a floor as well as a ceiling price. Germany’s RP system was largely ineffectual until 2004, because of both weak incentives and the exclusion of new onpatent products until 2004. In the Netherlands, firms discounted extensively to pharmacists on products that the pharmacists could substitute (generics and parallel imports), but there was little impact on list prices and hence little savings to payers. In New Zealand, low prices reflect the government’s use of its monopsony power to negotiate price cuts as a condition of reimbursement, rather than market competition under RP. In sum, RP alone was ineffectual in the three countries we studied, and all three countries adopted other controls.

However, if the United States were to adopt therapeutic RP, with therapeutic groups defined to include both on-patent and off-patent products, negative effects on the prices of on-patent drugs would likely be significant, because generic prices are lower in the United States than in other countries. Effects on global R and D would also be much larger, because of the large U.S. share of global sales. Thus it would be a serious mistake to extrapolate from the effects of RP in other countries to its likely effects in the United States. It’s one of the oldest debates in economics: what’s the difference between what something costs and what it’s worth?

Regulation of market access and promotion derives from uncertainty about drug safety and efficacy. These product characteristics can only be determined from accumulated experience over large numbers of patients in carefully designed trials or observational studies.

Due to the rarity of some diseases and illnesses, pharmaceutical companies often have little incentive to produce related drugs. Drugs such as these have been coined “orphan drugs”, for the reason that they are designed to produce “orphan diseases” that few people have. Governments invest in research and development of these drugs, to aid their production. Bibliography:

Brexit and medicines regulation - Parliament UKresearchbriefings.files.parliament.uk › documents › CBP-8148 › CBP-8148

https://www.abpi.org.uk/facts-and-figures/ https://efpia.eu/media/361960/efpiapharmafigures2018_v07-hq.pdf