The Cost of Innovation - Pharmaceutical Executive

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The Cost of Innovation
Highlights from "Large Molecules, Large Dreams: A Forum on Global Drug Pricing and Sustainable Medical Innovation," held August 12, 2004, at MIT's Sloan School of Management.

Pharmaceutical Executive


Large companies can provide product out of manufacturing excess for people who can't afford it. A small company like mine can't do that, but we do have what I've coined "IP excess." We're paying for patents anyway for our high-margin opportunities, and this allows us to develop products for the global community to combat the same diseases. But being able to develop them doesn't mean that we can get them to the people who need them.

The time is past for the United States to pay for all the research and development for the rest of the world and continue to let people freeload. I think all the developed nations should pay their fair share for pharmaceutical R&D, and all developed countries, not just the United States, should help pay for the developing countries' drugs.

As for how to do that, I want to start with the concept of indexing drug prices to gross domestic product. Some people may calculate it a little differently, but my method is fair and impartial. But we cannot have a system like the one I'm talking about if we don't have free market prices in the United States, which will certainly lead the way in R&D for the foreseeable future and which is currently leading the way in providing drugs to the poorer nations.

Preserving Price Differentials Patricia M. Danzon

Celia Z. Moh Professor of Health Care Systems and Insurance and Risk Management, The Wharton School of Management, University of Pennsylvania


Patricia M. Danzon
Although in the past companies were able to do differential pricing, the ability to do this has broken down in recent years due primarily to two phenomena: the growth of parallel trade, and extensive referencing by governments that regulate their prices based on prices in other countries. Because of these factors, the differentials are narrowing.

In a study that I completed recently, we looked at the prices of a fairly large market basket of drugs. The differentials relative to per capita income were about appropriate within the industrialized or more affluent countries, but for the two middle-income countries in our study—Mexico and Chile—prices were way out of line. That's just one illustration of how the existing price differentials are not optimal.

If we agree that differential pricing should exist, there are two possible approaches. One that has been proposed by Médecins Sans Frontières, the European Commission (EC), and other groups is a system of mandated discounts calculated as a percentage of some benchmark price. One EC proposal, for example, suggested that developing nations receive 75 percent off the average OECD price for drugs that treat HIV, AIDS, malaria, and TB.

In reality, the problem of disease in developing countries includes a lot of other, chronic diseases for which drugs should be available. And this approach hasn't addressed that issue. Another proposal by the EC called for a 15 percent markup over marginal costs, but that raises several questions. Which marginal cost? What if additional production capacity is required, and so on.

Even if politicians could agree on appropriate, acceptable prices, there's no guarantee that the companies would be willing to accept them. In part, that is due to the fact that the threat of parallel trade and the threat of external referencing would remain, because the price differentials would be visible. Furthermore, having a set of regulated prices like this would establish benchmarks and discourage competition below the benchmark prices.

Adrian Towse, a member of the Office of Health Economics in London, and I have proposed a system of achieving differential prices by permitting and encouraging confidential rebates. Manufacturers would sell their products to wholesalers at a fairly uniform price worldwide, but they would negotiate rebates with the final purchasers. Rebates would be contingent on purchases being made—very much the model used in the United States, where HMOs and pharmacy benefit managers negotiate discounts with manufacturers, and those discounts are made electronically. Manufacturers sell at a uniform price, but price differentials exist because of these rebates.


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