Transcript Erlinda Medalla - CUTS International

Erlinda M. Medalla
Melalyn C. Mantaring
Hanoi, August 2005
Medicines as % of Total Health
Expenditure 2000
Can’t pay, won’t get
• Fully a third of the world’s
people cannot afford essential
drugs.
• In the poorest countries of
Africa and Asia, half the
population does without.
• In the rich world, under 40% of
medicines are bought privately
compared to 67% in subSaharan Africa and 81% in Asia
and the Pacific
Key Features of the Pharmaceutical Industry
• comprises the discovery, development,
production, distribution, marketing of
prescription drugs and
• characterized by:
–
–
–
–
highly risky and lengthy R&D process,
intense competition for intellectual property,
stringent government regulations
powerful purchasers pressures (e.g. government,
insurance companies, patients as the final
consumers)
Four Broad Types of Industry Players
• Prescription-only or ethical drug companies
– producers of branded prescription drugs require strong R&D
and global sales and marketing infrastructure
• Over-the-Counter (OTCs)
– branded OTC drugs demand direct-to consumer (DTC)
marketing capability
• Generics companies
– focus on supply chain management and manufacturing cost
leadership
• Biotechs
– must create and defend intellectual property in specialized
research fields
Prescription-only vis-a-vis OTC drugs
• Prescription-only or “ethical” drugs comprised about 80
percent of the global pharmaceutical market by value
and 50 percent by volume
– Ethical products divide into conventional pharmaceuticals and
more complex “biological” agents and vaccines
• The remainder were “over the counter” medicines
(OTCs), which may be purchased without prescription
• Both ethical and OTC medicines may be branded or
“generic”
Pharmaceutical Producers
World-wide, a large number of firms are engaged in the production of
pharmaceuticals and it is possible to divide these firms into two
classes or tiers according to their level of investment in R&D:
• 1) relatively small number of global firms are responsible for the
R&D and consequently dominate the market for patent-protected
prescription drugs
– roughly 100 global firms originate mostly from the US, Germany, Switzerland
or the UK
– they perform most of the R&D of the world’s pharmaceutical industry and
dominate the market for prescription drugs
• 2) large number of small firms producing mostly for local or national
markets, holds fewer patents, relying primarily on manufacturing
off-patent “generic” medicines
– very little R&D is undertaken, which to a large degree is dictated by the
technology of pharmaceutical R&D and production
The World’s Largest
Pharmaceutical Companies
 For these companies competition is not primarily on the basis of
price but rather on the basis of marketing and innovation
 These companies compete to develop entirely new drugs which
either treat entirely new medical conditions, improve upon existing
drugs, or substitute for existing patented drugs
Big Pharma
“Big Pharma”- a dozen or so multinational
firms with headquarters in Europe or America,
the biggest company, Pfizer, holding less than
10% of the global pharmaceutical sales
Company
1 Pfizer
2 GlaxoSmithKline
3 Merck
4 Johnson & Johnson
5 Aventis
6 AstraZeneca
7 Novartis
8 Bristol-Myers Squibb
9 Wyeth
10 Eli Lilly
Top Ten Total
Global Pharma
Sales (In US$ B)
39.63
29.82
22.49
19.50
18.99
18.85
16.02
14.93
12.62
12.58
205.42
as % to
Total Sales
8.5%
6.4%
4.8%
4.2%
4.1%
4.0%
3.4%
3.2%
2.7%
2.7%
44.1%
 The top ten
companies
each had sales
of more than
$12.5 billion.
 Together
they generated
$205.42 billion
or 44% of the
Total Global
Pharma Sales
Horizontal and Vertical Consolidation
in the Pharmaceutical Industry
 There has been a significant
wave of mergers in the
pharmaceutical industry in the
last few years
 This merger and acquisition
process is continuing and is
reshaping the industry
 A collected mergers have
been announced between
Pfizer and Warner-Lambert and
between Glaxo Welcome and
SmithKline Beecham
 At the end of 2002 Pfizer
acquired Pharmacia
Research & Development Expenditures
 Pfizer, with nearly
$40 billion in sales,
spent almost 18% of
its prescription
revenue - $7.13
billion- on R&D in
2003.
Top 10 companies
combined spent
$35.98 billion on R&D
Company
1 Pfizer
2 GlaxoSmithKline
3 Merck
4 Johnson & Johnson
5 Aventis
6 AstraZeneca
7 Novartis
8 Bristol-Myers Squibb
9 Wyeth
10 Eli Lilly
Top Ten Total
R&D Spend
(In US$ B)
7.13
4.54
3.17
4.68
3.23
3.45
3.07
2.27
2.09
2.35
35.98
R & D as %
of Sales
18.0%
15.2%
14.1%
24.0%
17.0%
18.3%
19.2%
15.2%
16.6%
18.7%
17.5%
The Drug Discovery to Commercialization Process
• The pharmaceutical industry has long new product lead
times, it requires an average of 12 years for a medicine
to reach pharmacy shelves from discovery period
• Very costly and highly regulated process
– Only one out of 5,000 to 10,000 promising substances
survives the extensive testing in R&D phase to become
approved as a marketable product, with an average of $800
million dollars in R&D cost
• When the costs of all the projects that do not reach
fruition are considered, it becomes clear that
pharmaceutical R&D is a very high stakes game
The Drug Development Process
From Laboratory to Patient:
The Complex Pathway of Biopharmaceutical R&D
The Drug Discovery to Commercialization Process
• Given the enormous risks and considerable investment
involved, it is not surprising that pharmaceutical
companies compete fiercely to establish and retain
intellectual property rights
• Only by securing a patent that can be defended against
imitators can be the value of all this R&D be recouped
– The patent clock starts the moment that a promising agent is
identified in pre-clinical tests and its chemical structure and
synthesis filed with patent offices worldwide
– Once the patent application is made public, other companies
are likely to try to create improved, patentable versions
Marketing and Promotion
Once a product is brought to market, pharmaceutical companies
spend heavily on marketing and promotion
The typical cost
structure at ethical
pharmaceutical
companies comprises
manufacturing of
goods (25%),
research and
development (12 to
21%), administration
(10 %), and sales and
marketing (25%).
Marketing and Promotion
 The larger drug companies maintain a large sales force which makes
direct regular contact with individual prescribing physicians and other
pharmaceutical decision makers
 Between 1997 and 2002, promotion to healthcare professionals in the
US doubled to $18.5 billion.
 Direct-to-consumer advertising added another $3 billion.
Marketing and Promotion
 Given the huge fixed costs of maintaining a sales
force, drug companies do not always seek to carry out all
their marketing themselves
 Instead it is common for companies to enter into
arrangements in order to make use of another firm’s
marketing expertise
 Companies might choose to enter into “co-promotion”
agreements where they both agree to produce and sell a
drug under the same brand name or “co-marketing”
agreements where they both agree to produce and market
a drug, but under separate brand names
2003
Key Markets
 Global pharma sales*
accounted for $466 billion in
Rx drugs in 2003
The majority of global
pharmaceutical sales
originate in the “Triad” (US,
EU and Japan) accounting
for 85 % of the global market
in 2003
 The US has been by far
the largest pharmaceutical
market by volume and value
(half of global sales)
* Pharmaceutical sales figures include prescription and certain
over-the counter data, and represent manufacturer prices
Profitability of Research-Based
Pharmaceutical Companies
 Profit margins are the highest as
compared to other industry even beating
even the commercial bank sector (ranked
by percentage return on revenues, 2001)
 Over a 32 year period (1960-1991) the
return on equity averaged 18.4 percent for
pharmaceuticals and 11.9 percent for the
500 largest industrial companies
 This is consistent with investment
reports that also point to the above
average returns earned by pharmaceutical
company shareholders
Market Share in Individual
Therapeutic Classes
 The drugs in a therapeutic class are (more or less) substitutes from the perspective of
health consumers, therefore often used as a proxy for the competition law concept of the
relevant product market.
Major Industry Trends
•
•
•
•
Aging Population Increases Demand for Drugs
Big Pharma steps up R&D Spending
Mergers and Acquisition Reshape the Industry
Biotech Firms Gain Clout in Partnerships with Big
Pharma
• Direct-to-Costumer Push Proliferate in the US
• Internet Emerges as Key Marketing Tool
• New Role for Drugmakers: Defense
The Regulation of Drug Supply
• Intellectual Property Rights
• Generics
• The Regulation of Safety and Entry to the Market
The Regulation of Drug Demand
• The Effect of Insurance on Pharmaceutical Demand
• The Response of Health Insurance to its Effect on Demand
• The Control of the Quantity and Quality of Pharmaceutical
Expenditure
• Formularies
• Reimbursement Policies
• Controls on Prescribing Doctors
• Controls on Pharmacists
• Controls on Prices
• The Pharmaceutical Distribution Chain
Competition Issues in the
Pharmaceutical Industry
•
•
•
•
Market Definition
Agreements
Mergers
Abuse of Dominance
Concluding Remarks
Pharmaceutical Industry Regulation
• All aspects of the life-cycle of new drugs are regulated,
from patent application, to marketing approval,
commercial exploitation, patent expiration and
competition with generics
– All the important actors in the pharmaceutical industry the
manufacturers, wholesalers, retailers and prescribing physicians are
also subject to regulatory controls
• These regulatory controls pursue three primary
objectives:
– (a) preserving the incentives for research and development and the
flow of new innovative drugs;
– (b) ensuring the safety of drugs consumed by the public; and
– (c) controlling the quantity and quality of drug expenditures.
Pharmaceutical Industry Regulation
(con’t)
• The combined effect of this regulation is that competition
takes a different form than in other industries
– On the supply side, the vagaries of the R&D process and the substantial
costs and delays of the drug authorization process make new drug
development a risky and costly business. But, successful drugs, protected
from competition by intellectual property rights, can yield a substantial
reward
– On the demand side, the presence of ubiquitous health insurance partially
insulates final consumers from the prices of the drugs they consume. In
their place, public and private health insurers adopt a host of mechanisms
for controlling the quantity and quality of drug consumption
• The nature of competition in the drug industry is
determined by the interaction of both these supply and
demand side effects
Corporate Social Responsibility
•
During the 20th century average life expectancy in developed countries
increased by over 20 years
– A significant part of this improvement can be attributed to pharmaceutical innovation
– Few other industries can claim to have done as much for the well being of mankind
•
Then why the industry becomes an easy target for unpredictable government
intevention?
– The market for pharmaceutical innovation has the characteristics of a “public good” – i.e.
expensive to produce but inexpensive to reproduce
– The manufacturing cost of drugs is usually tiny compared with the amortized cost of R&D
that led to the discovery
– Setting prices that attempt to recoup R&D therefore looks like corporate greed
incomparison with the very low prices that can be charged by generic manufacturers
– Would prefer pharmaceutical companies to have a social mission
•
Thus, the pharmaceutical industry needs to be very good at explaining the
nature of its business and balancing societal and shareholder expectations, in
short companies must balance shareholder return against the huge unmet need
of developing nations
Public/Private Cooperation:
The US example
Major pharmaceutical and
biotech firms pay the greatest
share of R&D costs,
supporting in-house,
academic, and smaller
biotechnology company
research
The government and other
for-profit and not-for-profit
institutions also fund some
elements of R&D, and all
players interact cooperatively
to advance discoveries
For Patients, Access Equals Impact
The last step in the
pathway from scientific
discovery to use of medicines
by people is ensuring that
patients have access to
successful innovative
medicines
This final link relies on policy
rather than R&D to fulfill the
promise of today’s expanding
scientific knowledge.
Public & Private Policies that Improve
Access to Innovation
• Continue to support the public-/private sector cooperation in research and
related policies
• Support the implementation of the prescription drug benefit for Medicare
beneficiaries, a critical first step in improving patient access focused on
America’s seniors and the disabled.
• Improve access for uninsured Americans, who often cannot afford the
medicines they need
– One private-sector response that is making a difference: PhRMA members’ Patient Assistance
Programs
• Improve access for people around the world
– PhRMA members also support global patient assistance efforts by providing free and reduced-cost
medicines to developing countries and responding to global health crises
• Maintain a competitive market to sustain the investment in R&D
– Failed policies such as European-style government price controls and the importation of drugs into
the United States from foreign countries greatly reduce the incentives for innovator firms to
undertake the long, costly, and uncertain process.
Whose Job?
• Main Objectives:
– Equity and access/ health & safety concerns
• Big role for both government and business
• Social corporate responsibility
• Government provides through IPR some monopoly rights
to pharma industries to encourage innovation,
nonetheless it still has a role in promoting more
competitive market
• Public/Private cooperation essential
• Information & education/consumer protection