Lecture Health economics - Chapter 11: The pharmaceutical industry. This chapter presents the following content: Competitiveness of the pharmaceutical industry, conduct, performance.
The Pharmaceutical Industry Professor Vivian Ho Health Economics Fall 2009 Outline Competitiveness of the pharmaceutical industry Conduct Performance Benefits of Drugs Reduce mortality Reduce morbidity/improve quality of life Reduce cost of treating diseases Industry Structure # and size distribution of sellers Buyers’ side characteristics Barriers to entry Government regulation Top 10 U.S Prescription Drug Sellers, 2008 Company Sales $b Pfizer 20.5 GlaxoSmithKline 18.4 AstraZeneca 16.3 Johnson & Johnson 16.0 Merck & Co 15.5 Amgen 13.4 Hoffman-LaRoche (incl Genentech) 13.1 Novartis 12.4 Lilly 11.4 Sanofi-Aventis 11.0 http://www.imshealth.com 4-Firm Concentration Ratios 2002 Industry 4-firm CR % Apparel 18.4 Basic Chemicals 18.3 Computer software 34.1 Food 14.8 Footwear 34.5 Furniture 18 Automobile 87.3 Pharmaceuticals 33.6 Can competition be accurate measured at the industry level? Most drugs are not substitutes to the patient The relevant product market is the therapeutic market Only a few major drugs compete in most therapeutic markets Concentration ratios at this level are higher than for industry as a whole Concentration Ratios for Therapeutic Markets, 2006 Therapeutic Market Four-Firm Ratio Antidepressants 87* Antihistamines 99* Antihyperlipidemics 73* Antihypertensives 81* Antivirals 80* Gastrointestinal Diseases 91* *Includes “Generics” as a top-4 firm Express Scripts Drug Trend Report, 2006 Firms tend to make most profits from a few key drugs Top Drugs as a % of Worldwide Month Prescription Sales, 2007 Percent of Company Revenues Glaxo Smith Kline 29.1 Pfizer 40.9 Johnson & Johnson 44.7 Percent of Net Revenues Wyeth 55.5 Bristol-Myers Squibb 47.5 Merck & Co 44.3 The Buyer Side Buyers of Prescription Drugs, 2007 Expend Source ($billions) Percent Total 227.4 100.0% All private 146.6 64.5 Out-of-pocket 47.5 20.9 Private insurance 99.1 43.6 All government 80.8 35.5 Federal 66.5 29.2 State 14.3 6.3 Vertical Integration Comments from Roy Vagelos, former Merck CEO “In classic terms of competition, we could see that the power of the buyers was growing…PBMs were…bringing together the person who chooses the drug and the person who pays for the drug.” “Having salespeople visit doctors’ offices does not allow us to reach PBMs, HMOs, or plan sponsors the major players in the emerging market.” Vertical Integration Merck bought Medco as a response to managed care Strategic attempt to market power How? Followup on patients w/ chronic illness who may stop taking prescribed meds Position Merck drugs favorably on formulary e.g lower patient copay, or lower cost to plan sponsor Vertical Integration • In 2001, Medco accounted for $26b of Merck’s $46b sales • Medco filled 537m prescriptions in 2001 • But profit margins for Medco