Effects of Regulation on Drug Launch and Pricing

1. Patricia M. Danzon The Wharton School University of Pennsylvania danzon@wharton.upenn.edu Andrew J. Epstein Yale University andrew.epstein@yale.edu Effects of Regulation on Drug Launch and Pricing

2. Characteristics of On-patent Medicines • High R&D cost  patents are essential • Most medicines are potentially global • ∑ ∑(Pjt – MCjt) > F t j • Price-MC margin, across countries and patent life, must pay for R&D • Ramsey pricing  optimal cross-national price differentials • Prices should vary inversely with “true” price elasticity • (Danzon and Towse, 2004) • GDP per capita may be a rough proxy • Insurance undermines consumer price sensitivity  increased prices and volumes •  Third party payers act as cost-conscious surrogates

3. Regulation of Pharmaceuticals • 1. Registration and Market Access • Proof of safety, efficacy and quality • 1990s EMEA and US FDA harmonized requirements and accelerated procedures • Japan has unique requirements • 2. Price and Reimbursement Regulation • Price approval a condition of reimbursement in most countries • Country-specific rules are heterogeneous and complex

4. Price Regulation in Practice: Two Prototypes • Internal referencing to other products withinclass/country • Mark-ups for superior efficacy; pharmacoeconomic data may be required • Japan; France; Sweden; Canada etc. • Cost-effectiveness a condition for reimbursement (>1999 UK, Canada) • Therapeutic reference price reimbursement: RP = max. reimbursement for all drugs in a therapeutic group • Netherlands (1991); Germany (2005) • Generic RP within off-patent molecules, widely used but unlikely to affect launch • External referencing to same product in other countries • P j,n = min/ mean/ median {Pk,n……. Ps,n} • External benchmark  less discretion for regulators • Netherlands, Japan, Italy, Portugal, Greece, Canada, France • Informally used in many other countries e.g. UK, US

5. Price Regulation Affects a Firm’s Incentives for Launch of New Drugs • Direct Effects • Lower prices  lower NPV of sales vs. fixed launch cost • Non-launch most likely in countries/classes with small volume • Strategic delay • Firms may hold out for higher price; converse for regulators • Indirect Effects • Market segmentation and price discrimination constrained • Optimal strategy: delay or not launch in low price countries that may undermine potentially higher prices in connected markets • Parallel trade has same effects as external referencing • Limited to traded share of sales

6. Welfare Effects Differ by Type of Regulation • Internal referencing • Regulators should weigh benefit of lower prices against reduced access to new drugs • Cost and benefits are internalized to the regulating country • External referencing • Referencing by high-price country to low-price country  launch delay and/or higher prices in low-price country • Spillover costs in low-price country are not internalized to high-price country • Undermines Ramsey-optimal price differentials

7. Study Objectives: Determinants of Launch Delay and Launch Prices • Effects of regulation • Direct effect from lower prices • Spillover effects from external referencing and parallel trade • Strategic incentives to delay launch • Dynamic (between subclass) competition vs. Static (within subclass) competition • Local corporation effects • Uniform across countries? • Launch and/or price?

8. Launch and Price Conditions Launch Condition  Firm’s Reservation Price (PAsk) Fixed Costs Spillover Costs Expected Net Revenue Launch and Price at Launch

9. Reduced Form Equations Launch Price at Launch

10. Data • IMS quarterly data on drug sales Q1 1992 – Q4 2003 • Revenue at manufacturer prices • Volume in IMS standard units (doses) • 15 Countries: • 4 High-price EU (Germany, UK, Netherlands, Sweden) • 5 Low-price EU (France, Italy, Spain, Portugal, Greece) • 4 High-price non-EU (US, Japan, Canada, Switzerland) • 2 Middle income (Brazil, Mexico) • 12 Therapeutic classes, all with new “superior” and old “inferior” subclasses • Anti-ulcerants: H2 antagonists vs. PPIs • Anti-depressants: TCAs vs. SSRI/SNRIs • “Superior”: 116 molecules; 885 launches in our period • “Inferior” : 259 molecules; 390 launches in our period

11. Estimation (1): Launch Hazard (Quarterly) ML discrete-time proportional hazard model, based on complementary log-log regression • Accommodates: • Right censoring and late entry into risk set • Time-varying covariates • Robust s.e.’s for intra-molecule clustering • Alternative clog-log estimators: • -Split population model: lim(hazard) as time  infinity ≠ 1 • Random (molecule) effects: (Normal distribution) • Accounts for unobserved molecule heterogeneity

12. Estimation (2): Price at Launch • Dependent variable: log price per standard unit • Local currencies adjusted to 2003 using local PPI • Converted to US dollars at 2003 exchange rates • Estimation • OLS with robust, clustered SEs or Normal random effects • Estimates conditional on launch • Clog-log 2-step Heckman estimator with consistent SEs • Unconditional estimates, adjusted for launch selection • In practice, identification mainly off functional form •  Focus on OLS results

17. Number of Molecules Launched by a Local Corporation: Originators and Licensees

20. Spillover Effects of Prior Foreign Launch on Launch Hazard in Low-Price EU Countries: Superior Subclasses

23. GER is the referent

29. GER is the referent

30. Conclusions: 1. Regulation • Direct effect of price regulation is confirmed • Launch delay and non-launch more likely where expected launch prices are low • Indirect, spillover effects of regulation are significant • Spillover effects are greatest from high-price EU to low-price EU countries, in both launch and price • Referencing from high-price to low-price countries in the EU contributes to launch lags in these low price countries • Launch prices in low-price countries are also influenced by higher foreign prices • Parallel importation had smaller effects • Plausible, but power may be weak • Our data do not permit identification of PI source

31. Conclusions: 2. Strategic Bargaining Delay? • No evidence that firms can obtain a higher price by delaying launch • Launch hazards decline with time from global launch • Launch prices (real) decline with time from global launch • But being first is not necessarily best • Second and third entrants in superior subclasses get higher real prices on average than first entrant

32. Conclusions: 3. Dynamic vs. Static Competition • Launch lags and launch prices are related to prices of competitor products in the same subclass • Smaller cross-subclass effects • Other evidence supports dynamic competition • Late entrants in older subclasses diffuse less broadly • At lower prices, linked to prices in older subclasses • Generic prices not significant on average • Country-specific differences not tested

33. Conclusions: 4. Local Corporation Effects • Launch by a local corporation increases launch hazard only in certain countries • Italy, Spain, France, Japan, Switzerland for superior drugs • Local corporation does not significantly affect price • Suggests local corporation benefit is in registration, not pricing • Future work to distinguish originator vs. licensee effects

34. Conclusion: 5. Country Effects • Country effects are significant, after controlling for expected prices • Reflect all unmeasured country-specific effects • Within EU, potential parallel export countries have slower launch • Portugal, Italy, France, Spain, and Greece • But not consistently more negative than some other countries • Price effects are highly sensitive to control for GDP per capita • Controlling for GDP, low-price countries have relatively high prices • Controlling for GDP, high-price EU countries have relatively low prices • External referencing from high- to low-price countries contributes to launch lags and higher prices in low-price countries • If US adopts external referencing or parallel trade, spillover effects to other countries could be larger than within-EU effects here

36. Launch and Molecule Count, and Mean and Median Launch Delay by Country and Subclass