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Published on February 24, 2008

Author: Churchill


Estimating the outcomes of a prize-based system for promoting pharmaceutical innovation in the EU: a scenario building exercise   :  Estimating the outcomes of a prize-based system for promoting pharmaceutical innovation in the EU: a scenario building exercise   Joan Rovira and Leandro Lindner University of Barcelona Objectives:  Objectives To quantitatively assess the effects of the establishment of a global prize system for promoting pharmaceutical innovation on pharmaceutical expenditure in Europe, in comparison to the present system. The specific objectives of this preliminary exercise are: to assess the order of magnitude of the impact to identify the information lags and to identify the key assumptions to which the results are most sensitive, and therefore deserve a closer attention for further estimations. Description of the Scenarios:  Description of the Scenarios Baseline scenario (Present IP system) is the extrapolation of recent trends for GDP, pharmaceutical expenditure (1,5% of GDP)(1), R&D expenditure (0,18% of GDP)(2) and innovations. Alternative scenario 1. Hypothetical performance of a prize system assumed to generate at least the same type and volume of innovation as the present IP system (Baseline Scenario) EFPIA data on R&D (mean 2004-2005) (2) Extrapolation of OECD data (2000-2005) Assumptions:  Assumptions The prize system instantaneously replaces the present IP system in 2005. Existing on-patent drugs will be rewarded according to the new prize system. Pharmaceutical innovation fund with contributions by countries in proportion to their GDP. The innovation fund will be assumed to reward all new drugs considered to add therapeutic value to existing treatments innovations (e.g. QALY added) and a proportion of those considered therapeutically similar to existing drugs. Assumptions: Innovation outcomes and size of the fund:  Assumptions: Innovation outcomes and size of the fund The present IP system would produce 30 NCE per year, 4 of which (12,4%) would have some therapeutic added value (1) In order to obtain at least the same number of valuable NCE, the size of the innovation fund should be beween 25% and 50% of the expenditure projected for the IP system (1) Morgan SG, Bassett KL, Wright JM, et al. “Breakthrough” drugs and growth in expenditure on prescription drugs in Canada BMJ 2005;331:815-816 Main results from Morgan SG. et al.(2008) :  Main results from Morgan SG. et al.(2008) Between 1996 and 2003 the cost of prescription drugs per person in Canada doubled (from $141 to $316) The PMPRB (Patented Medicines Pricing Review Board's) classified 68 (5.9%) of the new products as “breakthroughs”. The authors increased this figure to 142, (12.4%), including all forms and new drugs of the same subgroup For the remaining 1005 new products, the PMPRB did not find any evidence of therapeutic advantage over existing treatments and were classified as me-toos. Expenditure on “breakthroughs” rose from 6% in 1996 to 10% in 2003, accounting for less than 15% of expenditure increase between 1996 and 2003. The share of generics (INN and branded) came down from half to one third of the total expenditure. The share of the new “me-toos” increased from 41% in 1996 to almost two thirds in 2003, accounting for about 80% of the increase in expenditure. Savings from the prize system:  Savings from the prize system PEEU: Pharmaceutical expenditure Europe/OECD with IP system: 1.5% of GDP, (based on 2000-2005 trend for 18 EURO countries) PEPzEU: Pharmaceutical expenditure in Europe under prize system = = PE-EU [(1 – se) + (se/Rpec)]   PEREU: Pharmaceutical expenditure reduction in Europe with prize system = = PEEU – (PEPzEU + GIFEU)  where se: share of the market under exclusivity Rpec: Ratio of exclusivity prices/competition prices GIFEU: Contribution of Europe to Global Innovation Fund Effect of competition on prices:  Effect of competition on prices Under the prize system prices of on-patent products will come down proportionally to the observed average price differential between exclusivity and generic competition after patent expiration. (Rpec: ratio of an AI originator product price under exclusivity / average price of all products with the same AI in competitive equilibrium after generic entry. We will use values for Rpec: 2.5 and 4   Market share under exclusivity:  Market share under exclusivity The price differential affects only the share of the market under exclusivity. se, the share of the national markets under exclusivity varies between 35% and 50% (years 1990-2001). We use 50% as the average for the period 2005-2020 Results:  Results Pharmaceutical expenditure in Europe is estimated to reach US$ 500.000 million in 2020 under the present IP system.   The savings attributable to the introduction of the prize system under 4 combinations of assumptions varies between 23% (high fund size and low price differential) and 34% (low fund size and high price differential). An alternative perspective to assessing the savings from the prize system:  An alternative perspective to assessing the savings from the prize system The prize system is expected to lead to the reduction of some types of outlays: advertising and marketing costs R&D expenditure on me-too-oriented processes profits Advertising:  Advertising Recent estimates suggest that advertising roughly amounts to one quarter of pharmaceutical sales [1]. We assume that under a prize system the profitability of advertising will come down and so will the expenditure on advertising, because there will be less products to advertise, and because the valuation of the products’ added value will be the result of experts assessment and not of market demand, i.e. the perceptions of consumers (doctors and patients), which are more likely to be influenced by advertising than experts. Assumed reduction from 24% to 12%. [1] Marc-André Gagnon and Joel Lexchin, “The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States,” January 3, 2008 PLoS Medicine. R&D:  R&D We estimated the likely reduction in R&D expenditure between 50% and 75% of the amounts required under the IP system. If applied to the present 13.4% R&D expenditure estimated by Gagnon and Lexchin (2008), the percentage of R&D on sales would drop to 3.35% or to 6.7%. PROFITS:  PROFITS According to data from “Fortune” profit over sales for the biggest pharmaceutical companies has been in the range of 14%-18% in recent years. We might assume that the increased competition brought by the prize system could reduce that profit to 10%, still twice the figure for the whole industry according to the same source. Slide17:  The sum of the three components would amount to an approximate reduction of 25%-30% in industry costs. This estimation is of the same order of magnitude as the one estimated with the first approach. Topics for discussion:  Topics for discussion What is the required annual expenditure of an innovation fund aimed at generating a certain number of innovations (breakthroughs and me-toos)? What amount of me-toos are assumed to be socially desirable and hence intended to be promoted by the prize system? Can innovators choose to invest either in breakthrough-generating R&D processes of in me-too-generating processes? Do the R&D processes that generate me-toos start after the originator breakthrough has been marketed or do the breakthroughs and me-too generating processes overlap? How would the added therapeutic value be calculated? Which criteria would be used to select the comparator (reference drug or treatment)?¿How will it affect the risk of R&D investment?

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