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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
1
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:
1. to assess the order of magnitude of the impact
2. to identify the information lags and
3. to identify the key assumptions to which the results
are most sensitive, and therefore deserve a closer
attention for further estimations.
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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)
(1) EFPIA data on R&D (mean 2004-2005)
(2) Extrapolation of OECD data (2000-2005)
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Assumptions
• The prize system instantaneously replaces
the present IP system in 2005. Existing onpatent 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.
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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
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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.
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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
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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
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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
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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).
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Table 1: Baseline scenario - Extrapolation of the Present Patent System
2001
2002
2003
2004
2005
2010
2015
2020
GDP OECD World (Billion US$)*
25.435.808 26.630.730 29.861.430 33.173.086 35.035.507 45.116.151 60.375.587 80.796.155
World pharmaceutical expeditures (US$)* ***
390.525
461.062
599.209
689.797
727.624
936.981 1.253.892 1.677.991
World pharmaceutical R&D Expediture (US$)**
70.448
73.682
98.603
131.953
176.583
GDP OECD Europa (Billion US$)*
9.012.105 9.879.905 11.984.178 13.795.932 14.552.487 18.739.623 25.077.843 33.559.811
Pharmaceutical expeditures % GDP*
1,3
1,4
1,5
1,5
1,5
1,5
1,5
1,5
Pharmaceutical expeditures US$ Europa*
117.157
138.319
179.763
206.939
218.287
281.094
376.168
503.397
Pharmaceutical R&D Expediture in Europe**
25.429
26.145
33.731
45.140
60.408
NCE** global
36
29
31
23
30
30
30
30
NCE breakthrougth. (12%)
4
4
4
4
NCE me too (88%)
26
26
26
26
Estimated GDP Annual grow: 2%
Sources:
* OECD countries - Eco-Salud OCDE 2007 - Values in US$ million
** EFPIA - EFPIA figures 2006 *** Europe assumed to represent 30% of the global market (EFPIA)
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Table 2: Hypothetical performance of a prize system - Alternative scenario 1
2005
2010
2015
2020
% savings
18420
36841
7.651
15.302
24651
49301
10.239
20.478
32988
65976
13.702
27.404
44146
88291
18.337
36.673
Pharmaceutical expenditures in Europa under a prize system (PR 2,5)*
Savings in pharmaceutical expenditures in Europe Fund 25% (PR 2,5)
Savings in pharmaceutical expenditures in Europe Fund 25% (PR 2,5)
152.801
57.835
50.184
196.766
74.089
63.850
263.317
99.148
85.446
352.378
132.683
114.346
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23
Pharmaceutical expenditures in Europe under prize system (PR 4)**
Savings in pharmaceutical expenditures in Europe Fund 25% (PR 4)
Savings in pharmaceutical expenditures in Europe Fund 50% (PR 4)
136.430
74.207
66.555
175.684
95.171
84.932
235.105
127.361
113.659
314.623
170.437
152.101
34
30
World fund 25%
World fund 50%
Europe share of the Fund (25% of actual R&D pharmaceutical expenditures)
Europe share of the Fund (50% of actual R&D pharmaceutical expenditures)
Percentage of the national markets are under exclusivity: 50%
Values in US$ million
*Ratio of an originator product price under exclusivity / average price of all products w ith the same AI in competitive market after generic entry: 2.5
** Ratio of an originator product price under exclusivity / average price of all products w ith the same AI in competitive market after generic entry: 4
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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
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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.
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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%.
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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.
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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.
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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 breakthroughgenerating 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? 18