Q1a. the author claims that pharma pricing is

Q1a. Critically evaluate Sach’s assessment and recommendations. Do you agree with his suggestions? What would be the push back from pharma companies?

 

 

I do not entirely agree with the author’s assessment and recommendations.

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For his assessment, the author claims that pharma pricing is not like other products because of the two reasons. First, main cost of drug is from producing the knowledge embedded in the tablet. Second, it relates to the life-and-death stakes in access to the drug. The author uses these two reasons to rationalize the necessity of pricing control but it is not persuasive enough to differentiate or highlight pharma pricing’s peculiarity.

First, it is true that pharma pricing represents most of R cost embedded in the tablet. However so is true for the high tech, cutting edge industries such as aerospace, semi conduct, new materials and so on. The unit production cost is relatively low whereas the R cost is enormous. Second, pharm products are the part of medical system deals with likely occasion of the life-and-death consequences. If pharm pricing has to be treated exceptionally, other parts of medical system such as medical device, service should also be favored. Too much intervention on the pricing will hurt the pricing mechanism with supply and demand in the market place and, as a result, penalize other industry. Pharma industry has different characteristics however unilateral and unreciprocated measure would cause unfairness among industries and eventually make the resources flow towards the more liberal and productive sectors.

 

For his recommendation, the author also suggests 3 principles on rational drug pricing. First, ensure R protected only enough to elicit the needed R and R profit should be managed around 10 times of the R cost at most because success rate of R is likely to be around 10%. Second, U.S. government pays for the much of the R but no return from it. The returns should be also captured by the government and tax payers. Third, for U.S. based research, production and sales, they should pay U.S. taxes on their profit.

 

First principle shows logical flaws because if the pharma companies can make only enough to elicit R cost, they will not invest financial resources to produce the knowledge embedded in the tablet. No one would like a business where there is a ceiling only can make break even. In addition, 10 percent success rate of R should be arithmetic mean which insufficiently represent the magnitude of each R. Every R cannot be the same. Each case will have different amount of resources input and expectance level of success. For example, when the pharma company failed 9 R’s which cost USD 1 billion respectively and succeed 1 R&D which cost USD 100 million if we follow the authors suggestion, the pharma company will lose USD 8 billion in total. Even if the measure is not this extreme, indiscriminative control of R&D profit will discourage pharma companies to flow resources to the R&D and eventually it will harm all key constituents – patients, pharma companies, government. Therefore, controlling R&D profits with price ceiling does not make enough sense.

Second principle is about the right of the government and tax payers (patients) who contributed for the R&D. It will leverage them to have their right to negotiate with pharma companies for rational price from government’s and patients’ perspective. This is reasonable appeal however, I am doubtful if this can help to rationalize pharma pricing in the long run because this is not win-win for pharma companies and will make things less favorable to them. It will make them under financial pressure and is not likely to act to make pharm price lower without hurting pharma companies. Nonetheless this will certainly help pharma companies listen more carefully to patients and government.

Third principle is about legitimacy and business morale. I don’t see the immediate relations between this and pharma pricing from normal honest pharma companies.

 

 

 

Q1b. What other pricing solutions would you suggest? Please provide reasoned justification for your solutions. Provide the pros and cons of your solutions from the points of view of the key constituents – patients, pharma companies, government.

 

 

1.     Government monitoring R to reduce overlapped investment

It will reduce overlapped investments by pharma companies. Designated government organization monitors the investment by pharma companies so that the organization finds out if pharma companies make the investment for the development of significantly similar medications. By collaborating the companies mediate the loss of investment and help companies cooperate for the development and, by extension, prevent overlapped investment, such as Elisha Gray and Alexander Graham Bell which is the poster case of winner takes it all. Elisha Gray also invented telephone prototype but was late to apply for the patent than Alexander Bell.

 

 

Pros

Cons

Patients

Lower pharma pricing

 

Pharma companies

Reduce the risk of fails

 

Likely need to share the success with other companies

 

Government

Have more control on pharma companies

Difficult to monitor and analysis all R
Incur extra cost

 

 

2.     Incentives to pharma companies

Government negotiate to maintain pharma price at rational level. With the evaluation that how much pharma improved health of patients, goverment collects the data from medical system as well as insurance companies on the treatment with pharma. For the effective pharma to save lives and improve health of patients, more financial compensation such as tax incentive for sales and purchase to be given. On the other hand, suppress incentives to the cosmetic pharma which is not directly related to desperate needs like life-and-death consequences in the access to the drug. It will compensate for the good pharma so that pharma companies will entertain financial benefit and flow more resources for R.

 

 

Pros

Cons

Patients

Lower pharma pricing

 

Pharma companies

Reduce the risk of fails
 

Likely need to share the success with other companies
 

Government

Have more control on pharma companies

Difficult to monitor and analysis all R
Incur extra cost
 

 

3.     No monopoly but harvest royalty

The government does not grant 20-year patent rights for drug discovery but instead allows for 40-year of royalty for generic production. The royalty will not be as much as immediate recoup of R cost but as a long term, the amount contributed to the pharma company will be larger. This will not make a blockbuster impact to the R but ensure long term profit pipeline for the R.

 

 

Pros

Cons

Patients

Low pharma pricing

 

Pharma companies

Long term stable profit
 

Hard to expect significant profit in short term
Takes long time to recoup investment

Government

Low pharma pricing

 

 

4.     Conditional patent right extension or allowing privilege after expiry of patent period

The government grants pharma companies to extend its patent rights over 20 years in case the company has managed the pharma price at rational level for certain period of time. (e.g. 50 percent of patent period) For pharma companies abide by the government guideline for rational pricing, pharma companies will entertain privileges, such as tax exemption, after expiry of patent period. It is not like Pfizer’s Lipitor that Pfizer made a deal with the generic pharma companies to add 6 more months for their own profit because the decision is by the government with the consideration of pharma companies’ performance during the patent period.

 

 

Pros

Cons

Patients

Low pharma pricing

 

Pharma companies

Long term stable profit

 

Less profit during the monopoly period
Takes long time to recoup investment

Government

Low pharma pricing

Extra cost (Tax exemption)
Monitoring cost

 

 

5.     Patient approval program

Patient participate in the approval program that evaluates pharma pricing with the data of R cost and financial performance of pharma company. Government body takes patient approval data into consideration for regulating or giving favor to pharma company.

 

 

Pros

Cons

Patients

Patient involved pricing

Difficult to analysis pharma pricing with data

Pharma companies

Likely to benefit from reasonable pharma pricing

Problematic if patience approves wrong

Government

Monitors pharma pricing together with patients

Monitoring cost

 

6.     Generic pharma pricing

Government regulates generic pharma pricing since the generic pharma producers harvest low hanging fruits without huge risk or R. Generic pharma pricing is also need to be considered through negotiation and/or price ceiling if this is considered with pharma companies with the patent.

 

 

Pros

Cons

Patients

Low generic pharma pricing

 

Pharma companies (Patent)

Generic pharm producing becomes less attractive for generic pharm companies

Pharma pricing becomes even lower after expiry of patent period

Pharma companies (Generic)

 

Less profit due to price control

Government

Low generic pharma pricing

Monitoring cost

 

 

 

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