ࡱ> _^3(  / 00DTimes New Roman0bbv 0b( 0DTahomaew Roman0bbv 0b( 0 " DWingdingsRoman0bbv 0b( 0 0DSymbolgsRoman0bbv 0b( 0  a.  @n?" dd@  @@`` `+`    , 0e0e A@A5%8c8c     ?1d0u0@Ty2 NP'p<'p@A)BCD|E?@8uʚ;2Nʚ;g49d9dv 0bppp@ <4!d!d` 0b1b<4dddd` 0b1b ___PPT9(? %O =X*5Differential Pricing: Reconciling R&D, IP and AccessEPatricia M. Danzon PhD The Wharton School University of PennsylvaniaReconciling the ObjectivesTwo Policy Objectives: Access to and affordability of existing drugs Incentives for R&D to develop new drugs Requires intellectual property rights The Key to Reconciling these Objectives International price differentials, which requires Separability of international markets W&(ZW& (Z .The Cost Structure of Research-Based Medicines//$RR&D expense is much higher for pharmaceuticals than for other industries 13-20% of sales for US companies > 30 % percent of total cost of developing, producing and marketing a drug (including forgone interest) R&D is a fixed cost, invariant to volume, sunk at launch Marginal cost (MC) is relatively low: < 25  50 % of total cost (production, distribution) Marginal cost pricing (P = MC) will not pay for fixed costs of R&DI  9 &05 C I!h9&4CThe Role of Patents in R&DLCompetition and free entry of copy products will force prices down to MC Marginal cost pricing (P = MC) will not pay for fixed costs of R&D Patents permit the innovator firm to bar copy products, in order to permit P>MC for life of patent Patents are necessary, not sufficient, for innovator to break even, including the cost of R&DLR&D as a Global Joint CostR&D is a  joint fixed cost of serving all patients Cannot be causally attributed to specific countries Necessary conditions for break even: Pj > Mcj : price in each country covers its MC S (Pj - Mcj) > F: in aggregate, price-cost margins must be sufficient to cover the joint, fixed cost of R&D Uniform prices in all markets are not necessary or desirable to achieve global breakeven R4Z5ZZ%ZBZZZYZZ45%         '            NYbh&* lOptimal Pricing to Cover Joint Costs:  Ramsey Pricing 77$. Optimal = pricing to achieve highest social welfare Prices inversely related to price elasticity price-insensitive consumers pay more than price-sensitive consumers Applies to R&D-based drugs while on patent Differential pricing is common for other industries with joint costs (utilities, airlines etc.) Pharmacoeconomics implies similar price differentials Differential pricing requires separable markets\cD+`fcD0 $Market Separability is Breaking Down 1. Regulation based on International Price Comparisons Canada, Netherlands, Italy, etc. Informal comparisons in many countries: UK, US Minimum price => maximum price in all connected/referenced markets Toughest regulator sets the global price 2. Parallel trade Permitted within EU, not yet from non-EU countries US recently enacted reimportation provisions; not implemented but under debate =>Low price in one country spreads regionally/ globally8 Q C )   9 3QC)8O g 6Manufacturer Response to Breakdown of Separate MarketsGEconomic Theory Manufacturers minimize losses by setting a single launch price near high end of the prior price range delay launch rather than accept a much lower price Evidence Launch prices are uniform or in narrow band, BUT A uniform price for pharmaceuticals is not good public policy contrary to standard trade theory @Z p#@Y-C#   -A Single Price is Inequitable and Inefficient"A single, relatively high price is unaffordable for low income countries => reduce utilization or lose access to new drugs, though they can pay Pi > MCi Single price reduces manufacturer revenues => fewer new drugs than with price differentials => all patients will be worse off in long runIxPx+1.xIH+_$'Price Differences Are Not Cost Shifting(x(Two separate markets: H = high income, L = low income Existing medicines: the price in H is unaffected by the price in L, if markets are separate Prospective new medicines: Sales in L with P > MC contribute to joint costs => lower price in H needed to recoup R&D costs H1/ 04   '  'No Efficiency Gains from Parallel TradeTrade benefits consumers, provided that Low cost suppliers have lower real costs low input prices or more efficient production Low prices for pharmaceuticals reflect aggressive regulation + weak patents not superior efficiency Parallel trade may actually increase costs: relabeling, quality concern Conclusion: Parallel trade in on-patent, R&D-intensive products is not good policyR.LHZTR.LH I f =Policies to Maintain Separate Markets and Price DifferentialsPatent rights based on national boundaries traditional in EU, US => Patent holder can bar parallel trade 2. Discourage regulation based on foreign prices 3. Permit manufacturers to give discounts/rebates through confidential contracts to specific payors/governments => Prices can differ without encouraging parallel trade or cross-national comparisons => With separate markets, manufacturers have incentives to charge low prices in low income countries,>Ve,>-mVe, The Free Rider Temptation for Regulation--$R&D joint cost is sunk when prices are negotiated Who should pay for the joint costs? => temptation to free ride Large buyers can force price to marginal cost through regulation or threat of compulsory licensing no effect on supply of existing drugs Low prices in one country spill over to other countries, through parallel trade and international price comparisons If everyone pays marginal cost, no one pays for R&D!`Wc&Wc& Conclusions    Differential pricing provides a way to pay for R&D while assuring access for low income countries If market separation is assured, to prevent  spillover of low prices, patents need not imply high prices in LDCs Additional funding may nevertheless be needed: If developing countries cannot pay their marginal cost; To develop drugs not used in high income countries In this case, prices in high income countries cannot be counted on to pay for the common costs of R&D@knfkf/8 ` 33PP` 3333` ___MMM` 13` 333fpKNāvI` j@v۩ῑ΂H` Q_{>?" dd@(?n<d@`7 `2@`7``2 n?" dd@   @@``PR    @ ` ` p>> 7 /   (    <di" @   Tld" @   <o"U_ @   Trd">& @   Nu"P @   <4x"p @   C x,{?d?"bUv @   6t~ "U  T Click to edit Master title style! !$  0L "   RClick to edit Master text styles Second level Third level Fourth level Fifth level!     S  6؆ "@  \*  6 "@`   GP. Danzon 4/4//01   6D "`  ^*B  s *޽h ? 13  Blendss   #  0 (  T +  "+bb P@ # "Dwoh  s *"PP  Bd" P@bb P 0  # "Nyh  s *"P    Bd"P 0 z   <" a*h   s *"   f?d?"+)  < ?"pP  T Click to edit Master title style! !  0| " `    W#Click to edit Master subtitle style$ $  6 "`p   `*  6P "`p   b*  6H "`  b*B  s *޽h ? 130 @,(  , , 0Policies to Maintain Separate Markets and Price Differentials- The Free Rider Temptation for Regulation Conclusions  Fonts UsedDesign Template Slide Titles%_| Carl SorensenCarl Sorensen  !"#$%&'()*+,-./0123456789:;<=>@ABCDEFGHIJKLMOPQRSTUWXYZ[\]`Root EntrydO)Current UserVSummaryInformation(?DPowerPoint Document(}DocumentSummaryInformation8N