Friday, August 13, 2010

Medicines, innovation and pricing

It is good to find a physician with a good grasp of economics and finance, and thus can write well on health policy issues. One such physician that I have read is Dr. Tej Deol of Asia Health Space

In his recent long article, Little red riding hood (society) and the big bad wolf (branded pharma), Dr. Tej discusses about certain expectations that pharma companies should sacrifice something for society. It is a philosophical-economics-innovation paper, well-written.

The author wrote for instance, about the role of pricing when a pharma company discovers a drug that is so valuable and innovative.

In well-functioning competitive markets Industries don’t have to defend their pricing choices to anyone in society (except its shareholders!). If a particular company prices it’s product (i.e a new patent protected antibiotic for urinary tract infections) too high, consumers (patients) will substitute to cheaper alternatives. For the vast majority of common illnesses there are plenty of cheap and effective treatment doctors and their patients can choose from. Patent protection to encourage the investment in new technologies/drugs is helpful in justifying the investment but it does not create a monopoly nor eliminate competition. Thus, pharma companies must expend “more on marketing than on R&D “. In order to achieve an acceptable market penetration to justify investment you must market your products. If the condition is rare, and your product is truly innovative and value enhancing, then high prices are very justified and less can be spent on marketing until someone else can challenge your product with a cheaper but equally effective alternative.

Several important concepts were touched by the above paragraph:
a) Pricing of products and to whom it should please,
b) Competition and substitution of products,
c) Patent and protection of a new invention,
d) Role of marketing for drugs on common diseases,
e) Pricing high for revolutionary drugs for rare conditions.

People wish for something very useful and revolutionary, something that is not availalbe yet and they wish were to be created by some magicians or angels. When that "something" was finally invented by humans and made available to the public but was unfortunately priced high, people would tend to demonize those inventors.

This is understandable somehow, part of "human nature" to wish to have something impossible be made possible for them. Like being made available to them for free or at a very low price. But inventions and discoveries, by nature, are scarce and limited. The scarcity (if not non-availability) of something -- like oxygen under the sea, or diamond or a super-fast car -- can be reflected by its price. The higher the price, the more scarce that product or service is. The lower the price, the more abundant a commodity is. Air is free and we pay nothing to breathe the air because its supply around us is unlimited.

Dr. Tej concluded his paper with the following observation:

Anyway, in my humble opinion both Little red riding hood and the big bad wolf are getting screwed. “Society” loses out on an critical source of healthcare innovation and forces large deep-pocketed branded pharma firms into consolidating with generics manufacturers with everyone competing on price and nobody competing on quality. Worse yet, once the consolidation matures, the prices will rise anyway. So in the end, no specialty pharma companies; no pure generics manufacturers; only consolidated hybrids and a commoditized industry with limited incentive to compete on quality or price.

It is important that people and their private enterprises would stick to certain division of labor. There are those who love high risks-high returns, long gestation and lots of hard R&D work; and there are those who love low risks-low (but assured) returns and little or no discovery and innovation work. Then people and their private enterprises can compete with each other in both product quality and product price.

The spirit of competition should be retained at all times at all places. When people feel there is too much competition on existing products, technologies and/or processes, then this will encourage, if not compel, them to do innovation work.

People are getting more demanding in healthcare. If they get sick, they want to get well within 1 or 2 days, not 1 or 2 weeks or longer. Hence, they demand more powerful, more revolutionary drugs and treatment. Health collectivism and coercion though would force pharma companies and retailers to focus on low price. If the price is deemed “expensive” even if the drugs are indeed highly effective and powerful, governments come in to impose price control and similar schemes. And this is where danger and uncertainties would flourish.

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