That’s the title of a implausible editorial from Olivença et al. (2024). Lots of people after they take a look at pharmaceutical costs assume they’re ‘too excessive’ or ‘too low’. However the query is, too excessive or too low relative to what? What are our objectives in pharmaceutical pricing. The editorial clearly articulates the problem as one among a market design downside. I’ve heard one of many co-authors (Dr. Lou Garrison) make this remark a number of occasions at conferences, however it’s useful to see this written down in print.
Of observe is that the market exclusivity medication get pleasure from covers simply the manufacture of a selected product; rivals could arrive with competitor therapies and equivalent generic copies could arrive after market exclusivity ends.
The worth of this monopoly energy is restricted by market competitors and time. This results in a market framework that promotes medical innovation by providing doubtlessly giant however unsure returns for high-risk investments, whereas utilizing competitors to control costs within the later levels of the product lifecycle.
The article begins by arguing in opposition to setting drug costs simply primarily based on analysis and improvement (R&D) value:
[Cost plus pricing]…not solely fails to acknowledge riskiness of those investments and the irrelevance on this market design of the prices of any particular product, but additionally the difficulties in figuring out related failed merchandise and in measuring their prices. Moreover, this angle would fail to convey the true worth of novel medicines for sufferers and society, and thus stifle innovation by sending no indicators of worth to traders within the extremely dangerous subject of drug improvement.
The article argues in opposition to value setting akin to these argued by Bernie Sanders amongst others:
Notably, Senator Bernie Sanders has lately requested Novo Nordisk for the R&D prices of semaglutide, a therapy for weight problems. It’s crucial that we talk that utilizing R&D prices to find out pricing is flawed and as a substitute focus ought to be made on estimating the total worth {that a} medication gives to sufferers, their households and society. The ‘blockbuster mannequin’…which depends on the revenues of profitable medication to cowl the prices of the numerous failed makes an attempt, is commonly misunderstood or missed in discussions about drug pricing and regulation. In fact, firms can nonetheless make revenue on a ‘marginal’ product if the revenues cowl the marginal R&D value and prices of manufacturing and distribution; however an organization wants a couple of merchandise averaging multiples of common R&D value to cowl the failed merchandise.
The determine under summarizes the blockbuster mannequin.
A really fascinating and clearly articulated editorial all through. Learn the total piece right here.
Why is the market design for innovative pharmaceuticals not well understood?
