HSC 6636: Pharmaceuticals & Medical Technology 1 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Topics Pharmaceuticals as Technologies Drug Development The Economics of Innovation The Pharmaceutical Market Medical Devices and Technology “Never take a laxative and a sleeping pill on the same night” Anonymous

HSC 6636: Pharmaceuticals & Medical Technology 2 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Pharmaceuticals as Technologies Pharmaceuticals have many of the economic properties of other technologies –Incentives for discovery –Diffusion –Adoption –Imitation –Market vulnerability No matter what the medical efficacy of a drug is the drug must survive in the market

HSC 6636: Pharmaceuticals & Medical Technology 3 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Pharmaceuticals as Technologies (cont.) “The discovery and subsequent development of new drugs occur within a structured framework and require heavy investments of time and resources” (p. 301) What are the costs and benefits of a potential new drug and who realizes each cost and benefit? What perverse incentives and information problems exist in the drug development process? –How have these issues affected the roles of government?

HSC 6636: Pharmaceuticals & Medical Technology 4 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Drug Development Consider the history of FDA legislation (next slide) –Source: Shi, L., and Singh, D. A., Delivering Health Care in America: A Systems Approach, 4 th Edition, Jones and Bartlett, Boston, 2008 –What problems with the drug development process are inferred by each of the remedies in the legislative history? –How did the legislation affect the incentives of all parties to the transaction?

HSC 6636: Pharmaceuticals & Medical Technology 5 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Drug Development (cont.) See previous slide for citation

HSC 6636: Pharmaceuticals & Medical Technology 6 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Drug Development (cont.) Drug development phases –Preclinical phase What is it? What are outcomes? What could kill a project in this phase? –Phase I Trials What are they? What are outcomes? What could kill a project in this phase?

HSC 6636: Pharmaceuticals & Medical Technology 7 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Drug Development (cont.) Drug development phases (cont.) –Phase II Trials What are they? What are outcomes? What could kill a project in this phase? What are the implications of endpoint selection in Phase II Trials?

HSC 6636: Pharmaceuticals & Medical Technology 8 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Drug Development (cont.) Drug development phases (cont.) –Phase III Trials What are they? What are outcomes? What could kill a project in this phase? What are the implications of endpoint selection in Phase II Trials?

HSC 6636: Pharmaceuticals & Medical Technology 9 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Drug Development (cont.) Drug development phases (cont.) –Phase IV Trials What are they? What are outcomes? What could kill a project in this phase? What differentiates findings in this phase from findings in other phases?

HSC 6636: Pharmaceuticals & Medical Technology 10 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Drug Development (cont.) How long does drug development take from inception to approval? –What tradeoffs do manufacturers face? –How did the series of legislation listed on pp affect all parties? Exactly what approval does the FDA grant? What mechanisms exist for expedited approval?

HSC 6636: Pharmaceuticals & Medical Technology 11 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Economics of Innovation Consider the following figures from the text (pp ) –US pharmaceutical companies spent $51.3 billion on R&D in 2005 –It costs an average of $850 million to bring one new drug to market –It takes an average of 10 – 15 years from discovery to general use with patients What time frame precedes discovery?

HSC 6636: Pharmaceuticals & Medical Technology 12 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Economics of Innovation (cont.) Let’s develop a business model that describes when undertaking research on a new drug makes sense. Consider: –Time required ‒ Risk –Cost ‒ Market size –Price ‒ Competitive landscape Expand the analysis to consider a suite of investigational medications

HSC 6636: Pharmaceuticals & Medical Technology 13 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Economics of Innovation (cont.) Patents –What is the role of patents in fostering innovation? Consider any innovation, not just drugs and medical devices –What built-in limitations do pharmaceutical companies face with respect to patent protection? –What is the market justification for generic drugs? –What special problems are posed by genetic patents?

HSC 6636: Pharmaceuticals & Medical Technology 14 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Economics of Innovation (cont.) What social tradeoffs do we make by giving pharmaceutical companies patents (monopolies) on their drugs? What do you think the results would be with… –…reduced or increased patent protection period? Policy has been mixed by supporting both innovation and the availability of generics –1984 Drug Price Competition & Patent Term Restoration Act –2001 Greater Access to Affordable Pharmaceuticals Act

HSC 6636: Pharmaceuticals & Medical Technology 15 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Pharmaceutical Market The market has a complex structure Expenditure growth affected by three factors –Increased cost per dose Tend not to increase for existing drugs –Increased number of prescriptions What factors might increase this? –Alternatives New options reduce demand for established drugs

HSC 6636: Pharmaceuticals & Medical Technology 16 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Pharmaceutical Market (cont.) Pricing –Companies follow established marketing principles for setting prices Existing competition Value of the remedy Likelihood of competing alternative –May negotiate prices for different consumers Volume purchasers Institutions with negotiating power

HSC 6636: Pharmaceuticals & Medical Technology 17 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Pharmaceutical Market (cont.) Pricing (cont.) –Prices can vary widely from country to country If US markets pay for R&D then sales to other countries are ‘extra’ Other governments have price controls

HSC 6636: Pharmaceuticals & Medical Technology 18 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Pharmaceutical Market (cont.) Drug cost control –Drug costs becoming an increasing portion of health expenditures –Insurance plans implementing tighter controls Mandatory substitution Prescription approval for some drugs Management programs including integrated supply and benefits management

HSC 6636: Pharmaceuticals & Medical Technology 19 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida The Pharmaceutical Market (cont.) Medicare Part D Drug Benefit –Provided only prescription benefit to millions of seniors –Increased demand for drugs often used by seniors –Provided for multiple competing plans –Included provisions for price transparency –Made U.S. Government the largest customer for drugs Medicaid rebate program negotiated between government and drug companies

HSC 6636: Pharmaceuticals & Medical Technology 20 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Medical Devices & Technology Similarities and differences from drug market and industry –Many smaller firms with targeted products Not well equipped for regulatory hurdles Usually require venture capital –Patents less important than innovation Rapid innovation lifecycle Many improvements to existing products –Lower unit demand for devices than for drugs

HSC 6636: Pharmaceuticals & Medical Technology 21 Dr. Lawrence West, Health Management and Informatics Department, University of Central Florida Medical Devices & Technology (cont.) Medical technology includes a huge range of categories –Implantable electronics –Imaging technology –Replacement joints and limbs