Using the New York Times article, \"Defiant, Generic Drug Maker Continues to Rai

Question

Using the New York Times article, "Defiant, Generic Drug Maker Continues to Raise Prices," conduct further research on the pricing strategies of generic drug manufacturers. In 750-1,000 words, analyze the pricing strategies and discuss the following:

Discuss the pricing decisions of generic drug manufacturers.

Evaluate the impact competitors and additional economic factors have on the results of the generic drug pricing strategies. What factors contribute to the advantages and disadvantages of various pricing strategies?

Discuss the social and financial implications of generic drug pricing decisions for various groups of stakeholders. What would be the socially optimum pricing strategy for the United States? What would be the socially optimum pricing strategy globally?

Explanation / Answer

According to Dr. John Virts, an economist for Eli Lilly and Company, 9 there is no such thing as an outright monopoly on drugs within the pharmaceutical industry (Competitiveness of the Drug Industry 290). He reasons that individual drugs compete with other drugs in a relatively large therapeutic market, and these larger markets are the ones that are relevant in economic decision-making. Executives for a company that sell a specific antiinfection drug use the broader anti-infection market to determine its price, as well as production and research costs (Competitiveness of the Drug Industry 290). Using a broader market than just a specific medication or product is done to find a possible range of prices. Companies go further to find the price that will maximize gross return on their product. The system they use is similar to a trial and error system, where they will find the best combination of price and volume that attempts to maximize gross return. According to John E. Calfee, Pharmaceutical companies are able to set their prices high due to a number of unique factors. The first is the cost structure of pharmaceutical development. There are high upfront research costs and low marginal costs of manufacturing and distribution. This allows for new drugs to be sold at a price that far exceeds production cost, which in turn makes a large gross profit possible. Another factor allowing for high pricing is the lengthy time gap between incurring costs from a specific product and recouping those costs through sales. This allows for those in control of prices to easily ignore.

Because generics are copies of brand name drugs, the costs associated with introducing them to the market are lower because there are less research and development expenses that manufacturers must recover. For this reason, there have traditionally been many generic manufacturers supplying products, and the resulting product volume has tended to keep acquisition costs low. Studies suggest that four to five generic suppliers need to be competing in the market at one time to keep costs from rising. In the case of digoxin, for example, the number of manufacturers dropped. to only two by late 2013, leading to price increases.In recent years, when prices have unexpectedly increased, adjustments to payer reimbursements have, at times, been slow to catch up to the market.

A number of market factors are expected to continue to influence generic pricing trends. These include ongoing consolidation of manufacturers within the generic pharmaceutical industry, aggressive portfolio management by generic manufacturers, reduced competition between brand and generic manufacturers, foreign supply issues, and a backlog on approvals for new generics within the Federal Food and Drug Administration (FDA). This dynamic marketplace requires pharmaceutical industry professionals to strategically plan for their business by understanding the factors that influence the generic market and how to best anticipate changes and respond.

The economic drivers that guide the pricing of television, mobile phones or clothing don’t apply to the pricing of drugs. There are multiple reasons for this, including market exclusivity and a disconnect between the economic buyer (the payer) and the end user(the patient). But the primary reason for high drug prices stems from the structure of the current system which depends on unit-based pricing, a methodology which needs to evolve as the health care ecosystem evolves.

Optimal pricing strategy requires understanding the factors-both clinical and economic-that are most critical to prescribing decisions. Product managers must understand

Decision makers must also consider the relative importance of price-sensitive segments. Through research, they can determine whether the product will be used primarily by patients who are more sensitive to price, or in situations where physicians view price as important in prescribing decisions-chronic, mild-moderate severity, first-line, and so forth.

In each segment, the demand for the drug identifies the share to expect at each potential price. Product managers derive the optimal price for maximizing profits directly by aggregating the results from each of those segments.

For patients covered by third-party payers such as MCOs, product managers need to quantify the share potential of improved formulary positions with the payer. For managed care plans in which the formulary has proven effective in moving market share, it may be worth substantial rebates to secure a lower co-pay than competitors have, or to avoid being blocked or disadvantaged in some way by the plan formulary. With reliable data on the value of an improved formulary position, product managers can make informed, economically sound decisions about how much to rebate or discount to optimize profits.

Pricing and contracting strategy go hand-in-hand. By applying a systematic approach to identifying both the optimal price in price-sensitive segments and the value and cost of contracting with key third-party payers, decision makers can maximize profits when faced with complex pricing choices in dynamic markets.

The pharmaceutical industry involves several key stakeholder groups. Like many industries, there are the employees, shareholders, and contractors hired by the different pharmaceutical companies. There are also stakeholder groups that are unique to this industry. They include the patients that take the products; physicians and other healthcare professionals that prescribe the medicine; the professionals (clinical researchers, medical educators) that determine a medicine’s safety, effectiveness, and appropriate usage; those with medical needs that cannot access the necessary medication; healthcare payers; and those who make decisions on healthcare policies. The actions that have the greatest impact on these stakeholders are actions that potentially affect the quality and cost of medical care. Due to rising prices of generic drugs , soci

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