Pharmaceutical+industry+-+Chp.+14

=**Pharmaceutical Industry**= A pharmaceutical company, or drug company, is a commercial business licensed to research, develop, market and/or distribute drugs, most commonly in the context of healthcare. They can deal in generic and/or brand medications. They are subject to a variety of laws and regulations regarding the patenting, testing and marketing of drugs, particularly prescription drugs. From its beginnings at the start of the 19th Century, the pharmaceutical industry is now one of the most successful and influential, attracting both praise and controversy. (Source: [|http://en.wikipedia.org/wiki/Pharmaceutical)] Although consumers are responsible for footing a relatively large portion of the drug bill, they generally are not responsible for choosing which specific drug to buy. Physicians are usually the ones who prescribe the drug, which entails a lack of financial incentive to make cost-effective choices, usually choosing the high-priced brand name medicine. There is a law now that enables substitution of generic brands by the pharmacist. There are 3 types of barriers that occur when entering the pharmaceutical industry, and they are as follows: Government patent which gives the innovating firm the right to be the sole producer of a drug product for a legal maximum of 20 years. The second barrier to entry is called a first-mover (brand loyalty advantage). The quality of a substitute generic product is generally unknown and requires one to experience it. The last main barrier is the control over a key input, such as a specific chemical or active ingredient, can also make it difficult for new firms to enter a drug market. Which barrier would this hinder given the following situation? A different chemical compostion treats the same disease as an already established drug does. The answer would be the government patent. The patent is granted for a new drug's chemical composition, not its therapeutic novelty.

The structure of an industry reflects whether certain markets conditions hold such that firms can exploit their market power and operate inefficiently. Studies have shown both prepatent and postpatent price competition often exist in pharmaceutical markets. The process of both brand-name and generic products are found to be lower when a greater number of substitute products are available.

=**There are 8 stages to the drug development process.**= 1. //Discovery stage//. Basic research synthesis of new checmicals and early studies of chemical properties. Identification of a specific new chemical entity worthy of further testing. 2. //Preclinical animal testing//. Short-term animal toxicity testing for evidence of safety in the short run in preparation for human testing. 3. //IND filing//. A request is made for authorization to begin human testing by filing a notice of claimed investigational exemption for new drug (IND). If there is no hold on the application, the firm begins climical testing 30 days after filing. (42.6 months for the first three stages) 4. //Phase I of clinical testing//. Dosage administered to a small number of healthy volunteers for information on toxicity and safe dose ranges in humans. Data are gathered on the drug's absorption and distribution in the body, its metabolic effects, and the rate and manner in which the drug is eliminated from the body. (15.5 months) 5. //Phase II of clinical testing//. Drug is used on a larger number of people whom the drug is intended to benefit. Evidence of therapeutic effectiveness and additional safety data are obtained. (24.3 months) 6. //Phase III of clinical testing//. Large-scale tests on humans over a longer period to uncover unanticipated side effects and additional evidence of effectiveness. (36 months) 7. //Long-term animal studies//. The effects of prolonged exposures and the effects on subsequent generations are determined. Such studies are typically conducted concurrently with other studies. (33.6 months) 8. //New drug approval//. Application for commercial marketing of the new drug. Review of evidence by the FDA. Marketing for approved uses may begin upon notification by the FDA. (30.3 months)

=**Conflict**= here is a main issue that is debated in the pharmaceutical industry. This conflict is between static efficiency versus dynamic efficiency. Static efficiency is pricing new drugs low, near short-run marginal cost whereas dynamic efficiency is pricing new drugs high while maintaining incentives for innovation. (Source: Santerre, Neun, Health Economics)

=**Types of Industries**= There are many types of industries. The industries are categorized into 4 main divisions: Monopoly, Monopolistic competition, Perfect competition, and Oligopoly.

1. Monopoly = is a board game played by two to eight players. (ha ha... just seeing if you were paying attention) In economics, a monopoly is when a product or service can only be bought from one supplier. In many places, utilities such as telephone service or cable television are monopolies. A product market characterized by one seller and perfect barrier to entry. 2. Monopolistic competition = is a common market form. Many markets can be considered as monopolistically competitive, often including the markets for restaurants, books, clothing, films and service industries in large cities. A product market characterized by numerous sellers, moderate product differentiation, no barriers to entry, and some imperfections in consumer information. 3. Perfect competition = is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the standard economical definition of efficiency (Pareto efficiency), perfect competition would lead to a completely efficient outcome. The analysis of perfectly competitive markets provides the foundation of the theory of supply and demand. A product market characterized by numerous buyers and sellers, a homogeneous product, no barriers to entry, and perfect consumer information. 4. Oligopoly = is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Some industries which are oligopolies are referred to as the "Big 3" or the "Big 4." Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterized by interactivity. The decisions of one firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion. A product market that is characterized by a few dominant sellers and substantial barriers to entry. (Source: [|http://simple.wikipedia.org]) (Source: Santerre, Neun, Health Economics)

=The **"Big 4"** for the pharmaceutical industry according to the IMS health would be:= 1. Pfizer 2. GlaxoSmithKline 3. Johnson and Johnson 4. Merck and Co.

The pharmaceutical industry has the most characteristics associated with an oligopoly. The big indicating factors would deal with the few dominant sellers, substantial barriers to entry, and the individual firms share a large portion of the market share.

=**Barriers to Entry**= The pharmaceutical industry has many barriers to entry. Barriers to entry simply means an obstacle that prevents firms from costlessly entering a particular market. In the health care field, barriers can exist because of cost structure or legal restrictions. Three types of barriers to entry into the pharmaceutical industry are typically cited. --First and most effective source is a government patent that gives the innovating firm the right to be the sole producer of a drug product for a legal maximum of 20 years. The argument is that a patent is necessary to protect the economic profits of the innovating firm over some time period. --Second, is a first-mover (brand loyalty advantage). The name is pretty much self-explanatory. A drug innovator can usually acquire and maintain a first-mover advantage because the quality of a substitute generic product is generally unknown and requires one to experience it. --Third, is the control over a key input. (Such as a specific chemical or active ingredient) New competitors require access to the input, and the originating firm may sell it to the new entrants only if it is profitable to do so. If it is not, and replication is difficult or costly, new firms may find it unprofitable to enter the industry.

=**Legal restrictions (FDA)**= FDA stands for the Food and Drug Administration. There is a substantial amount of technical knowledge necessary to judge a pharmaceutical product as it is for most medical goods and services. Pharmaceutical porducts are experience goods that are difficult to evaluate on a priori basis; therefore, consumers face some risk when directly purchasing pharmaceutical products. First, there is a risk associated with overpaying or receiving a pharmaceutical product of inferior quality. Second, an adverse reaction to a drug may lead to sickness or death. Third, a consumer may purchase the wrong drug or take the wrong dosage and therefore fail to recover from an illness or injury. The FDA plays an important role in protecting consumers from the risks associated with drug purchases. In addition to determining whether drugs should be assigned over-the-counter or prescription status, the FDA must approve a new drug before it can be sold in the marketplace.

(Source: Santerre, Neun, Health Economics)

=**Sample Questions:**=


 * Question**: Which one would you vote for and why?


 * Answer**: I would vote for dynamic efficiency because the incentive would be there to improve or substitute the composition of the drug, whether it be for price-conscious consumers or for better effectiveness of the drug. This would provide more competition, which studies have shown lower the over-all price of that particular drug market.


 * Question**: What is the legal maximum number of years for a patent?


 * Answer**: Maximum of 20 years.

A. Perfect competition B. Oligopoly C. Monopolistic competition D. Monopoly
 * Question**: The pharmaceutical industry would be classified under which of the following?


 * Answer**: B

A. First-Mover B. Control over a key input C. Government Patent D. None of the above
 * Question**: Which of the following is the most effective barrier to entry?


 * Answer**: C

A. Large firms are the best innovators because they have the financial resources to conduct effective research and development. B. Large firms are the best innovators because they can advertise more effectively. C. Small firms are the best innovators because they have more creative talent. D. Small firms are the best innovators because there is less bureaucratic red tape in smaller firms. E. A mixture of firm sizes is most favorable for fostering pharmaceutical innovation.
 * Question:** Which of the following statements is the safest conclusion regarding the relationship between firm size and the innovation process in the pharmaceutical industry?

E
 * Answer:**