That’s the title of a unbelievable editorial from Olivença et al. (2024). Lots of people after they have 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 in every of 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 word is that the market exclusivity medication get pleasure from covers simply the manufacture of a particular product; rivals could arrive with competitor remedies and similar 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 massive however unsure returns for high-risk investments, whereas utilizing competitors to manage costs within the later levels of the product lifecycle.
The article begins by arguing in opposition to setting drug costs simply based mostly on analysis and improvement (R&D) price:
[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 in addition the difficulties in figuring out related failed merchandise and in measuring their prices. Moreover, this attitude 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 area of drug improvement.
The article argues in opposition to value setting comparable to these argued by Bernie Sanders amongst others:
Notably, Senator Bernie Sanders has not too long ago requested Novo Nordisk for the R&D prices of semaglutide, a remedy 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 must be made on estimating the complete worth {that a} medication offers 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 neglected in discussions about drug pricing and regulation. In fact, corporations can nonetheless make revenue on a ‘marginal’ product if the revenues cowl the marginal R&D price and prices of manufacturing and distribution; however an organization wants a couple of merchandise averaging multiples of common R&D price to cowl the failed merchandise.
The determine under summarizes the blockbuster mannequin.
A really fascinating and clearly articulated editorial all through. Learn the complete piece right here.