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Case Study : Drug Pricing in International Markets

Group 5 :
Ankit Agrawal 5C
Nitin Tandon 26C Piyush Gupta 29C Ramil Sobti 35C Sachit Arora 39C Marc Laly 169E

Contents
Case Background:.......................................................................................................................................... 2 Case Facts:................................................................................................................................................. 2 Further Research on Present Scenario ..................................................................................................... 3 Identify the factors contributing to wide variations in the price of pharmaceutical products in international markets. .................................................................................................................................. 7 Case in India .............................................................................................................................................. 8 The consumer is the ultimate loser especially in developed countries as he hardly has access to the products at internationally competitive prices. Critically Evaluate the statement. ..................................... 9

Case Background:
Case Facts:
This case talks about differential pricing followed in Pharmaceutical industry worldwide. The prices of various essential drugs vary by as much a 200 times across the borders. This variation is due to the presence of local government regulations and the production of generic drugs. Both these factors drive down the prices of various drugs in local markets. Pharmaceutical firms are pressurizing various governments for extending the international product patent in all the countries to protect their investments in R&D activities. Their argument is that if their business is not profitable enough, it will not motivate people to innovate and come up with solutions to various diseases worldwide. TRIPS agreement talks about implementing these measures in all the nations. But still governments in developing world control the price ceiling on essential drugs and this has been the point of debate. Differential pricing not only effect the profits of pharmaceutical firms, but also give impetus to black marketing of these drugs to gain advantage of arbitrage opportunity available in global markets. Through this case study, we are trying to analyse the current situation and will try to suggest the course of action for the future.

Further Research on Present Scenario


Exhibit 1 shows price index values for the thirty-eight countries. Drug prices vary considerably across the countries, with mean prices in the five most expensive countries almost five times as high as prices in the five least expensive countries.

Exhibit 2 shows the relationship across selected countries between per capita income and the drug price index. There was a highly significant positive correlation between incomes and drug prices (p value < 0.0001), with the price of drugs generally lower in low-income countries. However, countriesparticularly low-income countries with similar levels of income pay vastly different prices for drugs.

Table : Cross Country analysis of Drug Prices


Per Capita GDP NAME OF THE DRUG Ciprofloxacin 500 mg Gliclazide 80 mg Ibuprofen 600 mg Indomethacin 25 mg Insulin 100 IU/ml Isosorbide Mononitrate 20 mg Ofloxacin 200 mg Omeprazole 20 mg Paracetamol 500 mg Propanolol 10 ml 111.47 12.55 61.41 42,000 $ USA 423.26 63.7 2.2 3.63 124.18 19.82 37,023 $ UK 324.77 53.77 0.43 4.87 131.05 59.87 144.63 91.54 4.43 32.33 35,133 $ CANADA 132.67 28.39 6.76 9.25 363.93 41.55 109.8 201.97 2 11.61 34,740 $ AUSTRALIA 213.8 9.15 6.67 10.85 219.53 30.51 192.15 109.15 12.98 6.49 705 $ INDIA 6 3.5 0.9 1.5 208 3.2 4 4 1 2

We retrieved secondary data on recent price levels of some commonly used drugs across various countries , The Findings are illustrated in the following graphs.
1.2

0.8

0.6

Ciprofloxacin 500 mg Gliclazide 80 mg

0.4

0.2

0 USA UK CANADA AUSTRALIA INDIA

Graph 1 : Relative Price Levels - Ciprofloxacin , Gliclazide

1.2

0.8

0.6

Ibuprofen 600 mg Indomethacin 25 mg

0.4

0.2

0 USA UK CANADA AUSTRALIA INDIA

Graph 2 : Relative Price Levels Ibuprofen , Indomethacin

1.2

0.8

0.6

Paracetamol 500 mg Propanolol 10 ml

0.4

0.2

0 USA UK CANADA AUSTRALIA INDIA

Graph 3 : Relative Price Levels Paracetamol , Propanolol

1.2

0.8 Insulin 100 IU/ml 0.6 Isosorbide Mononitrate 20 mg 0.4

0.2

0 USA UK CANADA AUSTRALIA INDIA

Graph4 : Relative Price Levels Insulim , Isosorbide Mononitrate

1.2

0.8

0.6

Ofloxacin 200 mg Omeprazole 20 mg

0.4

0.2

0 USA UK CANADA AUSTRALIA INDIA

Graph 5 : Relative Price Levels Ofloxacin , Omeprazole

Case Question 1
Identify the factors contributing to wide variations in the price of pharmaceutical products in international markets.
One of the primary reasons for the relatively low price of generic medicines is the increase in competition when drugs no longer are protected by patents. Companies incur fewer costs in creating generic drugs as they have to bear only the cost of manufacturing rather than spending on the entire value chain that stretches from Drug Discovery to End user availability. Generic drug manufacturers do not incur the cost of drug discovery neither do they bear the burden of proving the safety and efficacy of the drugs through clinical trials, since these trials have already been conducted by the brand name company. Sometimes, reverse-engineering is used to develop equivalent versions to existing drugs. Therefore removal of development and testing helps Generic drug manufacturers to maintain profitability at a much lower price. Generic drug companies may also receive the benefit of the previous marketing efforts of the brand-name drug company, including media advertising, presentations by drug representatives, and distribution of samples. Most of the generic drugs are already in the market for a decade or more, and are thus well known to patients and doctors. Furthermore, the costs of doing business vary from country to country. Due to varying measures of regulatory compliance, Liability regulations and Quality certifications, the final cost of drugs can skyrocket in some countries as opposed to others. The health coverage schemes that subsidize the amount individuals spend on pharmaceuticals and protect them against the risk of incurring high costs also distort the pharmaceutical market, affecting both prices and volumes of consumption. In countries that provide greater subsidies , There is a lower consumer price elasticity of demand and thus allows drug manufacturers to charge higher prices without much consideration to the cost parameters.

Due to the inelastic demand , the manufacturers can exploit a monopoly position , To prevent this many countries have also introduced the concept of Price regulation. This insures that the non coverage population does not suffer due to the inelastic demand of those covered under the insurance schemes.

Case in India
in India - NPPA is the National Pharmaceutical Pricing Authority which is an organization constituted by the government of India. This organisations responsibility is to fix and revise the prices of controlled bulk drugs and formulations. Its objective is to enforce low prices and good availability of pharmaceuticals in India.The retail price formulations are worked out as per the formula of DPCO.

R.P= (

) (

R.P. = Retail Price. M.C. = Material Cost. C.C. = Conversion Cost. P.M. = Cost of Packing Material. M.A.P.E. = Maximum Allowable Post- Manufacturing Expenses. E.D. = Excise Duty.

Case Question 2
The consumer is the ultimate loser especially in developed countries as he hardly has access to the products at internationally competitive prices. Critically Evaluate the statement.
No, we do not support this statement on account of following reasons: 1. Mostly all the developed countries have good health insurance programs in place. This

lowers the burden of higher drug prices on the customers in developed world. But these developing economies do not have access to even basis health care facilities. Health care plans are also at a very nascent stage in these countries. 2. The prices in different markets are in accordance with the purchasing power of the local

clientele and hence will have a marginal impact on the developed world consumers. 3. The protection has been provided for essential medicines. Developed world being better

educated and hence insulated from such diseases. But developing countries have huge sufferers of such diseases. Hence, there is a mass market for such medicines in these countries. Hence, marginal revenues of the pharmaceutical firms might be less in developing world, but differential pricing will have lesser effects on total revenues generated in developing countries as compared to developed countries. 4. Health sector being the most important for the survival of any economy cannot be

compared to any other sector in similar sense owing to criticality of this sector. The citizens of the developed world must understand that such a policy of differential pricing is fair for the people in developing countries. This gap can be filled through consumer education in developed countries.

Although, governments must have to join hands to bring out some plan to tackle underground trade of drugs and also ensuring that Pharma firms do not suffer from losses. A proposal in this regard can be setting up a panel to review and evaluate the costs incurred in the R&D activities of these companies and compensating them in case their products come under the umbrella for regulated pricing. This will help to motivate them to continue innovations in Pharmaceutical sector.

Case Question 3
The population living in extreme poverty is the worst hit by AIDS and other infectious diseases , Moreover , resistance to the existing drugs is rising fast . Buying high cost drugs is beyond the purchasing power of this segment. In view of the the new patent regime , should this most needy population be deprived of life saving medicenes. ?
Life saving drugs is the priceless goods. By "priceless" we mean a class of goods and services that is widely perceived as having some special non-market value that allegedly makes those goods unsuited for trading in the market. Sometimes (it is claimed) the goods or services in question are supposedly cheapened or defiled by being bought and sold. Sometimes they are necessities to which people are entitled as a matter of right and without regard to their economic condition. At other times they are services owed to society as a civic duty which citizens may not pay someone else to take on m their place. In addition, there are certain classes of people who may be deemed too vulnerable to be left fully exposed to the rigors of the market. For one or more of these reasons, most societies seek to block certain exchanges and to regulate others. Our society prohibits the sale of babies, eyes and kidneys, high military draft lottery numbers, and more. In many advanced societies, the market is either supplemented (say, by food stamps and legal aid) or regulated (as in the case of rent control) or even largely superseded by public provision (as in the case of public schooling or Britain's national health system). We don't leave consumer safety, occupational safety, conservation of scarce natural resources, or basic necessities like food, shelter, and utilities entirely to the mercies of the marketplace Nowhere, perhaps, is the taboo against commercialization or commodification stronger than in the case of health care where some fear that the profit motive is driving out the traditional ethic of care and is creating inequities in access. We may be prepared to tolerate wide inequalities in access to luxury or discretionary goods, but not when it comes to the basic necessities of life or life itself.

Second, there is the sense that something precious is lost when (or rather if) the profit motive drives out the traditional ethic of care Third, if we ration access to life-saving treatment, or to treatment that controls health conditions that blight people's lives, according to ability to pay, then we are in effect permitting life itself to be bought and sold like a commodity. Some scholars contend that "certain things should not be bought and sold because doing so diminishes their value. Fourth, it is seen as indecent to profit from the misfortunes of others.

Objections to Market Pricing


Allowing the market to set prices may work when it comes to satisfying wants, but drugs are necessities. It is intolerable to let producers charge what the market will bear for necessities. The principal objections to market pricing can be summarized as follows: In the first place, market pricing may place certain medicines out of the reach of people who desperately need of them. Alternatively, it means that people who need expensive medicines have to subject themselves to the degrading process of divesting themselves of their personal assets to qualify for Medicaid. Second, there are market failures that arise from the special nature of drugs. Unlike other products, where there may be a rough parity of bargaining power between consumers and producers, drugs are necessities. The sick may (literally) not be able to live without a particular medicine. Or their ability to lead full lives may be seriously impaired. In these circumstances, there is virtually no limit to what the sick are willing to pay. Drug makers take advantage of this desperation to charge extortionate prices. As a result, drug makers have consistently been the most profitable industry in the United States. Third, the evidence indicates that drug prices are grossly inflated and far in excess of what is needed to finance the industry's R&D. Drug makers spend more on promotion, some of it frivolous and possibly corrupt, than they do on R&D. And drug makers continue to sell their medicines abroad at regulated prices that are considerably lower than prices for the same products in the United States. Fourth, drug makers benefit from massive public subsidies (like support for basic research) that help to swell their profits. That entitles society to demand some sort of reciprocity, perhaps in the form of lower drug prices or some share of the industry's profits. The upshot of these arguments is that if drug makers are to be left unregulated, then they must exercise restraint in their pricing. The rest of this article critically examines these familiar objections to leaving the pricing of prescription drugs to the market.

Patents don't work for drugs.


It is undeniable that life-saving drugs are special. But it does not follow from that fact that it is reasonable to cap profits on life-saving or life-enhancing drugs while allowing unlimited profits on. say, mousetraps or drugs to treat baldness. Again, if we allow investors to keep all the profits they make on drugs (or other products) of trivial value but confiscate the "excess" profits on life-saving and life-enhancing drugs, then investors will rationally avoid high-risk but high potential drug research.

Case Question 4
The wide price differentials of drugs in International Markets conceptually gave rise to proliferation of counterfeit products and grey marketing. Assess the size of grey markets and counterfeit products in your region or country and its impact on health care.
The counterfeit drugs have been in existence for quite a long time and have made a negative impact in the recent history of industrial scale drug production in India and abroad. Recent evidence / seizures on counterfeits establish the scope and scale of the problem. Globally, counterfeiting is not just limited to high value branded drugs. It now includes everything the pharmaceutical industry produces globally from high value life style, therapeutic and life saving prescription drugs to generic therapies for malaria, AIDS/HIV and TB. Counterfeiting has taken an often silent yet devastating toll on humanity due to the lack of reporting in some critically affected areas. In addition to past and present losses due to fake drugs, the future of global public health is at risk. Disease-causing agents for cholera, malaria and tuberculosis can develop resistance to genuine drugs. Counterfeit drugs with non-lethal doses of active pharmaceutical ingredients effectively catalyze such evolution while evading widely-used drug tests Perhaps, the greatest single widespread disease being boosted by the presence of fake drugs is malaria. Estimates indicate that in 2002, 2.2 billion of the worlds population was exposed to the risk of malaria resulting in 515 million reports of clinical malaria.

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