Nice work if you can get it

Duke University issued a press release this afternoon touting a new paper to be published in the journal Managerial and Decision Economics by some of the university’s heavy hitters: Kevin Schulman, professor of medicine and business administration and director of Duke’s Health Sector Management program, Henry Grabowski, professor of economics and director of Duke’s Program in Pharmaceutical and Health Economics, and David Ridley, professor at Duke’s Fuqua school of business.

The paper, entitled Entry and competition in generic biologicals seeks to determine to what extent the introduction of generic biologics would reduce prices. The question is relevant and timely, because an underlying assumption of the pending legislation to enable generic biologics is that it would bring price relief.

In a few words, here’s what the paper says:

  • The introduction of generic biologics probably won’t produce significant cost savings, because:
    • High fixed costs (for clinical trials, capital and manufacturing) and smallish market sizes will limit the number of competitors
    • Fewer competitors keeps prices high, as can be seen from evaluating the market for traditional (non-biotech) generic drugs

The authors apply analytical rigor to their work, but let’s face it, the conclusions are obvious. Generic biologics are a dumb idea as I’ve been saying for a while now. It guess it’s good to have a bit more evidence out there to back up that argument.

Although I agree with the paper’s conclusions, I’m awfully disappointed in the authors. The paper was funded by biotech maker Genentech, and IMHO that sponsorship is reflected in the last two sections of the paper: Qualifications/Future Research and Policy Options. Rather than address head on the pertinent public policy issue of how to reduce biologics prices once patents expire, the authors retreat into the ivory tower.

For future research the authors want to explore demand side factors, i.e., whether entry costs would be even higher as generic biologics makers found they had to invest in detailing and branding. They also want to explore how innovator firms would respond, e.g., whether the tricks of the trade used by branded pharma companies to make life harder on generic players (authorized generics, line extensions and so on) might apply.

The Policy Options section is really disappointing. Here’s an excerpt:

To decrease prices the government could create incentives for greater entry using push or pull mechanisms. Push mechanisms decrease fixed costs… whereas pull mechanisms subsidize returns… Both push and pull mechanisms use government subsidies to encourage entry and drive down long-run prices.

It is not clear, however, that push or pull mechanisms would enhance social welfare.

There’s a much simpler option that should at least be considered: direct regulation of prices post patent-expiry. That would solve all the problems the authors raise. Why didn’t they mention it?

May 1, 2007

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