Abstract
Personalised medicine, by allowing to develop patient-tailored active principles, may improve health outcomes, but R&D costs are deemed to increase. Prices and competition play an important role in this investment decision, but their combined effect has largely been ignored so far. In an intertemporal setting with sequential entry, we study the effect of different definitions of value based prices on the decision to invest in drug personalisation. We show that (avoiding) competition rather than the price scheme adopted is the main driver for investing in precision drugs. In general, the incentives to differentiate are higher for the entrant than for the incumbent; Average Value Based prices produce the least incentive to personalisation while marginal value based ones may delay listing for some indications.. As a result, average prices may be higher than the societal value of the drug. Regulators should play a more proactive role during the listing stage to increase drug personalisation, by asking the industry, as it is increasingly common, to stratify effectiveness by patients groups.
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