The pricing of breakthrough drugs: theory and policy implications.

Moshe Levy,Adi Rizansky Nir,Toshiaki Abe

doi:10.1371/journal.pone.0113894

Abstract

Pharmaceutical sales exceed $850 billion a year, of which 84% are accounted for by brand drugs. Drug prices are the focus of an ongoing heated debate. While some argue that pharmaceutical companies exploit monopolistic power granted by patent protection to set prices that are “too high”, others claim that these prices are necessary to motivate the high R&D investments required in the pharmaceutical industry. This paper employs a recently documented utility function of health and wealth to derive the theoretically optimal pricing of monopolistic breakthrough drugs. This model provides a framework for a quantitative discussion of drug price regulation. We show that mild price regulation can substantially increase consumer surplus and the number of patients who purchase the drug, while having only a marginal effect on the revenues of the pharmaceutical company.

Highlights

Pharmaceutical sales have grown dramatically over the last decade, from $365 billion in 2000, to $837 billion in 2009, and they are expected to exceed $1.1 trillion by 2015 [1]
This trend has led to a heated debate about drug price regulation
Critics of the pharmaceutical industry claim that pharmaceutical companies, that benefit from public investment in basic research, price brand drugs essentially monopolistically, protected by patent rights, leading to prices that are ‘‘too high’’, especially in the U.S While most countries regulate drug prices, either directly (e.g. France and Italy), or indirectly (e.g. U.K., Germany and Japan), the U.S does not [3]

Summary

Introduction

Pharmaceutical sales have grown dramatically over the last decade, from $365 billion in 2000, to $837 billion in 2009, and they are expected to exceed $1.1 trillion by 2015 [1]. This demand function is the basis for analyzing the optimal monopolistic price from the point of view of the pharmaceutical company, and the effects of price regulation on the company’s revenues and on patients’ welfare. We quantify the loss of revenue to the pharmaceutical company and the increase in patient welfare resulting from price regulation.

Results

Conclusion