Elizabeth Docteur

Deputy Head, Health Division

Organization for Economic Cooperation and Development

Visit to the Korean Ministry of Health and Welfare

May 9, 2007

The Global Market for Pharmaceuticals and Policy Responses

2

Overview

Pharmaceutical sales and sellers

Pharmaceutical expenditures and purchasers

Pharmaceutical price regulation

Concluding remarks

3

US Dominates Global Market in Retail Pharmacy Drug Purchases

Retail pharmacy drug purchases 12 Months ending August 2006 Share in global market US $ Millions Approx. percentage 13 key markets 379,294 66% North America 204,858 36% USA 191,593 33% Canada 13,265 2% Europe (leading 5) 93, 026 16% Germany 27,097 5% France 24,791 4% Italy 14,797 3% UK 15,186 3% Spain 11,155 2% Japan (incl. hospital) 57,141 10% Latin America (leading 3) 18,562 3% Australia/New Zealand 5,708 1% SOURCE: IMS Health – Retail Drug Monitor 2006

4

10 corporations account for half of global sales

TOP CORPORATIONS BY GLOBAL PHARMA SALES IN 2005

2005 % GROWTH GLOBAL SALES CONSTANT $

% GLOBAL CAGR> RANKING US$ BN SALES 2005 00-04

01 Pfizer 47.6 8.4 -7.4 10.502 GlaxoSmithKline 34.7 6.1 4.8 7.303 Sanofi -Aventis 30.0 5.3 8.3 12.904 Novartis 28.5 5.0 10.9 13.705 Johnson & Johnson 25.3 4.5 0.2 15.606 AstraZeneca 24.0 4.3 9.0 8.307 Merck & Co. 23.5 4.2 -2.7 9.008 Roche 19.8 3.5 16.3 10.709 Abbott 15.7 2.8 8.4 10.510 Bristol-Myers Squibb 14.7 2.6 -6.5 1.0

TOTAL Top 10 Corporations $264.0 46.7 2.8 10.0

Source IMS, Intelligence 360, IMS Health MIDAS, Dec 2005

5

Global pharmaceutical sales have increased 7 - 13% annually since 1998

6

Sales growth factors: Changing importance of

volume/mix, new products and price

7

Growth factors vary across countries, 2004

SOURCE: IMS Health Data MIDAS MAT Dec 2004

8

Cross-European price differentials are diminishing

9

Wide variation in share of generics in the pharmaceutical market, 2004

Volume

37% USA

35% Canada

33% UK

30%Germany

10% France

8% Spain

4% Italy

2% Japan

Value

7%

16%

19%

20%

7%

5%

4%

2%

SOURCE: IMS Health MIDAS, MAT Dec 2004

10

Determinants of pharmaceutical sales value

SALES = [Ex-manufacturer Price] x [Volume of units sold]

Where volume over a product’s life cycle is a function of:Total time on marketExtent of competition (from generics, therapeutic alternatives)Prescribing regulations and practice patternsCoverage by insuranceFinancial incentives faced by doctors, pharmacists and patientsAdvertising/marketing

Thus, a range of policy levers exist by which to affect pharmaceutical sales and industry profits, including:Marketing authorization practicesDefault coverage status: positive lists (formularies) versus negative listsPhysician prescribing and dispensing policiesPatient cost-sharing (co-payments, deductibles)

Pharmaceutical pricing and reimbursement pricing policies and practices are just part of a bigger picture

11

Variation in availability of new drugs Time between first launch in the world and first launch in the

country for drugs launched between 1999 and 2002

Source: Pharmaceutical Industry Competitiveness Task Force PICTF, 2005, from Association of the British Pharmaceutical Industry ABPI calculations

0

5

10

15

20

25

30

35

40

45

50

Mon

ths

1st world application-application in market application in market-approval in market approval in market-launch in market

12

Average time between receipt of marketing authorization and launch on market

0 100 200 300 400 500 600 700 800

Belgium

Greece

Portugal

France

Austria

Finland

Italy

Norway

Spain

Netherlands

Switzerland

Sweden

Denmark

Ireland

Germany

UK

(Days)

Increasingoverall delay

P&R

Pricing Reimbursement

Publication

180 days90 days

Source: WHO Priority Medicines for Europe and the World Project, 2004.

13

Drug expenditure per capita (public and private) in OECD countries, 2004

599559

520494 477

434 429 425 424 421 407377 375 364 348 344

321 318 315 308 299270

238

138

752

261

400 393

0

100

200

300

400

500

600

700

800

USD PPP

Public Private

(1) 2003; (2) 2002

OECD Health Data 2006

14

Real annual growth in pharmaceutical spending and total health expenditure (net of pharmaceutical

expenditure) in the OECD, 1997-2004

(1) 1997-2003; (2) 1997-2002; (3) 1999-2004; (4) 1999-2003

OECD Health Data 2006

11.9

8.1 8.0 7.97.5

7.16.7 6.7

6.2 6.1

5.2 5.0 5.04.5

3.63.3

3.0

0.3

-0.8

8.5

6.3

4.94.7

2.4

5.5

7.0

4.95.2

4.8

3.5

4.3

2.3

11.4

4.6

3.0

3.7

1.7

3.3

7.7

6.7

5.4

3.6

1.4

4.6

4.0

9.0

7.4

5.25.0 4.6

7.7

3.5

5.0

4.2

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Mean A

nnual G

row

th R

ate

(1997-2

004)

Pharmaceutical expenditure THE (net pharmaceutical)

15

Drug expenditure as share of total health spending and share of GDP in OECD countries, 2004

23.1

38.5

27.6

18.9

29.6

12.3

17.7

21.122.8

17.4

22

14.114.8

18.9

27.4

17.6

13

20.9

12.8

16.3

10.411.312.311.512.4

9.5 9.4 8.5

0

5

10

15

20

25

30

35

40

45

50

% t

otal

hea

lth s

pend

ing

0

0.5

1

1.5

2

2.5

% G

DP

% in total health spending % of pharmaceutical spending in GDP

(1) 2003 (2) 2002

SOURCE: OECD Health Data 2006

16

Determinants of pharmaceutical expenditure

Expenditure = [volume of units sold] x [retail price]Where retail price = [Ex-manufacturer price] + [distributor/wholesale

mark-up] + [retail mark-up] + [VAT or sales tax paid by consumer]

Variation across OECD countries is very largeFor example, the share of the retail price accruing the product

manufacturer ranges across Europe from a low of 45% to a high of 88%

Many countries have scope to relieve the burden on public and private financing for pharmaceuticals by obtaining efficiencies in the supply chain.

17

Policy framework for pharmaceutical pricing and reimbursement

Pharmaceutical sectors reflect a mix of policies– free pricing --- in which prices are set according to what the market will bear,

without government intervention – regulated pricing --- in which prices are defined or capped according to

government rules– reimbursement pricing --- in which purchasers establish the level of

subsidies paid for pharmaceutical products. In the case of public purchasers, reimbursement pricing may reflect the use of regulatory authority in addition to purchasing power.

– de facto price regulation --- in which purchasers establish the level of subsidies paid for pharmaceutical products and set limits on how much patients can be charged above the reimbursement level.

Objectives– Free pricing seeks to optimize efficiency through market competition– Price regulation seeks to provide some degree of consumer protection

against the risk that manufacturers will exploit their market power to charge excessive prices for goods considered essential

– Reimbursement pricing generally seeks to promote accessibility and affordability of pharmaceuticals via subsidies

– de facto price regulation seeks to meet both objectives

18

Approaches used to set prices

Prices subject to price-setting vary and include– Ex-manufacturer price– Retail price– Reimbursement price

Methods and considerations in price setting– Internal price referencing (therapeutic benchmarking)– External price referencing (international benchmarking)– Cost-effectiveness assessment– Consideration of budget impact– Negotiations with manufacturers (which may include agreements

for risk-sharing, rebates or discounts)– Profit control– Consideration of manufacturer costs (R&D, production)

19

Overview of pharmaceutical pricing in 6 OECD countries

Free pricing– In Germany, all pharmaceutical products.– In Canada, all off-patent pharmaceuticals. – In Mexico, all off-patent pharmaceuticals, as well as on-patent products sold

to public purchasers.– In both Sweden and Switzerland, any pharmaceutical product that has

received approval for marketing that is not reimbursed by the universal health coverage scheme.

– In Slovakia, no pharmaceutical products.

Price regulation– In Slovakia, prices of all pharmaceutical products are regulated: retail prices

for medicines sold outside hospital and ex-manufacturer prices for hospital drugs.

– In Canada, all on-patent pharmaceuticals sold in Canada, to any purchaser. Regulation defines a level which ex-manufacturer price may not exceed.

– In Mexico, any on-patent pharmaceuticals sold in the private market. Regulation defines maximum retail price paid by consumers. Participation in pricing scheme is voluntary.

– In Sweden, Switzerland, and Germany there is no formal price regulation.

20

Preliminary findings from six case studies (cont’d)

Reimbursement pricing arrangements– Sweden, Switzerland and Slovakia have universal coverage

through a common scheme– Germany has universal coverage through a common scheme for

90% of the population; 10% opt out and use private coverage– In Canada, employment-based private insurance predominates.

Vulnerable populations are often covered through provincial, territorial and federal schemes. Significant diversity in coverage arrangements.

– Half of Mexicans have drug coverage through various social insurance schemes; half have no coverage but may be eligible for drugs furnished through federal programmes. Most Mexicans buy drugs at retail prices with no reimbursement.

de facto price regulation– In Sweden and Switzerland, prices paid for drugs reimbursed by the

universal health coverage schemes’ (quite inclusive) positive lists are regulated. There is a limit on what manufacturers can charge for reimbursed drugs.

– In Germany, there is no limit on prices charged by manufacturers, even for reimbursed drugs. (Neither direct nor de facto regulation).

– Canada, Mexico and Slovakia use direct price regulation.

21

Overview of preliminary findings (cont’d)

Cost-sharing arrangements vary widely– In Sweden, a graduated cost-sharing formula is used with an annual

cap on total out-of-pocket (OOP) spending.– In Switzerland, a cost-sharing formula exists for all drugs reimbursed

by basic insurance. Private insurance is prohibited from covering cost-sharing amounts.

– In German social insurance, co-payments are set at 10% of the drugs’ reimbursement price, with a minimum of €5 and a maximum of €10. Patients must pay out-of-pocket any difference between the retail price and the reimbursement price. Caps on OOP of 1% or 2% of income apply.

– In Slovakia, cost-sharing is set as a share of the reimbursed price. The ratio is maintained even if manufacturer lowers price. There is no cap on OOP.

– In Canada, cost-sharing arrangements vary widely.– In Mexico, there is no cost-sharing for prescription drugs included in

the public schemes’ formularies and dispensed through public pharmacies, although drugs are not always available and there are perceived quality issues.

22

Methods used to set prices

Internal reference pricing– Used in price regulation in Canada. Prices of ‘me-too’ drugs

and drugs offering little or no therapeutic improvement cannot exceed price of comparable products

– Used in reimbursement pricing in Germany, Slovakia and Switzerland, and in some Canadian provinces

• In Switzerland, price of alternatives in therapeutic class considered (with flexibility) in reimbursement price negotiations. Particularly innovative drugs may be awarded an “innovation bonus.” New generics must have lower reimbursement price than the original product or existing generics.

• In Germany, reimbursement price is defined for reference group consisting of at least 3 drugs. Drugs may be sold at prices above the reference price in theory, but rarely in practice.

• In Slovakia, internal reference pricing is used to create reference price determining reimbursement price. Drugs may be (and are) sold at prices above the reference price.

– Not used in Sweden and Mexico

23

Methods used to set prices (cont’d)

External reference pricing– Used in price regulation in Canada, Mexico and Slovakia

• Median price in seven comparator countries, selected because of their support for domestic pharmaceutical industry, considered as cap for ex-manufacturer prices of breakthrough drugs in Canada

• Weighted average price of six countries with highest sales penetration for a particular product serves as reference for defining maximum retail price in Mexico

• Median ex-manufacturer price in nine countries considered when setting retail price in Slovakia.

– Used in de facto price regulation in Switzerland• Average price of four economically comparable countries plus

three alternates considered as Swiss reimbursement price cap (much flexibility)

– Not used in Germany or Sweden

24

Methods used to set prices (cont’d)

Cost-effectiveness analysis– Used in price regulation in Canada and Slovakia

• In Canada, drugs that offer significant savings, in comparison with therapeutic alternatives, can be classed as “substantial improvements,” with price caps determined by international benchmarks (rather than therapeutic alternatives).

– Used in reimbursement pricing in Canada and Sweden and --- to a lesser extent --- in Mexico and Switzerland

• In Canada, CE is a very strong consideration in national, non-binding reimbursement recommendations for publicly financed drug coverage schemes. Also considered in formulary decisions by public plans.

• In Sweden, CE from social perspective is most important consideration in formulary inclusion and reimbursement pricing decisions.

• In Mexico, CE is considered to some extent by public coverage schemes in formulary inclusion decisions.

• In Switzerland, CE not formally considered in formulary and reimbursement pricing, but manufacturers may supply info and use in price negotiations.

– Not used in Germany at present

25

Other factors in pharmaceutical pricing

Cost or budgetary considerations– Considered in formulary inclusion decisions in Canada and Mexico. – Not taken into account in reimbursement pricing or coverage

decisions in Germany, Slovakia, Sweden and Switzerland.– Germany sometimes requires discounts to public purchasers.

Distribution costs– Wholesale and/or retail margins are fixed in Germany, Slovakia,

Sweden and Switzerland. – In Canada, both public and private third-party payers define mark-

ups and other similar types of regulation. – Wholesale and/or retail margins are implicitly determined in Mexico

by manufacturers who set both the ex-manufacturer and maximum retail sales price.

26

Summary and conclusions

The global pharmaceutical market is large and growing

Market value is not just about price levels– Many relevant market factors and policy levers

Manufacturers operate in a global market, where policies and outcomes in one country bear on what happens elsewhere

The United States is the most important pharmaceutical market – The US accounts for 1/3 of global retail pharmaceutical sales and is

responsible for 40% of all non-hospital drug expenditures in the OECD.– The US is characterized by relatively high prices for patented medicines,

and quick uptake and diffusion of new products.– Only a few other markets share this combination of characteristics, which

contribute to high sales and profits for the research-based pharmaceutical industry, but no other market compares to the US in size.

– Changes that affect the US prices obtained by manufacturers and/or the level or mix of consumption have significant implications for the industry as a whole.

27

Summary and conclusions (cont’d)

Pharmaceutical policies in OECD countries vary widely

These schemes have different objectives, apply different approaches and achieve different outcomes

The notion of regulated/free market pricing is overly simplistic and does not reflect the reality of the policy responses

28

More information

Project web page: http://www.oecd.org/health/pharmaceutical

OECD Health Working Papers can be downloaded at no charge: www.oecd.org/els/health/workingpapers – “Pharmaceutical Pricing and Reimbursement Policies in Canada,”

OECD Health Working Paper #24. – “Pharmaceutical Pricing and Reimbursement Policies in Mexico,”

OECD Health Working Paper #25.– “Pharmaceutical Pricing and Reimbursement Policies in

Switzerland,” (forthcoming).– “Pharmaceutical Pricing and Reimbursement Policies in Sweden,”

(forthcoming).– “Pharmaceutical Pricing and Reimbursement Policies in

Germany,” OECD Health Working Paper (forthcoming). – “Pharmaceutical Pricing and Reimbursement Policies in Slovakia,”

OECD Health Working Paper (forthcoming).