Economic Analysis of Patented Drugs vs. Generic Drugs - Research Paper Example

?Introduction: Drugs frequently have several terms. When a new drug is first researched, it is provided a chemical term, which explains the molecularconfiguration of that drug. The chemical term is thus normally too difficult and awkward for common use. Thereafter, a shorthand edition of that chemical term or a codename (such as RU 486) is brought up for easy indication among scientist. When the drug is accepted by the administration agency liable for making sure that the drugs being marketed in the country are not dangerous and efficient, it is provided with a generic (official) title and a business (proprietary or brand) title. The business title is made by that company requesting sanction for a drug and recognition for it as the special feature of that particular company. As for example, phenytoin which is the common name and Dilantin is the business name for a single drug. When one drug is in rights security, the company sells it with its business name. When a drug is out of the patent protection (no longer protected by patent), the company may sell the products under whichever name they want common name or business name. Other companies which file for authorization to sell that off-patent drug have to use the similar common name but have the freedom to use their own trade name. This results in drugs to be sold in the same generic name but multiple trade names. (Aronsson et al. 2001) General drugs are remedies that are known by the chemical formulae instead of their brand, or business name. Most of the people, as for example, know the brand title Valium, however the common name of the anxiety defiant drug is diazepam. (Mehta & Mehta, 1997) In the most cases, most drugs are likewise as efficient as brand-name remedies. They too are typically lesser expensive than the brand names, frequently as a great deal as 50 % or more. What is the reason behind this? (Mehta & Mehta, 1997; Aronsson et al. 2001) Pharmaceutical industries spend a lot of time (usually a decade or more) and cash—generally more money than $300 million—to research, develop, produce, and marketing a brand new drug. Which results in, if the efforts become positive, the brand-name drug which is patented plus sold solely under a particular business name for seventeen years, which permits the industry get back more money than it invested. As a patent runs out, or there is not any patent at all, other industries can produce and market that drug with the drug’s common name or with other brand names. Other industries don’t need to invest the time and wealth to get the actual drug to the market. Therefore, they can sell the drug at a lower cost. (Mehta & Mehta, 1997; Aronsson et al., 2001) Economic analysis of patent protection versus generic drugs: The limit of the patent security in helping the mechanisms for making novel remedies not supposed to be minimized. To get a fresh prescription remedy in the market, industries of pharmaceutics must beat several obstacles including large investments for researching and development (R&D), authoritarian scrutiny very importantly scientific trustworthiness corresponding the protection and effectiveness of that fresh drug. To attain this, companies continuously search for fresh compounds having medicinal power. When a brand new, hopeful substance is found, the industry files a request for patent security while it goes through different levels of Research and Development. Current estimations of the expense of developing a fresh drug is ranged between $230 million and $500 million prior to the remedy can be marketed. (Mehta & Mehta, 1997) Getting patent security for a particular remedy, the industry has the power to set the price as per wish; without contest, no descending pressure is there upon the price from different probable drug providers. The monopoly supremacy gained from that patent protection gives inducement for drug industries to put in a big capital needed for Research and Development by permitting them in earning much more than the possible result in more contesting market. With no patent security, other industries would take the drug’s chemical configuration at an expense much low than the primary costs of Research and Development by the actual firm. Industries wanting to bring in a good turnover from getting into the market for the remedy would start manufacturing the drug so the contest would force the market to bring even more competitive result where the entire market and not any individual company determines the price. In this case, where an industry incurs huge fixed expenses through Research and Development while other industries have least fixed expense, there are some incentives to up bring new, inventive drugs. (Aronsson et al. 2001; Frank& Salkever, 1997). Not only the industries are trying to get over the set expense associated with Research and Development, but there could be large changeable costs linked with selling patented drugs. Differing from other consumer goods which can be taken directly by barter between the buyer and the seller, prescription remedies are taken by customers only after a consultation with a physician, and getting a prescription from him and authorizing the purchase. On more, the physician is not permitted legally to profit from writing prescription and the customers have to take that prescription to a pharmacist who is independent for purchasing. Previous, pharmaceutical industries concentrated their marketing actions primarily upon the physicians, pursuing them to recommend the medicine for the well being of the patients. As the doctors’ action includes the patient’s interest also this marketing policy was quite effective. (Aronsson et al. 2001; Frank& Salkever, 1997). Nevertheless, around the 1980s the FDA began permitting straight-to-customer marketing by the pharmaceutical industries. These days, the influencing process is extended to the consumers also for the increment of the marketing of a product. The motive behind straight-to-customer marketing holds the concept that getting enlightened about a product will have them requesting to the physician for it. This changed system has increased the expense of the advertisement of the product equaling to the Research and Development costs. (Aronsson et al. 2001; Frank& Salkever, 1997). In variation, patent unprotected medicines have the power of being manufactured by any company that holds the belief of earning profit from it. These companies do not possess the outlay of Research and Development involved in making a new remedy, but only confronts the expenses related to reproduction and marketing a established medication. The industries producing generic alike have a lot lesser average price and so can still generate a profit in offering a priced product to consumers. On expiration of a drug patent and generic replacements show up in the market, theories related to economics predict that there ought to be a reduction in the remedy’s price as the factors like product demand is unaltered. (Aronsson et al. 2001; Frank & Salkever, 1997). Several surveys have concluded the impacts of generic vs. brand-name costs on expiration of a drug’s patent. Few observed effort in this field clarified two usual outcomes. Firstly the situation says that patent unprotected remedies getting into the market got lesser price equivalents of the drug name. In addition, market shares of a branded remedy declines, but it is also noted by the authors that contradictory evidence exists in the empirical studies regarding whether the cost of patented drugs originally increases or falls down on introducing the generic drugs. Observations suggested that brand name prices falls on introduction of the generics. Sometimes they may rise also but in that case their market shares fall. They consider this as a consequence of segmentation with customers who are brand-loyal and willing to pay higher price for the recognized drug name while others chose the less-costly generics. Nevertheless, their outcomes highlighted the shift in market shares from brand titles to generic titles resulting in a less average cost for a remedy issue to market contests. Overall, the accessibility of generics drugs leads to lesser-priced products for customers and their utilization in the places of much-priced brand name remedies should force to lessened health care expenditure. (U.S. General Accounting Office, 1993; Frank& Salkever, 1997). Conclusion: In the review, the big prices of prescription remedies are derived by market forces and government involvement. Patented remedies gets advantage from the government authorized monopoly and manufacturers of these remedies are capable of setting prices in places of their belief where they are sure of getting profit without competitions like low-priced products. Like this, they get the chance to earning enough profits to for the set Research and Development costs and the expenses of manufacturing and marketing the remedy. Since a particular firm that will market a patented drug, will confront the total market demand curve; holding other factors invariable. In this case, an increase in demand for a product will result in an increase in the price. Industries may boost revenue as well as profit potential with aggressive marketing to probable users of that remedy and also to physicians for prescribing. And since companies are conscious that patent security is given for a stipulated time, they will possibly attempt to create market shares and overcome R&D expenses before generic remedies are obtainable for contesting. Nevertheless, without the inducements given by the primary patent security, an unconfident company will not manufacture new, pioneering products having potential to improve the standard of human health. (Aronsson et al, 2001) References: 1. Aronsson, T., Bergman, M.A., & Rudholm, N. (2001). The impact of generic drug competition on brand name market shares — evidence from micro data. Review of Industrial Organization, 19(4):425-435. 2. Mehta, S.C., & Mehta, S.S. (1997). Strategic options for brand-name prescription drugs when patents expire. Health Marketing Quarterly, 14(3): 107-114. 3. Frank, R.G., & Salkever, D.S. (1997). Generic entry and the pricing of pharmaceuticals. Journal of Economics and Management Strategy, 6(1): 75-90. 4. U.S. General Accounting Office. (1993). Prescription drug prices: Analysis of Canada's Patented Medicine Prices Review Board. Retrieved from http://www.archive.gao.gov/d36t11/148527.pdf ( on 20th May, 2011) Read More