Business Context - Essay Example

? Pharmaceutical firms claim that they must charge very high prices for 'blockbuster' drugs because of the high cost of research and development and because they lose their monopoly rights within ten to fifteen years of commercial production commencing. [Name] [Course] [Professor’s name] [Date] Introduction Across the world, the pharmaceutical companies are feeling low due to tremendous growth in the operating as well as research & development costs of the firm. These factors are directly influencing the growth of healthcare expenses. Research and development (R&D) in the pharmaceutical sector is the process to discover, develop and market new generic products. R&D in the pharmaceutical sector is seen as an investment to create new products, which will open new doors of opportunity for the company. The main philosophy of R&D is that the money invested today will fetch higher profits for the company in near future. It is a complex process with a structured framework. The steps of the process consist of “synthesis and extraction of new helpful molecules, biological screening & pharmacological testing and pharmaceutical dosage formulation with stability testing.” (Pharmaceutical R&D: Costs, Risks, and Rewards, 1993) This process of developing, testing and offering the drug to the market is time consuming and expensive. Due to these factors R&D cost is gradually increasing which is directly affecting the increment of new drug prices. This will be evident if we carefully notice the new drug prices, which are growing more rapidly than the inflation rate, whereas the prices of old drug show decrement. Global pharmaceutical market scenario is extremely complex; here the large public sector investments is in basic biomedical R&D that influences the private sector to intensively fund on new research and development programs. Here the demand for the drugs are also indirectly generated i.e. the doctors and the health insurances act here as mediators to initiate demand for the drugs by prescribing them. Recently apart from the growth in the R&D cost a new crisis also gained prominence in the pharmaceutical world and that is the patentability of drugs and health related innovations. The pharmaceutical companies pour in billions of dollars on the R&D of new products and without the Intellectual Property (IP) protection law the formulations of the drugs are simply being duplicated. These duplicate formulations are synthesized at much low cost and the company, which initially developed the formulation, loses huge amount of revenue. Due to this reason the pharmaceutical companies utilizes the IP Law to monopolize the production and marketing of these innovative drugs. Here this report will make an attempt to focus on the recent scenario of pharmaceutical sector regarding the causes of growing cost in R&D segment and the importance of the intellectual patent tenure alterations for maintaining monopoly of the pharmaceutical companies. (OTA, 1993; Wei, n.d., p.1)                                           Industry Overview on high R&D costs and Patent rights As mentioned earlier, the pharmaceutical companies annually endow billions of dollars in R&D. Recent studies reflect there is a staggering growth of expenses in R&D costs of the global pharmaceutical industry. Though R&D costs are tremendously increasing day-by-day, the pharmaceutical companies think of it as a necessary evil. It is because R&D cost enables the company to synthesize new formulations and helps to open new avenues of opportunity to generate greater profits. R&D costs vary widely between different drugs as this cost depends upon the type of formulation being developed. The factors influencing the R&D cost are the probability of success, the molecule base of the new drug or modification of an existing generic drug. Development of innovative drugs cost the most, a rough estimation reveals it generally amounts to more than $800 million (CBO, 2006. p.2); it also includes the cost of failed attempts. This estimate mainly represents the new molecular entity development by the pharmaceutical majors, which is growing tremendously in recent times. On the other hand, the other types of drugs need less cost of development than the NME. (CBO, 2006, p.2) If we observe the trend over the last twenty five years in American pharmaceutical industry it is evident that investment in R&D has grown by three folds at year 2003 and up to six times at the year of 2005 if compared with the R&D costs of 1980. (CBO, 2006, p.7) But the number of annual approval of innovative drugs for market offering is quite less in America.  This above mentioned situation influenced the pharmaceutical industry to depend on the sales revenue generated from the old drug formulations. Furthermore a significant decrease in sales revenue from new drug formulations was noted in 2008. (Thompson Reuters, 2010) The total sales proportion also reflects that the revenue generated from old formulations are comparatively more than that of the new formulations. (Thompson Reuters, 2010)       Recent information from R&D Factbook also shows 44% of the total sales contribution is derived from the top three most matured drugs of the pharmaceutical company. (Thompson Reuters, 2010)  It is so because success rates for development of new drugs are decreasing due to termination of these programs at phase III of the R&D process. The phase III termination rate was twice as much in 2007-2009 than that of 2004-2006. (Thompson Reuters, 2010) If we observe carefully more revealing facts will come to light. Those are, the sales revenue proportion of last five years (i.e. from 2005 to year 2010) for new formulations and old formulation shows that there is a decline in revenue generation of new formulations which is below 7%; it is 1% less than last year i.e. 2008. (Thompson Reuters, 2010) The R&D cost in the year 2009 dropped by 0.3% from that of the previous year (6.6%.) (Thompson Reuters, 2010) The year 2009 also recorded the highest number of NME launched in the market and 17.9% of the total R&D expenses were directed for the therapeutic area concerned with the anti-cancer drugs. (Thompson Reuters, 2010) Even though all these positive and negative factors playing in the R&D of global pharmaceutical industry the main hindrance for the success of their new formulation occurred during the last phase of development. This influenced the decline in sales from new formulations in 2009.         If we observe pharmaceutical industry closely it will be evident that it is the most research-intensive industry compared to any other industry. R&D cost of this industry shows five times greater investment than the sales investment. Though there is strong evidence of growing R&D costs, the ratio between R&D expenses to total sales revenue has remained more or less constant. (CBO, 2006, p.9)       If we observe carefully there exists a very close relation between the R&D spending and sales revenue generation. Firstly, the new innovative drugs, successful in the market facilitate greater revenue generation. It is so because the manufacturing costs of most of the drugs are relatively very less than their price. This results in large cash inflow and initiates more investment in research and development of new drugs. Secondly, the alternative sources of capital for R&D from bonds and stock markets are more expensive due to compensation in the form of higher returns to the investors. But the funds are easily available which enables to produce successful new formulations and help to increase profitability of the company. (CBO, 2006, p.12) But the threat for the pharmaceutical majors starts from the instant of launching the new innovative drugs in the market. It enables other players to synthesize the molecule at cheap cost without incurring the R&D expenses. In this way other companies easily market these duplicate formulations at much cheaper prices by denting the profits of the original company. Here comes the necessity of the IP rights or patents. These above mentioned patents could counter threats from the duplicity of innovative drugs. The patent protects the new drug from duplicity for 20 years after its invention. But the problem is much complicated, as more than eight years are needed to collect data about the drugs to get approval from the Federal authorities. This results in entry of new generic drugs in the market to sabotage 80% of the brand name sales. In this regard to monopolize the drug a pharmaceutical company files for multiple patents. This complicates the situation to stifle other companies with same generics. In this way the mass pays more to meet the massive fund drug makers need for R&D cost and the drug makers fight in court for the patents and keep the generic drugs away from market. Owing to this situation the pharmaceutical companies gets distracted from their objective to formulate new drugs. Thus the pharmaceutical majors are not serving the society properly and this monopoly policy of the pharmaceutical majors by multiple patenting is causing the generic drugs to get stifled. (Herper, 2002)           Now it is clearly evident that the pharmaceutical majors are trying to maintain brand name drugs through monopolizing by filing multiple patents to lengthen the tenure. This helps in exclusive marketing of the drugs to maximize profits. The pharmaceutical companies are using legislative loopholes for patent extension, suing generic manufacturers for infringement of patents and in order to maintain monopoly they are also merging with their competitors. Furthermore, they are also trying to secure new patents by altering the drug formulation slightly, patenting for different aspects of same drugs and using advertisement to create brand awareness to limit the entry of generic drug makers. If one notes the different ways companies are employing for keeping the exclusive marketing of the drugs it is quite evident that the companies are not interested in using the IP law to create or innovate new drugs. Moreover they are using it to maintain a market share for making more profits. So there is a strong need to regulate these abusive practices. To take care of this malpractice Anti-trust laws are framed. The Anti-trust law provides control to regulate the players by preventing them from threatening the competition. A contradiction arises due to difference in philosophy of the Anti-trust Law and the IP Law. IP Law facilitates exclusivity to the companies to market the products encouraging innovation and creativity, which helps to maintain monopoly. The Anti-trust law in the other hand ensures competition and promotes that no single company will dominate the market with exclusivity posing threat to competition for a specific product. The Anti-trust law serves the people in better way by generating healthy competition and bringing the price of a commodity down for greater affordability. But the IP law actually promotes exclusivity, which translates in fewer buyers and higher prices of goods. So IP law is helping the major pharmaceutical players to increase profitability and it is being utilized in a rightful way. This is creating a direct conflict between the two laws. So there is a strong probability from the market players to use IP law to retain exclusivity and interfere in competition beyond the scope of this law. To curtail the excessive cost, which is a potential, threat to the consumers, Anti-trust law must come in action. This is the major issue, which is the focus of the pharmaceutical industry. (Glasgow, 2001, pp.227-231; Holland & Batiz-Lazo, 2003, p.1)       For example, SmithKline produced an expensive and powerful antibiotic called Augmentin. It will become off patent at 2002 due to expiry of the patent of its original molecular entity amoxycillin. (Glasgow, 2001, p. 234) But SmithKline filed for another patent for its other properties and secured another 15 years of exclusivity until 2017. In this way the new patent was secured for an innovation achieved in early 1970’s. In this way many drugs are being multiple patented to maintain market share and profitability by selling at dearer prices in cost of social welfare. This scenario clearly suggests IP laws are good if applied in rightful way. If the law is manipulated it will not serve the society well instead it will create a massive havoc in regard to social welfare. (Glasgow, 2001, pp. 231-232)                                                               Conclusion   After getting the clear picture of the issue from the industry overview regarding the R&D costs and analyzing it qualitatively it is evident that the patent tenure alteration is a grave issue which can be only solved by stipulating the patent for a fixed period (with a much longer period than the existing one) after the approval of the drug from the federal authority. It will also enable the companies to balance its incurred R&D cost. Furthermore a single time patent for drugs will also help in social welfare due to entry of generic drugs after expiry of the patent. This will result in adoption of cost leadership market strategy by the drug makers to reduce the cost and create greater affordability.                                                                   References 1. CBO, (2006). Research and Development in the pharmaceutical Industry, The Congress of the United States, Retrieved on June 25, 2011: http://www.cbo.gov/ftpdocs/76xx/doc7615/10-02-DrugR-D.pdf 2. OTA (1993), Pharmaceutical R&D: Costs, Risks, and Rewards, US Congress,  Retrieved on June 25, 2011: http://www.fas.org/ota/reports/9336.pdf 3. CMR International (2010), Global Pharmaceutical R&D Productivity Declining According to Thomson Reuters, CMR International; Thomson Reuters,  Retrieved on June 27, 2011: http://science.thomsonreuters.com/press/2010/cmr_2010factbook/ 4. Glasgow, L. (2001), Stretching the limits of intellectual property rights: Has the pharmaceutical industry gone too far?, Idea, Retrieved on June 27, 2011 from : http://www.ipmall.org/hosted_resources/IDEA/41_IDEA/41-2_IDEA_227_Glasgow.pdf 5. Herper, M. (2002), Solving The Drug Patent Problem, Forbes.com, Retrieved on June 27, 2011 from: http://www.forbes.com/2002/05/02/0502patents.html 6. Holland, S. & B. Batiz-Lazo (2003), THE GLOBAL PHARMACEUTICAL INDUSTRY, The Guardian, September 12, 2003, Retrieved on June 27, 2011 from : http://129.3.20.41/eps/get/papers/0405/0405002.pdf Read More