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Executive Summary

BRANDNAME PRODUCTS RETAIN ABOUT 75% OF MARKET SHARE THREE TO FIVE YEARS after patent expiration, preliminary revenue data collected by the congressional Office of Technology Assessment indicate. During a Feb. 21 Wharton business school health care conference in Philadelphia, OTA Health Program Senior Associate Judith Wagner, PhD, suggested that policymakers might miss the mark by focusing narrowly on the occurrence of price increases for brandname drugs following patent expiration. "The increase in brandname prices upon patent expiration is documented, there's no doubt about it," she said. However, "the culprit is not the originator company, the culprit is a system that is allowing 75% of the hospital and drug store market to remain brandname prescribing [measured in revenues] for three, four, five years after patent expiration." Wagner's comments followed presentations by Senate Aging Committee staffer John Coster and Pharmaceutical Manufacturers Association President Gerald Mossinghoff on drug pricing versus other factors such as research costs. Wagner recast the discussion in terms of policy measures such as incentives for generic use rather than the appropriateness of pricing decisions. "It just doesn't seem to me to be helpful to criticize companies for doing what's in the interest of their stockholders," she commented. The revenue pattern after patent expiration suggests "there's something wrong with the market there" and "instead of beating up on the companies for pricing their drugs high, we should be trying to fix that," she concluded, suggesting that this type of approach is "less destructive to the innovative process" of drug development. Wagner also acknowledged the differing measures of investment "risk" relative to return in the pharmaceutical industry, indicating that this is one of the thornier issues in OTA's much- awaited study on drug development. When considering large U.S. pharmaceutical companies, as a whole, they "are less risky companies than the market as a whole," Wagner said. "The company is a portfolio of ongiong operations which are really not very risky at all." For the R&D portion of a company's portfolio, on the other hand, the "risk is high." Coster and Mossinghoff continued the data debate between Aging Committee Chairman Pryor (D-Ark.) and PMA -- with Coster focusing on the Consumer Price Index as a measure of the outpatient retail prices which he said are most at issue, while Mossinghoff emphasized the Producer Price Index as a more direct measure of the manufacturer activity. Confronting industry's recent highlighting of the slowing drug component of the PPI ("The Pink Sheet" Feb. 10, p. 5), Coster said the gap has actually been widening between the Rx PPI and the general PPI. The Rx PPI was 9.5% in 1989, 8.1% in 1990 and 7.1% in 1991, versus 3.9%, 3.7% and 0% for the general PPI in those respective years. Thus, Coster noted, the Rx PPI exceeded the general PPI by 5.6 percentage points in 1989, 4.4 in 1990, and 7.1 in 1991. Mossinghoff, discussing the retail CPI, noted that the federal Bureau of Labor Statistics calculated that generally only 70% of spending as measured by the CPI goes to manufacturers. He also suggested that Wharton economists should study what he termed the retail price index's "strange" and "very curious" lag behind the Producer Price Index slowdown. Both Rx CPI and Rx PPI were 9.5% in 1989, he said. In 1990, the Rx CPI was 9.9% while the Rx PPI was 8.1% and in 1991 the Rx CPI was 9.4% versus 7.1% for producer prices. In addition to its reliance on the CPI, Mossinghoff criticized Pryor's proposed legislation S 2000 as penalizing only U.S.-based companies for price increases. A key provision of S 2000 would reduce the Sec. 936 tax credits available to pharmaceutical companies if their product prices increase faster than the general CPI. But Mossinghoff noted that the credit can be used only by U.S. based companies; thus foreign multinationals with U.S. sales would not be affected by the bill.

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