India Pharma Mfg India has relatively weak intellectual property rights protections, so pharmaceutical companies may avoid producing patented drugs in India. The country maintains that it has the right to set its own laws with respect to intellectual property rights protections (Baker, 2014). However, the country has come under fire from the U.S. In particular for having its own laws. U.S. industry is engaged in an active fight to gain U.S.-style monopolies around the world, and the competitive threat posed by India has made that country a specific target (Baker, 2014).
Many Americans have responded to the high prices on U.S. pharmaceuticals by purchasing them from other countries. Several countries have built cottage industries around shipping drugs to the United States. Initially, Canada was a favored country for this, given the reliability of drugs coming from Canada. However, price caps or not Canada still has Western prices for its pharmaceuticals, which has led to buyers searching the world for even lower-cost options, one of which is India. India's drug export market has grown at 24% per year, and now equals $14.7 billion, of which 55% goes to Western markets, the U.S. being the largest of these (Taylor, 2013). The total U.S. pharmaceutical market is $359 billion and is expected to grow to $476 billion by 2020 (PRWeb, 2013). This paper will analyze the impact that Indian pharmaceuticals are expected to have on the U.S. market. This discussion is especially salient given that the U.S. pharmaceutical market is lobbying actively to have more limitations put on Indian drug exports to the United States.
The Structure of the U.S. Drug Market
The U.S. pharmaceutical market is regulated by the Food & Drug Administration. The process has been in place since 1938 and has the objective of balancing the needs of consumers for access to safe drugs with the needs of business to provide a climate in which drugs can be developed (FDA.gov, 2014). The FDA does this by approving drugs for sale, but granting monopoly periods to approved drugs. The monopoly period allows the pharmaceutical company to recoup the cost of the drug development, which can run well over $1 billion. After the monopoly period has ended, the patent is expired and the drug can be marketed by any company. These are known as generic drugs. The structure of the generic drug market has some characteristics of perfect competition, because the product has a very low level of differentiation. It is not pure-form perfect competition because of differences in firm size and because of information asymmetry on the buyer side, but it is closer to that market form than any other because of the lack of differentiation.
The market for drug imports has become increasingly robust in the past couple of decades. Regulators have wavered on their opposition to drug imports. While the FDA cautions that imported drugs may be unsafe, that is code for "we don't know what the other country's regulatory authority does with respect to safety." Consumers in the U.S. may trust drugs from developed nations like Canada more than from developing nations, but there is good reason to believe that many consumers have high price sensitivity -- possibly out of necessity -- and therefore overlook safety considerations in favor of lower prices. To that end, India has become a favored nation for drug imports. India has a large pharmaceutical industry, and it is also a competitive industry. Production costs are generally low, such that India has absolute competitive advantage over American companies with respect to drug prices. One of the results of the competitive Indian domestic market -- and the lower purchasing power of Indian consumers -- is that Indian drug makers see exports as the key to growth. Several of the top manufacturers in Indian do 80% of their business or more in exports (Taylor, 2013).
Demand for drug imports is driven primarily by high pharmaceutical costs in the U.S. The cost of developing new drugs is high. The U.S. offers a unique combination of strong patent protection for new drugs and no price caps. In many nations where the government is the main payer for drugs, price caps are in place to strike a balance between the public need for drugs and the companies' need to earn profits. In the U.S., the companies face no such restrictions on profits. Predictably, with a monopoly and a high level of information asymmetry (customers know next to nothing about the drugs), pharmaceutical prices in the U.S. are the highest in the world. The following chart shows the comparison between prices in the U.S., UK, Canada, Australia and India.
NAME OF THE DRUG
However, it should be noted that gaining some global consensus on intellectual property issues is part of several trade negotiations (Halliburton, 2009). Frameworks that have been developed seek to move major nations towards intellectual property rights laws, something that could threaten the Indian pharmaceutical industry, which has built its business model around reverse engineering (Chandran, Roy & Jain, 2005). It is likely that if there is any influence of free trade agreements or changes in regulation due to the application of external pressure, that this will result in tightening of restrictions on Indian pharmaceuticals. However, the nation would still be able to compete with generics.
There are no meaningful barriers to trade in pharmaceuticals, in particular generics. This means that for American consumers, competition is global. Nations can compete based on competitive advantage, and that has opened the door for India to export drugs to the U.S. The practice has become widespread, and there no reason to think that in the generic market in particular the regulatory environment will change. It is simply too easy to get drugs through customs even when there are limits. This competition is not perfect competition, where firms are price takers, but it is close. Firms basically only compete on price, because the product is generic. Those firms -- and nations -- that have a price advantage will win the business. In that sense, the market for generic drugs is no different than the market for plastic garbage cans or wooden spoons. For drug companies accustomed to monopoly pricing on their drugs, such competition is naturally a shock, going from one end of the competition spectrum to the other.
The implication of such a shift in economic models is fairly obvious. A monopoly is characterized by the ability to increase prices as high as the market will bear. For most drugs under patent, there is very low price elasticity of demand because the benefit they convey is about health, one thing people tend not to put a price tag on. This is combined with very low information, and pharmaceutical companies leverage these information asymmetries to generate very high profits. Appendix A illustrates a typical monopoly market, compared with perfect competition. The graph shows that monopolists profit from constraining output and charging high prices. Now, with drugs demand is driven by medical need, and there is little control that the company has with respect to demand. As a consequence, profits are taken to the maximum effect for whatever the demand is.
Under conditions that approach perfect competition, the producer has no ability to earn monopoly rents on the prices. Under perfect competition, producers are effectively price takers. Because shipping drugs is easy, the market is essentially global in nature. Once the formula is understood, most drugs are relatively cheap to produce. Thus, marginal revenue is going to be quite close to marginal cost. Only a minor level of information asymmetry allows for a small degree of profit-taking among firms competing in the generics industry. American manufacturers have trouble matching production costs of developing nations like India, and therefore are at a competitive disadvantage. Trust in foreign producers is a limiting factor that will keep some demand focused on domestic suppliers, and market knowledge about foreign vendors is also a limiting factor, but these are informational problems that the Indian sellers can overcome in order to increase their market share in the United States.
The expected outcome of increased competition on U.S. producers, therefore, is that prices in the U.S. will drop. This is the normal reaction based on supply and demand. When more producers enter the market, the price of a good is expected to drop. This is especially…
India has relatively weak intellectual property rights protections, so pharmaceutical companies may avoid producing patented drugs in India. The country maintains that it has the right to set its own laws with respect to intellectual property rights protections (Baker, 2014). However, the country has come under fire from the U.S. In particular for having its own laws. U.S. industry is engaged in an active fight to gain U.S.-style monopolies around the world, and the competitive threat posed by India has made that country a specific target (Baker, 2014).
Generic Drugs in Prevention of Chronic Disease The cost of healthcare -- including the cost of health insurance -- in the United States has gone up exponentially over the last few years. And when it comes to healthcare for those suffering from chronic diseases, the cost is often more than the patient can afford. But the use of generic drugs could reduce those costs and bring the overall cost of caring
Industry and Regulatory Strategy The generic drug industry provides the public with pharmaceutical alternatives to branded big name prescription drugs. "In 2010 alone, the use of FDA-approved generics saved $158 billion, an average of $3 billion every week."(Generic Pharmaceutical Association. 2011. P.1). With the continuing increase in health care expenditures and health insurance premiums for business and consumers; in 2011 premiums increased by nine percent (Abelson, Reed. September 27, 2011. P.1),
309). The abbreviated approval process authorized by Hatch-Waxman lets generic drug manufacturers use the same clinical data that the original manufacturer used to obtain FDA approval, thereby avoiding these expenses. In this regard, Greene emphasizes that, "Whereas the pioneer drug manufacturer must incur great expense and undergo rigorous scrutiny when it files an new drug application (NDA) to secure FDA approval, a generic manufacturer may file an Abbreviated New Drug
) (Wadhwa, Rissing, Gereffi, Trumpbour and Engardio, 2008). Clearly, it is important to have standards for all pharmaceuticals. Perhaps the WHO or WTO could monitor the quality control of this globally, adding a few cents per dose to help defray the cost, or utilizing a United Nations budget to oversee this program. It is just as important, though, to realize that until the Developed Countries share in their own resources, whether
Recommended Pricing Strategies: As a pharmaceutical benefit manager, I have several primary stakeholders to whom I am responsible. These include: my organization, the employer as my client, the employees of the client as plan participants, the pharmacists dispensing the medications, and the pharmaceutical manufacturers and/or distributors. My job is to develop a plan that is profitable for my organization. I must also develop a plan that is cost-effective for the employer.
Generics, Biologics, and Biosimilars Properties of Generic Drugs, Biologics, and Biosimilars, with Examples and Usage Generic drugs Generic drugs denote pharmaceutical products that are typically meant to be substituted with some innovator product manufactured with no license from innovator, and sold in the markets after exclusive rights (such as patents) expire (WHO, 2016). Some of the properties of these drugs include; Generic drugs are usually sold at prices considerably lower than branded price; and