MOCKS! Pharmaceutical industry

• 21st Century

  - Mergers & acquisitions

  - Increase in generic (legally copy a medicine from another company ONCE the patents run out) manufacturing

  - Decline in profitable drug development
• What do they deliver?

  - Private company, profit motive, efficient

  - antibiotic 'problem' , resistance, stop over use

  - HIV treatments in developing countries

  - Vaccines for developing country diseases
• Significance of regulation

  - heavily regulated because of the risks involved to health from adverse side-effects (testing)

  - regulation lengthens the time-scale of the discovery & development of a new medical drug, adds to costs
• Oligopoly

  Top 5 firms in pharmaceutical industry = oligopoly

  - competitive, international industry

  - In Pharmaceutical industry, FC > VC

  - Only large firms can afford the initial R & D expenditure and production facilities

  - Marketing: some firms choose to have a high marketing spend in order to increase their market

  - C.R should be 20-40%, indicates oligopoly, not a strong one
• Making a new drug

  - long development cycle

  - high research and development & marketing costs (fixed costs). It takes place before any production takes place, highly risky, no guarantee that research will be successful

  - heavily regulated (clinical safety)
• Development of drug

  - early phase (pre-discovery)

  - pre clinical testing (computers, cells, animals)

  - apply for a patent early on, to protect intellectual property rights

  - trials on humans. First 100 healthy, then patients

  - application for a licence from the regulatory authorities

  - manufacturing & marketing
• Why AFC falls as output increases?

  AFC=FC/Q
• Why do Pharmaceutical firms charge high prices for their drug?

  - they are forced to submit their products to long & expensive clinical trials

  - the time taken to research a drug may be over ten years

  - consumers (patients, health insurance company, NHS) will have to pay high price demanded unless some monopsony buying power
• Problem of high priced drugs

  - the poor might not be able to afford the medicine

  - resolutions: Gov't could subsidise the medicine or firms could price discriminate for poorer countries, charge less, still make profit
• Patent definition

  A patent provides a right under law to produce and market a good for a specified period of time (20 years)

  
  

  Intellectual property rights, price discrimination, sunk costs

  
  

  Prevent other firms from developing and producing their potential product (elements of monopoly for a few years over different medicines, but oligopoly in general)

  
  

  R & D reduces time a firm can exploit the patent
• Without Patent

  - If patent holder doesn't license the product they are the sole source (provider) of the product

  - there is some competitive pressure

  - back to oligopolistic competition

  - prediction of output/price, difficult & imprecise
• With Patent

  - firm is a monopolist & has control over the market

  - prediction of price/output, no competitive pressure to reduce profits/prices
• What happens when patent expires?

  - 'Generic' copies of the drug appear

  - competition causes supply to increase

  - price decreases (shift in S & D)

  - no longer a monopoly, so oligopolistic competition
• Why is the pharmaceutical industry not an example of perfect competition?

  Strong barriers to entry such as:

  - patents (creates monopoly for a limited time period)

  - high fixed costs

  - high sunk costs

  - high minimum efficient scale & ATC

  - AFC

  - significance of economies of larger scale production
• Small firms in research & development

  small firms can input into research in the initial stages, but do not have the funds to develop the final product (drug)
• Patent characteristics for a Pharmaceutical company

  - the patent helps prevent free riders from copying

  - the patent can provide the owner with a degree of monopoly power
• Cost breakdown for firms in the pharmaceutical industry

  Fixed costs (very large): premises (rent), production machinery, research & development, clinical trials, marketing = SUNK COSTS, risks with R & D

  Variable costs (comparatively small): production staff (wages), components, packing & delivery
• examples of protecting intellectual property rights

  - supplementary protection certificates

  - trade marks (logo)

  - copyrights

  - patents

  - ever greening (patent for pharmaceutical industry)
• Key diagrams

  - monopoly diagram & supernormal profits

  - s & d shifts when patent no longer valid, s shifts to right

  - e.o.s & the minimum efficient scale