INNOVATION MODELS IN THE BIOPHARMACEUTICAL SECTOR - Innovation in the Biopharmaceutical Industry - page 20

Giaccotto et al. (2005) use an econometric model to identify a relationship
between R&D and pricing for the period of 1952-2001. They demonstrated that
a 1% decrease in the real average pharmaceutical price would lower R&D as a
percentage of sales by 0.6%.
Golec et al. (2005) examined whether expected price constraints affect individual
firms' R&D decisions. They concluded that expectations of price reductions reduce
share prices and R&D expenditure.
Patent systems in OECD countries, which offer 20 years protection from imi-
tators, provide the dominant incentive for pharmaceutical innovation. However,
patents must be secured at the time of invention, and hence the intervening years
needed for the development of innovations normally reduce the effective period of
market protection to between ten and 12 years. As illustrated in Fig. 4, the achieve-
ment of a fair return is critically dependent upon both the patent life remaining at
the time a product enters the market, and the revenue that can be generated across
world markets in the years before the patent expires. After this time, revenues are
almost completely lost to generic competitors.
The first in a new class that has a novel mechanism of action faces a major
time-consuming challenge of changing established thinking and practice across the
medical profession, world wide. However, while class follower NCEs are spared the
initial pioneering work of selling a new treatment concept, they face the challenge
of differentiating the product from the class leader and other closely related NMEs,
in order to achieve sufficient market share to recover the R&D costs.
Pioneering studies of returns in the US over a 20-year period by Grabowski and
Vernon (2000), show two important characteristics of pharmaceutical innovation:
1. A wide variance in the commercial success of NCEs launched into the market.
Although a few products achieve very high rewards, many others did not even
achieve sales that were sufficient enough to offset their R&D costs.
2. An uneven pattern in the correlation between the perceived healthcare added
value and the rewards gained from individual products. In some cases, the first
entrant in a radically innovative class was rapidly superseded by a “follow-on”
drug, as happened when the anti-ulcer drug, Tagamet, was superseded by Zantac,
a drug which was incrementally superior.
There appears to be a growing interest in models that classify new medicines into
two discrete classes as a means of containing demand side healthcare costs: “break-
through” drugs and “me-too” drugs (Morgan et al. , 2005). The essential aim of this
approach is to reimburse all but a few perceived breakthroughs at low generic prices
(Attridge and Sheridan, 2006). The substantial literature reviewed in this study indi-
cates that such reimbursement policies of this type, which are now being applied
more widely in Europe, are fundamentally incompatible with the modus operandi