Introduction
A prescription drug is that pharmaceutical medication that requires a medical prescription before use. There are many processes involved when introducing a new prescription drug. The process usually begins when a lead compound is identified. Various factors determine the research and development costs for innovative new prescription drugs. The research process includes the pre-clinic research on different microorganisms and animals, clinic trials, and finally getting the approval to sell the drug to people.
Preparation Process
Industry Overview
The pharmaceutical industry is of great importance to many economists as it is highly competitive. In the recent years, the industry has been brought to public limelight and policy scrutiny. There are proposals to effect price control on pharmaceutical products. Unlike other consumer products, the user of a prescribed drug does not have the right to choose which drug to use. It is also important to note that sales of drugs are majorly affected by insurance coverage, government regulations, and physician’s prescriptions. Such factors do not affect other consumer products (Zhang and Ahmed, n.d.).
The performance of the drug industry is affected by various factors such as the economic, legal and ethical factors. The economic factors have to do with the industry structure, productivity, and utilization of the drugs, the availability and regulation of prices. The uncertainty about drug efficacy and safety determines the market accessibility of a certain prescription drug. This efficacy and safety needs automatically contributes to the high cost of R & D. In this case, the returns from the first stage of clinical research are small as compared to the returns gotten from the other two phases. This could be due to the complex nature of the last two phases.
Price regulation is another factor. There are high rates of entry into the pharmaceutical business, which makes it competitive. Neither patents nor monopolies provide a means of regulating the prices of the prescription drugs. The only thing that can control this factor is either a third party payment or pervasive insurance. This in return creates incentives for the suppliers and the patients can then afford the drugs.
Challenges Involved
Experimenting on whether a certain prescription drug is working or not leaves those involved with an ethical dilemma. In most cases, human subjects from developing countries are used to conduct these tests. These people are usually poor and vulnerable. The dilemma often arises when setting priorities, especially in determining those people that need the most care and those that do not need a lot of care. The greatest ethical dilemma is experienced when there is a great need for medical care and very few resources are available. Efficiency and equity are critical when considering issues to do with ethics. A cost effective analysis should be carried out regularly to determine an individual’s ethical criteria when it comes to evaluating health programs. It is important to note that cost- effectiveness is not only an economic reason but also an ethical reason. That usually occurs because improving people’s health by controlling the cost of the prescribed drugs is a moral call. Ethics involve providing more resources for lesser benefits, for the good of the society. Equal distribution of costs and benefits during drug prescription plays a significant role in embracing the moral and ethical concerns. However, equity in the field of healthcare is hard to achieve as it involves considering many of the moral issues. Need for Ethics in prescription therefore highly restricts prescription as the question of moral issues is complex.
Regarding legal factors, there are rules to be followed before making a prescription. The state in most cases makes decisions that involve drug prescription on behalf of the whole population. The state government is responsible for restricting access and banning certain activities (Brock and Wikler, 2006). Other legal factors that affect the availability of a new prescription drug include trade secrets, use of patents, and confidentiality limits. These factors restrict the dissemination of the knowledge in medicine ((Ama-assn.org, 2016)).
In the imperfect market, however, there are factors that influence the cost and prices of the prescription new drugs. These factors include monopoly power, the impact of supply and demand, third party insurance, short-term supply and demand shocks, barriers to entry and, asymmetric information. In the monopoly power, the pharmaceutical market has limited manufacturers. This raises the seller’s market power because of factors such as guarantee via patents that protect the buyer from any form of competition, the fact that only one manufacturer is allowed at a particular time and lack of an exact substitute for the drug during the same period. The monopolist has the freedom to determine the price of the drug hence he is the price setter.
Source: 2012books.lardbucket.org, 2016
Allowing monopoly in itself sets barriers to entry. This limits the market access, as there is no free entry into the pharmaceutical marketplace. These barriers ensure that the allowed firm attains maximum profits. However, this allows incentives for new pharmaceutical products into the market. Economies of high fixed costs, patents and market advantage for the first mover create barriers. The factors discussed and previously mentioned show the relationship between the pharmaceutical market and the competitive market whether it is perfect or imperfect. Economics is, therefore, important in the prescription drug market (Rattinger et al., 2008).
An illustration of the price fluctuations in prescription drugs
The research and development cycle of every drug entails a risk. In most cases, only seven out of ten of the drugs reach the market. To add to this, most of the products never get back their average cost of development (Spiegel Jnr., 1991). Therefore, the pharmaceutical industry takes a lot of risk by deciding to discover a new drug and only expertise can help salvage the process, as large capital could be lost in the process. Another risk is taken when conducting the various clinical research phases. To test whether a drug is effective or not, there are procedures that involve giving the prescription drug to a group of people. In the first stage, the people are just a few; they are hundreds of phase two and thousands in phase three. All these stages help determine the effectiveness of the drug while also gathering the side effects. Whether the drug will have a positive or negative effect involves a lot of risk like this in one way or another could jeopardize people’s lives.
Patents and their Importance
The importance of patents as a form of legal protection is that they allow the company that develops a particular prescription drug make profit from the drug after they manufacture and market it. The lifetime of a patent varies from one country to another with those of the United States running for about twenty years. It takes around seven to twelve years for a company to receive approval for a patent after applying for one. Regarding prescription, a patent allows only the patent holder to prescribe the original drug in their terms and conditions. The company is also the price setter. It is only after the expiry of the patent that other companies are allowed to manufacture and sell the drug. At this point, the drug is referred to as a generic drug.
Cost-Structure
A typical pharmaceutical firm cost of the structure shows the high cost of expenditure as the process is very expensive. Most companies spend up to $800 million on research and development. Currently, to cover the expenditure, most Americans have to pay 40% to 125% more to acquire the new prescription drugs as compared to the foreigners (DiMasi, Hansen and Grabowski, 2003). It is, however, important to note that not all the products recover their cost of operation, and the company ends up having losses. In the economic theory, the abstract firm explains of a perfect market where the forces of supply and demand are equal. In the case of an imperfect market, only a few assumptions are violated. The big question is whether the laws applied in the abstract firm are realistic in a typical world? This is not so, as in most cases, the patent holder has the power to control all the prices in the market as they wish. Not even a life-threatening situation can make the firm adjust the price. Therefore, the economic theory is not always applicable in the prescription drug market.
Considerations to Make
When it comes to a matter of how the firms keep their secrets, all the team players are expected to have a code of conduct. They are expected to protect the interests of the company first. All conducts that may damage the workplace should be avoided at all costs. The employees in both firms are required to keep the new prescription drug secrets that they have acquired in the course of research and development. This practice remains even after an employee stops working for that company, as long as a patent is active. To enhance the issue of the code of ethics, the employees are also not allowed to accept any form of employment whether permanent or temporary, paid or no charge job without permission from the firm they are working for. They are also expected to declare revisions and personal information that concern their families’ addresses and civil status. To avoid a situation that would cause the employee to give out a secret or disobey the code of conduct, the company is supposed to spell out issues that would cause a conflict of interest. The employees are then expected to put the interests of the firms above theirs and carry out their stipulated responsibilities.
Conclusion
In conclusion, drug development is a long process that involves a lot of steps. A lot of capital and high technological expertise is required. Once the drug is in the market, it is given a patent protection and by this; it becomes the price controller hence able to maximize profit. This monopolizes the pharmaceutical market but also creates incentives for other firms to develop new drugs. Economic, legal and ethical factors play a significant role in restricting the availability of a new prescription drug.
References
2012books.lardbucket.org, 2016. Supply and Demand in Health-Care Markets. [online] Available at: http://2012books.lardbucket.org/books/theory-and-applications-of- economics/s20-01-supply-and-demand-in-health-ca.html [Accessed 16 Feb. 2016].
Ama-assn.org, 2016. Opinion 9.095 - The Use of Patents and Other Means to Limit Availability of Medical Procedures. [online] Available at: http://www.ama-assn.org/ama/pub/physician-resources/medical-ethics/code-medical-ethics/opinion9095.page [Accessed 16 Feb. 2016].
Brock, D. and Wikler, D., 2006. Ethical Issues in Resource Allocation, Research, and New Product Development. World Bank. [online] Available at: http://www.ncbi.nlm.nih.gov/books/NBK11739/ [Accessed 16 Feb. 2016].
Dickson, M. and Gagnon, J., 2009. The Cost of New Drug Discovery and Development. Discovery Medicine, [online] 4(22), pp.172-179. Available at: http://www.discoverymedicine.com/Michael-Dickson/2009/06/20/the-cost-of-new-drug-discovery-and-development/ [Accessed 16 Feb. 2016].
DiMasi, J., Hansen, R. and Grabowski, H., 2003. The price of innovation: new estimates of drug development costs. Journal of Health Economics, 22(2), pp.151-185.
Spiegel Jnr., F.H. , J., 1991. The Economics of Pharmaceutical Research and Development: An Industry Perspective. National Academic Press [online] Available at: http://www.ncbi.nlm.nih.gov/books/NBK234300/ [Acessed 16 Feb. 2016]
Rattinger, G. B., Jain, R., Ju, J., & Mullins, C. D., 2008, June 15. Principles of Economics Crucial to Pharmacy Students' Understanding of the Prescription Drug Market. American Journal of Pharmaceutical Education, 72 (3),p. 61.Available at: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2508734/ [Acessed 16 Feb. 2016]
