The third section of our Special Task Force report identifies and defines a series of elements that warrant consideration in value assessments of medical technologies. We aim to broaden the view of what constitutes value in health care and to spur new research on incorporating additional elements of value into cost-effectiveness analysis (CEA). Twelve potential elements of value are considered. Four of them-quality-adjusted life-years, net costs, productivity, and adherence-improving factors-are conventionally included or considered in value assessments. Eight others, which would be more novel in economic assessments, are defined and discussed: reduction in uncertainty, fear of contagion, insurance value, severity of disease, value of hope, real option value, equity, and scientific spillovers. Most of these are theoretically well understood and available for inclusion in value assessments. The two exceptions are equity and scientific spillover effects, which require more theoretical development and consensus. A number of regulatory authorities around the globe have shown interest in some of these novel elements. Augmenting CEA to consider these additional elements would result in a more comprehensive CEA in line with the "impact inventory" of the Second Panel on Cost-Effectiveness in Health and Medicine. Possible approaches for valuation and inclusion of these elements include integrating them as part of a net monetary benefit calculation, including elements as attributes in health state descriptions, or using them as criteria in a multicriteria decision analysis. Further research is needed on how best to measure and include them in decision making.

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We analyze the effect of price regulation on delays in launch of new drugs. Because a low price in one market may 'spill-over' to other markets, through parallel trade and external referencing, manufacturers may rationally prefer longer delay or non-launch to accepting a relatively low price. We analyze the launch in 25 major markets, including 14 EU countries, of 85 new chemical entities (NCEs) launched between 1994 and 1998. Each NCE's expected price and market size in a country are estimated using lagged average price and market size of other drugs in the same (or related) therapeutic class. We estimate a Cox proportional hazard model of launch in each country, relative to first global launch. Only 55% of the potential launches occur. The US leads with 73 launches, followed by Germany (66) and the UK (64). Only 13 NCEs are launched in Japan, 26 in Portugal and 28 in New Zealand. The results indicate that countries with lower expected prices or smaller expected market size have fewer launches and longer launch delays, controlling for per capita income and other country and firm characteristics. Controlling for expected price and volume, country effects for the likely parallel export countries are significantly negative.

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We examine the determinants and effects of M&A activity in the pharmaceutical/ biotechnology industry using SDC data on 383 firms from 1988 to 2001. For large firms, mergers are a response to expected excess capacity due to patent expirations and gaps in a firm's product pipeline. For small firms, mergers are primarily an exit strategy in response to financial trouble (low Tobin's q; few marketed products, low cash-sales ratios). In estimating effects of mergers, we use a propensity score to control for selection based on observed characteristics. Controlling for merger propensity, large firms that merged experienced a similar change in enterprise value, sales, employees, and R&D, and had slower growth in operating profit, compared with similar firms that did not merge. Thus mergers may be a response to trouble, but they are not a solution. The Wharton School University of Pennsylvania Abstract:This paper examines the determinants of M&A activity in the pharmaceutical-biotechnology industry and the effects of mergers using propensity scores to control for merger endogeneity. Among large firms, we find that mergers are a response to excess capacity due to anticipated patent expirations and gaps in a company's product pipeline. For small firms, mergers are primarily an exit strategy for firms in financial trouble, as indicated by low Tobin's q, few marketed products, and low cash-sales ratios. Conversely, small firms with a relatively high Tobin's q, a large number of marketed products, and high cash/sales ratios are less likely to engage in any M&A activity.We find that it is important to control for a firm's prior propensity to merge. Firms with relatively high propensity scores experienced slower growth of sales, employees and R&D regardless of whether they actually merged, which is consistent with mergers being a response to distress. Controlling for a firm's merger propensity, large firms that merged experienced similar changes in enterprise value, sales, employees, and R&D relative to similar firms that did not merge. Merged firms had slower growth in operating profit in the third year following a merger. Thus mergers may be a response to trouble, but they are not an effective solution for large firms. Neither mergers nor propensity scores have any effect on subsequent growth in enterprise value. This confirms that market valuations on average yield unbiased predictions of the effects of mergers. Small firms that merged experienced slower R&D growth relative to similar firms that did not merge, suggesting that post-merger integration may divert cash from R&D.

This paper reviews the economic case for patents and the potential for differential pricing to increase affordability of on-patent drugs in developing countries while preserving incentives for innovation. Differential pricing, based on Ramsey pricing principles, is the second best efficient way of paying for the global joint costs of pharmaceutical R&D. Assuming demand elasticities are related to income, it would also be consistent with standard norms of equity.To achieve appropriate and sustainable price differences will require either that higher-income countries forego trying to "import" low drug prices from low-income countries, through parallel trade and external referencing, or that such practices become less feasible. The most promising approach that would prevent both parallel trade and external referencing is for payers/purchasers on behalf of developing countries to negotiate contracts with companies that include confidential rebates. With confidential rebates, final transactions prices to purchasers can differ across markets while manufacturers sell to distributors at uniform prices, thus eliminating opportunities for parallel trade and external referencing.

Most countries regulate pharmaceutical prices, either directly or indirectly, on the assumption that competition is at best weak in this industry. This paper tests the hypothesis that regulation of manufacturer prices and retail pharmacy margins undermines price competition. We use data from seven countries for 1992 to examine price competition between generic competitors (different manufacturers of the same compound) and therapeutic substitutes (similar compounds) under different regulatory regimes. We find that price competition between generic competitors is significant in unregulated or less regulated markets (United States, United Kingdom, Canada, and Germany) but that regulation undermines generic competition in strict regulatory systems (France, Italy, and Japan). Regulation of retail pharmacy further constrains competition in France, Germany, and Italy. Regulation thus undermines the potential for significant savings on off-patent drugs, which account for a large and growing share of drug expenditures. Evidence of competition between therapeutic substitutes is less conclusive owing to data limitations. DisciplinesAccessibility | Education Economics AbstractMost countries regulate pharmaceutical prices, either directly or indirectly, on the assumption that competition is at best weak in this industry. This paper tests the hypothesis that regulation of manufacturer prices and retail pharmacy margins undermines price competition. We use data from seven countries for 1992 to examine price competition between generic competitors (different manufacturers of the same compound) and therapeutic substitutes (similar compounds) under different regulatory regimes. We find that price competition between generic competitors is significant in unregulated or less regulated markets (United States, United Kingdom, Canada, and Germany) but that regulation undermines generic competition in strict regulatory systems (France, Italy, and Japan). Regulation of retail pharmacy further constrains competition in France, Germany, and Italy. Regulation thus undermines the potential for significant savings on off-patent drugs, which account for a large and growing share of drug expenditures. Evidence of competition between therapeutic substitutes is less conclusive owing to data limitations.

Most studies on the indirect costs of an illness and the cost effectiveness of a medical intervention or employer-sponsored wellness program assume that the value of reducing the number of days employees miss from work due to illness is the wage rate. This paper presents a general model to examine the magnitude and incidence of costs associated with absenteeism under alternative assumptions regarding the size of the firm, the production function, the nature of the firm's product, and the competitiveness of the labor market. We conclude that the cost of lost work time can be substantially higher than the wage when perfect substitutes are not available to replace absent workers and there is team production or a penalty associated with not meeting an output target. In the long run, workers are likely to bear much of the incidence of the costs associated with absenteeism, and therefore be the likely beneficiaries of any reduction in absenteeism. SummaryMost studies on the indirect costs of an illness and the cost effectiveness of a medical intervention or employersponsored wellness program assume that the value of reducing the number of days employees miss from work due to illness is the wage rate. This paper presents a general model to examine the magnitude and incidence of costs associated with absenteeism under alternative assumptions regarding the size of the firm, the production function, the nature of the firm's product, and the competitiveness of the labor market. We conclude that the cost of lost work time can be substantially higher than the wage when perfect substitutes are not available to replace absent workers and there is team production or a penalty associated with not meeting an output target. In the long run, workers are likely to bear much of the incidence of the costs associated with absenteeism, and therefore be the likely beneficiaries of any reduction in absenteeism.