Essays on Pharmaceutical R&D

Abstract: The first paper, Pharmaceutical R&D: a real option approach, considers the process of pharmaceutical R&D analyzed with real option theory. This process is analyzed as an opportunity to research and develop a new pharmaceutical. Contrary to other models using real option analysis I use an option that takes time to exercise. Thus, the important aspect of long R&D processes when developing a new drug is recognized. The paper shows the value of a completed project that ”triggers” investment. This value is the expected market value of a new drug. In this study I proceed from well know theories in the economics of uncertainty, decision-making and finance. My main purpose is to give an insight to how financial theory can be used to enrich health economics in general and specifically the economics of pharmaceutical innovation. Some conclusions for pharmaceutical R&D policy are drawn as well. The second paper, Spillovers from pharmaceutical R&D - The case of Medicon Valley, analyzes external effects of R&D. I compare the geographic location of patent citations with that of the cited patents, as evidence of the extent to which knowledge spillovers are geographically localized. All originating patents come from a pharmaceutical or biotechnological company localized in the Öresund region, or Medicon Valley. I find that citations to Medicon Valley patents are more likely to be geographically matched. The effect fades over time indicating that proximity enhances knowledge spillovers. The probability of a geographical match increases if the citing patent comes from another pharmaceutical company. The third paper, Economic rent and incentives for the development of drugs analyze how an optimal two-part pricing model could be constructed for pharmaceuticals with lump-sum transfers combined with price taxes. The paper considers a closed economy and does not analyze pricing where international competition is present. The assumption here is that pharmaceutical development can be financed through sales of pharmaceuticals, where a special price tax is imposed on the sales price of the drugs. We base the model on the assumption of asymmetric information about the efficiency of research. The total cost of the company is not observable, but the imposition of a price tax makes it possible to find equilibrium in a dynamic regulatory process. The fourth paper, The Swedish pharmaceutical reimbursement system 1993 – 1996 A case study, analyses the regulation of pharmaceutical prices within the pharmaceutical benefit scheme in Sweden. It gives a brief overview of different price regulation policies in some OECD countries. After a theoretical analysis of the Swedish price regulation and implementation of a drug’s ”health economic value” evaluations supplied by the industry is analyzed. These argue for a certain price and thus the health economic value. The fifth paper, The pricing of pharmaceuticals in Sweden, continues the analysis from the previous paper and incorporates the changes made in the pharmaceutical benefit scheme. In 1997 the Swedish reimbursement scheme changed towards a system where the consumer initially carries the full cost up to a certain level. Over a 12-month period the consumer is insured by a high cost protection. Once this level is reached the marginal cost of consuming one more drug is zero. We analyze the implications for the pricing of pharmaceuticals in Sweden of the changed reimbursement system. Alternative reimbursement schemes are also discussed together with a proposal for changing the extent of price regulation.