Biotech Values

[iwfal]

The conventional wisdom, as described in a Reuters piece today (in.reuters.com/article/2013/05/10/us-usa-health-drugs-idINBRE9490UB20130510 ) is that the US has the highest branded-drug prices because of political imperatives and/or greed by the drug companies. However, these explanations miss a major point: the US is one of only a few countries in the world with fully substitutable generic drugs, which causes US branded drugs to lose almost all of their pricing power once they go off-patent.

In most other countries (including most countries in Europe), branded drugs continue to enjoy healthy market share even after patent expiration because generic drugs are not substitutable by a pharmacist or hospital, but rather must be explicitly prescribed (i.e. they are branded generics).

An interesting thesis for discussion - but I would suggest your logic implies much too strong a connection. E.g.:

1) If you got rid of substitutible generics in the US would you expect that the price inflation of on-patent drugs would start to significantly level out? No chance whatsoever IMO.

2) If you instituted substitutible generics in Europe would you expect that significantly more of the companies would just say "no, not worth our time - do without our drug". Again, no chance whatsoever IMO.

The reason is that even without substitible generics the life of a drug is generally a long way off (i.e. uncertain future discount results in small NPV deltas) and is in any case limited by other means - by non-substitutible, by Me-too's, by technological obsolesence, ... . I would suggest that substitutibility is only a small player in the initial NPV for most drugs due to the long time horizon and all the other factors at play