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International Journal of Health Economics and Management

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01-06-2017 | Research Article

Product safety spillovers and market viability for biologic drugs

Authors: John Romley, Tiffany Shih

Published in: International Journal of Health Economics and Management | Issue 2/2017

Abstract

When a pharmaceutical manufacturer experiences a safety problem, negative impacts on profitability can spread to its competitors. Reduced consumer confidence, product recalls, and litigation are limited to the responsible manufacturer only if that manufacturer can be clearly linked to the safety problem. We analyze the impact of “accountability” for safety problems on manufacturer entry decisions and investments to mitigate risk. Consistent with prior research, we find investment levels increase with accountability in a duopoly market, and that accountability can thus enhance market viability and improve consumer welfare. However, we also analyze the impact of accountability on entry of a competitor, after the originator’s exclusivity has expired. Accountability promotes the development of a robust market by raising expected profits, particularly for an entrant with a relatively low likelihood of a safety problem. Yet entry need not improve consumer welfare, and may benefit the incumbent in our model. In contrast to the traditional entry deterrence mechanism, when accountability is sufficiently low, increased incumbent investment encourages entry. Our analysis has important implications for biologic drugs, insofar as pathways for entry by “biosimilars” have been established in Europe and the United States, and informs pharmacovigilance and other accountability policies for biologics.

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An example in of a major safety issue in small-molecule drugs was the Vioxx (rofecoxib) recall of 2004, when the drug’s prior year global sales totaled $2.5 billion. The arthritis drug was estimated to be associated with up to 140,000 excess cases of serious coronary heart disease in the U.S. between 1999 and 2004, which itself demonstrates a fatality rate of 44% (Graham et al. 2005).

http://blogs.fda.gov/fdavoice/index.php/tag/biological-products/.

In our model, firms cannot determine with certainty whether their product will have a serious safety problem prior to consumption, and thus there is no opportunity for firms to take preventative actions or signal based on the realization of a safety problem. Despite the inability to perfectly predict a safety outcome, in practice, drug companies can plausibly undertake activities which have the effect of reducing the risk of serious safety problems and thereby safety spillovers. For example, a company can build a production facility with state-of-the-art quality control, or develop hiring, monitoring, promotion, and retention policies that create a culture of safety across its products. Similarly, drug companies can conduct extensive investigations of toxicity before marketing a product. While these investments may reduce the likelihood of a safety problem, firms and consumers are symmetrically imperfectly informed about the realization of safety problems before consumption.

Equation (2) uses the normalization $CS^{2}\left( {0,0} \right) =0$ in period 2.

Note that Proposition 3 also holds when both firms can adjust their safety investments after the entry decision is made, if safety investments are complements. Under these assumptions, $\frac{d{\Pi }_2^*}{da}=\frac{\partial {\Pi }_2^*}{\partial s_1 }\left( {\frac{ds_1^*}{da}} \right) +\frac{\partial {\Pi }_2^*}{\partial s_2 }\left( {\frac{ds_2^*}{da}} \right) +\frac{\partial {\Pi }_2^*}{\partial a}=s_2 \left( {\pi _d -a\pi _m } \right) \frac{ds_1^*}{da}+\pi _m s_2 \left( {1-s_1 } \right) .$ Taking the derivative of this expression with respect to $s_2 $ provides $\frac{d^{2}{\Pi }_2^*}{ds_2 da}=\left( {\pi _d -a\pi _m } \right) \frac{ds_1^*}{da}+\pi _m \left( {1-s_1 } \right) $, which is positive under complements ($\pi _d -a\pi _m >0$ and by the results in “Accountability in a duopoly market” section, $\frac{ds_1^*}{da}>0)$.

A duopoly need not produce more consumer surplus because high monopoly price may lead to substitution toward the outside options, so fewer consumers consume a product with safety problems.

In the case of the FDA’s approval of biosimilar Zarxio, the FDA assigned an interim distinguishable name (filgrastim-sndz), but noted the policy has not been set.

Our work has implications in the international context as well, particularly in low- and middle-income countries, where pharmacovigilance systems are more often resource-constrained (Pirmohamed et al. 2007). In this context, a lack of formal and comprehensive national pharmacovigilance systems may limit successful accountability. This concern was borne out recently in Thailand, when users of intended copies of Johnson & Johnson’s biopharmaceutical erythropoietin experienced an elevated risk of pure red-cell aplasia, a serious immune reaction. The government was unable to identify the product responsible, partly due to shared non-proprietary names for biologic drugs produced by multiple manufacturers (Siegal 2014; Wish 2011). Beyond the specific context of pharmacovigilance, the quality of healthcare in the developing world is an important issue and active field of research (see, e.g., Bennett and Yin 2014; Das et al. 2015).

Price-cost margins and thus profits are positive for both manufacturers, ensuring that manufacturers can recoup fixed costs including R&D (Dimasi et al. 2003).

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Title: Product safety spillovers and market viability for biologic drugs
Authors: John Romley
Tiffany Shih
Publication date: 01-06-2017
Publisher: Springer US
Published in: International Journal of Health Economics and Management / Issue 2/2017
Print ISSN: 2199-9023
Electronic ISSN: 2199-9031
DOI: https://doi.org/10.1007/s10754-016-9208-2

At a glance: The STEP trials

Springer Medicine

Product safety spillovers and market viability for biologic drugs

Abstract

At a glance: The STEP trials

Springer Medicine

Abstract

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