This is Module 2.1.1, pharmaceutical industry Defining a Market Space from Steve Parente, Carlson School of Management. So, in the first module we focused on really just looking at the bench work and science that ultimately creates innovations that takes pharmaceutical market to bed side. In this module we'll really start talking about the market dynamics and regulatory and other components that need to be taken into consideration reimbursement as well as some illustrations in different international markets of how the pharmaceutical market operates. So let's first talk about basic definitions again. It's important to understand that the FDA has a very specific definition of what they consider to be a drug. And so just to understand, it is an article intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or woman and other animals, and articles other than food intended to affect the structure of any function of the body of man or other animals. The other than the food piece is important to understand, because the FDA is not just there for drugs, the F stands for food. And the origin of the laws we discussed in the very first course goes back to the Pure Food Drug act in the early 1900s. So the common designations of what types of drugs that the FDA is concerned about is the prescription drugs that physicians will prescribe, actually in different countries sometimes those are prescribed by pharmacists without the physicians intervention. There are over-the-counter drugs which still have to be approved by the FDA before they're deemed to be safe but they do not require specifically a physician's permission. And we'll talk about that later in this module. And then the other distinction that's a major one. Again we're calling more detail, brand-name drugs versus generic. Brand-name generally being drugs that are on patent where the pharmaceutical company's trying to get their full profits or rents back versus generics where they're usually off patent. So we have seen in the last 20 to 30 years, a lot of increasing expenditure for pharmaceuticals. I tend to think it's mostly because the drugs are doing a lot more than they used to be doing in terms of really helping people out. In terms of looking at it more at a market level, what you have to understand is that, that expenditure is a function of both price and the quantity, use of those medications. And when you think about what's been driving expenditure growth, about three-quarters of that has been due to expanded use of different drugs, and switching to newer more effective drugs. For example in the 1990s there were far more effective drugs used for depression than there really were really three, four or five decades before. And then another part of why expenditure growth is that we have about a quarter due to price increases. And yes there are blockbuster drugs or some of the more things have been cited in 2015 and '16 like the HepC drugs. But for the most part, price increases are not substantial when you actually average them out across all the different regimens. Ernie Berndt, who's an economist at MIT, cites four primary reasons for a lot of this expenditure growth. This notion of the importance of being unimportant sounds kind of weird. But it's very key, if you're actually taking these pharmaceuticals, you don't want it to rule your life. You really would not like to be conscious of the fact you have a pill box with 12 things that you have to take every morning. And you want it to be as simple and part of your lifestyle, the easy way as possible. Another thing that is driving that growth is the expansion of insurance coverage for these pharmaceuticals. What folks don't realize is that drugs weren't really covered by private insurance until really the 1980s, and by Medicare not until the last decade or so with the Medicare Monetization Act in Medicare part D. And then new product innovation clearly, any new drug that's on the market with a patent return on investment, that can drive up some costs. And we've also seen some extremely aggressive marketing. Keep in mind that TV ad sales for drugs are a relatively new thing and did not exist before 1997, and so that has really ramped up considerably. So who are the principals in this pharmaceutical market? We have manufacturers, which are key. It's not just five firms, the five largest ones I list here. Merck, Pfizer, Bristol-Meyers, J & J, Eli Lilly. There's others as well in terms of where they've been gobbled up over the years. But when we think about the major corporations worldwide, we're talking about 30 or so the US manufactures are there but you also have on the, if you will the sort of pond, Bayer certainly in Germany is a major producer. But worldwide and in the US in particular there's about 1200 firms and there's a pretty wide range of products. So in Minnesota right across the school is located we have a firm, Upsher Smith that's not one of these top five but they produce for example a whole range of drugs for folks suffering with late stage Dementia. So other principals in this equation. The wholesalers for these pharmaceuticals, they generally are intermediaries who supply retail pharmacies. Hospitals, doctors, and downstreams organizations, they can provide product, patient, disease information, the other components. A major one that actually has ties to Carlson because their CEO is an alum is McKesson. McKesson from time to time gets listed as the largest of all the healthcare publicly traded firms in the world with their market capitalization. Another principal in this space is the retailers. So the one that probably is most commonly known to folks are the chain pharmacies, whether it'd be Walgreens or CVS. Now Walmart has now entered this space as well. For those of you who live in the New York area, in the New York City area, and you never leave it you know Duane Reade and you're wondering what Walgreens actually is. But there's a wide range. And then, of course, there's the independent pharmacies, that's where a really a lot of these groups grew out of, and they're scattered across the US. Other actors, agents in pharma includes the insurance industry, always present. I mean they are the third party financing system for United States system. So for private insurers whether it's Blue Cross, Blue Shield, managed care organizations such as United Health Care, Aetna played a role there, certainly Kaiser Permanente. Then we have the public insurers in the form of Medicare and Medicaid, the Veterans Administration, in other words known as the VA, the Tricare for Department of Defense. And then of course, employers are a major part of this market as well, we discussed that in module 1. They're core for the purchase for health insurance benefits for their employers and their dependents. Other actors that get involved, and this is a major one that's not so obvious, is what's known as the pharmaceutical benefit management firm otherwise known lovingly as the PBM. These administered pharmacy benefits, generally for self-insured employers, but they also can be engaged depending on their ownership clause with some of the folks doing Medicare part D, some of the Medicare advantage plans where everything is included. So they provide a major role. And actually there's been a tremendous consolidation in that space. There used to be over 60 of these firms and now there's just a handful. Consumers, obviously they're key as who's actually taking the drug and what their reaction is going to be. And then we talked from the very beginning, regulators. The Food and Drug Administration we've talked about before. One that's not so obvious but if you think about, it makes sense, is the Federal Trade Commission and Department of Justice both in terms of the competitive nature, undue monopolization, acquisition of affirms in a way that would harm the competitive nature of the industry. Both the FTC and Department of Justice get involved in those issues, if they see any issues of price fixing, otherwise determining a perse violation, that actually is very serious for the FTC, and potentially in terms of an anti trust issue, fines could be in there. They could actually be rather expensive if proven, generally that stuff doesn't come into play too much. This concludes this module on the pharmaceutical industry.
