Nova workboard

a blog from young economists at Nova SBE

Welfare Losses in Market of pharmaceutical Products in Germany

The expenditures for pharmaceutical products of health insurances in Germany increased in 2009 again about 4.8% to an amount of 32.4 billion Euro. This is much more than in other European countries. In 2010 the “Arzneiverordnungsreport” pointed out that prices of drugs in Germany are from 50% to 100% more expensive than prices in Sweden. Already in 2008 some Italian authors showed that Germany has the highest price level of seven European countries. An adoption of the Swedish price level would imply savings of 9.4 billion Euro.

A reason for this is that enterprises could set prices for their pharmaceutical products freely. This is also the case in Europe only in Denmark and Malta. When a drug is licensed, the statutory health insurances have to pay the dictated price. 19 other European countries dictate the prices of drugs by observing prices in reference markets (often Germany) and setting a discount up to 30%. Other 4 countries in Europe negotiate with pharmaceutical producers.

In the past several approaches of German government took occur to reduce the high costs for customers of drugs and statutory health insurances (18% of total expenditures). Most of them failed because the lobby of pharmaceutical industry threatened to reduce a fraction of their 100,000 workplaces in case of higher regulation.

During a reform in health sector in 2004 the “Institute of Quality and Economic Efficiency in Health Sector” was established. This institute is assigned by a committee of government and should work as a neutral controller and evaluator of pharmaceutical products with respect to prices and utility. But this evaluation doesn’t take place at the introduction of a new product, first after three months. After six months the price of the products become fixed if there is no additional utility compared with other recent products. After 12 months the prices of drugs are negotiated between the producer and statutory health insurances, where the neutral institute acts as a conciliator.

Negotiations between Ministry of Health and pharmaceutical producers in 2013 about this topic leads to selling of indulgences. The pharmaceutical industry is willing to pay 1.5 billion Euro per year by increasing the time of two years of given discounts to statutory health insurances and the price regulation of old drugs stops. Since 2010 these discounts are fixed by government by 16%. Critics of this decision mentioned that potential savings are much higher by negotiating and conforming to prices from other countries.

We can observe in Germany a typical case of welfare losses in cause of price settings from producers. The efficiency of a market with respect to prices doesn’t function in this case because statutory health insurances are committed to accept the price. In case of market failure the government has to intervene and to creep over influences of lobbies to create welfare gains. Different approaches for this can be adopted by other countries by fixing prices. A more efficient way would be an increased transparency and a higher competition among suppliers of drugs.


Alexander Max #1575



Are pharmaceuticals becoming fast moving consumer goods?

The question might seem superficial and of obvious answer. In fact, it is more than true that a lot of policies were taken by European countries to face these so-called crisis years, even substituting the imports of more expensive medicines from Switzerland and other countries, to another ones less expensive. It is consequently and predictable that the consumption of generic medicines would increase, just like the so called “white”, “retail” brands emerged in those years of crisis, which is perfectly normal, since it is a natural reaction to a less disposable income. Nevertheless, it is important to notice that private labels can be different products, while generics have to follow some requirements in order to keep the same properties as medicines.

According to Infarmed, in 2012, Portuguese consumed more 5,8 million packs of medicines but spent less 190 million euros when compared with the previous year, which means that either Portuguese are buying more generics or they are paying less for the medicines, or even both (something similar happens with fast moving consumer goods, with people seeking for less expensive goods in order to consume more in quantity with the same money). Actually both things are happening. In fact, according to SNS, in the last five years patients have never saved so much, or spent so less, in medicines as this year. Although the prices of medicines started to decline before, this is also being driven essentially by the international review of the price of medicines, aligning Portuguese prices with the lowest in the rest of Europe; also it has been made an effort to incentive generics by reducing the patents of this type of medicines. As a consequence, the market share of the generics has grown (it has about ¼ of all the packs sold and 35% of the ones subsidized by SNS), a similar moving as retail brands in supermarkets for example. Until here, the similarities are pretty obvious, aren’t they?

What might complicate things is that study recently conducted by Infarmed concluded that in about 57% of the cases, it is the patient, the consumer that decides to not buy the cheapest one, going against the theories that some many times echoed in media saying that doctors were being biased to prescribe certain medicines from certain labs or brands, which became stronger when, after the change in the legislation into the obligation of prescribing the generic whenever is possible, the doctors themselves did not agree. Nevertheless this study proves the opposite, it proves that given the choice, there are a lot of consumers that prefer to not buy generics, either because they prefer one brand to the other, either because they prefer to pay more to have a premium product. (notion of experience good). In the end, is this much different from fast moving consumer goods? Certainty pharmaceuticals are not commodities, but are everyday products for some people…Is healthcare market starting to behave more like other simpler markets? Only future will tell that…



How to make diabetics buy medicines for hypertension – polish example

This time I really wanted to write something positive about the polish health care system, however, after some hours of looking for a proper topic I came across very interesting information and then I changed my mind.

On January 1st 2012 a very controversial Medical Refund Act came into effect in Poland, arousing loads of discussions and objections not only from consumers but also from pharmacies, medicine producers, doctors and hospitals. Actually it was the most complex and bringing most changes act on the polish drug market since 20 years. The idea of the Act is to make changes in conditions of refunded medicines, food intended for special purposes and medical devices. According to the common assumption it should have increased the availability of medicines for patents through decreasing the drugs’ prices and patients’ co-financing level, however, it also excluded over 800 preparations from the list of refunded medicines. How does the situation look like after 9 months?

The first reaction was a mass purchase of refunded medicines in the end of 2011 by polish people. It led to loads of funny situations and paradoxes. For example my grandmother, who has been a diabetic since many years, bought some packages of medicines for hypertension and neurosis, although she does not need it at all. When I asked her about that, she answered, that you never know what can happen and it is always better to be prepared. Her colleagues did the same and millions of other polish people as well. They contributed to the fact that in December 2011 the sales of refunded medicines was about 35% higher than in comparable period of 2010.

December 2010 December 2011 Change (%)
Refunded medicines (m PLN) 1 100 1 484 35%
Non-refunded medicines (m PLN) 448 541 20,7%

The biggest loser of Medical Refund Act implementation are the pharmacies. The end of 2011 was extremely profitable but then everything collapsed. While the gross revenue from the sales of medicines amounted to 13.2 trillion PLN in 2011, rising at the rate of 5.6% comparing to 2008, the forecast for the end of 2012 accounts for 11.6 trillion PLN, which means a decrease of 11,3%.

What comes to the issue of patients’ co-financing level of refunded drugs, instead of decreasing it is still increasing and according to the forecasts it will amount to 37,8% whereas in the same period of 2010 it stood by 35,1%. It is a result of the fact, that the patients still must buy some medicines, although they are not refunded anymore. It means a negative change for consumers by 2,7 percentage points, which is in my opinion a big failure of this “great idea”.

To sum up, so far the new Medical Refund Act neither dropped the drug’s prices nor the co-financing level of patients. Evidently polish legislator did not like the fact that an average expenditures on drugs per capita in Poland is about two times lower than in the whole Europe (for Poland: 114 EUR, for Europe: 218 EUR) and decided to “improve” the statistics by removing refunded medicines from the list. In the end the only institution, which benefits from the Act implementation is so far Polish Government because of less expenditures. Let’s see what future brings.


  1. Report on the Medical Refund Act, IMS, November 2011,   
  2. Presentation of Maciej Pikiewicz (Country Manager, IMS Health Poland), May 2012
  3. Who profits from the war with medicines?, M. Czarkowski,           

Izabela Tomasiewicz

Should patients choose generic drugs over branded drugs?

Generic drugs are copied branded drugs which have been approved by the Food and Drug Administration (FDA). The generic manufacturer does not have to invest in research and development in order to produce the generic drug, a process that is very costly and time-consuming. Therefore, the prices of generics are usually 50 to 70 per cent less than branded drugs. A study which has recently been conducted in the U.S. states that these drugs have saved the health care system more than $1 trillion in the past ten years.

According to the FDA, generics have to be “identical, or bioequivalent, to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use.” They have to contain the same quantity of the same active ingredient (the one that helps to cure the disease) as a branded drug. However, these drugs may differ when it comes to inactive ingredients (the ones that give the product amongst others its smell, taste, shape but do not affect the body and the healing/curing process). Generics are legally manufactured copies of the original product (in contrary to counterfeit drugs, which are produced illegally and which might contain a different active ingredient) and are sold under a different name.

There are several advantages that come along with generic medicine. There is a huge economic benefit provided by generics as they are usually much cheaper than the original products and can lead to a great amount of money saved. Furthermore, because of its lower price they are widely available also to poor people who were not able to afford the drug before.  Due to the Branded Premium or Minimum Pricing Policy, generics cannot be sold for a higher price than its original counterparts. This policy has been introduced for various reasons: It encourages price competition between pharmaceutical companies as they are allowed to decide on their own prices for multi-branded medicine. The policy also leads to an enhanced awareness of differences in medicine costs to both, consumers and prescribers. Doctors should be encouraged to prescribe medicine according to its active ingredient and not brand name. The generic industry is able to develop and companies can monitor the prices of medicine and establish competitor prices effectively. Still, there are some disadvantages to be mentioned: Not all drugs have a generic substitute, the absorption rate in generics might possibly be slower due to different inactive ingredients used (although it has the same effectiveness as the branded drug), the inactive ingredients might also possibly lead to allergic reactions for some patients and as generics are produced in foreign countries, the FDA is not able to inspect, monitor and control all overseas manufacturing sites.

I think that it for sure is more profitable to substitute branded drugs and purchase generic ones, especially as the prices are most often much lower for the same effectiveness. However, I would first seek advice from my doctor before switching to a generic substitute. S/He might help to estimate potential risks that might occur when taking the generic, answer all questions and eliminate doubts.


Magdalena Glanc





The Male Birth Control Pill: Sometimes fairytales never come true

1960 characterized a turning point in the lives of women (and men!) around the Globe: for the first time, the birth control pill had been approved! This occurred in the United States and after only two years the efforts of researchers seemed to have paid off, as 1,2 million of American women were on the pill.[1] For a while, women regarded the tiny colourful pill as a victory in a World dominated by men, as it ended an era of endless baby making and marrying the wrong guy too early. Unfortunately, the small drug did not come without costs: besides the religious, cultural and political controversies it generated, women started to feel the side effects in their bodies, which ranged from the soft and frequent mood changes, weight gain and acne to the severe but rare blood clots, heart attacks and strokes. The question that came to the mind of many was then: what about a male birth control pill? Despite the popularity of the idea, a simple analysis of demand and supply for the product shows its lack of viability.

Let me start with the demand side. Why on earth would men demand a birth control pill? Rationally, it would only compensate if the expected benefits exceeded the expected costs. However, there are practically no benefits! Indeed, pregnancy imposes a higher cost on women than men, so the expected benefit from avoiding one is small for men. As for the expected costs, take into account worse or as negative side effects as women pills and the price men would have to pay for the drug. The obvious conclusion is that men are very unlikely to try this drug, which is confirmed by the scarce empirical evidence. Indeed, a study by Kaiser Family Foundation[2] for the USA found that even if the male birth control pill was provided freely, 29% of men would never use it. Women were even more sceptical regarding male use of the drug: 45% did not believe their partners would try it.

From a supply point of view, incentives are also weak: so far, the development of male birth control pills has shown to have more costs than expected return. R&D projects have started in the 70’s at Oregon, USA and then focused on the use of hormones to control sperm production. However, they were abandoned in phase I due to the adverse effects in men’s eyes. In the 90’s, a revival of the study of the male birth control pill has occurred: despite the different products tested, which ranged from papaya seeds to drugs such as Adjudin, Gamendazol or Trestolone[3], all failed during animal testing or phase I, after huge investments of time and resources. And in 2007, studies slowed down. Pharmaceuticals finally understood by past experience that the product would probably sell at a price that would not compensate the costs, if it sold at all. Indeed, besides the studies pointing out that demand is weak, entering with a new pill in the market could lead to a decrease in the whole price of pills (including women’s pills markets), due to increased competition. So, it was mainly universities and non profit organizations which continued research in the field.

More recently, scientists have isolated JQ1, a molecule which blocks a protein essential to produce sperm in mice and that has shown minimal adverse effects on animals. As such, a revival of enthusiasm on the male birth control pill has aroused, contaminating even prominent magazines such as the Economist[4]. But in my opinion, it is again a false promise, as the product is not viable from an economic perspective. The new pill (if it exists!) will be tested for efficacy over “several years” and due to the high costs of R&D, will be abandoned afterwards after the finding of some side effect on men. And the story will go on, over and over again. At last, until the day when a really high skilled economist kills the dream once and for all.

Ana Rita Borges


The general opinion about pharmaceutical companies is quite negative. Media inform us daily how they are trying to make profit out of people’s diseases. Also the lobbyism pharmaceutical companies are practicing is often criticized since by doing it, they influence lawyers and politicians in their own favor. Without any doubt, some of these accusations may be true. But to get a less black-and-white opinion on that topic, it might be helpful to know how the pharmaceutical industry operates and which characteristics of it could serve as a justification for that behavior.

First, the industry is highly competitive. The oligopoly structure due to high investment costs is a barrier to entry for new firms. But even the dominant players change the position of the biggest companies every few years. When patents expire and generics enter the market, companies are suffering huge revenue losses. Sometimes mergers or acquisitions are the only acute solution: Pfizer, for instance, after the expiration of the patent for Viagra, acquired Wyeth, a manufacturer of vaccines. Adding vaccines to its portfolio, enriched Pfizer with a new business unit. Also, GlaxoSmithKline is merger of three companies.

We see, the nature of business is different than in other industries. The mentioned patents are also crucial. Pharmaceutical companies face very high R&D costs. The investment for finding a new drug are very high and only a very little number passes all stages and are finally approved as drugs. These new blockbusters have to make up for the costs of all other potential drugs which did not pass all phases of the test.

In that context, the pharmaceutical industry also faces stricter regulations than other industries. In Germany, for instance, a recent law requires companies to prove that the new drug adds more value to the quality of life of the patient than the previous drug. Easy marketing tricks become nearly impossible. The restrictions in terms of advertising are also another barrier for the industry. In many countries the promotion of prescriptive drugs is not permitted.

Furthermore, it is often criticized that pharmaceutical companies pay very high salaries. But on the other hand, only the best managers and chemists and pharmaceutical engineers are suitable for these high responsibilities.

In fact, often the money might be coming from the wrong sources. Instead of trying to find a cure for Alzheimer or cancer, pharmaceutical companies prefer to invest in slim pills or other diet medicine which is a quicker more lucrative business. Some journalists even go that far stating that pharmaceutical companies do not try to fight e.g. diabetes since they are making huge profits by selling insulin. But that is also only one side of the truth. The discovery of a vaccine or cure for one the diseases like cancer, HIV, Alzheimer or diabetes could bring the company high profits by making them the only one with the patent – a new bestseller.

All in all, yes, some criticism is justified. But in order to get a clearer picture, this comment aims at showing some difficulties and special characteristics in the pharmaceutical industry.



Compare Top 10 pharmaceutical companies (by revenue) in 2008 and 2010:



 Tomasz Pierog