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Abstract
Countries with distinct institutional endowments are trying to reach drug harmonization. The explanation given for the beginning of this process is that the rising health concerns governments have about patients transcend their different visions of social welfare and increasing bureaucratic costs, for both pharmaceutical companies and governments. The underlying reasons are, on the one hand, the high transaction costs between the pharmaceutical companies and the patients of medication and, on the other hand, the differing pharmaceutical regulations increase bureaucratic costs. This situation pushed Europe, Japan and the US into initiating a process of harmonization of regulation for new drugs. Even though harmonization is an on-going process, global and simultaneous medication product approval is not easy (the final objective of harmonization). In this paper we present, from a transaction cost approach, the economic reasons why pharmaceutical transactions need to be under public control. At the same time, we evaluate the public policies related to pharmaceutical exchange – technical guidelines, funding and price policies – as elements of the institutional endowment of countries that could facilitate or slow down the harmonization process. We use two protagonists of the harmonization process: Europe and the United States.
Notes
1. On one hand, the time it takes for a new drug to be approved is a key factor in the profitability of pharmaceutical laboratories. In each country, once the patent has been granted a drug still has to be adapted for commercialization, and this may require another ten years of clinical trials to guarantee the safety, quality and efficiency of medicines, two of which are taken up by the registration application process. On the other hand, for the same medicine, a large number of studies pointed to substantial differences in the speed of approval depending on the country of authorization (Grabowski and Vernon Citation1983, Berlin and Jonsson Citation1986, Kaitin Citation1989, Burstall Citation1991, Schweitzer Citation1997).
2. This refers to the likelihood that a pharmaceutical company sells a non-approved drug or the chance that a patient buys a prescription drug out-of-the-market or the possibility that a physician prescribes an untested drug for a patient.
3. We consider the term “frequency” in the sense that the frequent and high usage of a pharmaceutical product will be related to the potential recovery of the R&D investment by the pharmaceutical company. Other than that, “frequency” will also impact on the potential surveillance of medication once it is prescribed and sold.
4. An economic definition of transaction costs is the cost of measuring what is being exchanged and enforcing agreements. The two transaction costs are: (1) costs of exchanging goods in a market and (2) costs of enforcing property rights (Williamson Citation1985).
5. An orphan drug is a drug designed to treat or prevent an orphan disease. A disease which has not been ‘adopted' by the pharmaceutical industry because it provides little financial incentive for the private sector to make and market new medications to treat or prevent it.
6. We will see later that in this situation the “payer” introduces a new stakeholder that makes the agency relationship more complex.
7. We should note that when a pharmaceutical laboratory comes to the end of a research project, these costs could be quickly recovered. The problem lies in recovering the investments undertaken from the very beginning of the R&D process.
8. Cerivastatin is the main compound used by Bayer and other laboratories to produce other pharmaceutical drugs (Fournier, Ferrer Internacional and Vita in Spain and other countries in the European Union).
9. Several cases have been presented above. For a detailed interpretation of these and other cases see Abraham (Citation1995).
10. For more details of this case see COMP/36.957 and UE Bulletin 5-2001.
11. There is a direct effect of insurance coverage on prices for new drugs. However, the direction of that effect is not clear (Danzon and Pauly Citation2002).
12. Some countries do not have price controls on medication or controls are not homogeneous among medicines. For example, Japan, New Zealand or Canada are countries where there is limited price control. In Chile, Hong Kong or Malaysia medication prices are not controlled.
13. This price system is analyzed in detail in Balance et al. (Citation1992: 141).
14. The price of pharmaceutical products could be controlled by using mechanisms applied in other industries such as the control of the rate of return or the growth rate as maximum price (Puig Junoy Citation1998: 98). Another price system is related to the reduction of marginal cost linked to manufacturing. This tool is not very popular among manufacturers bearing in mind that they want a joint cost reduction. Global joint costs are costs that are generated independently of the number of final consumers. Therefore, these costs cannot be rationally distributed among the consumers (Danzon Citation1997: 7, 10–13).
15. The same decision has been taken by the Spanish government and other European countries.
16. The relationship in the health care industry between its participants is characterized as an agency relationship in which “the one who consumes does not choose or pay, the one who pays, does not consume or choose and the one who chooses, does not pay or consume” (Cabiedes Citation1995: 215).