טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentRegina Schvartzenberg
SubjectBranded Drugs Prices, Patent Expiration and Competiton
DepartmentDepartment of Industrial Engineering and Management
Supervisors Dr. Baron Mira
Mr. Hochman Gal
Full Thesis text - in Hebrew Full thesis text - Hebrew Version


Abstract

The pharmaceutical market is unique and interesting. Its unique features are:

  •  Production is by producers of Ethic drugs and Generic drugs (see below); The end users do not influence directly the producers since there is a third party which purchases the supply for the end users;

  • The demand for pharmaceutical products is relatively inelastic;

  • The market behaves as a monopoly as long as only Ethic drugs are produced. With the introduction of Generic drugs, the market diverts to a competitive structure.

In the pharmaceutical market there are two types of drugs:

Ethic drugs and Generic drugs.

Ethic drugs (Brand drugs), are original drugs that were developed by pharmaceutical companies after research and development. Most companies that develop Ethic drugs register a patent on their drugs in order to prevent other companies from producing the same products. This is the stage when the producer behaves as a monopoly.

Generic drugs are an imitation of the original formulae, available after the patent has expired. The development costs of generic drugs are lower than the development costs of the Ethic companies.

The objective of this research is to model price strategy of Ethic drug companies.

This is an empirical research based on data on prices of generic and brand drugs. The data set covers a period of three to eight years per drug.  Parametric and A-parametric methods were used. The parametric model uses Linear Regression model based on Panel Data using the cross-section time series data.

The second model is an A-parametric model that assumes drug price in period t is a function of its price in the previous period (t-1), adding A-parametric segmentation that is estimated by kernel method. After finding the estimators for the variables, the multivariate density was found.

Robustness of the estimators was examined using Jackknife and bootstrapping methods.Results are as follows:

  • Ethic drug prices are mostly higher than Generic drug prices. The ratio between the prices shows that Ethic drugs are twice as expensive.

  • The competition between Generic manufacturers causes a stronger effect on Generic drug prices in comparison to its influence on Ethic drug prices.

Market share of the Generic market is increasing as the number of active Generic firms is increasing.