PPI for Prescription Pharmaceuticals

After the refinement steps described above, the frame in-
cluded 566 products, comprising 192 unique active ingredi-
ents from 106 manufacturers. Although there were only 192
unique active ingredients, the final sampling universe con-
sisted of 204 products. Some active ingredients fell into both
the generic and line extension classes, and were given a chance
of selection in each class. A sample of 99 items was selected.
The first stage sample was selected as follows:

@ All new chemical entities were certainty-selected,

e All first generics were certainty-selected;

e A simple random sample of all remaining new products
was selected.

In the second stage, the specific manufacturer (if there
was more than one for the sampled active ingredient) was
randomly selected. All the remaining product detail not
implicit in the above (strength, presentation, and transac-
tion variables) was sampled during the interview with the
respondent.

The final sample consisted of 99 items produced by 57
companies. Forty companies overlapped with Cycle C, and
the remaining 17 were new to the PPI. BLS economists ob-
tained company cooperation in repricing 49 additional prod-
ucts, bringing the total number of observations in the PPI pre-
scription pharmaceuticals sample to 544.'* Collected
Supplement I items fell into 21 of the 50 detailed price in-
dexes for prescription pharmaceuticals. (See exhibit 1.) The
therapeutic class with the largest number of Supplement I
items was miscellaneous pharmaceutical preparations, fol-
lowed by antihypertensive drugs, systemic antihistamines, and
ophthalmic and otic preparations. No other therapeutic class
had more than two items added from Supplement I. The aver-
age age of the items included in Supplement I when they were
introduced in January 1996 was 22 months, and the range of
ages was 9 months to 37 months.

Following normal ppt methodology, weights for Supplement
I items were derived from revenue figures provided by the
manufacturer during the selection interview, with two
exceptions: first generics for which the brand-name version
was already included in the index, and line extensions for which
the earlier version was already included in the index. For line
extensions in which the route of administration remained the
same as in the earlier version, it was assumed that, at least in the
short run, the overall size of the market for that formulation
does not change with the introduction of another version. There-
fore, the item weight for the original version in the Cycle C
sample was re-apportioned between the original and new ver-
sions based on sales data provided by the respondent.

First generics were handled similarly. The current item
weight for the branded version was reapportioned between
the brandéd and generic versions. The rationale is that, at

14 Monthly Labor Review October 1997

Number of new drugs approved by the Foa,
1986-96

Number Year Number

BSR8R8

‘Source: U.S. Food and Drug Administration.

least in the short-run, availability of generics will not lead
to an increase in the number of prescriptions written for
that drug, but instead will lead to a reallocation of sales
dollars between the branded and generic versions. All first
generics introduced in Supplement I were apportioned
64.2 percent of the predecessor branded product’s item
weight.'>

Supplement I items fell into two classes: those new drugs
with predecessors in the existing sample and those without.
New drugs without predecessors, including new chemical
entities, were introduced using standard PPI sample rotation
methodology. No price comparisons were made between
items in the existing and supplemental sample.

New drugs with predecessors include line extensions fea-
turing unchanged routes of administration. These drugs
were introduced by splitting the predecessor drug into two
items. One comparison was made between the December
and January prices of the predecessor, with its item weight
reset to reflect the proportion of sales retained by the pre-
decessor. A second comparison was made between the De-
cember price of the predecessor and January price of the
successor line extension product, with its item weight cor-
responding to the sales captured by the latter. If production
cost information for the predecessor and successor drugs
had been provided by the manufacturers, BLS analysts
would have adjusted the comparison to account for any pro-
duction cost differences. In practice, the comparison was
made showing the full price change between the predeces-
sor and successor drugs.

New drugs with predecessors also include the first gener-
ics group. These drugs were introduced into the PPI in a man-
ner similar to that for line extensions, except that the prede-
cessor brand-name drug price and successor generic drug
price were always directly compared without adjusting for
qualitative changes. The direct comparison captures any dif-
ference between the predecessor’s price and the successor
generic drug’s price for the portion of the market captured
by the successor generic drug. The direct comparison is
predicated on the assumption that the two products are of
equal quality, given that the FDA has determined them to be
bioequivalent'®



dollar value sales captured by the generic versions. BLS pur-
chased data from IMS America to calculate these reallocations.
The data represent dollar sales to retail pharmacies and hospi-
tals—an estimated 89 percent of the totai market. The data
are for March 1997, and represent the most current data avail-
able when the weight re-allocations were made. Price compari-
sons for Supplement II were done in the same way as in Supple-
ment I.

The impact of Supplement II on the age distribution of pre-
scription pharmaceuticais priced for the PPi is shown table 2.
As with Supplement I, the younger age classes had greater
representation in the PPi than they did prior to the introduc-
tion of Supplement II. Since the inclusion of Supplement I]
items in January 1997, the published index has continued to
show smaller price increases than in the unsupplemented re-

Footnotes

search index. The simple average price change in January
1997 for drugs in Suppiement ii was a 4.5-percent decline.
The published index increased 0.8 percent. In the 14 months
since January 1996, the published index has risen 3.3 per-
cent. Had Supplements I and II not been introduced, the in-
dex would have risen 4.1 percent.

BOTH THE FIRST AND SECOND SUPPLEMENTS had predictable effects
on the PP! for prescription pharmaceuticals, given prior research
by BLS researchers and others. The unpublished research index
will continue to be calculated to track the cumulative impact of
this methodological change on price measures for the industry.
BLS plans to introduce additional supplements in January 1998
and January 1999. A completely new sample will be introduced
in the year 2000. a)

' For more information on the Producer Price Index, including back-
ground and methodology, see “Producer Prices,” Bs Handbook of Methods,
Bulletin 2490 (Bureau of Labor Statistics, 1997), pp. 130-43.

? Generic drugs are new versions of existing (predecessor) drugs that
use the same active ingredient and are rated as bioequivalent to the prede-
cessor drug by the FDA. The FDA’s bioequivalence criteria requires that the
absorption rate and peak concentration in the bloodstream of the generic
drug does not vary significantly from the predecessor drug.

> The act is titled Drug Price Competition and Patent Term Restoration
Act of 1984.

+ A variety of internal research is conducted by PP! analysts on a con-
tinual basis.

5 Emst Berndt, Zvi Griliches and Joshua Rossett, “Auditing the Pro-
ducer Price Index: Micro Evidence from Prescription Pharmaceutical Prepa-
rations,” Journal of Business and Economic Statistics, July 1993.

* Emst Berndt and Paul Greenberg, “An Updated and Extended Study of
the Price Growth of Prescription Pharmaceutical Preparations,” in Robert
B. Helms, ed., Competitive Strategies in the Pharmaceutical Industry (Wash-
ington, The A&I Press, 1995), pp. 35-48.

7 Zvi Griliches and Tain M. Cockburn, “Generics and the Producer Price
Index for Pharmaceuticals,” in Helms, ed., Competitive Strategies.

* Richard Caves, Michael Whinston and Mark Hurwitz, in “Patent Ex-
piration, Entry, and Competition in the U.S. Pharmaceutical Industry,”
Brookings Papers: Microeconomics (Washington, 1991), showed that
branded drug producers sacrifice significant market shares to low-priced
generic substitutes, but the reductions are fairly small given the price differ-
entials. They presented an example with five generic competitors showing a
generic/branded price ratio of 0.456, but the branded drug's market share
falling only to 0.748.

° Caves and others also showed that entry of additional generic produc-
ers depressed the price of existing generic products much more severely
than the price of the branded drug. They showed ratios of generic to branded
drug prices of 0.558 with | generic on the market, 0.496 with 3 generics on
the market, 0.294 with 10 generics on the market and 0.171 with 20 gener-
ics on the market.

°° For more information on these programs, see the following in the aL
Handbook of Methods, Bulletin 2490 (Bureau of Labor Statistics, 1997):
“Producer Prices,” pp. 130-43; and “Employment and Wages Covered by
Unemployment Insurance,” pp. 42-47.

" Represents share of countable units, such as tablets. Pharmaceutical
Research and Manufacturers of America (PhRMA), 1997 Industry Profile
(Washington, March 1997).

"2 Standard and Poor’s, Industry Surveys, Healthcare: Pharmaceuticals

May 29, 1997 (New York, McGraw-Hill, 1997).

© The initial impact of Supplement I and future supplements is seen in
May of the year of introduction, when final January indexes are published.
Due to the PPt calculation methodology and its N-4 month revision period,
the weight changes of the predecessor drugs discussed below are not seen
until the final indexes are published, For more information on the supple-
ments, see Douglas Kanoza, “Age Distribution and Price Movements of
Drugs in the 1994 ppt Prescription Drug Sample,” Producer Price Indexes,
May 1995; and Douglas Kanoza, “Supplemental Sampling in the PP Phar-
maceuticals Index’ Producer Price Indexes, January 1996. The data source
for Supplement I items covering the December 1992-April 1995 period
was Food and Drug Administration, Center for Drug Evaluation and Re-
search, Approved Drug Products with Therapeutic Equivalence Evalua-
tions, 15th ed. and Cumulative Supplements (For sale by the Superinten-
dent of Documents).

“ This number is lower than would be expected from previously pro-
vided information due to attrition of Cycle C items. Attrition can be due to
a manufacturer’s discontinuation of an item or refusal to continue to pro-
vide price data.

's This percentage was based on an estimate of maximum generic pen-
etration. Data released by Pharmaceutical Research and Manufacturers of
America (PhRMA) showed a 57.2-percent to 42.8-percent ratio of pre-
scriptions filled by branded and generic drugs, respectively. The percent-
age assigned to brand-filled prescriptions was reduced by an estimate of
the single source brand drugs—that is, prescriptions filled by branded drugs
because only branded drugs are on the market. The ratio of single source
to multiple source active ingredients from Approved Drug Products with
Therapeutic Equivalence Evaluations was used for this purpose. Emst
Berndt, Iain Cockburn, and Zvi Griliches, in “Pharmaceutical Innovations
and Market Dynamics: Tracking Effects on Price Indexes for Antidepres-
sant Drugs,” Brookings Papers: Microeconomics (Washington, 1996),
found the estimate to be realistic based on their research of one therapeu-
tic class of drugs.

6 The Food and Drug Administration, in Approved Drug Products with
Therapeutic Equivalence Evaluations, 15th ed. (For sale by the Superinten-
dent of Documents, 1995), states: “A major premise underlying the 1984
Jaw is that bioequivalent products are therapeutically equivalent and, there-
fore, interchangeable.”

"” As mentioned previously, Supplement I includes drugs approved by
the FDA between December 1992 and April 1995, and its initial impact
was not seen until the final January indexes were published in May.

° The data source for Supplement II was Food and Drug Administration,
Approved Drug Products with Therapeutic Equivalence Evaluations, 16th
ed. and Cumulative Supplements.

Monthly Labor Review October 1997 17


costly alternative to inpatient therapies, which in turn helps
promote the development of new drugs. Managed-care orga-
nizations also encourage the use of generic versions of drugs,
and, as a result, generic market penetration has grown consid-
erably and is projected to continue. The share of the U.S. pre-
scription drug market held by generic drugs more than doubled
over the 1984-96 period, rising from 18.6 percent in 1984 to
41.6 percent in 1996.'' Over the next 5 years, new medica-
tions generating more than $15 billion in annual sales will lose
their patent protection, with generic versions of these drugs
likely being introduced.” All of these factors should continue
to put downward pressure on the average age of drugs in the
marketplace.

Although each succeeding redesign of the PPI sample for
prescription pharmaceuticals made it more representative of
the industry, program resource constraints and the need to
minimize respondent burden prevent BLS from shortening the
resampling interval to fewer than 6.5 years. As mentioned ear-
lier, with constant introduction of new products such a re-
sampling interval ensures continual erosion in sample repre-
sentation with respect to new drugs.

Regardless of the cause of the differences in drug age-group
price movements, it appears that a drug’s price behavior var-
ies significantly over its life cycle. Between samplings, failure
to include new drugs—which have been shown to have differ-
ent price movement than older drugs—could lead to upward
bias in the PPI. To compensate for this aging, in January 1996,
BLS introduced an initial supplemental sampie (Supplement I)
of new items to the PPI prescription pharmaceuticals sample.'*

All new chemical entity drugs, generic versions of existing
drugs in the PP! sample, and new versions of existing drugs
produced by the same manufacturer (line extensions) that were
approved by the FDA between December 1992 and April 1995
were eligible for the Supplement I sample.

The raw sampling frame contained 885 products, consist-
ing of 284 unique active ingredients in multiple forms and
strengths, and produced by 157 companies. The data were re-
fined as follows:

@ Companies that refused to cooperate in Sample C were
eliminated from the sample under the assumption that they
probably would refuse again.

Products known to be produced in Puerto Rico or elsewhere
outside the United States are considered out-of-scope and
were excluded from the sample.

The remaining products were assigned to one of three gen-
eral classes: new chemical entities, generics, and line exten-
sions. The generic group was further split into two
subgroups: first generics (products available generically for
the first time) and bandwagon generics (products already
available generically). The line-extension group was further
stratified by the nature of the change: new dosage form (such
as tablet or injection), new strength, or new formulation (mix
of ingredients). Some active ingredients fell into both the
generic and line extension classes: the company with the
original approval received approval to market a new form/
strength/formulation, and during the same period, another
company received approval to market a generic version.

Lida Weighted distribution’ of the PPI sample for prescription pharmaceuticats by product age class, 1993-97
Year
Product age class? 1996¢ 19975
(in years) 1993° 1994 1995 (without 1996 thout 1997
supplement!) ‘supplement Il)

a7 44 ot 0.0 72 24 58

11.0 7A 87 44 63 71 69

186 142 11.0 TA 64 78 75

19.1 20.0 20.0 23.7 216 155 149

407 49.3 55.2 59.4 53.8 62.1 60.0

5.0 5.0 51 5.3 48 5.1 49

1 l i

‘Weights were calculated to represent the item's weight within the PP! for
prescription pharmaceuticals. Age weight = collected item weight * ((thera-
peutic class of pri for prescription pharmaceuticals in the sampling period) +
(therapeutic class of pri for prescription pharmaceuticals in the current pe-
riod) /2. Age weights were then summed by age class and for the industry.
‘The figures in table 2 represent the percent the age class’ age weights are of
the industry's age weights.

2 Number of years product had been on the market in January of the indi-
cated year.

‘These data represent the age of the Cycle C sample when it was drawn.

Cycle C was not introduced until January 1994, The data used in the Pt prior to
January 1994 were from Cycle B and no age data have been calculated for that
sample

* These data represent the age of the Cycle C sample without Supplement |.
‘The data used in the Pe: from January 1996 forward include Cycle C and Supple-
ment |.

® These data represent the age of the Cycle C sample with Supplement |, but
not Supplement Ii. The data used in the Pt from January 1997 forward include
Cycle C and Supplements | and II.

Monthly Labor Review October 1997 13


Impact of Supplement |

The impact of Supplement I on the product age distribution
of the PPI sample for prescription pharmaceuticals is shown in
table 2. With the inclusion of Supplement I items, the younger
age classes had greater representation in the ppI than when
Cycle C was introduced in January 1994. The published in-
dex for prescription pharmaceuticals from January 1996 for-
ward includes the Supplement I items. The index for prescrip-
tion pharmaceutical products rose 2.1 percent during 1996. If
Supplement I had not been introduced, the index would have
risen 2.7 percent. Chart 2 and table 4 compare the PP! for
prescription pharmaceuticals with an unpublished research
index for the same industry. (The research index excludes 211
Supplemental items.)

Approximately half of the cumulative impact of Supple-
ment I on the published PPI occurred when it was intro-
duced in January 1996." In that month, the direct price com-
parisons were made between branded items in the Cycle C
sample and generic versions in Supplement I. The Supple-
ment I items continued to put downward pressure on the
published ppI throughout the calendar year, as evidenced by
the widening disparity in the index levels. (See table 4.)
Items in Supplement I registered a lower rate of inflation
than older items already in the sample: simple average
prices for Supplement I items decreased 1.5 percent in 1996,
while prices for Cycle C items increased 2.7 percent over
the same period. It should be noted, however, that the price
differential between the research and published indexes has
varied. In 3 of the 14 months since the introduction of the
supplements, price changes in the published index exceeded
those of the research index.

Current price trends for the various age categories differ
from those in the 1994 study, largely due to the average age of
the drugs in Supplement I. Because Supplement I included
nearly 3 years of product introductions, the average age of
drugs in the sample was 22 months when the sample was in-
troduced. Supplement I included four generic drugs, with three
falling in the 2- to 4-year age category when introduced, and
two of these showing significant price declines. (The branded-
to-generic price comparison was made when the drug was in
that age class.)

Supplement Il

Because newer and older drugs have different price move-
ments and product introductions are accelerating, BLS now
supplements the PPI prescription pharmaceuticals sample an-
nually. The second supplement was introduced in January
1997 (Supplement II). Eligible products included all those
approved by the FDA between May 1995 and May 1996. There
were 507 products in the raw sampling frame, consisting of

[sialecimem Detailed producer price indexes for
pharmaceutical preparations, prescription
Product code Product
2834- Pharmaceutical preparations,prescription|
102 Analgesics
1021 Narcotic analgesics
1022 Non-narcotic analgesics
1023 ‘Synthetic, including acetaminophen and
anti-migraine
10229 Aspirin, apc and related
104 Antacids
105 Antiarthritics
108 Anticoagulants
107 Anticonvulsants
109 Systemic antihistamines
1 ‘Systemic anti-infectives
4111 Broad and medium spectrum antibiotics
11111 Cephalosporins
41112 Broad spectrum penicillins
11113 Erythromycins
11114 Tetracyclines
11119 Other broad and medium spectrum antibiotics
11429 Systemic penicillins
11139 Urinary antibacterials
11199 Other systemic anti-infectives
116 Antispasmodic/antisecretory
118 Bronchial therapy
119 ‘Cancer therapy products
121 Cardiovascular therapy
12119 ‘Antihypertensive drugs
12129 Vasodilators
12191 Other cardiovasculars
123 cons stimulants/antiobesity preparations
124 Contraceptives (excl. devices, kits, implants, etc)
125 Cough and cold preparations
12511 Oral cold preparations
12512 ‘Nasal decongestants
12513 Decongestanvantihistamine combinations
12519 Other cough and cold preparations
126 Dermatological preparations
12611 Acne preparations
12619 Fungicides
12631 Topical anti-infectives
12641 Antipruritics
12691 Other dermatological preparations
127 Diabetes therapy
128 Diuretics
135 Hormones
136 Hospital solutions
139 Muscle relaxants
141 Nutrients and supplements
142 Ophthalmic and otic preparations
144 Psychotherapeutics
1441 Tranquilizers
14411 Major tranquilizers
14412 Minor tranquilizers
1442 Antidepressants
145 Sedatives
147 ‘Tuberculosis therapy
148 Vitamins
14819 Adult multivitamins
14829 B-complex
14839 Other vitamins
198 Miscellaneous prescription pharmaceutical
Preparations

Monthly Labor Review October 1997


PPI for Prescription Pharmaceuticg

Gregory G. Kelly

Gregory G. Kelly is an
economist with the
Division of Industrial
Prices and Price
indexes, Bureau of
Labor Statistics.

Improving the PPI sample
for prescription pharmaceuticals

Frequent new product introductions make developing
price indexes for this industry challenging;

BLS updates its methodology to capture new products
and make its sample more representative

he prescription pharmaceutical industry,
I with its frequent product innovation and
tightly regulated markets, poses unique
challenges to the development of price indexes.
This article describes the industry and the fea-
tures that make it unique. It also discusses some
of the problems confronting analysts as they de-
velop price indexes for the industry, and the solu-
tions implemented by the Producer Price Index
(PPI) program of the Bureau of Labor Statistics to
more accurately measure price change for pre-
scription pharmaceuticals.’

About the industry

The pharmaceutical industry is characterized by
frequent product innovation, with manufacturers
continually developing and marketing new prod-
ucts. Some of these newly-developed products
compete with existing products; others are com-
pletely new. The development of prescription
pharmaceuticals requires costly and time-con-
suming research. After a product has been devel-
oped, it must undergo the rigorous approval pro-
cess of the Food and Drug Administration (FDA).
This process, which currently takes about 18
months, tests the product for safety as well as its
efficacy in treating specific conditions.

To allow time to recoup the considerable in-
vestment costs associated with developing new
products, manufacturers of FDA-approved new
products are granted a period of patent/exclusiv-
ity protection. During this period, the company
gaining approval has exclusive rights to the
product’s formulation. The new product com-
petes against other products used to treat the same
condition, but with different formulations and

10 Monthly Labor Review October 1997

characteristics. When the protection period ex-
pires, other companies can gain approval to mar-
ket “generic” versions of the product.”

Two new laws enacted since the early 1980s
accelerate the approval process for new phar-
maceutical products, both patented and generic.
The Hatch-Waxman Act, passed in 1984, re-
duces the time between the patent expiration of
a predecessor product and the approval of
bioequivalent generic competitors.? The Pre-
scription Drug User Fee Act, passed in 1992,
significantly decreases the approval time for
newly developed drugs. Both new drugs and
generic versions of existing drugs now reach the
market sooner and competition has increased
within the therapeutic classes of drugs. In-
creased competition may help control inflation
in the industry. Throughout the 1980s, prices for
prescription pharmaceuticals increased much
more rapidly than overall prices. Since 1992,
however, inflation in the prescription pharma-
ceutical industry has slowed to less than one-
half its 1980-92 average. (See chart 1.)

Price behavior and product age

Ongoing BLS research shows that prices of both
new protected and generic drug products increase
less rapidly (or even decline) in the 2 years fol-
lowing the products’ introduction, than those of
drugs on the market for more than 2 years. In one
internal analysis, BLS researchers found that
prices for drugs on the market for 2 or fewer years
had decreased by 15.9 percent, while prices for
the sample as a whole had increased by 3 per-
cent. The same analysis also found that new pro-
tected products had a lower rate of inflation than


PPI for Prescription Pharmaceuticals

Chart 2.

Published producer price index and unpublished research index (excluding supplements) for

pharmaceutical preparations, prescription, December 1995-February 1997
Index Index
June 1981 = 100 June 1981 = 100
310 310
308 F 4 7] 308
>
‘
*
306 « 4 306
304 * +| 304
Research PPI
302 | ne cageese® | 302
300 | 300
Published PPI
298 | 298
296 | + + 296
204 La 1 1 n 1 1 1 1 nl 1 1 n f LI 294
Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb.
1995 1996 1997
oe

194 unique active ingredients in multiple forms and strengths,
produced by 132 companies.'*

Supplement II data were refined as in the first supplement.
After refinement, the sampling frame included 139 products,
comprising 87 unique active ingredients from 57 manufactur-

class had more than two items added from Supplement II.
Items in Supplement II were added to the existing sample in
amanner similar to that used in Supplement I, with one signifi-
cant exception. The weight of predecessor-branded drugs re-
allocated to the generics was based on the actual percentage of

in Supplement I. The second stage of
sampling, however, differed from
Supplement I in that all generic ver-

ers. First-stage sampling proceeded as

Index levels and percent change over the month for published pri and
unpublished research pri for prescription pharmaceuticals, December
1995-February 1997

sions of a sampled drug were selected.

The final sample consisted of 46
items—29 new chemical entities, 7
first generics, and 10 line extensions.
The items were produced by 30 com-
panies, with 24 being current PPI re-
porters; the other six were new to the
PPI. BLS obtained company coopera-
tion for 17 items, bringing the total
number of observations in the pre-
scription pharmaceutical sample to
561. The therapeutic class with the
largest number of Supplement II items
was miscellaneous pharmaceutical
preparations, followed by cancer
therapy drugs. No other therapeutic

Published producer Unpublished research
rice index producer price index
Year and month p pe

Percent
Index level |Percentchange| Index evel chewe

296.0 296.0 wee

295.8 296.9 0.304

295.6 296.5 136

296.7 297.5 337

297.0 298.0 168

299.4 300.5 839

300.3 300.8 .100

301.2 302.3 500

300.9 302.3 “000

300.4 301.9 =.133

300.7 301.9 000

300.7 302.2 .100

302.1 304.0 597

1997: January... 304.6. 306.7 890

February 305.7 308.0 425

16 Monthly Labor Review October 1997


the sample as a whole, while the rate for generic drugs de-
clined.‘ (See table 1.)

In 1993, Ernst Brendt, Zvi Griliches and Joshua Rosset
found similar results: less-than-average price increases in
younger products, and higher-than-average price increases in
medium-age products.* The authors tried to determine why the
Ppl for prescription pharmaceutical preparations grew faster
than several pharmaceutical indexes they had constructed for
the January 1984-December 1989 period, using a variety of
methodologies. A key determination was that the PPI differed
from their research indexes due partly to an underrepresentation
of newly developed drugs in the PPI sample. The research was
subsequently updated, using a larger database for the January
1987—December 1991 period. The findings were similar to
those of the earlier study.®

Although it is unclear exactly why new drugs, both pro-
tected and generic, behave differently than older drugs, sev-
eral causes are likely. New protected drugs must compete in
established markets with drugs of the same therapeutic class.
Short of significant product differentiation, price competition
is anew entrant’s most promising opportunity to gain market
share. This provides the manufacturer with an incentive to
minimize price increases in the first years following the new
product’s introduction. Conversely, older drugs supply estab-

lished markets where demand is relatively price inelastic and
thus less sensitive to price increases.

New generic drugs must compete with the predecessor
product and other generic versions of the product solely based
‘on price. Research shows that introduction prices for most
generic products tend to be 30 percent to SO percent lower
than prices for predecessor products.’ Following the intro-
duction of a generic competitor, prices for predecessor prod-
ucts remain relatively unaffected because manufacturers of
predecessor drugs generally do not enter into full-scale price
competition with the generic versions.*

Price competition among generic versions of a drug is quite
fierce. Research shows that each additional generic product
entrant results in lower prices for all of the generic versions
of that drug.? Therefore, because the majority of generic ver-
sions of a drug are introduced shortly after expiration of the
predecessor's patent, most generic drug prices continually
decline in the 2 years after introduction.

PPI sampling methods

The PPI measures average changes in selling prices received
by domestic producers for their output. Traditional PPI meth-
odology selects a first-stage sample of manufacturers from a

Annual percent change (December to December) in the producer price indexes for pharmaceutical

preparations, prescription and finished goods, 1981-96
Percent Percent
14 14
12> 4 12
mee necee®, Prescription pharmaceuticals
10 4 10
oe
8} ae Stews, 4s
ore
ary
6 “ 716
e
*.
47 Finished goods
ab
0
( 12
(4) 1 aL 1 1 i 1 J. it A. i‘ aE i 1 i 1. 1 (4)
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Monthly Labor Review October 1997. 11


PPI for Prescriotion Pharmaceuticals

Percent change in the producer price index for
Prescription pharmaceuticals by product age
class, 1993-96
Product December 1993 December 1995
age class to to
(in years) December 1994 December 1996
15.9 07
13 3.1
44 47
26 15
67 34
3.8 44
3.0 2.9
Note: This table represents the price change of items by age class based
on their importance to the Pri. Items were weighted by item weight and
the weight their therapeutic class carries within the ppt for prescription phar-
maceuticals.

database of all domestic manufacturers based on the Unem-
ployment Insurance System.'° Then, a second stage of sam-
pling is conducted to select individual products and transac-
tion data. A new sample for each industry included in the PPI
is selected, on average, every 7 years. Within this framework,
PPI methods for selecting a representative sample of prescrip-
tion pharmaceuticals have continually evolved. Thus far, three
complete samplings (Cycles A, B, and C) of the industry have
taken place since 1981, when it was first included in the PPI.
The main characteristics of each sample design are described
below.

Cycle A (July 198/). At the first stage of sampling, 150
manufacturers were drawn from the universe of producers,
with probability of selection proportional to employment. Pro-
ducers were asked for an average of four price quotes, with a
maximum of eight. For each sampled manufacturer, products
were selected with probability proportional to value of ship-
ments at the time of collection.

Cycle B (January 1987). To improve the statistical quality
of the detailed price indexes published, while also reducing
the number of manufacturers sampled, the previous method-
ology was modified. At the first stage, 82 manufacturers were
selected from the universe of producers. The average number
of price quotes per manufacturer was increased to 8, with a
maximum of 16. The second stage of sampling used a special
procedure that forced the selection of 1 quote from each thera-
peutic class in which the sampled company produced. A spe-
cific product within each class was then selected using normal
procedures, based on probability proportional to current value
of shipments.

12. Monthly Labor Review October 1997

Cycle C (January 1994). Cycle C represented a departure
from traditional PPI sampling methodology. Instead of a com-
pany-based sample, a product-based sample was selected.
Products were selected proportionate to size within therapeu-
tic class, rather than proportionate to size within a manu-
facturer’s product line. As a result, the chance of a product
being selected depended only on its share of sales relative to
other drugs of its class, rather than on its proportion of the
manufacturer’s sales. Thus, the Cycle C sample was more rep-
resentative at the therapeutic class level. It also gave newer
products, with a relatively lower value of shipments, a greater
chance of selection. The product sample was obtained from a
third-party database of prescription pharmaceutical sales at
retail pharmacies in 1992. The database included the manu-
facturer, the products’ form and strength, and the costs to the
pharmacies for the drugs sold. The database covered 77 mil-
lion prescriptions from 30,000 pharmacies.

The sampling universe was stratified into 34 separate thera-
peutic classes. Products were selected from each stratum in
two stages, with probability of selection proportionate to dol-
lar sales. In the first stage of sample selection, the product was
selected. In the second stage of sampling, the specific dosage
form and strength were selected. No restrictions were placed
on the number of quotes per company. Specific product pre-
sentation and transaction variables were selected at the estab-
lishment in a third stage, with probability of selection again
proportional to dollar value. The final sample consisted of 965
items from 124 manufacturers. Because the number of quotes
per manufacturer was not restricted, many companies were
asked to supply the ppi with more than 20 quotes, and some
were asked for more than 30. BLS was able to obtain coopera-
tion in repricing 511 items.

Ppl standard sampling procedures call for selecting a new
sample of products every 7 years, on average. Prices for se-
lected products are then followed for the life of a sample. Natu-
rally, these products age over the life of a sample, resulting in
an age distribution shift. There was a significant shift in the
age distribution of the Cycle C sample between 1993, when it
was selected, and January 1994, when it was first used in the
PPI. (See table 2.)

While the pp! sample for prescription pharmaceuticals is
naturally aging, new products also are constantly being intro-
duced in the market. Table 3 shows the number of new FDA-
approved drugs brought to market each year since 1986. New
drugs, both new generics and those whose active ingredients
are available for the first time (new chemical entities), are be-
ing introduced at a rapid pace. The FDA reports that more new
drugs were approved in 1996 than in any previous year.

For various reasons, the rapid rate of new product intro-
duction in the prescription pharmaceuticals industry should
continue in the near future. The growth of managed care, for
example, has accelerated the use of drug therapy as a less