Essays on drug distribution and pricing models
Creators: name: Iacocca, Kathleen M.
Publisher: name: No Publisher Supplied
Year: 2011

description: This dissertation investigates distribution and pricing models for the U.S. pharmaceutical industry. Motivated by recent events in this industry, we explore three areas of the pharmaceutical supply chain in an effort to streamline the drug distribution channel and to understand the underlying market forces and the pricing structure of pharmaceutical drugs.    First we present a mathematical model to compare the effectiveness of the resell distribution agreements (Buy-and-Hold and Fee-For-Service) and the direct distribution agreement (Direct-to-Pharmacy) for the U.S. pharmaceutical supply chain and its individual participants. The model features multi-period dynamic production-inventory planning with time varying parameters in a decentralized setting. While the resell agreements are asset-based, the direct agreement is not. We show that the Direct-to-   Pharmacy agreement achieves the global optimum for the entire supply chain by eliminating investment buying and thus always outperforms the resell distribution agreements currently practiced in the industry. We also show that the Direct-to-Pharmacy agreement is flexible because it allows the manufacturer and the wholesaler to share the total supply chain profit in an arbitrary way. We further provide necessary conditions for all supply chain participants to be better off in the Direct-to-pharmacy agreement.    Motivated by the public concern for the rising cost of prescription drugs, we next examine how four factors (the level of competition, the therapeutic purpose, the age of the drug, and the manufacturer who developed the drug) play a role in the pricing of brand-name drugs. We develop measures for these factors based on information observable to all players in the pharmaceutical supply chain. Using data on the wholesale prices of prescription drugs from a major U.S. pharmacy chain, we estimate a model for drug prices based on our measures of competition, therapeutic purpose, age, and manufacturer. We observe that proliferation of dosing levels tends to reduce the price of a drug, therapeutic conditions which are both less common and more life threatening lead to higher prices, older drugs are less expensive than newer drugs, and some manufacturers set prices systematically different from others even after controlling for other factors.     Lastly, we investigate why brand-name drugs are priced higher than their generic equivalents in the U.S. market. We hypothesize that some consumers have a preference for brand names which outweighs the cost savings they could realize by switching to generics. Brand preferences are derived from two sources. First, brands may have a higher perceived quality due to advertising and marketing activities. Second, individuals are habitual in their consumption of prescription drugs, which leads to continued use of the brand in the face of generic competition. To explore these issues, we develop a structural demand model within one therapeutic class. We estimate the model using wholesale price and demand data from the years 2000 through 2004. Through this process, we estimate the brand preferences by customer utility equations. Conservatively, we see consumers willing to pay $400 more per month for a brand name drug than for its generic equivalent. In addition, consumers exhibit high switching costs for prescription drugs. Finally, we find that generic entry reduces sales only for the brand that it is replicating, but not for other brand drugs even if they treat the same condition.