Economics for Managers

4Case study

Case Study

Recently the medical professionals have questioned the pricing of some of the cancer drugs in the market. Dana and colleagues examined the reasons that contribute to the pricing of the cancer drugs. Consequently, they looked into to the reflective value and research demonstrated by the pricing and health benefits the drugs give the patients. If the patients enjoy more life, the pricing becomes justified since they gain from the expensive. Moreover, a hidebound reimbursement system is to blame for the poor job in letting the prices adjust to new information about value as asserted by the authors of this article. As articulated in the article drug prices are expensive during launch and fall overtime but the system is still not efficient enough to allow the prices to behave, as they should. Regulators having set thresholds for the pricing system instituting the price floor and ceiling are also not competent enough. If the distortions were detached from the reimbursement system, enhancing lifesaving endeavours would become more articulated in the medical scene.

A joint international cancer doctors came out and labelled the cancer drug prices as unsustainable. For the sake of the patients who are suffering, they appealed to the manufacturers to reduce their prices for a better cancer treatment program for all. Consequently, the complaint was phenomenon for the political debate over healthcare costs in the country. However, the question remained why the drug prices are high to start. One prominent reason was the fact that manufacturers are locked into the approval and reimbursement system, which twists the fundamental value of their merchandise hence making the initial price high as their best option for getting their return on investment. Moreover, regulators have set inceptions for cost-effective pricing. The threshold determines their price ceiling and price floor. If the systems were made price flexible, they would enable drugs prices to rise and fall appropriately owing to the new information on the drug value to the patients guaranteeing drugs will get to required users. When drugs cost $76,000 a year it is hard to see the value since the manufactures would keep gaining profits for a lifetime as long as the patient still lives. Therefore, it becomes inhumane to burden a patient financially in the pretence of assisting their condition (Hirschey, 2006).

Apparently, regulators and insurers are confined on a wrong path where no one can change the pricing. For instance, an insurer is not ready to pay more than the competitors are if a drug becomes more valuable with time so prices stabilise. As Medicare tries to stabilise the costs of this drugs, private insures might be forced to follow. Medicare is the largest payer for the cancer drugs according to the government accountability office. As presented by the Medicare Part B, cancer medications make 40% of the most expensive drugs. With utmost gratitude, war against cancer is prevailing thanks to innovation and technology that see to that fact. However, the drug pricing for cancer treatment should be made subtle, whether valuable or inadequate, would assist in ensuring success triumphs in saving lives.

effective new technologies is a task around the world. Costly medicine that hypothetically prolong life particularly the ones lucrative in oncology, display cost stresses on private, public, and private payers, plus the individual patients and their families. In order to assist on these tensions, the United Kingdom, Australia, and Germany have reputable programs that need comparative clinical and for the UK and Australia cost effectiveness for informing how decisions are made on allocation of the resources. The issues are compared across these countries’ policies on the coverage of the medications and predominantly those that assist in adding life to the patients who are near death. Based on investigation published policies, administration, and grey literature for all these countries and not forgetting individual case studies coverage decisions for end-of-life medicines, all the countries face the same problems. A vast research that was comprehensive on how the countries make coverage decisions and spending realised some differences in the systems but they are all tied up in the same pharmaceutical quagmires. Despite significant cultural and structural differences in these countries challenges come up with respect to pharmaceutical policies. In Australia and European countries, the main agenda is to curb the burgeoning pressures to pay for costly cancer drugs for patients with incurable maladies via resource-constrained schemes funded via taxes or social security without destabilisation of the primary principles. In comparison to the USA, the main agenda is to make sure there is fiscal sustainability of Medicare, the private insurance market and Medicaid. The affordable care act has broaden access to healthcare to more Americans restricting choice or triggering a repercussion from the ones well insured and the healthcare industry. However, with the prices escalating in the established markets and affordability a concern for the US insurers and the healthcare system managers, it is evident there is a battle to reconcile sustainability with the access, equity, and healthcare policies. As asserted by Dana et al, pricing of the drugs is a produce of hidebound reimbursement system. In the countries researched, system have kept the management at bay making it hard to make informed decisions since they have to follow several channels and appease all of them in order for a fundamental change to take place. Consequently, the market tends to fail since only the rich can afford most of the end of life drugs. For sustainability of a market, there must be a break-even point, which is hard to reach since the pricing makes many patients spend every penny in the quest to save the life of a family member. When there is no buyer, a market crumbles progressively. The reimbursement system is used by companies to make sure they gain their return on investment, but they continue to gain even after making back their investment and profits. This issue makes it hard for the market to grow. Therefore, the hidebound reimbursement system is key to the market failure.
Harmonizing sustainability and cost control with reasonable and sensible admittance to

Pricing strategies

When pricing the new cancer drug several strategies should be included in order for the company to breakeven. A patented pharmaceutical medication in time losses the initial price when it comes off patent. As the CEO of a pharmaceutical company that has discovered a drug that cures all types of cancers, the best way to price the drug is to make sure the research and development costs are first met before the drug goes of patent. However, there are several issues to consider when making the pricing choices. Sharp declines in prices of patented drugs always show a balance in the pharmaceutical market although they introduce conflicting goals. The initial goal is boosting of a competitive market that includes generic competitors. A competitive market allows the drug market to have affordable medicine for all consumers. This ensures that many patients get the required treatment for their maladies. However, a problematic situation broods over the market if the patent is lifted when all regulatory bodies like the FDA and safety and efficacy standard certify the new drug. Pharmaceutical drugs take a long period to develop and this becomes a blow for the company where return on investment may take a long time. Estimates for research and development of a drug may be as high as $5.5 billion as per successful companies and fraught with failure. Contrary generic drugs cost less to manufacture since the original drug has been invented and approved. Taking into account this situations pricing of the new drug should fall under the research and development cost fraction in order for the drug to bring in any profits. As articulated above, the future of patients is determined by pharmaceutical companies making ends meet and gaining more funds to make more drugs that are lucrative.


When the drug is certified as safe to use the initial consideration to make is a structure that will make it affordable for all consumers. This can only be achieved by the price forecasting a clear compensation to the investors. With respect to the innovation and development, the investor is the first individual to remember since they would have done something else with the investment money they put into the drug. Keeping this in mind the pricing should make sure the risk taken by the invested is considered. In a research done by the California Biomedical Research Association gave an estimate of five in 5000 drugs that begin pre-clinic tests ever reach human testing. Price balance for the drug will certainly have to reach the needs and desires of the consumers however; the risks taken by the producers have to bear in order to make sure there is creation of products. Precisely, the initial market price will reflect the cost of production; the next batch of the same product will reflect a marginal cost of production coupled with marginal value the users point to the drug.

For a great initial price, reflection of an efficient balance between the consumer desires and production costs will be included in order to contain every aspect that will assist in reaching the R&D costs. Despite the inadequacies in the pharmaceutical market, the price has to make sure it attracts the necessary financial resources for the investors for creation of new and better medicine for the patients. Competition based pricing will be included in case there the drug falls out of patent and the generic versions create competition. The competitive price will include consideration of expected competitors and the current in the market. The fine line between loss and profit is will be countered by the infusion of R&D cost for a period of time where the company would have made the required profit that assists in better researches.

Pharmaceutical Benefit Scheme (PBS) in Australia

The PBS system in Australia is a structure administered by the government to make sure there is a subsidised price for the medicine that is costly and is needed by many patients. Therefore, PBS is not the factor that makes the Australian drug market lucrative. Instead, it tries and regulates the prices the companies bring to the market. Actually, the PBS facilitates the people with better offers the companies are reluctant to give to the consumers in the country. Consequently, guidelines for threshold value of drugs are set by the system but the companies set their prices in the non-PBS market without regulation from the outside parties. As a regulator, it only gives the companies to join the listing in order to reduce the price. If the company does not comply with the set rules, they deny the company inclusion until the company reduces the price for the patients. This process is an encouragement to the pharmaceutical companies to adjust prices in order to get better recommendations from the PBAC.

However, a committee that negotiates the pricing decides the final price. This implies that the market is still controlled by the companies with the PBS just reducing the prices by a very little fraction. The market is lucrative since the companies are busy making a kill from their drugs while the incompetent structure feigns reduction of prices. Moreover, the government cannot compel a manufacturer to list a product in the programme. This gives the market a monopoly over their prices. The government can set a price ceiling and floor after negotiations proving that the PBS system is not the factor that leads to the dominant market.

Global drug market

The global market has its own set of opportunities and threats for the businesses in all ranges of industries. According to the IBIS world Global Pharmaceuticals & Medicine Manufacturing analysis of the industry on an international level, report a growth that will span in a consistent manner making the industry one of the world most lucrative industries. Five years before 2016 the market growth in the industry was moderate. However, underpinning this steady growth is the rising demand for healthcare standards and a greater emphasis on prevention of diseases give the consumer a higher significance among customers. Moreover, the global credit crisis and ensuing severity measures led to the cutting of funding by governments to healthcare researches. The industry is at its peak today as they adopt cost friendly developing strategies and merging with other companies to make up better knowledge base for drug production. The pharmaceutical environment for both innovative R&D corporations and the generics manufacturers has continued to increase competitiveness in the drug market. As often described as the best care for patents where it is the only industry where the products are brought to the consumers with a patent. Their fixed costs for manufacturing tend to be higher that other industries.

The industry keeps on growing with annual rates of 5-8%. This proves that the competition in the market is competitive. The industry is responsible for the development, marketing, and production of medication hence the enormous importance in the global sector is noticed. The level of market is estimated as one trillion U.S dollars. Consequently, North America has the largest influence in the aggregate revenue produced by the industry generating approximately 40% of the revenue generated. This is evident for the pharmaceutical industries in the U.S are leading worldwide in production of various drugs into the market. However, other countries contribute to the industry.

China has a lucrative industry showing the highest growth rates in the recent years. The global outlook in the drug market describes the current state as profitable owing to emerging markets. Innovation and shareholder value in the industry add to the betterment of the marketplace advances.

On a regional base, North America is expected to continue in growth by a margin of 4.8% in the span of four years as at 2014 to 2018. The growth is driven by the expanse in the healthcare access. The affordable care act has made it possible for the consumer to get healthcare at an affordable rate. In the Western Europe, healthcare spending is slow since they have ties with the euro zones. Contrary, Asia and Australasia public health care programmes and consumer wealth are anticipated to boost the growth. The most prominent area of growth is the Middle East and Africa since they are developing hence expanding access to care creates a more competitive ground for the industry. Another factor that promotes competition in the marketplace is the increasing development in chronic diseases. More than any other marketplace drug market is highly dependent on research and development. Patented drugs makeup the largest share for the revenues accrued in the worldwide revenue. Considering that the industry has numerous fields of medicine to handle, the industry is highly prolific in terms of drug sale since many people have different types of complications. As illustrated in the graphical representation figure one, growth in the industry will continue to prevail immensely. This proves that continued competition is there in the global scene.

Economics for Managers


In conclusion, the worldwide drug market is a competitive marketplace for numerous sectors of research. The aptitude to speedily adopt and commercialize new scientific and clinical innovations is essential to acquisition of a reasonable advantage in a changing marketplace. Pharmaceutical companies should come together with health care investors who are adopting the digital media and using expertise, vast statistics, and analytics to progress product development and care provision.


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LIGHT, D. (2010). The risks of prescription drugs. New York, Columbia University Press.

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Philipson. 2010. “An Economic Evaluation of the War on Cancer.” Journal of Health

Economics 29 (3): 333–346.