06-demand_and_price_dynamics_pbs.doc

Demand and Price Dynamics within the
Pharmaceutical Benefits Scheme
Kim Sweeny
Pharmaceutical Industry Project
Equity, Sustainability and Industry Development
Working Paper Series
June 2002
PO Box 14428 Melbourne City MC VIC 8001 Australia Contents

1. Introduction

Around 75% of the ethical drugs consumed in Australia are provided through the
Pharmaceutical Benefits Scheme (PBS).1 Through the PBS, the Commonwealth
Government subsidises the cost of pharmaceuticals to the final consumer and, in
effect, acts as a single buyer, negotiating with pharmaceutical suppliers, the terms
and conditions under which their drugs are made available to the general public.
In 2000-01 the cost of the PBS was $4.5 billion, of which 16% was met by consumers
of drugs while the Commonwealth Government paid for 84% from general revenue.
The cost of the PBS has grown at about 14% per year and this, combined with the
fact that the PBS is an open-ended scheme, has caused concern within Government
and elsewhere about its long-term sustainability.
In its annual budget brought down in May 2002, the Government announced
measures to curb the increase in the cost of the PBS, principally through increasing
the amount paid by the final consumer. It reiterated its commitment to the general
principles of the PBS, but flagged an intention to look more closely at the operations
of all aspects of the health care system in Australia with a view to their long-term
impact of government expenditure. A paper released at the same time as the budget
highlighted the ageing of the population over the next 40 years, and claimed that this
would lead to an increase in the use of pharmaceuticals.2
A number of factors have been put forward to explain the increase in cost of the PBS,
including:
the listing of newer, more expensive drugs; the prescribing by doctors of these and other drugs for conditions outside the guidelines specified by the PBS; and more of the population being able to qualify to receive drugs at lower cost. This paper aims to provide some insight into the operations of the PBS by examining the markets for 3 categories of popular drugs that make a significant contribution to the overall cost of the PBS. While there are around 600 unique entities listed on the PBS, 30 of these were responsible for over half the cost of the PBS in 2000-01. Of these 30 top selling drugs, 10 are included in the case studies in Sections 3 to 6 which cover the following classes of drugs: Drugs to reduce cholesterol (cholesterol and triglyceride reducers). In 2000-01, these three classes collectively cost $1,437 million or 31% of the total cost of the PBS. When a new drug enters the market, it is typically protected by a patent with a lifetime of 20 years. This patent is usually granted at a relatively early stage of a drug’s development and well before it is actually available to be sold. The patent enables the developer of the drug to recoup the substantial R&D and other costs involved in bringing a drug to market, by giving it monopoly rights to supply the drug. 1 Productivity Commission, “International Pharmaceutical Price Differences”, Research Report, July 2001. 2 Department of the Treasury, “Intergenerational Report 2002-03”, Budget Paper No 5, 14 May 2002. These monopoly rights usually cover about 10 years in the market and enable the supplier to charge substantially more than the unit cost of manufacture which is a relatively small percentage of cost for most drugs. This low cost of manufacture means that when drugs are no longer covered by patent, other suppliers are willing to start manufacture of the identical chemical and enter the market as competitors to the original monopoly supplier. As the cost of manufacture and other barriers to entry are relatively low, the introduction of new suppliers can lead to rapid and significant reductions of price. There is strong interest therefore from governments and other bodies concerned about meeting the cost of pharmaceuticals in encouraging the introduction of these so-called “generic” suppliers.3 Companies providing insurance against pharmaceutical costs, such as the pharmacy benefit managers in the US, often specify the use of generic drugs either as a condition of coverage or in guidelines to participating doctors. The PBS enables the pharmacist to recommend a generic drug for the branded drug if allowed by the prescribing doctor. While the impact of generic drugs can be significant, a drug is open to other sources of competition in the market, while still protected by patent. It will compete with older drugs that may be less efficacious but are already well established in the market, as well as with so-called “follower” or “me too” drugs. These are drugs that are similar but not identical in chemical composition to the patented drug and will have similar strategies to treating disease. They will also be protected by patent. Sometimes these drugs will have been developed to imitate the patented drug but are usually simply later to the market than the initial drug. The time in which a new drug does not face these follower drugs seems to be shortening and can be as little as 2 years. A drug therefore will face significant pressure on sales and unit prices at 2 stages – firstly when one or more follower drugs are introduced and secondly when generics can enter the market after a patent expires. The case studies in this report illustrate the varying degrees of success that the PBS has had in orchestrating a market in which these demand and price dynamics can occur. This in one in a series of reports by the Centre for Strategic Economic Studies on the Australian pharmaceutical and health care system.4 A companion report in this series provides a more detailed description of operation of the PBS and analyses a number of its characteristics not covered in the present report.5 The analysis undertaken in this paper is based on a database provided by the Pharmaceutical Access and Quality (PAQ) Branch of the Department of Health and Aged Care. The database covers the period 1991-92 to 2000-01 and consists of annual script and cost data for each brand of drug supplied under the PBS, as well as the conditions under which they are listed.6 3 See, for instance Congressional Budget Office, “How Increased Competition from Generic Drugs has Affected Prices and Returns in the Pharmaceutical Industry”, July 1998. 4 Reports in this series can be found at www.cses.edu.au. 5 Sweeny, Kim, “Trends in the Pharmaceuticals Benefits Scheme”, CSES, May 2002. 6 The author would like to thank Peter Marlton of the PAQ Branch and John Abrams of the PBS Branch of the Department of Health and Aged Care for their assistance in providing this data and guidance in its use and interpretation. 2. Drug Pricing within the PBS

The PBS uses a number of methods for determining the price of new drugs entering
the scheme as well as for drugs already listed. The prices of all drugs listed on the
PBS are reviewed at least once per year.7 Drugs are divided into therapeutic groups
with drugs used for the same purpose being reviewed together.
Where the drug is unique in its class, or when a benchmark price is being calculated
for a therapeutic group, a cost plus method is used, i.e. the price is equal to the cost
of manufacture plus a margin. This method relies on cost information provided by the
supplier.
For drugs in the same therapeutic category, the lowest priced brand sets the
benchmark price for either the other brands of the same drug, or the other drugs
within the same therapeutic group. This is known as therapeutic group pricing or
reference pricing.
The prices of a selected group of drugs are determined by a method called weighted
average monthly treatment cost (WAMTC). The drugs in this category include H
receptor antagonists, ACE inhibitors, HMG CoA reductase inhibitors, proton pump
inhibitors and selective serotonin reuptake inhibitors. The benchmark price among
these classes is calculated as the lowest weighted treatment cost per month ie total
cost of the drug provided over a period divided by the total number of months
treatment provided.
Where a benchmark price has been set by reference to the lowest cost brand, other
suppliers may charge a brand premium above this price. The level is determined by
the supplier but must be approved by PBPA.
For four classes of drugs, namely the H
blockers, ACE inhibitors, and HMG CoA reductase inhibitors, the base price is set by
reference to other drugs in the same therapeutic group. Some suppliers, usually of
patented drugs, can then charge a therapeutic premium above the benchmark
price.
In addition to these pricing methods, the Pharmaceutical Benefits Pricing Authority
sometimes negotiates price/volume arrangements for new drugs when unit prices are
relatively high and there is potential for high demand or demand is uncertain. This
may also occur when restrictions on drugs already listed are relaxed or the
indications for the drug are widened. Under this arrangement, unit prices fall as
volume increases
These various methods are used to determine the wholesale price of a drug, i.e. the
maximum price of the drug supplied to the pharmacist. The maximum retail price that
the pharmacist can charge for PBS drugs is determined by adding a profit margin
and a dispensing fee to the wholesale price. The dispensing fee is adjusted regularly
and has risen by about 2% per annum over recent years.8
7 The methods used by the PBS to determine drug prices are described in PBPA, “Pharmaceutical Benefits Pricing Authority Procedures and Methods”, August 2001, and HIC, “Pharmaceutical Benefits Scheme Explanation of Current Pricing – 2000”, 8 Most of the price data in this paper is obtained by dividing the total cost of a drug by the number of scripts written. This is therefore a proxy for the average annual retail price of the drug. A drug is listed on the PBS for treatment of specific conditions (indications) and use
for other indications requires a further submission to PBS for approval. In addition
some drugs carry further restrictions – for instance they can only be used to treat an
indication if other conditions apply. For other drugs, a doctor needs approval from
the Health Insurance Commission before being able to prescribe the drug.
At February 2002, there were 2630 items listed on PBS (primary reference), of which
504 were in the ”authority required” category, 683 were “restricted benefit”, and 1443
had no restrictions. Despite the necessity for the doctor to receive specific authority
before being prescribed, “authority required” drugs were responsible for 24.5% of
PBS cost in 2000-01.
Table 2.1
Restriction Levels for Items in PBS
3. Treatments of Peptic Ulcers9

3.1 Overview

Drugs to treat peptic ulcers cost the PBS $374.6 million in 2000-01 – an amount that
has remained reasonably steady over the past 5 years.
Although this represents only about 8.2% of the overall cost of PBS, two of the most
popular treatments for peptic ulcers – omeprazole and ranitidine – are among the top
8 selling drugs.
The PBS lists 5 different categories of drug for peptic ulcer, although only 3 of these
– the H2-receptor antagonists, the proton pump inhibitors, and combinations of these
with antibiotics are of any significance in terms of use and cost. Table A3.1 at the end
of the paper, sets out, for each of the various treatments for peptic ulcer, the annual
cost, number of prescriptions written, and cost per script over the period 1991-92 to
2000-01.
Historically, the H2-receptor antagonists were introduced earlier than the proton pump
inhibitors, although both have been available for over 10 years. Combination
therapies are more recent, the first appearing on the PBS in 1996-97.
The H2-receptor antagonists were originally dominant in the market, but were
overtaken by the proton pump inhibitors in 1997-98 and these are now the more
important drug in terms of cost (Figure 1a) and about equal in terms of scripts (Figure
1b).
Figure 1.a Treatments for Peptic Ulcer
Figure 1.b Treatments for Peptic Ulcer
Total Cost ($m)
Scripts (thousands)

There are currently 4 types of H2-receptor antagonist listed on the PBS although
the Anatomical Therapeutic Chemical (ATC) classification10 contains at least another
2 types (niperotidine and roxatidine). The newer versions of this type of drug –
famotidine and nizatidine – are still protected by patent so there is only one supplier
of them. Cimetidine and ranitidine however have been around longer, so there are
more versions of them and they have multiple suppliers (Table 3.1). Despite its age,
9 Most of the price data in this paper is obtained by dividing total cost of the drug by number of scripts. This is a proxy for the retail price of the drug, and care should be exercised in interpreting the data on scripts at an aggregate level. Each drug type consists of different chemical entities in various formulations with differing amounts of drug per script. 10 The internationally recognised classification scheme for drugs maintained by the WHO Collaborating Centre for Drug Statistics Methodology in Oslo. ranitidine is still the most widely prescribed drug in the H2-receptor antagonist class
(Figures 2a and 2b).
There are 4 different types of proton pump inhibitor, although again the ATC lists
one other type (esomeprazole). The newer versions (lansoprazole, pantoprazole, and
rabeprazole) were listed within the past 6 years and are still protected by patent.
Omeprazole is now the most popular treatment for peptic ulcers and was also
provided by one supplier until relatively recently (November 2000) (Figures 3a and
3b).

Table 3.1
Principal Treatments for Peptic Ulcer
Formulations PBS Items Suppliers
Single supplier
H2-Receptor Antagonists
Proton Pump Inhibitors
Figure 2.a H2-Receptor Antagonists
Figure 2.b H2-Receptor Antagonists
Total Cost ($m)
Scripts (thousands)
Figure 3.a Proton Pump Inhibitors
Figure 3.b Proton Pump Inhibitors
Total Cost ($m)
Scripts (thousands)

For both classes of drugs, and more so for the H2-receptor antagonists, the PBS has
acted to control their costs by applying significant price reductions over the past few
years, which has meant that cost has not risen as quickly as demand (as measured
by scripts).

3.2 Ranitidine

The decline in famotidine since 1997-98 and the earlier falls in sales of cimetidine,
has left ranitidine as the dominant type of H2-receptor antagonist, although nizatidine
may achieve greater market share in future (Figures 2a and 2b).
Ranitidine was originally developed by the company now known as GlaxoSmithKline
(Glaxo) and is marketed by them under the brand name “Zantac”. Ranitidine is
available in the following forms under the PBS (May 2002).

Table 3.2
Ranitidine

Formulation
PBS items
PBS Cost Availability
Number of
suppliers
Each line in Table 3.2 above lists 2 PBS items, the first of which is for the initial treatment of peptic ulcer, the second is for maintenance treatment or other indications (and for which repeat prescriptions can be written). Items marked with an “R” indicate the item is a “Restricted benefit”, while an “A” indicates “Authority required”. Authority is required to prescribe the effervescent tablet or syrup, perhaps because these formulations are still provided by one supplier (Glaxo) protected by patent and have a higher price than the base-priced drug in the ordinary tablet form. The 150 mg tablet is the most widely prescribed form of ranitidine, and until February 1997, Glaxo was the only supplier. Alphapharm, a US-based manufacturer of generic drugs, introduced a generic equivalent at that time (under the name “Rani 2”), and this was followed by other suppliers, so that by May 2002, there were 11 suppliers listed on the PBS. Five of these suppliers are part of the Mayne company, which operates a number of pharmacy chains in Australia. Alphapharm quickly took market share from Glaxo, so that by 2000-01 their shares were virtually the same (46% for Alphapharm and 50% for Glaxo), whether measured in terms of cost or scripts. The other suppliers have made almost no impression (Figures 4a, 4b). The retail price of the 150mg tablet form of ranitidine has declined steadily over the past 10 years. From around $41.18 in 1991-92 it fell 20% to $33.00 in 1995-96, and with the advent of competition, a further 31% to $22.53 in 2000-01 (Figure 4c). These prices are derived from the annual scripts and costs numbers in the database provided to CSES by the Department of Health and Aged Care. The prices set out in the Schedule of Pharmaceutical Benefits are charted in Figure 4d from August 1994 to May 2002. This shows both the wholesale (pharmacist) price and retail price once the pharmacist’s margin, dispensing fee, and brand premium has been added. Figure 4.a Ranitidine 150mg tablet
Figure 4.b Ranitidine 150mg tablet
Total Cost ($m)
Scripts (thousands)
Figure 4.c Ranitidine 150mg tablet
Figure 4.d Ranitidine 150mg tablet
Cost per script ($)
PBS listed prices ($)

3.3 Omeprazole

In contrast to ranitidine and the other H2-receptor antagonists, the demand for the
proton pump inhibitors is still growing strongly, particularly for the newer version,
pantoprazole.
Omeprazole, however is the most popular form of proton pump inhibitor, either as the
original drug – “Losec” provided by AstraZeneca – or as “Acimax” from Alphapharm.
The various formulations of omeprazole available under the PBS are shown in Table
3.3.

Table 3.3
Omeprazole

Formulation
PBS items
PBS Cost Availability Number of
suppliers
For each formulation, the first PBS item is for initial treatment of peptic ulcer, the second version (where relevant) is for gastro-oesophageal reflux disease, scleroderma oesophagus and Zollinger-Ellison syndrome. In August 2001, all versions of omeprazole moved from being “authority required” drugs to “restricted benefit”. Omeprazole was only available as the Losec 20 mg capsule until May 1999, when Alphaparm’s Acimax capsule was listed. At the same time the number of capsules in a packet rose from 28 to 30. In August 1999 AstraZeneca introduced its tablet form – Losec Tablets – in 10 mg and 20 mg versions. In February 2000 it ceased supplying the original 20 mg capsule. In November 2000, Alphapharm introduced a 20 mg tablet formulation – Acimax Tablets. Despite the introduction of a competitor in the market for omeprazole, AstraZeneca managed to maintain its market dominance, in part at least, by replacing the capsule form with tablets a year earlier than Alphapharm. Script numbers are still high, although the cost has begun to fall. In contrast to ranitidine, the price of omeprazole rose slightly from $93.50 in 1991-92 to $101.03 in 1998-99, but fell to $73.04 in 2000-01 after the introduction of Acimax. In total however this is only a price drop of 22% over ten years (Figures 5a to 5d). Figure 5.a Omeprazole 20mg
Figure 5.b Omeprazole 20mg
Total Cost ($m)
Scripts (thousands)
Figure 5.c Omeprazole 20mg
Figure 5.d Omeprazole 20mg
Cost per script ($)
PBS listed prices ($)
3.4 Discussion

A detailed analysis of the treatments for peptic ulcer over a number of years provides
some insight into the way competitive forces operate under the PBS.
The entrance of newer more effective forms of treatment (in this case the proton
pump inhibitors) puts pressure on the more established drugs (the H2-receptor
antagonists) and helps the PBS reduce their price even while the established drug is
still under patent ie. before the entrance of suppliers of the same chemical entity. The
price of Zantac (Glaxo’s brand of ranitidine) had been falling consistently before
Alphapharm’s Rani 2 arrived. Nonetheless the PBS acted rapidly to bring the price
down further once Rani 2 and other generic brands were listed. This price reduction
of about 45% over 10 years significantly reduced the cost to the PBS of H2-receptor
antagonists.
Within the H2-receptor antagonist class, Glaxo managed to hold its initial advantage
with ranitidine, despite the listing of 3 similar “follower” drugs. Only famotidine came
close to having a significant presence in this market.
By contrast, the PBS seemed to have less success in restricting either the demand
for or price of the preferred treatment, omeprazole or the other “follower” proton
pump inhibitors. Only the advent of competition from the generic Acimax provided the
opportunity for PBS to reduce the price of Losec, so that by 2000-01 it was 21% less
than its price in 1991-92.
Both ranitidine and omeprazole as an H2-receptor antagonist and a proton pump
inhibitor respectively fall within the PBS’s therapeutic group pricing policy where the
price is determined by the WAMTC methodology described in Section 2.2 above.
Omeprazole’s advantage in being first in the field is shown in the relatively small
headway that the other proton pump inhibitors have made in taking market share
from it. In this it is similar to ranitidine.
AstraZeneca’s move in August 1999 to introduce a newer formulation of Losec with
greater patient acceptance (tablet rather than capsule) seems to have been
successful, as demand shifted decisively to this formulation. It has given
AstraZeneca at least a further year’s worth of revenue while Alphapharm converted
Acimax to a tablet.
4. Antidepressants

4.1 Overview

The Australian Institute of Health and Welfare has estimated that depression is the
fourth most prevalent disease in Australia accounting for about 3.7% of the total
disease burden11.
The use of antidepressants has grown strongly over the past 10 years (at about 17%
per annum) resulting in a cost to the PBS of $319.0 million in 2000-01 (Figure 6).
Figure 6 Anti-Depressants
Total Cost ($m)

This growth has been generated mainly by the selective serotonin reuptake
inhibitors (SSRI), which includes citalopram, fluoxetine, fluvoxamine, paroxetine,
and sertraline, and also by a newer type of drug, venlafaxine.
Until the advent of the SSRIs, the antidepressant market consisted of non-selective
monoamine reuptake inhibitors (NMRI), monoamine oxidase inhibitors (MAO, mainly
moclobemide) and various other antidepressants such as lithium and mianserin.
Figure 7a shows that, although the NMRIs are significant in the number of scripts
written, their cost is fairly low and has declined steadily for the past 10 years, to a
total of $17.5 million in 2000-01. Similarly, the importance of moclobemide has
fallen in terms of cost and scripts since 1995-96 to a total of $22.0 million. The
miscellaneous group of other antidepressants has grown strongly, but this is almost
entirely due to venlafaxine, particularly over the past few years.
Figure 7a Anti-Depressants
Figure 7b Anti-Depressants
Total Cost ($m)
Scripts (thousands)
11 Mathers C, Vos T, Stevenson C, “The burden of disease and injury in Australia”, Australian Institute of Health and Welfare, Canberra, November 1999. Except for fluoxetine and moclobemide, most of the principal antidepressants are still
under patent or were so until recently. Those that have been off patent longest have
the most number of suppliers (Table 4.1).

Table 4.1
Principal Antidepressants
Forms Suppliers
Single supplier

Fluoxetine was the original drug in the SSRI class and exhibited strong growth over
the first half of the 1990s, although demand stabilised thereafter (as measured in
terms of scripts). Its cost similarly went through a rapid increase before stablising at a
somewhat reduced level. Sertraline and paroxetine entered the PBS at the same
time and have gone on to be the first and second largest selling SSRIs respectively.
Citalopram and fluvoxamine were listed more recently with citalopram showing the
same sort of growth as sertraline (Figures 8a and 8b).


Figure 8a SSRIs
Figure 8b SSRIs
Total Cost ($m)
Scripts (thousands)
The other two significant antidepressants – moclobemide and venlafaxine – have had varying histories. Moclobemide has a growth and decline profile very similar to that of fluoxetine, while venlafaxine’s very strong growth has mimicked that of sertraline and the more recent SSRIs (Figures 9a and 9b). Figure 9a Other Antidepressants
Figure 9b Other Antidepressants
Total Cost ($m)
Scripts (thousands)
4.2 Fluoxetine

Fluoxetine was originally developed by Lilly under the brand name “Prozac”. It was
protected by patent until February 1996, when Alphapharm’s “Lovan” was listed on
the PBS. There are now 9 suppliers of this drug, with the most popular formulation
being the 20 mg capsule. In August 1996, the drug moved from “authority required”
status to “restricted benefit”.
Table 4.2
Fluoxetine
Formulation
PBS Cost Availability
Number of
2000-01, $m
suppliers
Alphapharm quickly took market share from Lilly and by 2000-01 it was the major supplier of fluoxetine under the PBS. Other suppliers have had no impact. The entry of Alphapharm also triggered a 46% fall in the price of the 20 mg capsule, against a rising trend in previous years. This fall in price for fluoxetine seems to have caused similar falls in the prices of the other SSRIs, sertraline and paroxetine, even though they were still under patent at the time. The prices of these SSRIs also seems to have created the reference price for citalopram when it entered the PBS. Figure 10a Fluoxetine
Figure 10b Fluoxetine
Total Cost ($m)
Scripts (thousands)
Figure 10c Fluoxetine
Figure 10d Other SSRIs
Cost per script ($)
Cost per script ($)
4.3 Moclobemide
Roche developed moclobemide as a 150 mg tablet under the brand name “Aurorix”
and was the sole supplier until Alphapharm introduced its brand “Arima” in August
1996. Other suppliers have also entered the market in recent years. Roche had
anticipated this, however and released a 300 mg tablet in November 1995 and this
quickly displaced the 150 mg tablet as the preferred formulation. Alphapharm
eventually released its 300 mg version in February 2000, as did other suppliers in the
following year but by this time both formulations were losing sales (Figures 11a, 11b).
In contrast to fluoxetine, Alphapharm and the other suppliers have had little impact so
far on Roche’s market share of both formulations of moclobemide.
However, Alphapharm’s entry in 1995 with a 150 mg tablet had a immediate impact
on the PBS price of this formulation and also on the price of the 300 mg version even
though Roche remained its only supplier for another 5 years (Figure 11c).
Table 4.3
Moclobemide

Formulation
PBS Cost Availability
Number of
2000-01, $m
suppliers
Figure 11a Moclobemide 150mg
Figure 11b Moclobemide 150mg
Total Cost ($m)
Scripts (thousands)
Figure 11c Moclobemide 150mg
Cost per script ($)
4.4 Venlafaxine

Venlafaxine is produced by Wyeth under the brand name “Efexor” and entered the
market in August 1996 in the 37.5 mg and 75 mg tablet formulations. It moved from
“authority required” status to “restricted benefit” status in May 1998.
Table 4.4
Venlafaxine

Formulation
PBS Cost Availability
Number of
2000-01 $m
suppliers
The tablet forms of Efexor experienced rapid growth in terms of demand and cost but this was curtailed in part when the price was reduced in a way similar to the SSRIs. In 1998-99 however, Wyeth introduced both a 75 mg capsule in competition with the 75 mg tablet and a higher strength 150 mg capsule. These quickly took over from the tablet forms and to date seemed to have escaped further downward pressure on prices. Figure12a Venlafaxine
Figure 12b Venlafaxine
Total Cost ($m)
Scripts (thousands)
Figure 12c Venlafaxine
Cost per script ($)
4.5 Comparison with USA
While sertraline quickly established itself as market leader after 2 years in the PBS,
leaving behind paroxetine, in the USA their market shares have been virtually the
same for a number of years. Fluoxetine maintained its dominance in the US market
for a much longer time than in Australia, while citalopram and venlafaxine have
experienced similar growth profiles in both countries.
Figure AD1 Antidepressants - Aust
Figure AD2 Antidepressants - US
Scripts (thousands)
Scripts (thousands)

4.6 Discussion

Through the 1990s the newer types of antidepressants, the selective serotonin
reuptake inhibitors not only displaced the older drugs such as the NMRIs and
moclobemide, they also expanded the market considerably, indicating that they were
fulfilling a demand not being met by these older drugs. There is every indication that
their use will continue to grow.
Among the SSRIs, the rapid growth in the cost of fluoxetine was brought to a halt
firstly as the “follower” forms sertraline and paroxetine took over from it as the
predominant SSRIs, and secondly when Alphapharm introduced its “Lovan” in
competition with Lilly’s “Prozac”.
This second event triggered a major reduction in the price of fluoxetine with flow-on
consequences for the prices of the other SSRIs, even though each had only one
supplier in the market. As with the treatments for peptic ulcers, this reflects the
inclusion of the SSRIs within the PBS’s therapeutic group pricing policy using the
WAMTC methodology.
Wyeth achieved very strong growth for venlafaxine in its tablet form, and when the
price of this was reduced by PBS, it also introduced a capsule form which became
dominant, but without further reductions in price.
Roche followed a similar strategy with moclobemide, by releasing a 300 mg tablet
version of “Aurorix”, after Alphapharm’s “Arima” emerged as a competitor for its 150
mg tablet. Unlike venlafaxine, however, it did not avoid further reductions in price for
both versions.
Competitive forces in the antidepressant market have worked firstly by competition
among classes of drugs and secondly by the introduction of competing suppliers of
the same drug.
5. Cholesterol Reducers

5.1 Overview

The cost of drugs aimed at reducing the levels of cholesterol in the body has grown
consistently over the past 10 years – at an average of about 23% per year – so that
by 2000-01 the total stood at $642.9 million, or about 14% of the overall cost of the
PBS. High levels of cholesterol are associated with cardiovascular disease – in
particular heart disease and stroke.
Although other treatments for high levels of cholesterol do exist – the fibrates, bile
acid sequestrants, nicotinic acid and others – the introduction of the HMG CoA
reductase inhibitors (“statins”) in the late 1980s effectively created the market for
cholesterol reducers (Table C1, Figure 13).
The statins also are known as serum lipid reducing agents and their demonstrated
popularity has lead the PBS to introduce special guidelines for doctors on their use –
the so-called “General Statement for Lipid-Lowering Drugs”.
Figure 13 Cholesterol Reducers
Total Cost ($m)

5.2 Statins

The first of the statins to be listed on the PBS was simvastatin developed by the US
company Merck with the brand name “Zocor”. This was followed by pravastatin
(“Pravachol”) from Bristol Myer Squibb in 1993-94 and atorvastatin (“Lipitor”) from
Pfizer in February 1998. Another version – fluvastatin – was introduced in February
1996 by AstraZeneca.
All the statins have been listed as “restricted benefit” drugs since their introduction.
They are all still protected by patent and therefore have only one effective supplier12.
Competition in the market for cholesterol reducing drugs therefore has been between
simvastatin and the “follower” drugs pravastatin and atorvastatin, and does not
involve generic drugs.
12 Until recently simvastatin was distributed by both Merck and Amrad in Australia. Table 5.1

Formulation
PBS Cost Availability
Introduced
2000-01 $m
Atorvastatin
Pravastatin
Simvastatin
While pravastatin demonstrated solid growth after entering the market, this was overshadowed by atorvastatin which grew very rapidly, so that by 2000-01 it had equal market share with simvastatin. Fluvastatin, on the other hand, failed to make any headway in the market (Figures 14a, 14b). The relative failures of fluvastatin and pravastatin to gain market share were repeated in the US market, although atorvastatin became the dominant type of statin within 2 years of entering that market (Figure 14c). Figure 14b Statins
Figure 14a Statins
Scripts (thousands)
Total Cost ($m)
Figure 14c US Cholesterol Reducers
Scripts (thousands)
5.3 Different Strengths of Statins

As is the case with a number of the drugs looked at in these case studies,
competition in the statin market has revolved around the progressive introduction of
different strength formulations.
Merck initially brought Zocor to market as a 10 mg and a 20 mg tablet. BMS also
launched Pravachol in these 2 forms in 1993-94. Merck then introduced a higher
strength 40 mg tablet in August 1997 and BMS followed in November 1997. When
Pfizer’s Lipitor entered the market in February 1998, it was as all 3 strengths. When
Merck launched a 80 mg tablet in Ma y 1999, Pfizer responded in August 2001, while
to date BMS has not followed this lead.
Merck has also had a 5 mg tablet on the market since 1992-93, but this has had
relatively insignificant sales.
Higher strength drugs generally mean a reduction in the number taken per day and
hence represent a significant benefit for the patient.
The 20 mg tablet of all kinds of statin soon began to outsell the 10 mg version, both
in terms of the number of scripts written and also in terms of cost to PBS. Since its
introduction, the 40 mg tablet has grown at about the same rate as the 20 mg tablet
for scripts and slightly more quickly in terms of cost (Figures 15a and 15b). It is still
too early to tell how important the 80 mg tablet will be.
Figure 15a Statins
Figure 15b Statins
Cost ($m)
Scripts (thousands)
Of the different kinds of 10 mg tablet, atorvastatin assumed market leadership from simvastatin in 1998-99, two years after entry (Figures 16a-c). Simvastatin however held onto its lead in the largest market, the 20 mg tablet (Figures 17a-c). For the 40 mg tablet, simvastatin and atorvastatin are similarly placed while pravastatin has a much high share in this market than for the other 2 types of tablet (Figures 18a-c). The response of prices has varied among the different formulations. The price of the 10 mg tablet of simvastatin fell by 8% from about $45.70 in 1991-92 to about $42.00 in 1995-96 after the entry of pravastatin, and has remained at around this price ever since. Initially the price of pravastatin followed that of simvastatin quite closely, but since 1997-98 has fallen significantly. While entering with a $6.00 premium on simvastatin, atorvastatin’s price has been reduced to that of simvastatin over a period of 4 years. The prices of the 20 mg tablet have shown similar movements to those of the 10 mg tablet. However the price fall for simvastatin has been larger, firstly through an 8% drop when pravastatin entered and then a further 4% after the 40 mg tablet was introduced. Again atorvastatin carried a significant premium on entry which was almost com pletely eroded, and pravastatin has sold at an increasingly significant discount. The price of the newer 40 mg tablet of simvastatin has remained virtually unchanged since initial listing on the PBS. Again atorvastatin has entered with a $15.50 margin over simvastatin and has seen this reduced to $5.00 in 2000-01. Pravastatin sold for $3.50 less than simvastatin that year. Figure 16b Tablet 10 mg
Figure 16c Tablet 10 mg
Figure 16a Tablet 10 mg
Scripts (thousands)
Cost per script ($)
Total Cost ($m)
Figure 17a Tablet 20 mg
Figure 17b Tablet 20 mg
Figure 17c Tablet 20 mg
Total Cost ($m)
Scripts (thousands)
Cost per script ($)
Figure 18a Tablet 40 mg
Figure 18b Tablet 40 mg
Figure 18c Tablet 40 mg
Total Cost ($m)
Scripts (thousands)
Cost per script ($)
5.4 Discussion

The statin’s have shown very strong growth since being listed on the PBS as the
most effective type of cholesterol reducing drug. This growth has shown little signs of
tapering off.
Because they are relatively new drugs, all forms of the statins are still protected by
patent, so the PBS has not been able to rely on competition from generic suppliers to
obtain major price falls. Instead they have used the introduction of a “follower” type of
statin – pravastatin– to reduce the price of the original drug simvastatin. They have
also acted to bring down the price of the more recent drug atorvastatin, even though
it was able to command a price premium on entry.
The statins are subject to WAMTC pricing policy but this has not reduced prices to
the same extent as was the case for the treatments for peptic ulcers or the
antidepressants.
Through issuing special guidelines to doctors on their use – the “General Statement
for Lipid-Lowering Drugs” – the PBS has also acted to restrain usage of all forms of
statin.
Merck acted to protect its market for simvastatin by introducing new forms – the 40
mg and 80 mg tablets. Pfizer was quick to respond with a 40 mg version of
atorvastatin, but took over 2 years to introduce its 80 mg tablet, giving Merck a
significant period in which it had the market to itself. The 80 mg tablet has yet to
make any significant inroads into the markets of the other strength tablets however.
6. Conclusions

In its analysis of drug prices in the USA, 13 the Congressional Budget Office found that
there is significant price competition in the USA among suppliers of different versions
of drugs within a given therapeutic class, even though each holds a patent. This
competition often took the form of discounts being offered to those purchasers that
were members of pharmacy benefit managers or similar bulk purchasing
organisations with standard formularies that can significantly influence a drug’s
market share. Consumers purchasing drugs through retail pharmacies would not
generally receive these discounts.
The CBO confirms other studies showing that the entry of generic competitors has
little effect on the prices of the original brand name drug, although the discounts
offered by supplier are likely to be larger than before. The same effect occurs when
“follower” drugs enter the market.
Savings from the entry of generic drugs therefore depend on how much of the market
the generic suppliers can capture by offering a lower price.
Because discounts are made available to some organisations and not others, the
effect of lower prices are likely to vary considerably among different types of
purchasers.
The case studies examined in this report show that, in Australia under the PBS,
drugs also face competition both from “follower” and generic drugs.
However, because most drugs are supplied through the PBS, consumers face only
one set of prices, i.e. those negotiated by the PBS. The Productivity Commission
study confirms that discounting is not widespread in Australia.14
The Productivity Commission also found that when comparing Australia to a range of
other OECD countries,
The prices of new innovative drugs in Australia are broadly similar to other countries, except for the USA The prices of “me-too” drugs in Australia are the lowest among the comparison countries The prices of generic drugs in Australia is among the lowest of all countries In general, the real price of drugs in the USA tends to rise over time.15 In Australia, however, after some tendency to rise in the first half of the 1990s, drug prices have fallen consistently since 1996-97.16 Three of the drugs examined in this report – fluoxetine, omeprazole and moclobemide – experienced some rise in prices until about 1995-96, but all drugs have had static or declining prices from that time onwards. Two of the case studies – peptic ulcer treatments and antidepressants – show that the PBS acts quickly to achieve price reductions once drugs go off patent and 14 Productivity Commission, ibid, p xxii. 15 Lu, J and Comanor, W, “Strategic Pricing of New Pharmaceuticals”, Review of Economics and Statistics, Feb 1998, Vol 80, No 1, pp 108-111. CBO, ibid, pp 20-21. generic suppliers make the same drug available under different brand names. Within 2 years, the PBS had achieved retail price falls of between 18% and 44%. Although the original drugs elected to include a brand premium in their retail price, this was typically around 5-10% and did little to offset the price reduction. Unlike the US, therefore, the price of both the original and the generic competitor drugs fell at about the same rate. The case studies show that the outcome for the original brand in the market is hard to predict. For ranitidine and fluoxetine, a generic supplier quickly took market share away from the original supplier. Unlike the US however the market share of the original suppliers is still significant. In the case of omeprazole and moclobemide, generic suppliers made little headway in acquiring market share. Generic suppliers however enter the market quite late in a drug’s life. Before this time, other follower drugs are likely to have emerged within the same class. In addition, completely new classes of drugs are developed to treat the same condition. While ranitidine successfully fought off challenges from other H2-receptor antagonists, it had begun losing share in the market for peptic ulcer treatments to omeprazole before the arrival of generic suppliers. Omeprazole has also been successful in its competition with other proton pump inhibitors. In these 2 instances, the original drug has been more successful than the “follower” drugs. The presence of omeprazole enabled the PBS to reduce the price of ranitidine by 20% before generics arrived The market for antidepressants presents a somewhat different story. Fluoxetine, the original drug in the SSRI class, was successful in displacing moclobemide, the NMRIs and the other antidepressants, when it first appeared. However fluoxetine in turn was displaced by sertraline and paroxetine as the preferred SSRIs – a process that started before fluoxetine went off patent. In addition a further challenger, venlafaxine has emerged in recent years to take market share from the SSRIs. In contrast to ranitidine, the price of fluoxetine rose steadily before generics became available. At that point however it suffered a 39% price fall. The PBS was successful in transferring the price reductions achieved after generic competition began for fluoxetine to all the other antidepressants including the market leaders – sertraline, paroxetine and venlafaxine - even though these were still covered by patent and did not face generic competition. The other case study – the cholesterol reducers – does not include any generic drugs. Nonetheless there has been significant competition among the three main forms of statins. Simvastatin, the original statin, lost some market share to pravastatin when it arrived, and greater share to atorvastatin, a more recent version. Despite the absence of generics, the PBS has achieved a 12%, 11% and 20% falls in the prices of the 20 mg tablet form of simvastatin, atorvastatin and pravastatin respectively since each first entered the market. It has been less successful in dropping the price of more recent formulations. Although the PBS is effectively the single source of drugs for most Australians, it has managed to promote effective markets where it can within the three case studies examined in this paper. It has used the WAMTC pricing methodology entry to force prices lower for drugs still under patent once “follower” drugs are listed, and has moved quickly to impose the even lower prices offered by generic suppliers once drugs go off patent. In doing this it has still enabled suppliers to compete freely for market share. APPENDIX
Data Used In Case Studies

Treatments for Peptic Ulcer

a. Total Cost

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
H2-Receptor Antagonists
Prostaglandins
Misoprostol
Proton Pump Inhibitors
Lansoprazole
Combinations for Eradication of H Pylori
Bismuth, Metronidazole, Tetracycline
Omeprazole Magnesium, Clarithromycin, Amoxycillin Omeprazole Magnesium, Metronidazole, Amoxycillin Ranitidine Bismuth, Clarithromycin, Amoxycillin Other Drugs for Peptic Ulcer
Sucralfate

All Treatments for Peptic Ulcer
Treatments for Peptic Ulcer

b. Scripts

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
H2-Receptor Antagonists
Prostaglandins
Misoprostol
Proton Pump Inhibitors
Lansoprazole
Combinations for Eradication of H Pylori
Bismuth, Metronidazole, Tetracycline
Omeprazole Magnesium, Clarithromycin, Amoxycillin Omeprazole Magnesium, Metronidazole, Amoxycillin Ranitidine Bismuth, Clarithromycin, Amoxycillin Other Drugs for Peptic Ulcer
Sucralfate
Treatments for Peptic Ulcer

c. Prices

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
H2-Receptor Antagonists
Prostaglandins
Proton Pump Inhibitors
Combinations for Eradication of H Pylori
Bismuth, Metronidazole, Tetracycline
Omeprazole Magnesium, Clarithromycin, Amoxycillin Omeprazole Magnesium, Metronidazole, Amoxycillin Ranitidine Bismuth, Clarithromycin, Amoxycillin Other Drugs for Peptic Ulcer
Sucralfate
Ranitidine Tablets 150 mg
Ranitidine Tablets 150 mg

b. Scripts

Ranitidine Tablets 150 mg
Omeprazole 20mg

a. Scripts

Capsule
Acimax (Alphapharm)
Capsule
Acimax (Alphapharm)
Tablet
Acimax (Alphapharm)
Omeprazole 20mg
Capsule
Acimax (Alphapharm)
Antidepressants

a. Total Cost

Non-Selective Monoamine Reuptake Inhibitors
Selective Serotonin Reuptake Inhibitors
Monoamine Oxidase Inhibitors, Non-Selective
Monoamine Oxidase Type A Inhibitors
Other Antidepressants
Total Antidepressants
Antidepressants

b. Scripts

Non-Selective Monoamine Reuptake Inhibitors
Selective Serotonin Reuptake Inhibitors
Monoamine Oxidase Inhibitors, Non-Selective
Monoamine Oxidase Type A Inhibitors
Other Antidepressants
Total Antidepressants
Antidepressants

c. Prices

Non-Selective Monoamine Reuptake Inhibitors
Selective Serotonin Reuptake Inhibitors
Monoamine Oxidase Inhibitors, Non-Selective
Monoamine Oxidase Type A Inhibitors
Other Antidepressants
Total Antidepressants
Fluoxetine, 20 mg capsule
Cost per script
Moclobemide

a. 150 mg tablet

Cost per script
Moclobemide

b. 300 mg tablet

Cost per script
Venlafaxine
Cost per script
Cholesterol and Triglyceride Reducers

a. Total Cost

HMG CoA Reductase Inhibitors
Fibrates
Bile Acid Sequestrants
Nicotinic Acid and Derivatives
Other Cholesterol and Triglyceride Reducers
All Cholesterol Reducers
Cholesterol and Triglyceride Reducers

b. Scripts

HMG CoA Reductase Inhibitors
Fibrates
Bile Acid Sequestrants
Nicotinic Acid and Derivatives
Other Cholesterol and Triglyceride Reducers
Cholesterol and Triglyceride Reducers

c. Prices

HMG CoA Reductase Inhibitors
Fibrates
Bile Acid Sequestrants
Nicotinic Acid and Derivatives
Other Cholesterol and Triglyceride Reducers

Source: http://www.business.vu.edu.au/cses/documents/working_papers/pharma/wp6_2002_pharma.pdf