Pharma $20-sidewalk-bills

This one's been puzzling me since I saw it reported first last week. The underlying study got a lot of press when it was first published in 2013. Here's the original press release; it's easy to find lots of follow-up stories based on it. It's resurfaced with Jezebel figuring the patriarchy was to blame. Siouxie Wills takes it up again in today's Dom.

Long story short, one study suggested Viagra is effective in mitigating menstrual pain - but nobody seems to have known about it or prescribed if for that purpose. And nobody seems to have replicated the initial trial.

So what's up? Nobody typically complains that Big Pharma isn't quick to jump on any profit-making opportunity. The usual complaint goes the other way.

First potential explanation - maybe it isn't nearly as effective as the first published study suggested. There were 25 subjects in the 2013 trial. The trial showed efficacy against a placebo, but didn't test against existing treatments. This 2019 metastudy does not include any follow-up tests of Viagra. Why wouldn't there be follow-up trials or use?

My next instinct's to look at regulation.

The FDA rules say that once something's been proven safe and effective for one use, it can be prescribed for other uses. So there's no particular legal barrier to doctors prescribing Viagra for menstrual pain. But a lot of them might not know about it. It has been legally difficult to market pharmaceuticals for off-label uses, but I'm not sure on the current state of play on that. And doctors might reasonably be reluctant to prescribe based on a single study of 25 subjects.

Efficacy trials aren't the cheapest things in the world, and might be necessary to market Viagra for a novel use - or to convince doctors to prescribe it. But we aren't talking about some rare disease thing where there'd be a small number of customers. So why mightn't they have gone for it?

One potential reason: you can get a patent extension by registering an older drug for a novel use.

In addition to patent protection for the original compound and method of use, patents directed to new uses and treatment indications can be obtained. Developing new methods of use for identified compounds can be a successful strategy for maximizing research dollars and for increasing the commercial life.

Several pharmaceutical companies have successfully obtained patent protection for new methods of use. For example, Merck originally developed, patented, and marketed finasteride as a treatment for benign prostate enlargement under the brand name Proscar. Additional patent protection and FDA approval were sought when a new use for finasteride — treating male pattern baldness — was identified. Finasteride for the treatment of hair loss is marketed under the brand name Propecia. Similarly, the compound atomoxetine was patented in the early 1980s by Lilly and initially investigated as a treatment for depression. Further research and development of atomoxetine led to the identification of a new use for this compound in the treatment of attention deficit hyperactivity disorder. Lilly has obtained patent protection and FDA approval for this new use, marketing it as Strattera. More than two million prescriptions for Strattera were written in its first nine months on the market.7

Ideally, more than one of these approaches should be employed to extend patent protection. For example, in addition to developing a once-weekly formulation, Lilly sought to minimize its losses from the expiration of the Prozac patent by obtaining a patent and FDA approval for a new medical use of fluoxetine in the treatment of premenstrual dysphoric disorder (PMDD). Lilly markets fluoxetine for PMDD as Sarafem and has secured patent protection until 2007 for this new indication.

But that doesn't seem to work here - the patents on Viagra are up, and the research work on the alternative use is from 2013. If it were patent extension, it should have been filed a couple years ago and available by now.

The most plausible candidate explanations then, in descending order of plausibility, although my priors are fairly flat:

• Unpublished follow-up trials showed the first study to have been a fluke;
• The costs of proving efficacy for the novel use are high relative to the likelihood of being granted a patent extension based on the novel use - I don't know enough about practice here;
• Maybe the Phase I trials only included men, so the costs of a new trial are much higher than I'd thought;
• There's some other regulatory barrier in here I don't know about;
• Pharma executives are idiots, and all potential entrants are idiots too. They're leaving a pile of money on the table.

If I had to give odds - at least 2 chance in 3 that the first one's the right explanation. But I've wide confidence intervals here. Anyone have better information?

Markets hate profits

Unless there's some barrier in the system preventing it, no firm can sit on excess profits forever. Competition erodes away the excess profit until everybody's again earning a normal rate of return. Today's case in point: alcohol minimum pricing. I've made the point before, but it's worth walking through again as the logic isn't immediately obvious to non-economists.

Neil Miller argues:

Because most craft beers are currently priced over the $2 a drink threshold, it could be argued that they will become closer in price to mainstream beers which might encourage drinkers to “trade up”.  However, the costs to the big breweries will not have increased and they will basically be making more money for the same beers.  This means they will be able to increase marketing and distribution efforts.  Mr Albertson’s point about minimum pricing putting pressure all the way up the chain is critical.  

He's right that the big brewers will have more money for marketing and distribution. But they're pretty unlikely to be making more money for the same beers. Let's walk through the logic.

Suppose I'm one of the big brewers and Labour takes power. Lianne Dalziel announces a $2 per standard drink minimum price. Doug Sellman shouts about how it should be $10. My product previously retailed at $1 and cost me $0.25 to produce. I got $0.05 in profit and the rest was distribution / retailing costs. Can I suddenly start pocketing $1.05 in profits for that drink?

Minimum pricing hasn't made my competitors go away. I expect that they'll be trying to increase market share. What should I do? The first thing I'd try is a new promotion: Every 4th case (24 pack) of beer has $20 inside. My production cost goes up by a bit over $0.20 per bottle, so I'm only pocketing $0.85 in profit per bottle. But if my market share goes up by enough, it's totally worth it.

My competitors try it too. They promise $20 in every 3rd case. Then somebody in Parliament figures out that the real cost of alcohol to consumers is nowhere near $2 per standard drink as we're effectively rebating a big pile of the minimum price to consumers as a cash lottery. So that gets banned.

What next? Free t-shirt! Free shot glasses! Free beer mugs (collect all 8!). Then Parliament bans bundling any kind of good with the beer.

What next? It depends a lot on how different cohorts of drinkers respond to increased product quality versus increased related amenities. Maybe I can turn my bottles into something that's beautiful, with a stopper cap on a wire that makes it useful for re-use as a water bottle. Maybe I can make my labelling nicer. Maybe I can open up my own bottle shops where I sell only my own product but there's just an awesome environment for my customers: free massage from a Tui Girl with every purchase.

Think I'm kidding? Look at what happened in the US when airline prices were regulated. The airlines were banned from competing on prices. So what did they compete on instead? Better meals, better drinks, and more attractive stewardesses.

Unless there's some barrier to competition somewhere in the system, nobody gets to sit on free profits. These kinds of rents get eroded pretty quickly. Customers either wind up buying alcohol that actually costs $2 per standard drink (less normal profit) to produce, or that's bundled with amenities they find more valuable than improvements in the quality of the drink but that still cost $2 per standard drink (less normal profit) to provide.

Who might get to enjoy excess profits - rents - out of minimum pricing? My first pick are those who have bottle shop licences in poor neighbourhoods. They'll have local monopoly rents, especially when their customers have a harder time going across town for bargains. That will be capitalised into the price of the firm, and the next guy who buys the bottle shop will only then be earning normal profits, but there's likely a windfall gain to some small bottle shops.

Markets hate free profits: somebody's always rushing in to try to grab them. That competitive process runs until everybody's just earning a normal rate of return. I'd expect that the only conditions under which the big breweries get to keep selling current product at a $2 per standard drink minimum profit and just bank the profits are the conditions under which they could do it without a minimum price. Basically they need a strong cartel that prevents entry. Fortunately, we're nowhere near that kind of a world, at least in New Zealand.