Value-Based Pricing for Patent-Protected Medicines Over the Product Life Cycle: Pricing Anomalies in the “Age of Cures” and Their Implications for Dynamic Efficiency

Published:November 03, 2022DOI:


      • Conventional cost-effectiveness analyses have generally not taken patent expiry (or, similarly, “loss of exclusivity”) into account, and overlook the impact on sharing of social surplus between the manufacturer and society following the loss of exclusivity.
      • Different medicinal products are rewarded vastly different shares over an assumed product lifetime of 30 years, even when all are assumed and modeled to 12 years of exclusivity.
      • These practices generate pricing “anomalies” that might inadvertently create an unlevel playing field across different products, especially curative ones, and may be distorting prices, rewards, and incentives for the size and composition of pharmaceutical research and development in unintended ways.



      Conventional cost-effectiveness analysis (CEA) for the value-based pricing of new medicines largely ignores the implications of limited market exclusivity (ie, patent-protection periods plus any exclusivity granted by regulators). This paper explores the implications of this methodological shortcoming, which produces several pricing anomalies with potentially unintended effects on research and development (R&D) incentives.


      We illustrate these implications by comparing 4 stylized examples of increasing complexity, from short-term cures for acute conditions to long-term cures for rare, health-catastrophic conditions.


      (1) Conventional-CEA will project a different result than an adjusted CEA that considers generic or biosimilar entry; (2) free and flexible pricing of long-term treatments (eg, statins for hypercholesterolemia) or repeated-dose cures (eg, insulin for type 1 diabetes) for chronic conditions will likely result in predictable price increases at the end of the exclusivity period that may be perceived as unjustified or unsupported; and (3) one-time administration “cures” (eg, gene therapy for spinal muscular atrophy) have the potential to allocate a large share of the social surplus to the manufacturer over the product lifetime, which may or may not be dynamically efficient per se, but may also inadvertently disadvantage the development of valuable long-term treatments or repeated-dose cures for chronic conditions.


      We highlight the need for additional research on long-term solutions to these issues that would aim to promote dynamically efficient global R&D. More work is needed on the following: (1) relationships between social surplus allocation and the amount and composition of global R&D, as we may be as likely to be encouraging excessive R&D in some areas as to be undersupplying it in others; and (2) relating the size of the surplus reward to R&D cost and, thus, the return on investment.


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