DraftPreliminary work product Drug shortages pricing and reimbursement

Draft--Preliminary work product Drug shortages, pricing and reimbursement NBER-CRIW Conference October 18, 2013 Christopher Stomberg, Ph. D. , Partner Bates White, LLC

Draft--Preliminary work product Ongoing drug shortages October 7, 2013 2

Draft--Preliminary work product Newly reported drug shortages October 7, 2013 3

Draft--Preliminary work product Average of ongoing drug shortages October 7, 2013 4

Draft--Preliminary work product Some considerations • Forces driving trends appear to be common across markets • Unlikely to drive observed trends: § § Medicare ASP Manufacturing issues specifically related to sterile injectables • Alternative thoughts § § § October 7, 2013 Competitive conditions universal to generic markets Patterns of regulatory activity Reimbursement and price issues that might be universal 5

Draft--Preliminary work product Competitive conditions • Basic issues § § § Institutionalized near-perfect substitution Differentiation nearly impossible Price competition “near-Bertrand” Prices often very low for mature products Relentless cost cutting Each product (particularly mature products) generally makes small contribution • Responses § § October 7, 2013 Possible indifference to supply shock given incremental investment relative to incremental revenue Invest in new ANDA product with higher potential margins instead? 6

Draft--Preliminary work product Regulatory activity • Basic issues § § Quality is largely unobservable Institutional framework makes it almost impossible for consumers to trade on quality information anyway Regulator (FDA) sets quality threshold for market Inspection and detection are probabilistic • Responses § § October 7, 2013 Equilibrium quality is related to threshold and probability of inspection and detection Participants invest according to expectations and risk aversion Risk takers with low expectation of inspection have lowest costs, possibly dominate the market through Bertrand competition Changing inspection probability and threshold levels can create disruptions due to time-inconsistency issues 7

Draft--Preliminary work product FDA inspection rates and newly reported drug shortages October 7, 2013 8

Draft--Preliminary work product FDA citation rates and newly reported drug shortages October 7, 2013 9

Draft--Preliminary work product Relationship between inspections and citations October 7, 2013 10

Draft--Preliminary work product A simple pooled OLS model October 7, 2013 11

Draft--Preliminary work product Regression results – newly reported shortages Parenteral = y Contemporaneous 1 month lag 2 month lag 3 month lag October 7, 2013 12

Draft--Preliminary work product Regression results – newly reported shortages Parenteral = y Contemporaneous 1 month lag 2 month lag 3 month lag October 7, 2013 13

Draft--Preliminary work product Regression results – newly reported shortages Parenteral = y Contemporaneous 1 month lag 2 month lag 3 month lag October 7, 2013 14

Draft--Preliminary work product FDA inspection rates and ongoing shortages October 7, 2013 15

Draft--Preliminary work product FDA citation rates and ongoing shortages October 7, 2013 16

Draft--Preliminary work product Regression results – ongoing shortages Parenteral = y Contemporaneous 1 month lag 2 month lag 3 month lag October 7, 2013 17

Draft--Preliminary work product Reimbursement and price • Price is typically implicated in neoclassical model of supply shock • Shortage is disequilibrium concept usually rooted in price "stickiness" • Potential sources of price stickiness on generic market § § October 7, 2013 Supply contracts (not likely) Reimbursement (MAC, FUL) 18

Draft--Preliminary work product Example of evolution of prices for one shortage product October 7, 2013 19

Draft--Preliminary work product Price increases for drugs in shortage 3 months or less October 7, 2013 20

Draft--Preliminary work product Price increases for drugs in shortage 3 months or less October 7, 2013 21

Draft--Preliminary work product Price increases for drugs in shortage more than 12 months October 7, 2013 22

Draft--Preliminary work product Adding reimbursement to the picture October 7, 2013 23

Draft--Preliminary work product Drug shortages, pricing and reimbursement NBER-CRIW Conference October 18, 2013 Christopher Stomberg, Ph. D. , Partner Bates White, LLC