Posted by All Information Here on Thursday, November 20, 2014
In economics, as is the case with real life, “cancer drugs” would be classified as necessary goods or necessities as opposed to normal goods like telephones or luxury goods like fancy cars. This would mean that regardless of the price the demand for cancer drugs should not really fluctuate too much.
 |
| Image from Investopedia over here |
On other hands, the demand for normal goods, which are not necessities, will change in response to the unit price of the good. If plotted on a graph, the demand curve for a normal good would look like the graph on the right. A decrease in price would increase demand, presuming all other factors are equal. In other words the price elasticity for the demand of normal goods will be rather high.
 |
| Image from Wikipedia over here |
Necessities on the other hand demonstrate a radically different demand curve (more of a line!) because the demand for necessities does not fluctuate with price. Especially in the case of life-saving cancer drugs, the demand curve, if plotted on a graph, should look like the graph on the left. The price elasticity for the demand of necessary goods like cancer drugs will thus be rather low i.e. the demand would not really fluctuate with a change in price. (Here's an interesting lesson on the Khan Academy website for those of you interested)
Recently I wandered through the file-wrappers for Tykerb and Herceptin and pulled out the “Statements of Working” for 3 years. Both drugs are prescribed for HER2 breast cancer – while Herceptin was approved in 1998 by the FDA, Tykerb was approved much later in 2007. I understand that Herceptin is more effective than Tykerb.
Below are the total sales for both Tykerb & Herceptin:
(i) Figures for Tykerb
| Year | Quantity Sold | Estimated Patients Served | Total Revenue | Per unit cost* | Link to Form 27 |
| 2010 | 5723 | 225 | Rs. 13.51 crore | Rs. 23,622 | |
| 2011 | 8575 | 286 | Rs. 17.20 crore | Rs. 20,058 | |
| 2012 | 9622 | 313 | Rs. 18.80 crore | Rs. 19,538 | |
(ii) Figures for Herceptin
| Year | Quantity Sold | Estimated Patients Served | Total Revenue | Per unit cost * | Link to Form 27 |
| 2009 | 7559 | 503 | Rs. 68.62 crore | Rs. 90,791 | |
| 2010 | 10467 | 697 | Rs. 94.12 crore | Rs. 89,926 | |
| 2012 | 21068 | 1404 | Rs. 127.65 crore | Rs. 60,589 | |
* Disclaimer: I derived the unit cost by dividing the Form 27 revenue with the quantity sold – this does not equal the Maximum Retail Price at which the patient buys the goods since it appears to be calculated without taxes and the retailer cost made by hospitals – Herceptin for instance cost Rs. 1,10,000 a vial till 2012. Regarding the estimates of the patients served – both drugs require year-long therapy – for Herceptin it could be between 12 to 18 units – I took an average of 15 and divided the total units sold by 15 to come to the estimate of patients served. For Tykerb, as I reported in this earlier post of mine, the cost is about Rs. 6,00,000 for the entire treatment – I divided the total revenue by Rs. 6 lakhs to come to a rough estimate of the patients serves. I’ll concede that both figures are rough estimates.
If I were to plot the demand curves for both Tykerb & Herceptin, they would appear as follows:
As you can see from above, both the demand curves exhibit characteristics of normal goods rather than necessities. As shown in the second graph in this post, the demand curve for a necessary good like life-saving drugs should be a straight line i.e. demand should be perfectly inelastic for any increase in price. In reality however both Herceptin & Tykerb demonstrate a dangerously flexible elasticity in demand for every small change in price – in other words, the market for these drugs is highly price sensitive and even a small variation in price has a dramatic influence on the demand for the drugs. Of course, the number of cancer patients is growing but that alone cannot count for the huge spike in demand for Herceptin in 2011, which co-incidences with the significant price cut made by Herceptin. Besides, drugs like Herceptin are not repeated for more than one cycle of treatment.
The demand curve for Herceptin is particularly depressing because it has been on the market for so long. Tykerb is a relatively new drug on the market, having been approved by the FDA only in 2007 and given that it had to compete with the formidable Herceptin, since both drugs cure HER2, it is understandable if GSK is taking longer to increase the sales of the drug. Herceptin however was approved in 1998, yet Roche was not getting its pricing right, as demonstrated by the huge spike in demand in 2012 when the price was cut by 40%. While GSK appears to have figured out the need for deep price cuts for Tykerb back in 2010, Roche took until 2012 to figure out the need for price cuts despite having been in the market since 1998.
Why did Roche take so long to react?
One possible reason is because Indian doctors started prescribing Tykerb to Indian patients who could not afford Herceptin since both drugs were targeting the same kind of cancer and at the time GSK was offering Tykerb at less than one-third the price of Herceptin. There were other advantages to prescribing Tykerb. For example is administered in the form of pills while Herceptin is administered in the form of intravenous drip, which would require at least a few hours in the hospital – which means hospitalization charges, losing a day’s work (for either the woman or her caregiver) and if you are not living in a major city, it means you have to travel to the city for the treatment. Tykerb doesn’t have these extra costs, which makes it preferable, except for the fact that it demonstrates more side-effects than Herceptin.
The above is the market reason - truth be told - the problem is with western corporate attitudes towards emerging markets - I don't think Roche has any idea on how to do business in India - they presume that once they have a patent - conventional economics will takeover - instead we only have dead people to show for Roche's pricing strategy.
As demonstrated by the statistics in this post, Roche gained tremendously by the price cut – within two years its sales and revenue doubled despite a deep price cut. In other words it was win-win for both Roche and patients. In fact, presuming that there are 25,000 HER2 breast cancer patients in India, as claimed by the Campaign for Affordable Herceptin and presuming that Roche, in a moment of madness, slashes the price of its drug to a more affordable Rs. 3 lakhs per year from the present Rs. 9 lakhs per year (It used to be Rs. 22 lakhs a year before the price cut), it could boost its revenues to Rs. 750 crores.
In other words small margins, big volumes – that has always been the trick of sales in India. Of course Roche could continue to live in a fool’s world and presume that Indians are going to buy their drug by hook or by crook since it is a necessity commodity.
In reality we have a situation where even in 2009 a whole 11 years after the drug was introduced in the Western market, an average of only 500 Indian patients were being treated with Herceptin. Fast forward to 2012 and this number jumps to 1400 patients because of the price-cuts.
All of these numbers raise several questions for not only policy makers in India and the U.S. where national interest is used to over-ride patents to protect the beloved Ipad but also for companies like Roche. Why is it that alarm bells didn’t ring in Basel when Herceptin was reporting such low sales in a country of a billion people? Forget caring about Indian lives – you would have thought that they at least cared about their own profits. When will these companies learn that even with health insurance most Indians cannot afford their drugs? It is time for them to get realistic. There are ways to make money in India – this is not it.