Pharmaceutical innovation, reference pricing and therapeutic classes

Abstract

This paper is a first attempt to model the effects of reference pricing on the innovation effort of pharmaceutical firms. The model is based on a dynamic game involving three types of agents: pharmaceutical firms, consumers and a regulatory entity. The games includes research stages where the innovation efforts by the firms are determined and introductory stages where a price for a new medicament is fixed. We model the negotiation between the drug owner and the regulator to fix the price, first without legal constraint, second under the regime of reference pricing in therapeutic classes. We then solve the innovation game where the firms anticipate the results of the negotiation round on prices. We thus consider the effect of the therapeutic class regulation on both prices and the innovation pace. The final stage consists in calibrating the model with a small data on anti-statine in France and simulates the effect of the change in regulatory regime.