Price Regulation, Intellectual Property Rights, and Business Model of Life Science

2004 Fiscal Year Final Research Report Summary

• Project/Area Number: 15530165
• Research Category: Grant-in-Aid for Scientific Research (C)
• Allocation Type: Single-year Grants
• Section: 一般
• Research Field: Applied economics
• Research Institution: KEIO UNIVERSITY
• Principal Investigator: ANEGAWA Tomofumi Keio University, Graduate School of Business Administration, Professor, 大学院・経営管理研究科, 教授 (80159417)
• Project Period (FY): 2003 – 2004
• Keywords: Pharmaceutical / Price / Regulation / Research and Development / business / Patent

Research Abstract

To evaluate Japanese life science research policy, this study investigates Japanese pharmaceutical industry. First, we investigate the role of price regulation for the purpose of national health insurance plan. This study examines the relationship between price variables and demand. This study focuses on the "price difference ratio" defined as the difference between the official price and the wholesale price divided by the official price. The ratio has declined sharply in the late 1990s in response to the official price reduction. Old products with generic competition, however, are found to have higher ratio, which fact indicates that seller of old products significantly reduces the wholesale prices to fend off generic competition. The higher price difference ratio could increase demand for products even in the late 1990s, which fact shows price competition prevailed even in that period.
Second, we examine the sources of pharmaceutical technology by using various patent data. This study focuses on location, type, of technology, scale of firms, type of institutions. The U.S. and European pharmaceutical firms are found to have established technological social division of labor ranging small biotechnology firms, universities, and public research institutes. Japanese pharmaceutical firms are behind the U.S. and European firms.
Third, this study examines whether pharmaceutical firms can finance ever increasing R&D expenditure when they face price reduction. By making assumption on future pharmaceutical products, demand, R&D expenditure, and failure rates of R&D projects, this study examines profitability of a pharmaceutical firm. We find that pharmaceutical firms will not be able to sustain R&D expenditure when it continues to increase with current rate. This study concludes that pharmaceutical firms need more lenient official price regulation, infusion of huge public fund into R&D process, or simply abandon current business model relying on R&D finance from cash flow from products.