Yesterday I wrote:
So the most probable outcome of introducing monopsony power here [in the U.S.] is that the market for drugs shrinks to the point where it will support few-to-no new drugs.
Not to put too fine a point on it, Tom responded:
This seems crazy.
He is not the only one for whom this seems a little nuts. But it is not. Let me explain.
People who think that there will be continuing R&D in the pharmaceutical industry are basically thinking of it as a budgeting problem. They think of the pharmaceutical industry's gross income as a budget to be allocated between various functions, such as marketing and R&D. They may concede that by changing the size of the budget, you may shrink the amount of money to fund R&D, because there will be less money in the kitty. (Though many or most hope that shrinking the size of the pie will force pharmaceutical companies to transfer money from the advertising budget to R&D1). But, their reasoning goes, there will still be money in the kitty; if you allow pharmaceutical companies 1/3 as much gross income, you will get 1/3 as much R&D. Or perhaps they will cut their advertising budgets to zero, and then you will get 2/3 as much R&D. But still, you will get something.
I don't think of R&D as a budgeting problem; I think of it as an investment problem. After all, even if the pharmaceutical industry has no profits right now, they can borrow the money in the financial markets at fairly attractive rates.
The main obstacle to R&D, then, is not the current state of pharmaceutical industry profits; it is the potential return on the investment in R&D. After all, Merck doesn't have to make drugs; it could generate a nice, safe return of 5% a year in government bonds. Or it could get into some other business, such as making soap. If you drive down the profits on new drugs too far, it stops making sense to invest in new drugs, even if there is a small profit to be made on current production.
Developing new drugs is very, very risky. Depending on what you think constitutes a drug candidate, somewhere between one in one thousand, and one in ten thousand drug candidates makes it from a lab bench to clinical trials. Each of the failed drugs was very expensive, particularly if it got partway through clinicals, which run about $500 million per course.
The problem is, once you've developed a drug, it's easy to copy. It's also usually trivially cheap to produce. And your patent is rapidly running out. This gives a monopsony buyer a lot of leverage to force down your price--you're almost always better off taking something. This is particularly true if the monopsony buyer has the power to break your patent and license its generic manufacturers to turn out cheap but near-perfect imitations of your product2. This is, in fact, what Europe has done; they make pharmaceutical firms sell to them at cost plus. The lion's share of the profits on any drug come from the United States; what they get in Europe and Canada and the rest of the world is (thin) gravy, a price that is just a little bit better than not selling any drugs there.
Now imagine that America drives drug prices down to that sort of "cost+10" or "cost+20" level. The pharmaceutical firms will keep making the drugs they already have, because there will still be a little profit there. But they would have to be psychotic to invest billions of dollars over a 20 year time horizon in exchange for a one in a thousand chance of making that small a profit. Would you put 20% of your income now into an investment that might yield a profit of 10% of your income--in thirty years?
But they have to invest in R&D, say my interlocutors; otherwise they won't have any drugs to sell! This makes the odd assumption that they can't do anything else. But history is full of companies that used to do something else entirely--and also, of companies that went out of business when their market collapsed.
1 This belief is wrong, for reasons I will explain in another post.
2 The patent threat seems to be the most plausible reason that pharmaceutical firms do not raise Canadian prices to US levels.
I have made this exact argument on more than one occasion when confronted with the "they have to invest in R&D" argument. I have yet get reply from anyone.
And one obvious 'something else' to do is R&D in optional, non-life saving drugs that government systems are unlikely to provide and, therefore, that drug companies would remain free to sell at market prices. So R&D for baldness cures would be a good bet while R&D for AIDS drugs would not.
Really, what drugs are there left to develop? I think the state of medicine we have now is pretty good now. If we can guarnatee most people a reasonably good shot at 80 or 90 years before they die, what else needs to be done? It seems like we are shoveling resources down a pit to get ever diminishing returns? I'd be happy to live under the staus quo of the medical technology for the rest of my life. In fact if it means I pay less for insurance etc. ove my lifetime it seems like a good trade.
Isn't there a middle road here, as alluded to by some other commenters? I mean, I think that the underlying issue (for progressives, say) is that the drug companies' R&D investments are frequently highly irrational, from the perspective of public health.
So let's say we allowed the US gov to bargain on drug prices (or whatver price control measure suits you best), but only on 'critical' drugs (think cancer, heart disease, diabetes). In exchange, the US gov agrees to front a (substantial) investment in R&D in these sorts of drugs. But the drug companies are allowed to charge whatever the heck they want for 'non-critical' drugs (think viagra, baldness), and _they_ foot the R&D bill for these drugs.
The real issue (as with most health care policy questions) is the push/pull between profit motive and public health. Sometimes these forces act in the same direction, sometimes not.
Novartis, Swiss
Glaxo, UK
Roche, Swiss
Sanofi, France
Astrazeneca, UK
Takeda, Japan
Teva, Italy
Novo, Denmark
Bayer, Germany
Astellas, Japan
Daiichi, Japan
Elan, Ireland
Shire, UK
UCB, Belgium
Don't we have any leverage with the threat of retaliation if the developed countries dishonor our patents? Well, developed ex-Canada. Lazy bastards.
mm: "But history is full of companies that used to do something else entirely"
You mean, like many of the pharma companies that were founded in the 19th c.? Bayer, Merck and the component companies of Novartis, as 5 examples, all started out in the business of synthetic dyes and moved into pharma later.
Mintun - Yeah, and what happens in a decade or two when most bacteria are resistant to our current crop of antibiotics?
There are whole basketfuls of drugs left to develop (I'm more interested in the scientific understanding that comes with that development, though)
But I'd like a cure for fibromyalgia. My girlfriend has it. Or central core myopathy. One of my cousins has it. I could go on...
But what I'd really like to see is development of bacteriophage therapy, and some changes to drug development that makes it cheaper, since that, more than anything, seems to promise benefits.
I'm still waiting for the fat pill... and I'd be quite happy to live a healthy life to 160 or 200 if possible. I think a lot of people would like for medicine to continue to improve.
People also need to remember that marketing costs are also an investment. A drug company isn't going to spend money on marketing (advertising, market research, etc...) if it doesn't think it will make money off of it.
Also, advertising is really, really important. Companies that stop advertising generally stop selling their product. Especially in pharma where you only get to sell your product until the patent expires, so everything is a new product. No getting people used to your product over generations like some other products.
Mintun: If you're right, there's no problem. Over the next few-several years, all of the drugs we now have will see their patents expire and all drugs will be available at slightly over cost. This is generally the case for all drugs that anyone was taking ten years or so ago, because the approval time eats up a bunch of the patent. It's only the new drugs that cost money, and ten years from now, it still only be the new drugs (if any) that cost money.
Megan: If we use monopsonies to lower our drug costs to Canada and Europe's, isn't there some reason to believe that will force Canada and Europe to stop free riding, or to free ride less?
Don't we have any leverage with the threat of retaliation if the developed countries dishonor our patents?
Well, more and more of them are moving their research arms to the US, to be closer to their profitable market. As Tyler Cowen said, scream this paper to the rooftops:
I'd be happy to live under the staus quo of the medical technology for the rest of my life.
Here's the awesome thing, Mintun. You can do that, right now. And it'll be cheap, as almost all the drugs you'll use will be generics. Especially if you move to a HSA-style plan, insisting on ten year old drugs and health care can save you money. In fact, that's practically what Europe and Canada are doing now, only they still get some on-patent medicines. But don't worry, generics are as cheap or cheaper in the US as in Europe, so you'll be fine. So you don't need to change policy and prevent everyone else from paying extra money to develop and get the latest thing, at least not if it's privately done. I guess you should oppose the people who want massive public investment, though.
So let's say we allowed the US gov to bargain on drug prices (or whatver price control measure suits you best), but only on 'critical' drugs (think cancer, heart disease, diabetes). In exchange, the US gov agrees to front a (substantial) investment in R&D in these sorts of drugs
This wouldn't solve the original complaint of everybody else free-riding on the US, though. So the US government increases the public subsidy of some research. Then what? Is that necessarily more likely to make Canada and Europe increase their public subsidy of drug research? If they're planning on free-riding, why would they care how the US chooses to shoulder the burden?
Discussion of an academic paper demonstrating that while patented drugs are more expensive, generics are cheaper (and used more often) in the US.
Mintun: Really, what drugs are there left to develop?
I'm sure that 50 years ago, when chemotherapy came into widespread use as a cancer treatment, lots of people said the same thing. Imagine what we'd be missing if we had packed up and stopped medical research then.
I would like a drug that cures or slows the effects of multiple sclerosis, a crippling degenerative disease that affects about 2.5 million people worldwide.
I would also like a drug that effectively treats chronic pain without causing debilitating side effects.
I would like a cure for cancer, one that works for everyone and doesn't involve months or years of having doctors shoot radiation at your body until you almost die.
I can think of dozens of other drugs and medical technologies I'd like. And I'm willing to pay a little more in health care costs to get someone to work on finding them, because lots of suffering people need them now, and I may be one of those people someday. You may think that you're satisfied with what you have now. But I think that at some point down the line when you or someone you love gets old and develops Parkinson's Disease or a malignant tumor or simple chronic, untreatable pain, you will feel differently and be willing to pay a high price to restore your quality of life. Unfortunately, we can't wait until you need medical research's results to decide to fund it.
People who think Viagra and Propecia are outrages should check their facts; neither was developed for its current use but was rather a failed drug for something else (hypertension in the case of Viagra; prostate ailments in the case of Propecia).
"This wouldn't solve the original complaint of everybody else free-riding on the US, though. So the US government increases the public subsidy of some research. Then what? Is that necessarily more likely to make Canada and Europe increase their public subsidy of drug research? If they're planning on free-riding, why would they care how the US chooses to shoulder the burden?"
Maybe I'm missing something, but wouldn't they then be free-riding (in effect) only on the 'non-critical' drugs?
Could one argue that other nation's free-riding on our R&D investments isn't such a travesty? I mean, could one argue that this is a 'cost of doing business' for the single largest economy in the world (i.e., us)?
I guess I just don't see how the free-riding problem is such a big deal, though I'm no economist for sure...
If we use monopsonies to lower our drug costs to Canada and Europe's, isn't there some reason to believe that will force Canada and Europe to stop free riding, or to free ride less?
The only thing that would probably encourage less free-riding by Europe is a stronger European Union, with prices and funding set at the EU level instead of individual countries. The smaller entity always has more incentive to free ride; not only does the smaller population have to shoulder a larger cost per capita, but the total benefit to that country is less because there's a smaller population.
Consider a hypothetical drug that costs $100 million to develop and has average net benefits of $1 per capita. Any country with over 100 million people in population will have a strong encouragement to develop this drug even shouldering the entire burden and letting all the other companies free ride. For smaller countries, developing this drug would be a money-loser; it makes sense to free ride.
(There are other effects-- poorer countries often have better things to do with their money that yield larger net benefits than investing in drugs, but we'll limit ourselves to the rich countries.)
Yes, if the US funds drugs less by any method, than the marginal unfunded drug will become somewhat more attractive for anyone to fund. But as long as the US is both one of the richest countries and has a larger population than the other rich countries, the US will have the biggest incentives to fund drug development, and the small countries will have the free-riding incentive.
In other words, if you want someone else to pay for drug research, you had better either hope for a stronger EU, or for India and China to keep getting rich.
Maybe I'm missing something, but wouldn't they then be free-riding (in effect) only on the 'non-critical' drugs?
Free riding is free riding, whether it's free riding on privately researched drugs by having governments set low prices in some countries, or free riding on publicly researched drugs by letting the country with the largest economy/population combination pay for the research.
Could one argue that other nation's free-riding on our R&D investments isn't such a travesty? I mean, could one argue that this is a 'cost of doing business' for the single largest economy in the world (i.e., us)?
Yes, one absolutely can, and I'd have to say that I don't see a way around it. That was precisely my point-- if your complaint is the free-riding, neither private nor public funding will solve the issue. Smaller economies with fewer people or poorer people will always have stronger incentives to free ride than the US. It really is the cost of doing business for the largest economy in the world, as you say. It may be unfair, but refusing to fund drugs out of pique because others won't pay their "fair share" wouldn't help us or the world. I consider medical research some of the best foreign aid that the US gives the world, even though it helps us at the same time.
"I guess I just don't see how the free-riding problem is such a big deal, though I'm no economist for sure"
The real cost of Europe's (and the rest of the world's, but Europe is the richest offender) is in drugs that could have been developed if the Europeans paid market prices. It's tough to quantify the opportunity cost, but Europe is a big, rich market, so we can assume it's pretty large.
Unfortunately, there's no easy solution. Europe seems happy with the trade-off (cheaper drugs for them, fewer drugs for everyone) so we must be content with the warm glow of moral superiority.
How about we throw a few more facts into the discussion, hmmmm? As opposed to excessive theorizing in the absence of data?
http://content.nejm.org/cgi/content/full/351/15/1580
Here's a bit from the above:
Or how about this?
http://www.sciencedaily.com/releases/2008/01/080105140107.htm
Yeah, I know, what does the New England Journal of Medicine really know about pharmaceutical research, or scientists not directly affiliated with the industry?
Part of the problem is something akin to what hit the insurance companies a while back: new discoveries are in a slump, but profitability has to be maintained. Back in the day, the insurance companies blamed frivolous lawsuits, and pushed for 'tort reform'. I haven't noticed that my insurance has gone down since then. Has it happened for anyone else? No? Didn't think so.
The problem for the pharmaceutical houses is a bit different: there is concern that the low-hanging fruit is just about gone. Cures for cancer, or fibromyalgia, or multiple schlerosis will not cost hundreds of millions of dollars to produce, but tens of billions to hundreds of billions (this is sort of like peak oil - the mining out of all the cheap effective discoveries has been anticipated since about 1950.)
All Big Pharma can really do at this point is ring through the changes, making minor variations on already-known drugs, hope for the odd bit of serendipity, and hope that basic research (something, oddly enough, that they seem reluctant to do on their own) offers new approaches.
I'd have more sympathy for these companies if they were actually doing basic research, but they seem to feel this is one of those things the taxpayer should foot the bill for; public risk, private gain and all that.
I would like a cure for cancer, one that works for everyone and doesn't involve months or years of having doctors shoot radiation at your body until you almost die.
There are what appear to be cures for certain cancers (not for the enormous category of "cancer" generally). Then tend to carry price tags in the tens of thousands of dollars. I can't predict whether the science of these drugs will generalize and lead to many more cancer cures, but they've at least made a start down this road, and it's a good one to be going down.
SOV,
You simply don't know what you are writing about when you claim pharma "doesn't do basic research". We do quite a lot of it, and we would do more if we had too, but government insists on funding a lot of it (which pharma also does in academic institutions, though less of).
"Really, what drugs are there left to develop?"
I believe this is the essense of all sorts of socialist style approaches to things: the view that things are good enough, so let's revoke the property rights from those who drive civilization and hand it over to everyone else so the rest of us will be better off.
A real miracle drug for some types of arthritis just entered the market not many years ago. It's horrendously expensive, but at least it offers a choice not available before. Because it works so well, does that give people the right to steal it away? No, because that removes the incentives for others to invest in future drugs that may have all sorts of unexpected benefits.
Someone spent billions of dollars developing a drug, why the hell does someone else think they have the rights to it just because it does something well? If someone pays a huge amount of money to build an airplane to transport people between places very quickly, do its benefits grant society the right to confiscate it for the greater good? We've seen what happens to societies that try foolishness like that and it's only makes everyone poor.
Socialism is getting far to fashionable for our society to continue to improve itself.
Too few people understand the profit motive as a source of almost all new technological innovations, including life-saving ones like pharmaceuticals. This is frightening.
The idea that the United States simply HAS to subsidize drug prices for the EU or else pharmaceutical companies won't conduct R&D into new drugs might be reality, but is a fallacy. Clearly somebody has to have these costs passed on to them, and maybe it's fine for our economy to finance this expenditure, but why must it Of Necessity be us?
If the EU is getting all these drugs on a cost-plus basis and the vast majority of the profits are coming from sales to the US market, well, we can negotiate with EU governments, and ultimately, decide who sells what here.
And we can tell the pharmaceuticals that they can sell to us on that same cost-plus basis or not at all--that we want prices in line with what other Western, wealthy, developed countries get. If they need to adjust prices across the board, so be it.
Ironically, Bush would be just the guy to get the cooperation we'd need from EU governments on this--they'd certainly fear his ability to upend the apple cart without due regard for what mayhem follows.
I also am no economist, but might there be some ways to pressure Europe into discontinuing its free-riding. I'm thinking of a situation in which the American government were to threaten to void patents on drugs if the pharmaceutical holding the patent sells those drugs below market cost in other countries. In this situation the drug company would be faced with losing its ability to profitably sell new drugs (in America) if it remains complicit in selling the drugs in Europe at the prices that Europe demands they be sold at. This would effectively take the drugs off of the shelves in Europe unless European governments were willing to cough up more money for these drugs. Which in turn may have the effect of lowering the market cost if more consumers were bearing the burden. Of course this would only apply to drugs that are still on patent, and it is possible that Europeans would simply choose to wait until they are off patent to start buying them. But I suppose that we could institute some sort of retroactive policy in which drugs must be sold at the previous market prices for a certain time after being introduced to a new market (Europe) with the threat of voiding patents on some of the companies newer drugs in America for violation. This would force Europe to pay their fair share of the R&D costs of the drugs that they enjoy.
I'd be happy to live under the staus quo of the medical technology for the rest of my life. In fact if it means I pay less for insurance etc. ove my lifetime it seems like a good trade.
I congratulate on your obviously excellent health.
Sitting in front of a computer, I can solemly assure that were I standing before a firing squad, I’d haughtily refuse the blindfold, and march to my death with a smile on my lips. No, really, I would. I’m sure of it.
So let's say we allowed the US gov to bargain on drug prices (or whatver price control measure suits you best), but only on 'critical' drugs (think cancer, heart disease, diabetes). In exchange, the US gov agrees to front a (substantial) investment in R&D in these sorts of drugs. But the drug companies are allowed to charge whatever the heck they want for 'non-critical' drugs (think viagra, baldness), and _they_ foot the R&D bill for these drugs.
Sancho beat me to it, but Viagra and Propecia resulted from serendipity, not directed research. For example, Viagra was under investigation to treat hypertension (and so not a completely frivolous project, yes?) when in phase I trials it was administered to healthy 20-something guys and its (ahem) remarkable properties were unexpectedly found. The nurses taking blood samples may never be the same…
Could one argue that other nation's free-riding on our R&D investments isn't such a travesty? I mean, could one argue that this is a 'cost of doing business' for the single largest economy in the world (i.e., us)?
So…are we taking the rest of the world to raise, then? Are we just the world’s biggest charity? Or are you just modeling pharma off of the defense spending situation? Besides which, I thought the EU was now the world’s largest single economy now, or so some would have us believe.
How about this –for the Europeans and Japanese to pay their share of R&D costs is just a cost of doing business to them?
All Big Pharma can really do at this point is ring through the changes, making minor variations on already-known drugs, hope for the odd bit of serendipity, and hope that basic research (something, oddly enough, that they seem reluctant to do on their own) offers new approaches.
That’s what I’d think, too, if I knew nothing about it. But since I do, let me assure you that that’s rubbish. Pure, crystalline, rubbish.
Other Mike and Someguy,
Yes, the US could try to get the European's to pay more, but there is less real leverage here than you think. Unfortunately, copying pharmaceuticals is trivial compared to discovering them in the first place. Any hardball approach that threatened, in any way, to take patented pharmaceuticals off European shelves would immediately draw the counterthreat of patent abrogation and forced licensing to "in house" producers- a threat that is real and effective.
Muntun,
Let me point out the stupidity of every single word in your post.
"Really, what drugs are there left to develop?"
How about a cure for cancer? AIDS? Asthma? Alsheimer's? How about drugs that help regenerate damaged/lost limbs, organs, etc.? How about drugs that aleviate pain without the side effect of dependency? How about replacing current drugs with effective drugs, but fewer bad side effects. Note that my first two suggestions (cancer and AIDS) consume billions of dollars a year, yet millions of people die of these diseases.
I just can't get over how dumb, short-sighted, and evil a statement this is. Oh and anyone dying of a disease we can't cure, well that's just tough. Muntun declared no new drugs need to be developed. And let's not forget the inevetibility of evolution. As we evolve and adapt, new problems will arise. But hey, what we have in 2008 should be fine for whatever might be ailing you in 3008.
"I think the state of medicine we have now is pretty good now."
Hey, I thought cassette tapes were pretty sweet. I thought 170 megabyte drive would be more than I ever needed. But, man, I'm glad to have an iPod and a 350GB hard drive.
Now imagine that someone as stupid as you had had the power to make this statement a reality 30 years ago. How many women would be dead now because of breast cancer? How many men would be dead now because of heart disease?
Again, you are an evil person.
"If we can guarnatee most people a reasonably good shot at 80 or 90 years before they die, what else needs to be done?"
How about living indefinitely, without worrying too much about the ravages of aging? How about having a 25 year old's body indefinitely? How about finding a way to fix my ankle, which has caused a severe drop in my life's quality due to my inability to play most sports? Also, see my answer to your first stupid question.
You really are evil.
"It seems like we are shoveling resources down a pit to get ever diminishing returns?"
Then you have not been paying attention at all. Life expentancy has doubled and I would guess that the quality of life has improved by an order (if not orders) of magnitude in the last 100 years (it's hard to quantify quality of life, hence the guess). And it's all due to things you couldn't have imagined.
Now you're evil and inattentive.
"I'd be happy to live under the staus quo of the medical technology for the rest of my life."
So would many people, but I'd be (and almost everyone else) happier and satisfied if medicine advanced far enough to fix the damages done to my body over time.
Have I mentioned what an evil fool, unimaginative, and inattentive fool you are?
"In fact if it means I pay less for insurance etc. ove my lifetime it seems like a good trade."
This doesn't even make sense. You can pay less for insurance at any time you want to receive the level of care you want. Insurance premiums have been increasing due to the demand for the latest and greates treatment. Do a quick search online and you can find all sorts of insurance programs designed just for you. Mandating that other people have to make the same choices that you make makes you especially evil because others are willing to pay more to get better insureance than what you would consider typical. And you would stop them from improving their own lives!
Improvements in medicine mean cheaper medicine as well. My grandfather died of a heart attack at the age of 52 in the 70's. If any 52 year old had the same type of heart attack today, the chances of survival are phenomenal, even for those without a lot of money. The ignorance of medical professionals relating the heart in the 70's would be considered scandalous today. With enough evil people like you, millions of others can enjoy growing up without ever having met their grandfathers and sometimes fathers.
The accumulation of knowledge takes time. You should take the time to reflect on just how evil a person you really are. Your evilness isn't a conscious act of maliciousness, it's the much more pervasive and corrosive evil of sloth and tyranny clothed in feel good idiocy.
Man you really pissed me off with this post!
-Ken
To put it another way, regulating drug prices is like having a casino where every time someone hits a really big jackpot, a staff bouncer comes over, tells the winner that they don't need all that money, and confiscates most of it, leaving them with what they already gambled, plus 10%.
If there was a mechanism by which consumers could demand lower prices from an industry; and that mechanism was outlawed by the government to protect said industry, that would be a backdoor subsidy. I'm surprised this conservative/small gov't/free market blog and blog writer spend so many bytes protecting a huge gov't sponsored subsidy.
It has nothing to do with R&D or Europe. Consumers in the U.S. are not allowed to form the insurance pools that would get the best drug prices. This is anti-free market right here.
If you want to continue to give pharma companies a subsidy, call it what it is, but find a better way to do it. Allow consumers to organize for the best prices they can get for the drugs they want most. If this subsidy is so crucial then have the Federal Gov't give a direct subsidy to the pharma companies. All this indirect subsidizing is making people miss the forest because of the trees. But maybe that is the point.
I'd be happy to live under the staus quo of the medical technology for the rest of my life.
I wouldn't. For one, I need a kidney. Right now I'm four years into a roughly six year wait to get one from some poor unfortunate guy who gets hit by a car or falls off a bike and hits his head. Until I get it, I'm suffering bone problems that year by year are causing increasing pain in everyday activities. When I eventually do get it, I'll be forced to take drugs that repress my immune system and make me vulnerable to something as simple as the flu forcing an organ rejection (and starting the years long wait over) or increased chance of certain types of cancers. Even if none of that happens, the repression will almost certainly shorten my life measurably.
Not nearly as much as if I was born in my grandfathers time of course, if he suffered from my problems he simply would have died mysteriously until an autopsy determined he had kidney problems.
I am day by day thankful that medical technology has improved since then, and I can certainly imagine all sorts of improvements for the future. I'm sorry your imagination is so stunted.
I have a personal stake in this. I take a $30k a year biotech pharmaceutical for severe crohns disease which has come on the market in the last two years. Before that, I was on another drug which was less than ten years old. It worked for about five years. In the last month, a third biotech drug has been approved for my condition. I expect I will go on it sooner rather than later.
Anyone who says they are fine with current technology is deluding themselves. When something happens to you and you find yourself wishing god almighty for something- anything- you will thank the drug companies.
I support extending the patent period on pharmaceuticals to make them more, rather than less profitable. This would be more profitable for society in the long run.
Mintun, when someone you love develops Parkinson's disease, let us know how that I'd be happy to live under the staus quo of the medical technology for the rest of my life attitude works for you. Even with treatments (10+ different meds a day, many new and still under patent) and a (relatively new) electrode-implant, my boyfriend is almost at a point where he can no longer teach, despite his qualifications and experience. He's 45, by the way. We hope that additional treatments will be developed for Parkinson's Disease, as well as all of the other medical conditions that either have no treatment at all or have manifestly inadequate treatment regimes.
Really, what drugs are there left to develop?
Jesus wept. Let me guess - you're either a Huckabee or Ron Paul supporter.
Ms. Megan,
Basically accounting wise R&D is an expense, not an investment. That limits how it can handled. Cut profits and drug companies will compete on making what they have already found. The time from patent dies to generic is about 15 minutes these days. New drugs carry risk and its a complex game.
Most of the majors have generic branches. RD is awful expense. See the blog In the Pipeline for continuing discussion of it. But anyway, without the profits, the RD goes away like it has in so many other industries. It'd be hard to justify the costs imposed by the FDA on the margins they see in Europe.
In my day job, I am the chief financial officer of a fairly large medical device company. The economics of surgical instruments and implants are a bit different than those of pharmaceuticals, but the reasoning is the same. Megan, you are exactly right. The incredibly thing to me is that anybody with two brain cells to rub together even imagines that the budgeting model applies. Politicians propose it, but I always figured that was obvious nonsense. That so many people appear to believe it indicates the unbelievably sad state of economics education in this country (and I only took two semesters of economics as an undergraduate, so I know that it isn't book learnin' that's required).
In any case, this much is certainly true: If we reduce the rate of return from inventing and selling drugs, fewer drugs will be invented or sold. There is no getting around that. The only question is whether we care. Since my wife has multiple sclerosis and her quality of life (and, probably, mine) has been rescued by the surge in innovation for that disease in recent years, I do not want to see less innovation.
Finally, I note with no little amusement that the people who claimed to be outraged over Bush's decision on funding fetal stem cell research (the point of which is to innovate new medical therapies) overlap closely with the people who want to destroy innovation in the pharmaceutical industry. Well, who is going to take all that basic stem cell science and reduce it to medical therapies if it is not the pharmaceutical, biotech, and device industries? That is one project that will require a very high rate of return. People who are mad at Bush over stem cells and who want to destroy the return on investment in the pharmaceutical industry need to ask themselves whether they are, well, insane.
Basically accounting wise R&D is an expense, not an investment.
My understanding is that that's an accounting formalism because no one knows what value to place on R&D in progress (so conservatism requires it to be accounted to have zero lasting value). Is that correct?
Certainly the drug debate is, like all health care debates, colored by one's own state of health. Mintun's post is a case in point.
I have a Korean ex-girlfriend who used to expound at length on the superiority of the Korean health care system. Insurance is so cheap it's almost free, you see, and the quality is first rate.
After we broke up she went back to Korea and had a (very) minor medical problem. Her tune has changed enormously, since the system she used to think was perfect only covers routine, clinic-type care. Great for ear infections, but it doesn't cover an appendectomy, say, or an organ transplant.
I myself take a drug every day for an adrenal gland tumor. It's only a couple years old and replaces a drug that makes me grow breasts. Now, I'm a big fan of breasts, but I like them best on my lady friends. This particular drug was developed originally for some kind of heart condition. It's $100 a month after insurance, but my chest and I give hearty thanks for a drug development system that works. I seriously hope nobody screws it up.
As an accounting matter, most R&D is expensed right away, rather than capitalized (and expensed over more than one period). That does not mean that the justification for any particular decision to engage is R&D is not financial analysis founded on return on investment.
Thanks.
I've heard business guys speak dismissively of R&D as a pure expense that they bore with ill humor (because didn't bring in any money, as they put it).
This struck me as a wildly short-sighted viewpoint, since by extension of their logic, the only people who were worth having around (because they brought in money) were the sales force. It seemed that they failed to distinguish accounting convention with value to the business in a non-accounting sense.
Even now there is not enough return on investment
to justify antibiotic research. Notwithstanding the
growing evidence that many common diseases are pathogenic and thus curable, we have little progress on cures for chronic disease. 80% of our health care spending goes to chronic disease. Instead of new antibiotics, we have our government telling us it's bad public policy to prescribe antibiotics aggressively. Physicians get nasty grams from our government if they over prescribe abx. We are acting as though there will never be another antibiotic found so we must manage the rare set we have now. Witness governments new role in the brave new world we are marching into.
Since Canada imports our drugs for "cost-plus", can we do the same for their oil? Surely they don't need $90 per barrel for it, when it only costs them $10 per barrel or whatever to extract it. Maybe we should be paying them $11 per barrel instead. For an alleged hegemon, we let a lot of countries take advantage of us.
Well argued, and there are many good points in the follow-up comments. There are many good reasons why the creation of a government monopsony would become a poster child for "the law of unintended consequences", and why the status quo is far superior.
And, yet, the cry to change the current situation continues. People continue to suffer from high health care costs and health conditions. What is to be done?
As the old saying goes, "monopsony is not the cure for monopoly." The cure, instead, is to set loose competition and let market forces do their work.
Whenever you scratch a monopoly, you find one of two causes -- steep economies of scale, or government intervention in the market. With drug manufacture, there are certainly some economies of scale, but they could be addressed in a manner analogous to semiconductor foundries. The largest barrier to entry for medicines is government intervention. This intervention comes in two flavors, patent and clinicals.
Many people don't realize that patents are an arrangement by which inventors donate their inventions to the greater good of mankind, forever...in return for a modest government-supported monopoly for a number of years. People see only the monopoly portion, but don't realize that the generic medicines they consume are manufactured using detailed instructions from the patent application, put into the public record by inventors who could have kept them secret. Patents are an incredible bargain....for anyone who can outlive their term, and all future generations thereafter.
Which leaves clinical trials. Once a scientific inquiry into the safety, efficacy, and security of medicines, these have changed into hugely expensive -- half a billion USD in the post above -- bureaucratic time-wasters that purport to be everything to everybody. If a drug would make a thousand people better and a dozen people worse, huge resources are devoted to ensuring that those worse off would not number 11 or 13, and that the exact dozen under scrutiny might be protected from their folly if they didn't cease using the drug upon the first incidence of a side effect.
If you want new drugs AND low prices, the clinical trial system is the fundamental obstacle.
What about re-importation of drugs from first world countries? This would force drug companies to either raise prices to market levels in Europe, Canada, Japan, etc., or to stop selling to those places that refuse to pay market rates.
This ought to work like a dutch auction... Clearly, Europe, Japan, etc. value the drugs less than US consumers. But by including them in the auction, the price should end up in a spot much higher than the Europe/Japan/etc. price, but somewhat lower than the US price. Which would increase the returns on investments to the pharmas, and cause them to increase their R&D.
There is one thing to appreciate about other first-world drug markets that doesn't ever seem to get mentioned. Something that lowers drug ROI in the US is the risk of drugmakers being sued and drugs taken off of the market for low-probability side effects, because of the availability of class-action lawsuits. Imagine that there was a serious life-threatening medical condition, which was one of the leading causes of death in the US. Imagine that there was an effective drug therapy which treated the condition, whose side effects caused 1 in a million people to die. Imagine that there was also an effective surgical treatment for the condition, that killed 1 out of every hundred (i.e. 10,000 out of a million people).
So, in this scenario, what is the better odds? The treatment that kills one person, or the treatment that kills 10,000 people? Well, in the US phen-fen has been sued out of existence, while bariatric surgery is going strong. Because one lawyer can sue the drug company once for everyone, whereas it takes a whole army of lawyers to sue the surgeons, who have to be sued one at a time.
Even the most expensive drugs are dirt cheap compared to their non-drug substitutes. (My late father-in-law used to take daily heart medication that cost $10/pill. We would wryly point out that $10 was like 15 minutes in cardiac intensive care...) Allowing drug companies to be sued in class-action lawsuits kills off many drugs and dilutes ROI, and kills off the millions of people who die because they don't have access to them.
Most of the politically popular proposals amount to stealing the property of the drug company stockholders. Today, many (most?) of these stockholders own relatively small amounts of stock through mutual funds, retirement, and pension accounts.
The practical effect will be do stop new drug development - which will in turn result in early death or reduced quality of life for tens of millions of people. Many specific examples are noted above.
But hey, it makes the "progressives" feel good about themselves.
Unquestionably the high cost of drugs results from complying with the unbearable FDA regulations, and the rest of the world free-riding on the U.S. market.
I work in the pharma industry, and the asninity that I have seen from FDA on interpretation of clinical trials would make you cringe. Since no-one at FDA wants to be tagged responsible for approving another Vioxx (its withdrawal from the market will also work to the detriment of sick people), the demand for ever more rigorous reviews of potential side-effects, etc. adds more delays, more clinical trials, etc.
FWIW, on the patent side, as part of the bargain to permit the generic drug process we have today, Congress enacted 35 USC 156, which extends the life of a patent that covers a drug that has gone through FDA approval. Also, for a new molecule drug, no generic application can be approved for a monimum of five years after the brand drug goes on the market. So big pharma does get some reinstatement of patent life and relief.
But yeah, suggesting that you should strip away drug companies' profits will kill off both the brand and generic market -- generics too make most of their money when they manage to bring their generic to the market the first six months after the brand goes off-patent (or after a generic wins a challenge to brand patents). After that, once you have 3+ generic players in the market, you get to commodity pricing, i.e., pennies above cost. That is not going to justify most generics' efforts to to their own R&D and clinical work to prepare generic formulations.
Kill off big pharma, and you can start to have fun with cheap "made in China" drugs... (shudder).
Dear Megan,
Good piece. I've worked in the Pharmaceutical business for 26 years. One more observation rarely mentioned but equally important. In the late 70's and early 80's, many states repealed their anti-substitution laws. What this did was two things. The first thing it created a more expansive generic market and it forced the cost of new drugs up even higher since they had a shorter period to make money.
Before these laws were repealed, Big Pharma actually promoted older non patented drugs; since no one could substitute them unless the doctor okayed it. This gave patented drugs a longer shelf life for profitability and it allowed new drugs to be less expensive.
It's been repeatedly pointed out here and in just about every other economics blog that when it comes down to it, the Europeans are vastly poorer on a per-capita basis than Americans. (I'm always bemused by the comparison of health spending by %GDP as a comparitor between countries. Shouldn't it be simply straight purchasing-parity dollars?)
The reality is that no-one in the world *except* the US can afford new drug prices - they're simply not wealthy enough.
There's no doubt that the rest of the world free-rides on US drug prices, but really, isn't it simply the case that for the rest of the world the choice is between lower prices or not using the drug at all?
"Really, what drugs are there left to develop? "
All the other suggestions are excellent, but I'd like to see a sure cure for BDS. Seemingly, millions upon millions are stricken. And do we really want to hand American medicine and 'Big Pharma' over to the same people who wrote the clear as day IRS tax codes, guarantee Social Security and operate VA Hospitals?
Don't blame all clinical trial (or pre-clinical trial) costs on the U.S. FDA. European regulators in particular make their own unique demands for specific types of data. These must be carefully considered before the start of trials if those trials are to satisfy all developed countries. In registering drugs overseas, i found it frustrating that in at least one progressive (Scandanavian) country, we sometimes ran into regulators who refused to register a new drug if they already had 2 or 3 generic drugs for the same condition. Even if the new drug showed a (non-dramatic) advantage in clinical trials, such as reduced uncomfortable side-effects.
Even with price controls, these bureaucrats were not prepared to allow their populations incrementally better products, or a choice of products which might work better in some individuals than in others, if the cost of the drug was a little more than what they already had.
And yes, the risk of litigation in the U.S. is a serious consideration in drug pricing. Innovator companies can get stuck with the lion's share of a judgment even after the drug goes off patent and the actual pills the patient took were manufactured by someone else. Pharmaceutical companies can be held liable even if the adverse event could not have been foreseen or if it was a coincidental medical problem, presented in court as a side-effect throug junk science.
Canadian laws which allow for negating drug patents if the patent holder would not sell a drug at the price the government wants (mandatory licensing) are seen in terms of competitive national interest in Canada. These laws are apparently justified in the minds of Canadian lawmakers because not much drug research is done in Canada. Canadian drug regulators (from the equivalent of our FDA) were very bold in affirming this reasoning during a conference I attended some years ago.
Drug manufacturers can sometimes negotiate a little higher price in Canada if they do part of their clinical trials there, or if they open or expand a Canadian subsidiary. Conversely, the Canadian government feels free to take drastic steps against an innovator company which refuses to market a specific drug in Canada at the government's price or to cooperated in helping a Canadian company manufacture the innovator's drug from a negated patent. They will threaten to kick the company out of Canada altogether.
This analysis is spot on. It is a matter of economic profit rather than accounting profit. Accounting profit considers only explicit costs (R&D, manufacturing overhead, etc.).While economic profit considers explicit costs and implicit costs (opportunity cost; the cost of foregoing the next best alternative). Essentially, economic profit will be less than zero (read, an economic loss) when opportunity costs too high. If returns on investment for R&D capital are lower than returns on the next best alternative (opportunity cost) then the firm experiences an economic loss and has no incentive to invest further in R&D. Rather, the firm will use the R&D budget to invest in the higher yielding alternative.
I hope this makes sense.
I love the a priori assumption that driving down drug costs and loosening patent controls would kill off drug research. That's what happens when you think purely in terms of economics and mathematical formulas, and assume no possible alternatives like public financing.
Whatever happened to government-sponsored research? I seem to remember that a lot of research used to go on at universities, back in the days before we decided that we had to turn everything over to the "free market" and let corporate beancounters decide what we should research.
You're all so locked-in to this idea of market uber alles that you refuse to consider any alternative scenario. Sad. Government exists to serve the people; what service could be more welcome than researching improvements to public health?
Great idea, Rob. We could turn drug research over to a joint venture of the DMV and the Post Office, and then sit back to wait for those drugs to roll in.
Socialism is dead, Rob. Central planning - dead. Public ownership - dead. All thoroughly discredited. Sad, but there it is.
PS: try to keep up on current events. You're at least 20 years out of date.
liberalrob,
The current arrangement which allows companies to develop new drugs leaves much to be desired. But a lot of government research still goes on. Look throught the comments above. The best government-funded researchers are fond of high-minded, creative basic research which sounds good in grant proposals. They are not so interested in the grinding, repetitive, expensive, picky type of work it takes to bring a "safe and effective" drug to market.
If university researchers could bring the same drugs to the population as drug companies, you would probably see drugs being registered in the United States by European universities. I believe that if drug development were turned over to the public sector, drugs would be more expensive than they are now, and that less-than-optimal drugs would be aggressively pushed onto the population (this happens occasionally now, too). Some truly daffy medical treatments were promoted in the USSR back in its heyday. Government functions better as a watchdog over others than as a watchdog over itself.
My husband works for a government institution and he regularly encounters inefficiency, embezzlement, falsification of reports, cronyism, factionalism, coercion and other malfeasance which would quickly kill a for-profit organzation. He has receive death threats and has been assaulted for reporting malfeasance. He stubbornly stays there out of a sense of duty which I don't quite understand. I never heard of anything like this when I was working for a pharmaceutical company, except in medical journals.
A lot of reports of harassment of whistleblowers came out of the socialized British health system and out of both foreign and domestic government-sponsored scientific research projects, including clinical studies. In particular, I remember a case in which a university researcher fabricated results of a large clinical study on African women out of whole cloth. The university official whose job it was to uncover the fraud received death threats and was ostracized by the university community. Advisors to potential whistleblowers in our own government's research organizations are advised never to report malfeasance by a superior, as they will be driven "out of science" and will probably lose their families, while the accusations of fraud will likely be covered up.
The temptation to hide negative data or to generate false data also exists in the private sector. But companies pay an extremely high price when fraud (or even sloppiness) is uncovered. Government institutions just charge any costs to the taxpayers.
I'm so sorry, communistrob, that we are concentrating on keeping drug mfg'ing in a sector that actually gets results (despite all the meddling and free-riding) instead of going back to the failed ideas of the past like socialized research.
It's not working out too well in Europe, is it? But you want to follow that model because it's more ascetically pleasing when a senator from Arkansas decides which drugs get funding.
So when the republicans are in power, no birth-control pills get funding and when the democrats are in power, diseases that disproportionately affect minorities more get double the funding the death rate would justify. That's BRILLIANT.
Or were you thinking of having the univ's totally unaccountable for what their research focuses are? Because that's the choice when government holds the purse strings: either the recipient is accountable or they are not... and the only one they can be accountable to is our beloved pork barrelers.
liberalrob,
Read the comments and the blog entry- the claim is that private firms will start cutting back on research. If government is to pick up the slack, then it will have to actually pick up the slack- not claim that private firms will not cut back on research in response to lowered returns.
One question I have wanted progressives and anti-pharma people to answer is this: if given government run drug research (public financing), would they then be willing forgo any claims on the product of private research?
Or better yet, do they really want all those hordes of poor people broken, maimed, murdered by the heartless pharmas to now be unable to sue their tormentors because now its the government doing the research and... surprise! Now the drug developers have sovereign immunity.
Of course, you COULD let the patients sue the universities that are now doing the research, but I wonder what would happen when the liberal trial lawyers start killing off our liberal universities all because we liberalized our pharma system.
It'd be a 'friendly fire' massacre as the different factions of the democrat party go to war with each other. Which would be tremendously amusing to watch, but I'm not willing to scrap large portions of the free market just to watch the fireworks.
Re: But history is full of companies that used to do something else entirely
True, but then why do so many unprofitable or minimally profitable businesses stay in business? Why haven't the airlines all gotten out of the air transport business and opened up Wall Street banks instead? It does seem to be the case that economic niches do not go unfilled any more than biological niches do. If there's even a small profit to be made someone will enter the market to make it. Technological obsolecence drives companies into new lines of business (when they do not fail outright) but it's unheard of for a company to drop a line of business with tens of millions of customers and any sort of profit potential at all. You need to come back to reality on this one.
So instead of several companies fighting it out to get the best drug to market first, there's only room in the starved market for one. Congratulations, you've found the one thing that rivals governmental control for sheer inefficiency and inadequacy: a monopoly.
With your permission, I'd like us to stay as far away from that 'reality' as possible, thankyouverymuch.
Re: So instead of several companies fighting it out to get the best drug to market first, there's only room in the starved market for one.
See my example about the airlines. I do believe we have more than just one of them around despite the low profitability of their buisness.
Reality trumps ideology every time.
ScenOfViolets wrote:
Back in the day, the insurance companies blamed frivolous lawsuits, and pushed for 'tort reform'. I haven't noticed that my insurance has gone down since then. Has it happened for anyone else? No? Didn't think so.
My wife's malpractice insurance is about 60% below what it was at the peak, and she has a higher policy limit. It peaked just before tort reform was passed here in Texas. So, yeah, tort reform helped. A lot.
Yes, and the airlines are SUCH a model of efficiency... how many times has the government bailed them out, now?
How's that 'reality' feel when it smacks you upside your head, eh?
Yes, and the airlines are SUCH a model of efficiency... how many times has the government bailed them out, now?
How's that 'reality' feel when it smacks you upside your head, eh?
I'm not sure what your point is. Yes the government had bailed out the airlines, but the government has also been the cause of much the airlines' woes (see: the 9-11 grounding of all flights). Often this has been for safety reasons and I am OK with that, as we all should be. My point stands: the airlines have not fled the transportation business to open up strip clubs or investment banks. An economic niche does not go unfilled.
I'm not sure what point you are trying to make with the airline industry angle.
How different is the coach flying experience today compared to 10 years ago? Faster, cheaper, more comfortable, less side effects? No?
Airline seats are a commodity, and I don't see a whole lot of innovation. So, yes, the economic niche of commodity drugs (generics) will clearly not go unfilled. But that's not what this discussion is about.
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