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Drug Prices

Drug Prices and Costs – From the Mail

Here are some of the responses to the recent posts on drug prices and research costs. First off, from Dave S.:

“I’m a skeptic on the idea that the proceeds from the temporary legal monopoly represented by a patent is, in fact, used by pharmaceutical companies to finance R&D. Yes, I know it stands to reason and it’s the prevailing wisdom, but is it true? One way to investigate this would be to see how the companies themselves view R&D. This, in turn, may be determined by how real R&D expenditures vary with real revenue. If, as real revenue rises, R&D expenditures rise either proportionally or faster, it would be a reasonable conclusion that patents do support R&D. If, however, R&D expenditures grow more slowly than revenues or not at all, it would be equally reasonable to conclude that the prevailing wisdom is wrong and that patents do not in fact support R&D but just raise profits, which nice as it is for the companies involved is not the constitutional purpose of a patent.”

Interesting point. I’ll see if I can round up some figures, but I’m not sure how good they’ll be. Like any other industry, pharma companies do all tricks with earnings statements that they possibly can, in order to tell Wall St. a coherent story. And there’s also the tendency to think, as the money comes in, that “Hey, we don’t need to increase research that much. Look how well we’re doing with what we have!” Conversely, on the way back down, as revenues fall, R&D isn’t always the first thing to get cut. By that time, it’s clear that the only thing that will save the situation is for some new profitable breakthrough to emerge from the labs. But let’s see what the numbers say.

There have been several letters along the lines of this one, from Mark S.:

“What I find baffling is that no one is pointing out who the enemies really are. Americans are subsidizing the world. Subsidizing AIDS drugs in Africa may be defensible, but subsidizing cholesterol drugs in Europe isn’t. I’d like to see some information about what would happen to American drug costs if Europe (and Canada) were just cut off. Obviously some money is getting into pharma coffers, the question is how much? What sort of profits are European Pharmas making in America vs Europe (i.e. are they extorting Americans, too)?”

Well, the larger European companies depend on revenue from American sales, too, I can assure you of that. As for cutting off the European market, it would be a difficult, although intruiging, thing to calculate. I don’t know of any company that publicly breaks down cost-of-sales for the two markets, though (although I’m sure that these figures are worked out internally.) Marks’ suggestion:

“While not a big fan of regulation, I think it would be fair to regulate drug prices in America this way: The cost to Americans is the lowest cost negotiated with any other country. It doesn’t cap drug costs, it just evens them out. Drugs could cost anything, but everyone would be paying the same amount for the same product. Pharmas are free not to sell to any country if doing so would lower the US price. They are also free to negotiate different prices for different countries, the US would always match the lowest.”

I think that this would fall victim to a sort of Gresham’s Law – bad prices would drive out the good. Countries with national health plans already can use their muscle to negotiate prices that couldn’t be sustained across the worldwide market – “You want to make a tiny amount of money here, or nothing at all?” As long as the US runs a different sort of market, things wouldn’t mesh too well. Here’s an approach to that problem, from reader Clark H:

“If the US, the last of the free markets, ever starts allowing reimports or does “National Bargaining”, I would suggest that the Drug Companies start the bargaining BEFORE they have finished their R&D. When they still have leverage. The problem with any product with a large up-front cost and relatively small operating costs is that it is at a huge disadvantage bargaining with a small number of customers after all the costs are “sunk”. The customer knows the hand of the supplier. The supplier can’t walk away because any positive cash flow is a good thing at that point. The drug companies should get to phase 2, when they know roughly what to expect (after all they are designing the phase 3 endpoints), and then bargain. If the countries aren’t willing to pay an adequate rate, they walk away having spent only the cost that would otherwise have been spent. Not a perfect solution, but. . .”

I think that there’s something to this, although the Phase III failures would throw a wrench into the works. Of course, that’s what they do now, actually. I wonder, though, if what would happen under this plan is that countries would just apply a standard calculation for what they thought the Phase III trials and regulatory approvals would cost, which would take things right back to the “already knowing the hand of the supplier” stage.

Well, the mail on this topic doesn’t show much sign of letting up, so we’ll keep it open and revisit it in a few days. Brainstorms appreciated.