The Pharmaceutical Industry

The Pharmaceutical Industry

E-mail debates of newsworthy topics.
April 9 2001 11:35 PM

The Pharmaceutical Industry

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Merrill,

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Thanks for going first. To my mind, this is one of the critical debates now going on—the real fault line in the new politics. And it pits, as the old politics did, the culture of achievement against the culture of resentment. Guess which side I'm on.

Can I start with a look at the broader picture of what these products are doing? I see from today's Time  that a new drug designed to fight and destroy leukemia cells—and only leukemia cells—is now in early development. The drug company Novartis came up with most of the investment for this—and it may not pan out. The drug is in phase 1 trials and may never make it past the second. In fact, as you know, only one out of 500 drugs makes it from the beginning to the end of this elaborate trial system. Still, I've no doubt that if Novartis does manage against all the odds to bring this drug to market, you'll be among the first to try to rob them of any profit. How dare they make money back off an extremely risky investment that may rescue thousands of people from debilitating chemotherapy? Who do they think they are—capitalists? I guess they're the same evil capitalists that researched and made the several anti-HIV drugs I just swallowed an hour ago—drugs that have given me and countless others a new lease on life, and drugs that no government would or could have produced on its own.

You slyly claim that this achievement shouldn't be rewarded in the marketplace because the government actually did most of the research for our pharmaceutical revolution. Hooey. Despite big increases in NIH funding in recent years, over 70 percent of pharmaceutical research and development comes from the private sector—and that proportion is growing. They take the huge risks and occasionally reap the rewards. Have they been pushing drug prices up beyond inflation? Nope. Between 1993 and 1999, consumer prices went up some 19 percent. Drug prices went up 18.1 percent. Do they make "exorbitant" profits? That depends on how you measure them, as Ron Bailey explains in a terrific piece in the current Reason. By some measures, pharmaceutical companies have profit margins of up to 20 percent. But that measurement means writing off R&D as "current expenses." For drug companies, R&D is of a different level of magnitude than for most other outfits. Adjust for that and the profit margins come down to around 9 percent. That's still a healthy margin—but it exists to offset the epic risks that drug research entails. There are very few other industries where you can invest hundreds of millions of dollars in a project over 10 years and end up with absolutely nothing. One of the reasons for patents and profits on successful drugs is to balance out the huge losses and bankruptcies that occur every day in this industry for the failed drugs. Indeed, the top 10 percent of drug sales account for 50 percent of company profits. That's a lot riding on a very few—which is why the very few are priced competitively.

You complain about research into "me-too" drugs, slightly different versions of drugs that are already in the marketplace. But all this does is increase competition, which reduces prices. You also suggest that the rock-bottom prices for drugs in Africa is somehow proof that they're overpriced here. But you must know that for many products the cost of something isn't just the marginal cost of producing one extra widget. It's the cost of all the research, development, manufacturing, and so on that made that one widget possible. So, it's no skin off the drug companies' nose to give many of these extra widgets away for free. They're right to do what they're doing. The reason they were reluctant is that lefties like you will then turn around and demand that we give the same drugs to Americans for the same rock-bottom prices—thereby eviscerating the very incentives that made the drugs possible in the first place. A reimportation bill, beloved of Democrats, would have done just that. I also think you're being naive about the ability of these countries to deploy these drugs effectively. A friend of mine who spent several years in Africa as a Peace Corps volunteer told me about river blindness. It's a debilitating disease that can be cured by taking one single pill every six months. Merck gave the pills away for free. The disease is still endemic—compliance averaging 2 percent. If you think that most poor Africans are going to be able to juggle the extraordinarily complex regimen of dozens of anti-HIV pills every day, with and without food, on time, for years on end, you're nuts. Worse, if the drugs aren't simply stolen, they will help develop HIV-resistant strains of the virus more lethal than the current ones.

Over to you—but one last thought. Have you ever thought about the real cost of these drugs? I mean by that their cost when measured by how much they also save our society? The Columbia University economist Frank Lichtenberg has done some fascinating work on this. The bottom line is that if you factor in increased longevity, productivity, and declines in hospitalization, every new, expensive drug on the market saves far, far more than it costs. On average, every $1 spent on new drugs saves over $3 in hospitalization expenses alone. Far from being overpriced, the current prices for new drugs are actually massively underpriced when you factor in the benefits. Of course, that reasoning would rob you of your current populist bogeyman. Sorry, but go find yourself another one. I want to stay alive.

Andrew