Friday, October 21, 2005

Pharmaceutical research, costs, and prices

The BMJ has an evidence-based look at whether other countries that pay less for drugs are free-riding on research paid for by US consumers:

Worth a look.


Tom Huddle said...

“evidence-based?” As someone who occasionally dips into the economics literature (admittedly as an amateur), this piece seems to me to be a hit piece rather than serious analysis; file under pharma bashing.

So far as I can tell, the article not only fails to engage with an extensive economics literature on the costs of drug development and drug pricing, it is actively misleading. Companies whether based in the US or Europe sell drugs throughout the world; they price their drugs sold in the US in a market (however imperfect) and in their home countries (if not based in the US)according to what is allowed by regulators. They subsidize their R and D from the American market whereever else they may sell their drugs. Thus it is a complete non sequitur to infer that European countries with low drug prices are not free riding on the American market for pharmaceuticals from the fact that drug companies spend as much on R and D in Europe as they do here in the US while charging lower prices in Europe. (this seems to be the point of the table in the article). Of course they can spend as much as they do both here and in Europe; they have profits from the American market that enable them to do so.

The broader claim is that European/Canadian drug prices are sufficient to sustain current levels of R and D and leave plenty of money left over for profits, marketing, etc. E.g. pharmaceutical firms in Canada can spend plenty on R and D and yet charge lower prices than in the US; the implication being that if they can do it, why can’t US companies? To quote the authors:

Companies in other countries also fully recover
their research and development costs, maintain high
profits, and sell drugs at substantially lower prices than
in the US. For example, in Canada the 35 companies
that are members of the brand name industry association
report that income from domestic sales is, on
average, about 10 times greater than research and
development costs.11 They have profits higher than
makers of computer equipment and telecommunications
carriers12 despite prices being about 40% lower
than in the US.11 (p.958)

This claim appears to be based upon a Canadian govt report documenting pharmaceutical company compliance with a govt requirement that companies selling patented drugs in Canada spend at least 10% of Canadian sales on R and D done in Canada. So the fact that pharmaceutical companies in Canada (that appear to be mostly subsidiaries of companies based in the US and Europe) more or less comply with this requirement is seriously presented as evidence that Canadian prices for drugs worldwide would be adequate to incentivize levels of R and D presumably close to what pharmaceutical companies operating in a global market are actually spending worldwide. Breathtaking!

The throwaway attacks on patents and marketing expenses are of a piece with the above.
Big Pharma deserves some bashing lately; why can it not be done more competently?

Anonymous said...

Oh, Big Pharma deserves more than just bashing, Tom. It has been under government scrutiny since the Kefauver hearings of the 1950's -- and what do we have to show for it? Ever higher profits for the industry; lavish tax breaks; and plenty of publicly funded research for them to lean on. The CBO report of October 2006 found that government funded research actually leads private sector research in new areas (see page 31). In the pharma industry, the market does not lead -- it follows!

I'm surprised that you don't develop the clear implication of the conclusion of your first paragraph. If US profits are bountiful enough to subsidize R&D expenses all over the world, then US profits are plainly excessive. The "non sequitir" would seem to be in your assumption that profits generated in America's free (however imperfect) market must be closer to the norm than those generated in the controlled foreign markets -- in the face of your own evidence to the contrary.

I'm also puzzled by your verdict on the Canadian case. The fact of government regulation is irrelevant to the question of business viability. If pharma companies are complying with the regs, that means they are capable of turning a profit under those conditions. Whether those conditions are imposed by a government or by the market is beside the point of profitability. The companies would not do business there if they could not turn a buck. So their continued presence in the Canadian market does in fact prove that the pharma biz can succeed in such conditions; that it doesn't need the pampering we Americans give it.

James Hanley said...

I've just thoroughly reviewed this article, and it's really a dreadful piece of work. The authors not only completely ignore the economic literature, they make pretenses at economic arguments while wholly bungling the economic concepts.

I'm wholly neutral on whether the pharmas deserve bashing, as that's outside my area of expertise. But I can attest that this article does not make a good case for it, being based wholly on misunderstanding and misapplication of economic concepts.