The Pharmaceutical Industry Under Attack

[KendallJ]

By Kendall J from The Crucible & Column,cross-posted by MetaBlog

The Pharmaceutical Industry is one of the last industries where high value innovation occurs (the other being the IT industry). While Pharma is more regulated than IT, it has relative freedom within the U.S. to capture value for its product and in turn to fund development. This is evidenced by the strong Venture Capital market for young pharma companies, where it is still a viable financial bet to invest in companies whose products won't come to market for a decade or more. The only way this sort of investment is viable is if the possible payoff is huge and in Pharma, a successful blockbuster makes billions for its parent.

But witness a string of healthcare legislation, proposals from political candidates, and ongoing debates, all of which, if they make it to fruition will serve to continue to decimate pharma's long term prospects. Here's a round-up:

Drug Re-importation: under the guise of the government acting as an "efficient purchaser" of drug proposed legislation is nothing more than riding piggy back on European socialism. I had a whole post on this, and ARI's great op-ed beat me to it. Europe doesn't get better drug prices because they have access to volume discounts or to some magic to make pharma producers more efficient. They have them because they dictate the prices in their countries. Re-importing drugs through those countries is nothing more than adopting the same dictates, only in a seemingly "squeaky clean" Mafioso money-laundering style.

Post Vioxx increase in FDA's regulatory powers. From a recent Forbes.com article, "The Biggest FDA reform in a Decade", new legislation, quietly moving through congress, and attached to appropriations legislation would increase FDA's powers to meddle in pharmacuetical companies development programs. This includes dictating drug label claims to pharma companies, directing pharma companies to do post launch clinical trials, and forcing drug companies to make public all clinical trial results. All of these measures will serve to bottleneck and already too lengthy clinical trial process, increasing development costs even further.

Hillary Care 2.0. Another veiled attempt at socialized medicine. How many times must we see this kind of crap. ARI's again takes these to task, in both a letter to the editor (which I'll post when available) and a great op-ed by Noodlfood's Paul Hsieh.

View the full article

[~Sophia~]

Re-importation law - what a joke! Prime example of how a government puts a bandaid on a problem of its own creation.

The reason why prescription drugs are 30-50% more expensive in US than anywhere else is because there is a federal law that gives drug manufacturers a monopoly over prescription drug importation. In a free market structure (which you don't have when it comes to prescription drugs) healthy competition between producers takes care of price fixing.

[KendallJ]

Re-importation law - what a joke! Prime example of how a government puts a bandaid on a problem of its own creation.

The reason why prescription drugs are 30-50% more expensive in US than anywhere else is because there is a federal law that gives drug manufacturers a monopoly over prescription drug importation. In a free market structure (which you don't have when it comes to prescription drugs) healthy competition between producers takes care of price fixing.

Sophia,

You think the fundamental issue is "price fixing" amongst manufacturers? So Lilly and Pfizer are colluding to keep the price of Cialis and Viagra high? I hardly think this is the case. Yes, maybe drug mfgs have legal monopoly, but two large companies like that will definitely fight each other to take market share from their rivals. The fact that downstream entities can't mange importation does not curtail "healthy competition".

I would disagree with your assessmnent. The fundamental issue is that in just about every other country in the world, drug prices are negotiated with govt authorities. The US is one of the few countries where govt doesn't have as much influence in pricing policy.

[~Sophia~]

Sophia,

You think the fundamental issue is "price fixing" amongst manufacturers? So Lilly and Pfizer are colluding to keep the price of Cialis and Viagra high? I hardly think this is the case. Yes, maybe drug mfgs have legal monopoly, but two large companies like that will definitely fight each other to take market share from their rivals. The fact that downstream entities can't mange importation does not curtail "healthy competition".

I would disagree with your assessmnent. The fundamental issue is that in just about every other country in the world, drug prices are negotiated with govt authorities. The US is one of the few countries where govt doesn't have as much influence in pricing policy.

Yes, I do think that the fundamental issue, in US, is a government induced monopoly (if Big Pharma is not afraid of competition why are they spending so much money to make sure that they don't loose it?). As you know, I am not for price regulation of any kind - I do like the fact that you have no price controls (great!) but that is only effective if the market is open to anyone, which you don't have. As a result the cost of prescription drugs in America is the highest in the world by... A LOT.

Edited October 4, 2007 by ~Sophia~

[KendallJ]

Yes, I do think that the fundamental issue, in US, is a government induced monopoly (and BIG Pharma is fighting very hard to keep it). As you know, I am not for price regulation of any kind - I do like the fact that you have no price controls (great!) but that is only effective if the market is open to anyone, which you don't have. As a result the cost of prescription drugs in America is the highest in the world by... A LOT.

Yeah, I highly disagree with this. The easy way for a mfg to control this is to grant exclusivity of territory to his distribution channels, with no abilty to reimport, contractually. The idea that a mfg has to sell his product or allow his product to be sold to someone who will reimport it and destroy the price structure he has created is ludicrous. A private market will not have "more competitive" situation. One would simply see drug mfgs manage their channel partners much more tightly. There might be leakage, but not a significantly different pricing competition structure.

Again, do you have some evidence that mfgs of similar competiting drugs are colluding on price? If not, then one doens't need a separate layer of the value chain to have competition.

[~Sophia~]

The idea that a mfg has to sell his product or allow his product to be sold to someone who will reimport it and destroy the price structure he has created is ludicrous.

But I am not for this re-importation law (it is reimportation of the same drugs which are already available on the market instead of opening the market to everyone) or any other law that would introduce more market controls. I am for getting rid of the federal law establishing monopoly. I am for you being able to go to your local drugstore and seeing drugs from Europe sold also under no price controls; I am for you to have a choice.

Edited October 4, 2007 by ~Sophia~

[KendallJ]

But I am not for this re-importation law or any other law that would introduce more market controls. I am for getting rid of the federal law establishing monopoly. I am for you being able to go to your local drugstore and seeing drugs from Europe sold also under no price control, for you to have a choice.

Implied in that is the idea of perfect competition. You have a choice now. Buy Cialis or Viagra.

What I am saying to you is that I as a drug manufacturer will simply not sell my product without a contract that divides up terrirtories and disallows reimportation. Now my distributor in the US has an exlusive territory by contract with me. He does not want to see anyone violate their contract terms and reimport drugs into his territory. I sell my drugs to US distributor at one price and to EU distributor at another price. And if I catch either one of them reimporting drugs, they will lose their very lucrative business.

What you are saying is that in a free market somehow much more perfect competition will occur, and I am saying that the market wis just as capable to put in place structures to continue to preserve the price. What you have to show is that the US price is not the market price, but he US market is the freest market. What makes you think that the US price is 30-50% too high and the Canadain price is the right one?

[~Sophia~]

I sell my drugs to US distributor at one price and to EU distributor at another price. And if I catch either one of them reimporting drugs, they will lose their very lucrative business.

But again I am not talking about re-importation of the same drugs but allowing new producers, new drugs to enter the market. Those two are two different things.

What you have to show is that the US price is not the market price, but he US market is the freest market.

US drug market is the freest market, in terms of not having price controls, but it is not a fully competitive market. For example, in terms of over the counter medication for cold and flu for children there are many more alternatives in Europe, many of which, I consider better.

What makes you think that the US price is 30-50% too high and the Canadain price is the right one?

I am not saying Canadian price is the right one. It is probably somewhere in between.

Edited October 4, 2007 by ~Sophia~

[KendallJ]

But again I am not talking about re-importation of the same drugs but allowing new producers to enter the market.

Could you give me an example of this? A particular product market that has "reduced" competition because new producers are not allowed to enter?

Prescription drugs are a global market and every major pharma company targets and gets entry to both the US and EU markets. OTC, I know less about, but within a country there are rife options in any OTC category. It woudl be tough to claim that prices are elevated due to collusions when most OTC categories are jammed with competitors.

To claim that this is the major issue of pricing differences you would really have to show systematic problems, and I'm hard pressed to see a plethora of concrete examples of it.

[~Sophia~]

Could you give me an example of this? A particular product market that has "reduced" competition because new producers are not allowed to enter?

I am afraid I don't understand the question.

Let's say you are making a drug X and I am making a drug Y which is similar or offers an alternative treatment (treating the problem from a different angle) which is cheaper. If both of our products are allowed on the market - you either have convince the public that it is worth to pay more for your drug (that you offer more value) or if not - you have to match my price. If however my product is prevented from entering the market - you can sell your drug for whatever and further if yours is the only available product - it is not as if someone who gets sick (let's assume serious illness) won't buy it even if overpriced. It is not like a TV that one can do without.

I know things are not this simplistic but that is a good illustration of the principle.

Prescription drugs are a global market and every major pharma company targets and gets entry to both the US and EU markets.

Drugs which are sold in the US are available in every other market but many drugs that are sold outside of US are not available in US.

I think you are underestimating the benefits of having a market monopoly.

Edited October 4, 2007 by ~Sophia~

[KendallJ]

Let's say you are making a drug X and I am making a drug Y which is similar or offers an alternative treatment (treating the problem from a different angle) which is cheaper. If both of our products are allowed on the market - you either have convince the public that it is worth to pay more for your drug (that you offer more value) or if not - you have to match my price. If however my product is prevented from entering the market - you can sell your drug for whatever and further if yours is the only available product - it is not as if someone who gets sick - won't buy it even if overpriced. It is not like a TV that you can live without.

Many errors there.

a. Price has no functional relation to cost, other than it has to be higher than marginal cost for a business to be viable. The mistake of looking at cost already starts to imply an idea of "perfect competition" where price is drive down to cost.

b. It is actually just like a TV that you can go without.

Drugs which are sold in the US are available in every other market but many drugs that are sold outside of US are not available in US.

Could you provide some examples, that clearly show this market monopoly preservation, by coercive means? That may be, but it does not prove the point. It is circumstantial until you provide some evidence that it is specifically due to the reasons you claim.

I think you are underestimating the benefits of having a market monopoly, especially as wealthy as the US market is.

If the US is so wealthy that the cost of drugs are minor enough as to consider a drug necessary at any price offered, then I think you underestimate the markets ability to preserve its monopoly power and price discriminate, through purely non-coercive means.

Edited October 4, 2007 by KendallJ

[~Sophia~]

a. Price has no functional relation to cost, other than it has to be higher than marginal cost for a business to be viable.

I mean that I want to offer it to the public for cheaper.

b. It is actually just like a TV that you can go without.

Actually with many drugs, when you are seriously ill, I don't think it is, not for anyone who values their life. Studies show that today, 91% of seniors and 61% of nonelderly adults rely on a prescription medicine on a regular basis.

Could you provide some examples, that clearly show this market monopoly preservation, by coercive means?

The French and Italian pricing system allows pharmaceutical companies to sell their products at any price (only the price of reimbursement under the national health care system is negociated and only for drugs which are covered). Brand name drugs there are on average 45% lower than prices in the US.

Edited October 4, 2007 by ~Sophia~

[aequalsa]

but two large companies like that will definitely fight each other to take market share from their rivals.

That is not necessarily true in a muddled market like ours. GM's official company policy for two decades was to never acquire more then 45% market share in order to avoid anittrust lawsuits. This would lead to an emphasis on increasing profit without increasing desirability. So not making cars which breakdown less allowing the selling of more parts might become a viable approach.

[aequalsa]

Could you provide some examples, that clearly show this market monopoly preservation, by coercive means? That may be, but it does not prove the point. It is circumstantial until you provide some evidence that it is specifically due to the reasons you claim.

I would suppose that there are many drugs not sold because they cannot afford the expense of FDA approval.

[softwareNerd]

Sophia, Regarding examples of drugs allowed abroad, but not in the US... are these kept out of the US because they have not passed FDA approval, because of patent issues, or is there some other law?

[KendallJ]

The French and Italian pricing system allows pharmaceutical companies to sell their products at any price (only the price of reimbursement under the national health care system is negociated and only for drugs which are covered). Brand name drugs there are on average 45% lower than prices in the US.

The much more direct explanation for this is that off formulary drugs have to compete with their price controlled brethren in order to have any volume at all. If Viagra is selling through national health care at a 50% discount who would opt out of a universal health care option to pay 50% MORE?

[stephenmallory]

Could it be that foreign drugs are kept out of the US because those drugs are produced by government-owned or government-subsidized pharmaceutical companies?

Why should an independent US company have to compete with socialism or quasi-socialism?

I don't know much about this industry.

[~Sophia~]

Sophia, Regarding examples of drugs allowed abroad, but not in the US... are these kept out of the US because they have not passed FDA approval, because of patent issues, or is there some other law?

From what I gather there are significant government induced barriers to entry. The law limits who can import drugs to US even if FDA approved (for a while it was only drug makers). Also, there is a significant delay in FDA approval on competing products. Citizen petitions are being misused by brand-name drugmakers to stave off generic competition. Even if the FDA finds that a petition was frivolous and rejects it, the drug companies profit from the delay.

The much more direct explanation for this is that off formulary drugs have to compete with their price controlled brethren in order to have any volume at all. If Viagra is selling through national health care at a 50% discount who would opt out of a universal health care option to pay 50% MORE?

However, that does not explain the discrepency in prices of drugs which are not covered.

[DavidOdden]

The Patented Medicine Prices Review Board in Canada controls the price of patented drugs in Canada. It appears that they undertake a comparative price review so that the price cannot be higher than some function of the price in other countries, which may be Germany, Italy, France, Sweden, Switzerland, UK and US. Thus Alertec has a median price of $3.87, a US price of $5.38, and a Canadian price of $1.20 (all prices Can$, from PMRRB web page). This is an instance where the market in force determines how best to bleed the victim without actually killing the producer -- if the other price-determining nations were to decide that the product should cost a nickel and they set the price by fiat at a nickel, then Canadian price would have to come in at around a nickel. The stick that allows PMRRB to beat pharmaceuticals into submission is the Patent Act. If you do not apply for patent to protect your product in Canada, then it is perfectly legal for anyone to manufacture and sell your product in Canada. In order to be protected, the price of your product must be controlled.

21 USC 331, 355 prohibits interstate transport of unapproved drugs, which includes foreign-manufactured version of US-approved drugs. The rationale for the latter is, as we know, that government approval is required for a drug to be safe. The approval process is summarized here.

[KendallJ]

However, that does not explain the discrepency in prices of drugs which are not covered.

Sure it does. Via your own mechanism.

Let's say you are making a drug X and I am making a drug Y which is similar or offers an alternative treatment (treating the problem from a different angle) which is cheaper. If both of our products are allowed on the market - you either have convince the public that it is worth to pay more for your drug (that you offer more value) or if not - you have to match my price.

Drug X is the French covered drug. Drug Y is the French uncovered drug. If the price of drug X is forced to be lower, and offered to anyone, then the price of drug Y will also be lower, otherwise everyone will choose Drug X.

You are attempting to make the case that various Drugs Y1, 2, 3 etc. are lower priced in France than the US price because there is more "fair" competition in France, but the fact is the ALL the drugs Y are competing with the on-plan drug X, and as a results they MUST lower their prices to the range of the socialized drug. That is why the French govt need only fix the price of one drug option, and in the result still control the prices of the entire market. That is most certainly NOT any sort of "increased" or "fair" competition.

Edited October 6, 2007 by KendallJ

[Randall]

I think what Sophia is saying is that the import taxes imposed by our government, which are supported by pharmaceutcal companies through campaign donations/interest groups, on foriegn drugs is immoral. They're artificically inflating the price of foreign drugs so that they end up more expensive than what is being sold in the U.S.

I wouldn't say this is a central issue since as it was pointed out most foriegn drugs are under price controls, which would make them cheaper than ours in many cases, and possibly provide a case for drug price controls to be implemented here (as I understood it some are under price controls, but I don't know who or which ones).

It's just one of many symptoms of system hampered by government controls. The solution is to get the gov't the hell out of the system entirely which would not only fix the regulatory issues but also the company's abilities to influence our politicians.

Edited October 7, 2007 by Randall

[softwareNerd]

While searching for old posts on drugs, I found an earlier one about drug imports.

[~Sophia~]

Drug development is an expensive and risky problem

While that is true and therefore there should be incentives for drug companies to want to spend that money (like no price controls) - I would like to point out that Big Pharma only spends about 10-15% on R&D (which is not small change as the global market is estimated at over 400 billion dollars/year). Compare that to 40%+ that it spends on marketing and lobbying. There are very few truly new drugs on the market. Most of them are remakes of old drugs for which patent expired. They change a small thing within the structure of the drug and get a new patent for it - call it something different and spend a lot of money convincing the public (thus the high marketing cost) to take it instead of the old one which now is much cheaper. Often the new version, now again under the patent, is not significantly better, sometimes it is only better because the dosage is different. If you would truly discover a brand new great drug, or anything significantly different than what is already available on the market, there would be no need to spend this much money on marketing/incentives.

They can of course run their business however they like - just pointing out that the cost of drugs is not due to how much they are spending on R&D (as how they would like the public to believe). A lot of new drugs actually are being discovered by small biotech companies and then bought out by Big Pharma (which BTW is great for biotech industry). There is of course further and significant cost associated with bringing a new drug to the market.