Angry Toxicologist

Two things got me thinking about the upcoming topic.

1) I saw “Into the Woods” recently and there’s a part where the old hermit asks the baker how much $ a son would be worth (he’s trying to have a kid). The baker first thinks this is a insane question, but you can see a small bit of wheel turning going on in his head.

2) These posts on drug development and cost.

The huge profits that drug companies make mostly get plowed back into R&D to develop the new drugs. When profits start drying up, as they are doing now, less $ goes into R&D and therefore, new drugs are less likely to come by. In fact, at this time, drug companies are having a real hard time coming up with new safe and effective drugs (especially more effective that what’s already out there). Everytime a drug comes out for any disease or problem, the bar is raised that much more for the next one down the road. It either has to perform better or help people who weren’t helped by the first drug. It’s no wonder that development is slowing down, especially for the common disease states. Add to that the fact that many of the blockbuster drugs have their patents expire soon and you can see why pharma has been slashing jobs all over the place.

So the question of whether we want collective bargining power in the US to lower drug prices like they do in the EU also includes the question of whether we are okay with less drug development. I’m fine with that as you know; there are much better places to be spending our medical dollars.

Hat tip to Mike for sending the manifestdensity link.

Comments

#1 Liz
January 29, 2008

Any thoughts on the idea of rewarding innovation with prize money rather than drug monopolies? I just heard a presentation on this last week, and while I’m sure there are lots of bedeviling details, it does seem like a neat way to cut the “lower prices = less drug development” knot.
#2 Jason
January 29, 2008

My issue is that pharmaceutical companies love to say that lower prices mean fewer and less effective drugs – it’s a thinly veiled scare tactic. What they don’t say is that they could (and should) make cuts in other areas, like direct-to-consumer marketing for instance, before sabotaging their pipelines any further.
#3 Cynthia Bagley
January 29, 2008

I am NOT alright with the slowing down of R&D because there are diseases out there like mine that need a cure. We only live because we have been able to use some drugs developed for RA. Of course, it could be because Wegener’s Granulomatosis is a rare disease… (Prior to using cytoxan/pred combo, anyone with this disease just died.)
#4 Constance Reader
January 29, 2008

I have been the pharmaceutical research industry for ten years and I must point out a few misunderstandings in this post. Please excuse the long comment.

First, most of the companies’ huge profits are plowed into marketing and advertising, not R&D, which gets a fraction of what the marketing departments get. Just ask any drug rep about their job perks and salary, or any physician about the swag that drug reps dump in their offices every day.

Second, “Everytime a drug comes out for any disease or problem, the bar is raised that much more for the next one down the road. It either has to perform better or help people who weren’t helped by the first drug” is a complete misunderstanding of the drug approval process. All a company has to prove to the FDA is that a drug is safe and that it helps at least some people. How it compares to other drugs, although that is how the approval process should work IMHO, is irrelevant. Rarely are experimental drugs tested against existing drugs; why would any pharma company allow its product to be used to prove the marketability of a competitor? It must only be proven at least as effective as placebo.

I say “at least” instead of “more” because post-marketing research has demonstrated that anti-depressants are hardly if any more effective than placebo. But they were all approved for sale. The same could be said for safety instead of efficacy, although that something of a different problem.

One possible reason for diminishment of development that I can speculate is that most Big Pharma and Biotech companies’ R&D budgets are dedicated to copycat drugs. When word of Viagra was heating up the industry wires, everybody started digging through their catalogs of licensed compounds to find a potential copycat. RFPs for erectile dysfunction drug studies poured from the fax machines of companies like the one I work for like water from a burst pipe (no pun intended). A compound for a relatively untreated condition will not usually receive attention from a pharma unless the #s of people suffering from the target condition can tilt the cost/benefit ration in the compound’s favor.

Typing the above made me wonder: if the FDA did say “We decline to approve this drug because it offers no benefit that the three currently approved drugs do not”, could that fourth drug’s owner sue the FDA for restraint of trade?
#5 Julie
January 29, 2008

If you look at the financial statement for most (if not all) the major pharms it is clear that more is spent on marketing than R&D. I just checked Merck’s and in the first 3 quarters of 2007 they spent 1,951.4 million on Marketing and 1,440.5 million on R&D. That’s better than 2006 where they spent 2,370.6 on marketing versus 945.4 on R&D. Guess they just need to find a new “disease” to treat so they can make some money when their patents expire (restless leg and fibromyalgia seem to be common ailments these days….)
#6 Phil Boncer
January 29, 2008

The best way to reduce the prices of new medicines (aside from making the other rich countries open their markets, which isn’t going to happen) would be a simple reform to the patent system. Since the very idea of a patent is a period of time of exclusive marketing of your own idea, as a reward for developing the idea, time during which you aren’t allowed to market the idea shouldn’t count. If the patent period was put on hold until the drug was approved for sale, the development costs would be able to amortized over a much longer time frame, and thus greatly reduce the cost per dose. This would also reduce the pressure for shortcuts in development, as well as the whole direct-to-consumer advertising problem. Currently, to protect its ideas, the company has to file the patents fairly early in development, and by the time the typical drug is approved there is only 5-7 years left out of 17 to recover the investment, which creates a huge pressure to get it as widely prescribed as possible as soon as possible, thus the huge marketing costs which then also get added to the prices.

Constance – it depends on the drug and on the condition treated. But a great many drugs *are* tested in clinical trials in comparison with existing treatments, and with FDA-directed trial endpoints that include having to show an advantage over the current state of the art. The advantage may be better efficacy, or same efficacy with lower side effects, or showing that it helps a portion of the patient population that the existing treatments don’t do so well on, or something. But the FDA has taken a position on quite a few ailments that it doesn’t want to put the effort into reviewing and approving anything that doesn’t show a sgnificantly better result than what has already been approved.

PhilB
#7 Dave Briggs
January 30, 2008

So the question of whether we want collective bargining power in the US to lower drug prices like they do in the EU also includes the question of whether we are okay with less drug development.

Lower prices would be great but I am not sure I am OK with less R and D. Above in the comments someone said that what he has was fatal until a drug was developed. The whole thing is a complicated subject but I think we need to keep up with the new R and D.
Dave Briggs :~)
#8 Mike
February 1, 2008

Currently, US purchasers of prescription drugs are subsidizing European and Canadian purchasers as those countries forbid the pharmaceutical companies from selling the drugs at market prices. Trade sanctions need to be imposed on these countries until they open up their markets. If they still refuse, the US government should refuse all patent applications from citizens and companies that are based in these countries.
#9 syntyche
March 11, 2008

Currently, US purchasers of prescription drugs are subsidizing European and Canadian purchasers as those countries forbid the pharmaceutical companies from selling the drugs at market prices.

Fine. I’ll let the pharmas charge whatever they want for drugs, but in return, they’re not allowed to take their lead from government funded basic research. Now remind me again where all of those nice signal transduction pathways the pharmas are targeting were discovered?
#10 sailor
March 12, 2008

Last figures I saw were that big pharma spent more on advertisng AND made more in profits than they spent on R&D. Let us start off by banning direct advertising to consumers in the media (I have no probelm with them maintaining web sites that is not particularly expensive and and you have to go there to look the stuff up yourself). There is no evidence to buy their propoganda you have to pay a fortune or there is not R&D.
#11 Phil Boncer
March 13, 2008

The advertising is needed (by the pharmaceutical companies) because once the drug is approved they have to get it to reach its market potential ASAP since there is only a limited time to make back the money before the patents run out.

The best way to reduce the prices of new medicines would be a simple reform to the patent system. Currently, to protect its ideas, the company has to file the patents fairly early in development, and by the time the typical drug is approved there is only 5-7 years left out of 17 to recover the investment, which creates a huge pressure to get it as widely prescribed as possible as soon as possible, thus the huge marketing costs which then also get added to the prices.

If the patent timer didn’t start ticking until the product was approved for market, this whole problem would be much smaller. The R&D costs would be amortized over more time and doses. The drug could be allowed to reach its market at a more natural rate and also there would then be more time to see how it performs in the real world. This would also make sense since the whole idea of a patent is market exclusivity for a determined period, in exchange for the disclosure of the ideas in question. If the ideas are not allowed to be marketed, then the patent period should not be running.

PhilB
#12 David Marjanovi?
March 13, 2008

Currently, US purchasers of prescription drugs are subsidizing European and Canadian purchasers as those countries forbid the pharmaceutical companies from selling the drugs at market prices.

You act as if pharma companies wouldn’t make any profit outside the USA. You also act as if they wouldn’t do any R&D outside the USA. You know full well that neither is the case. So why do you act as if?

————————-

I like the idea to reform the patent system.
#13 Valerie Nicholls
March 13, 2008

I think it is a slippery slope to say you have “to be OK with less drug development.” Those things are not linked in the way this stub claims they are. Sure, there might be less drug development that is financially welcoming for those companies… For example, instead of making a drug that you need to take once or twice to help your ailment, these companies are in the business of making drugs that a given person will take for an extended period. The more time a patient spends on a drug, the more money they make, therefore in a system with lower drug prices or a universal health system, it would be financially helpful to provide the most efficient drugs, which would actually lead to more and better drug development. Furthermore, at this point in time drug companies are in the position of not even producing possible drug therapies if they can’t make a giant sum of money before their patent is up, and a companies like Novopharm and Apotex start producing the drug in competition with the larger company for less. Again, a universally run system is going to push for the development of drugs not based on gross profit but on efficiency. If the government is paying they want the least number of people ill, and that will increase drug development and be better for the public as well.
#14 Phil Boncer
March 14, 2008

Wow, Valerie. You have a faith in governmental effectiveness that is totally unbased in reality.

To demonstrate, Canada once had a thriving medical R&D industry. When they nationalized their system, 75% of that industry packed up and moved one border south. The literal majority of medical R&D is done in and for the American market. This is not a coincidence; it is a direct result of America being the only rich medical market that has any significant free market presence.

David, the pharmaceutical companies can and do make a profit over the production costs of the drug in most wealthy countries, which is why they bother at all. But they can’t make enough at the socialized prices to recover the R&D costs (and pay the investors for gambling on those R&D costs), so the majority of those costs get made in the U.S. (along with the marketing costs to get that much drug sold that quickly before the patent runs out). So yes, we here *do* wind up subsidizing the world’s medicines, because we pay for most of the cost of the creation and bringing to market of those medicines in the first place.

PhilB
#15 R E G
March 14, 2008

I’m not a scientist, I just have an interest in learning.

I AM an accountant, and this is one of those times my background is relevant.

Roughly speaking, the profit on any item is the markup X units sold. You can increase the profit by increasing EITHER of these factors.

So if those 40 million uninsured Americans got proper medical care and everyone had their high blood pressure, blood sugar, depression etc treated there would be more units sold and the drug companies could still make out like bandits on a lower mark up.

In fact the perfect new drug is an item like Viagra. No one feels it is so essential it needs to be offered cheaply. It doesn’t really cure anything so it must be taken indefinitely. You can even use it if you don’t really have the problem it treats. It’s just about a licence to print money.

No way is anything, except maybe the cure for cancer, going to compete financially. If Viagara is a benchmark, no drug company will ever make money again.

In financial circles, you can “lose money” while making a profit if you don’t hit your targets.

I don’t have any hard data, but there is no way drug companies are losing money selling to Canada and the EU. They are selling enough units to cover an entire population, to one buyer, on a tight budget, who negotiates aggressively. I suspect the per capita profit margins are similar. Big Pharma could, after all, just take its toys and go home. Instead they prefer to run drug trials in UHC countries, so the system will cover the collateral damage.
#16 David Marjanovi?
March 14, 2008

Instead they prefer to run drug trials in UHC countries, so the system will cover the collateral damage.

Interesting, though actually unsurprising. (By UHC you mean universal healthcare, right?)

except maybe the cure for cancer

Cancer is such a complicated group of phenomena that I can’t imagine there’ll ever be a single cure for all…
#17 Philip Boncer
March 15, 2008

R.E.G., they aren’t *losing* money selling to Canada and the E.U., but they aren’t making back the development costs either. That is, if the U.S. market wasn’t there, they would be losing money overall. To take a surpisingly realistic set of numbers, suppose a drug, once approved, costs 25 cents a dose to manufacture, but development costs would amortize to $40 a dose in the U.S. market alone. If Canada and the E.U. will pay $5.25 a dose for it, then it is worth doing that, to help with some of the cost recovery, but it would not be worth it to develop the drug for the Canadian and E.U. markets alone. If the Canadian and E.U. markets total to, say three times the U.S. market in dosages, then those sales can allow the U.S. dose to sell for $25.25 instead of $40.25, which helps some, but still leaves us subsidizing it for them. If the U.S. were to socialize medicine and also then decide to pay $5.25 a dose, then suddenly the whole program becomes unprofitable and that’s that.

One of the problems we already have is that it is too expensive to develop drugs for many conditions that are not very common. Making drug development less profitable will extend this problem to even more conditions. We should be looking rather at how to make the health care system *more* open and free market, not less.

PhilB
#18 Kimpatsu
March 16, 2008

The huge profits that drug companies make mostly get plowed back into R&D to develop the new drugs.
This is untrue. The big pharmaceuticals companies spend an average of 20% to 25% of their revenue on drug development, compared with 42% on advertising. Don’t buy into their proaganda; the reality is that there has been very little new drug development in the past decade, so to maintain profits, the pharmaceutical companies are trying to sell you cures-in-a-bottle for family problems and other social issues. This repackaging of causes is a huge problem, and has nothing to do with the idea of new drug development.
See http://www.badscience.net/?p=630#more-630 for one example, and search elsewhere on the Bad Sciecne website for more on the issue.
#19 Phil Boncer
March 17, 2008

20-25% is HUGE for development costs. Name any other industry that spends that percentage on product development. Likewise, every other industry has sales and advertising costs that are legitimately counted as business expenses; why is this not legitimate for medicine? (And, as previously noted, the pressure for DTC advertising could be drastically reduced by rational patent reform. It’s not the fault of the pharmaceutical companies that they only get 5 or 6 years of patent protection left, on average, by the time the drug is approved.)

PhilB
#20 factician
March 17, 2008

“The huge profits that drug companies make mostly get plowed back into R&D to develop the new drugs. ”

As other commenters have pointed out, this is nonsense. Far more money is spent every year on marketing than on R & D. It’s a nice myth that pharma companies like to point to, but it’s simply not true.

The problem with the system as it currently stands is that the patent system works for all technologies except drugs. If you patent a computer chip, and then decide to charge $1 million for it, no one will buy it. So you lower the price until someone buys it. But if you patent a drug for a fatal disease, consumers will be willing to mortgage their children to be able to get their hands on it to save their lives. So, in America, the cost of drugs is going through the roof, because everyone is willing to mortgage their kids.

In other countries, governments have regulated a maximum that can be charged. Are companies losing money, selling drugs in the U.K. and in Canada? Hell, no. They’re just not able to pull in the obscene profits that are fueling the fancy drug ads we see here in the U.S.

Let’s not pretend that this argument is a simple money for research argument. It’s not.
#21 Phil Boncer
March 17, 2008

“factician”, please read some of the posts above that explain some of how this actually works. My post three above yours specifically addresses your point about price levels in other countries vs. price levels here.

The relationships between prices, patent durations, R&D, and advertising costs are also explained above to some extent as well.

Most drugs (and most drug costs) do not involve fatal diseases, so your allegation about how the market fails to work on drugs doesn’t hold water. If you can show that the profit margins are substantially higher for drugs for fatal diseases than for others, then you may have a point. But without evidence for that, you are just throwing around unfounded allegations.

PhilB
#22 factician
March 17, 2008

“Phil Boncer”,

I already read your explanations. I just disagree with them.

I’m going to give a very small dataset, but I think you’ll get the point. If you think I’m wrong, dig up a larger dataset:
(from http://www.usatoday.com/news/health/2006-07-10-cancer-drugs_x.htm)

Drug Company Monthly cost

Avastin Genentech $4,400

Erbitux ImClone/Bristol-Myers $10,000

Gleevec Novartis $2,600

Herceptin Genentech $3,000

Nexavar Bayer Pharmaceuticals $4,300

Revlimid Celgene $4,500

Rituxan Genentech $4,200 to $13,000 1

Sutent Pfizer $4,000

Tarceva Genentech/OSI Pharmaceuticals $2,400 to $2,700

Monthly cost of Viagara = $150 (if you take it every night).

Monthly cost of Propecia = $60

Montly cost of Cialis = $300

Have I proved my point? Granted, I haven’t made an effort to compare similar types of compounds with similar marketing costs, but I rather doubt your average fellow in the middle class would pay $10,000/month to take care of hair loss…
#23 factician
March 18, 2008

Hmmm… my last comment seems to have been hung up in the spam filter. (I linked a reference in it – I guess scienceblogs thinks I’m a spambot). Hopefully it’ll still get through, because there were a bunch of drug prices in it. As I type this, I wonder if the spam filter didn’t see “Viagara” a price and a link and destroy my comment forever. *sigh* Anyway, I’m not going to retype the prices for 20 different drugs. I’ll just hope it gets through.

The basic gist of it was that your average new cancer treatment costs in the thousands of dollars a month range. Whereas your average newish impotence treatment or hair loss treatment costs hundreds of dollars a month (if you use it *every* day). I think that “Phil Boncer”‘s argument on how the market works brilliantly fails to hold water. People simply won’t pay the prices for impotence that they will for cancer.

Go figure.

It’s interesting to note: those people who are against price controls on drugs fail to remember – a patent is a price control. But with drugs, if we’re going to give companies a monopoly for a few years (which I think we should), we should also enact legislation to protect consumers from ridiculous prices.
#24 Phil Boncer
March 18, 2008

OK, you “just disagree”. But you haven’t proven your point. A key part is what you admit yourself, that “Granted, I haven’t made an effort to compare similar types of compounds with similar marketing costs”. The medications you cite are very complex. And cancer clinical trials are *far* more involved and expensive than for hair loss or impotence.

I work in the pharmaceutical and medical device industries, as a consulting engineer. I help small companies who are the early stages of development to move their products towards marketability. I (and the companies I serve) are acutely aware of the costs, timelines, and risks of this process. We are constantly evaluating the market potentials in each potential country, and how they get affected by laws, socialism, generics, product piracy and patent infringement, re-importation, and other factors that be determinant in whether a product is worth the financial investment to develop it or not.

So you can “just disagree” all you like, but I do know exactly whereof I speak.

PhilB
#25 factician
March 19, 2008

I provided data. Do you really think production costs are 80x higher for Avastin than they are for Propecia? Really? No, you *really* think production costs are 80x higher for Avastin?

All you’ve provided is “trust me, I’m an adult”. But do you have data?
#26 Kimpatsu
March 19, 2008

@Philb:
If 21% (or, let’s be generous, 25%) is huge, then what is 41%?
It’s not about the absolutes; yes, 21% of a big pharma budget is huge. But the 41% advertising budget will always be bigger. And, as such, the claim that the high cost of drugs is a necessary evil to fund a new generation of pharmaceuticals is just so much nonsense.
#27 Michael
March 19, 2008

A quick Google search gives this source (in German unfortunately):
http://www.imshealth.de/sixcms/media.php/16/Pharmamarkt%20Februar_2007_kversion_.pdf

that puts sales to pharmacies at a total of 22.1bn EUR and hospitals 3.3bn EUR. That is 25.4bn EUR (39.9bn USD) that Germany alone pumps into the system.

If you take the total spent in the EU and Canada on drugs you could easily finance the R&D of all top pharma companies and the production costs and would probably have enough money left to buy out these pharma companies all together. The latter might be a slight exaggeration.

Germany doesn’t bargain with the companies btw. They provide some incentives to the patient to choose the cheapest alternative available.
#28 Phil Boncer
March 19, 2008

factician: First, they may well be. Biologics are *far* more expensive to produce than small molecule pharmaceuticals, often 100x or more to build a plant of equivalent capacity. Second, the even bigger factor is the other one I noted, that cancer clinical trials are *much* more expensive than others, and also take longer as you have to track the patients for longer to guard against recurrance, and this leads to even less patent protection time than usual for these compounds. I have seen promising cancer drugs abandoned in development, not because they wouldn’t be effective, but because they actually wouldn’t hit the market until after tha patents run out.

Kimpatsu: this has already been answered above. The huge advertising costs are a product of the very limited time the companies have to recover their investments. This means that they *must* get their drugs to be prescribed for as high a percentage of the target patients as possible as quickly as possible. On it’s own, the medical market will typically take about 4-5 years to fully accept a new drug, for the doctors and hospitals to become comfortable with it and so on. But the average drug patent has only 5-7 years left upon market approval, so the companies can’t afford to let that process happen at its natural pace. Changing the patent so that the timer starts upon market approval would largely fix the advertising problem as well as greatly reducing the development investment problem itself.

And Michael: no you’re not even close.

PhilB
#29 Michael
March 20, 2008

Phil, your anecdotal evidence makes for nice fireplace talk, but is unconvincing. You would have provided numbers if you had any.
#30 factician
March 20, 2008

As to small molecules, you should check out nitrogen mustard. Came off patent decades ago. Small molecule. Clinical trial done decades ago. Still costs more than Viagra (which is still on patent, I think?).

Hmmm… I’ve provided my data (still waiting for data from Phil), now I’m going to provide 2 imaginary scenarios.

Imaginary scenario 1: Marketing executives from a pharmaceutical company are sitting around a table discussing marketing a cancer drug. They’re considering the advertising costs, the production costs, and how much they’ll need to make back all the R & D money they spent. They also consider how much a desperate cancer patient is willing to spend, given that their drug is the only drug for someone with a particular end stage cancer X.

Imaginary scenario 2: Marketing executives from a pharmaceutical company are sitting around a table discussing marketing a cancer drug. They’re considering the advertising costs, the production costs, and how much they’ll need to make back all the R & D money they spent. However, they *never* talk about how much a desperate cancer patient would be willing to spend. One of the executives brings it up, but another executive hushes him with a glare, and whispers, “That would be highly unethical!” For the rest of their meeting, they base all their discussions merely on what a fair compensation would be for the work that they’ve done. They would *never* charge more than required for their product, because unlike other business executives, they’re not interested in profit, and they don’t consider the power that having a monopoly on a lifesaving product brings. After work, they all discuss how unfair it is that countries outside of the U.S. regulate how much they’re allowed to charge, given what upstanding citizens they are, and given that they never charge more than is required to make a modest profit.

Are you sure you aren’t being desperately naive, Phil?

Pharmaceutical companies are like everyone else, they’ll leverage the power they have to make more profits. That’s why I’ve always argued that in addition to granting them the power to make large profits over time (to recover R&D costs), you have to balance that with making sure they don’t screw the public. It’s a balancing act that is done in all countries in the developed world – except the U.S.
#31 Phil Boncer
March 21, 2008

Except that:

(a) There’s a curve on how much you can charge vs. how many people can afford to pay it, that is, if you charge too much you will make *less* money because fewer (no matter how desperate) *can* buy it.

(b) There is the issue of how insurance companies approve drugs for payment, if a drug is too expensive, they won’t approve it for their formulary. This is a huge factor in drug development and the financial viability of a medicine; whether or not the insurance companies will think it is worth the money.

And (c), believe it or not, most people in the world, and most people in the pharmaceutical industry, are not heartless evil people. A great many of us in this industry are here because we see value in what we do and like the fact that the products we make help people.

Your “balancing act that is done in all countries in the developed world – except the U.S.” is not balanced, and is a large part of why these are so expensive here, to make up for that. I did provide an example above, with realistic numbers, of how that works.

You might also notice that Canada has recently legalized independent medical practices. The Supreme Court of Canada overturned the government monopoly on healthcare delivery because of the long delays in getting care, resulting in thousands of deaths, that are common to simgle-payer systems around the world.

But fine, y’all go ahead and believe the “great conspiracy” of the evil medical industry that can only be kept from taking over the world by our naturally benevolent and honest government. :rolleyes:

PhilB
#32 factician
March 21, 2008

You’ll note I didn’t write that I thought there was a “great conspiracy”. You’ll note that I also didn’t suggest that the government is benevolent and honest. I suggested that considerations of what people are willing to pay (and their insurance companies on their behalf) is considerably higher if the drug is for a lifesaving treatment.

Are you suggesting this is something that isn’t considered while pricing the drug?

And may I ask for data to refute that? I keep asking you for data, and you keep knocking down strawman conspiracy allegations that I haven’t suggested. Data, Phil? Data? At the risk of being repetitive, data? Didn’t think so…

As it happens, I am also looking for work in research in the biotech/pharma industry (after completing a post-doc). I also understand that money is required for biomedical research. I just happen to think that pharma companies aren’t morally superior to other companies. I think that *any* company that has a monopoly on something that saves lives will charge as much as they possibly can, and that most people will be willing to sell their grandma for access to lifesaving treatment. It’s human nature.

Time to take off your rose-colored glasses, Phil.

(P.S. Canadians have a higher life expectancy than Americans. In fact, most single-payer health systems have better life expectancy than Americans. Yep, thousands of Canadians dying while waiting for healthcare. Keep repeating that to yourself. Have you ever been to Canada, Phil? Have you ever experienced single-payer healthcare? I’ve had single-payer healthcare. It beats the shit out of any HMO coverage (by lightyears), and I imagine the Americans with no health insurance would be delighted to have it). In fact, I imagine anyone with shitty HMO insurance would be delighted to have it. Which Gucci healthcare plan do you have, Phil?
#33 Phil Boncer
March 21, 2008

Yes, I AM suggesting that, for the most part, “this is something that isn’t considered while pricing the drug” in the sense that you mean. The insurance companies that mostly pay for it won’t stand for it. There is a sense that it’s considered, in that it factors into whether the drug is viable to develop in the first place. For instance, if someone could discover a drug that permanently cures baldness, but if it will wind up costing $5000 a month for two years, they just won’t bother to bring it to market because people *won’t* pay for that. But if the same drug cured a fatal cancer, then it might become worth developing, even if the patient population isn’t huge. Biologics *are* inherently very expensive, and so you pretty much only see them developed for serious conditions. Which is why you see the costs for those that you do. This explains the disparities in pricing you listed above, which I already noted in my reply to that post and which speaks again to the relevence of the flaw that you admitted with regard to comparing similar types of compounds.

(1) Canadians have longer life expectancies on average than Americans because they don’t eat so much junk food, and because they don’t have as many poor minorities.

(2) HMOs are as screwed up as they are mostly due to (a) government regulations, and (b) the fact that their real paying customers are not the people getting the care, but mostly their employers. Putting the whole system in the hands of government sure as hell isn’t going to fix either of those problems. Ask someone who gets their healthcare from the VA whether they think we all should be so lucky.

(3) Single payer healthcare inherently requires that, at some point, the delivery of care become rationed. Those who get treatment are happy; those who die waiting for it haven’t got much to say about it anymore.

(4) I’m self-employed and pay for my own health insurance. It’s expensive, and I haven’t been all that happy with it. It’s certainly not a “Gucci” plan. In fact one of my difficulties is that I *don’t want* a Gucci plan; I want one that is as simple as possible, with a high deductible and no frills, that will cover me for a catastrophe and not bother me otherwise. This should be easy to get and not terribly expensive, but there are too many regulations that define things that health insurance “must cover”, that I must then pay for even if I don’t think it’s worth it. In a free market, with insurance sold to and paid for by the people who are going to use it, the companies would have incentive to attract customers and keep them at least reasonably happy, and to develop a variety of insurance products for different customers.

(5) If you think single payer healthcare is the right answer, there are *plenty* of countries that have it that you can go to. There’s no need to completely kill the last somewhat functional semi-market based system left. In general, in fact, those who think more socialism is the answer have lots of choices. It would be nice if y’all could leave those of us who would rather have capitalism *one* country in the world to have it in. I don’t have any countries to move to that have more freedom and liberty overall than this one.

PhilB
#34 Michael
March 22, 2008

Phil,

the lower life expectancy figure for the US vs. Canada is mostly a result of the 38% higher infant mortality rate (its 56% higher than Germany btw.).

The EU countries that you like to lump together actually have very different health-care systems but they are getting much closer to the goal that no one should suffer or die from treatable or preventable illnesses than the US.

But then to you they are all parasites that are subsidized by US patient’s money. I thought the idea was ridiculous but now that you explained your rejection of all non-US health-care in general it becomes clear why you would want to promote such absurdities.

Capitalism works best if the parties to a transaction are free in their decisions. When you have a life threatening disease and the other party has a monopoly on the cure then only a cynic would call this a free market decision. And health insurance does not change that equation, it just distributes the costs. While you are hoping that one day reality will bend so that your magic free market formula works in the health-care market, more people in your country are dying from curable illnesses than in other industrialized nations.
#35 factician
March 22, 2008

Canadians don’t eat as much junk food? Do you just make this stuff up? They don’t have as many poor minorities? Data, Phil, data! You really aren’t fond of data, are you? You seem to enjoy making stuff up, and writing long scenarios to describe it. You should travel to these unfree, communist, totalitarian countries (like Canada) before you make shit up about them. You won’t sound quite so silly, when you make stuff up if it can have *some* basis in reality. You seem to have caught the ‘market-will-solve-all-problems’ virus. Free markets are great, Phil. But they don’t solve *all* problems.

And Phil? Healthcare gets rationed in *all* countries. In the U.S. it’s rationed based on how much you earn. In Canada & the U.K., it’s rationed based on how sick you are. Are any of these systems perfect? Far from it. I’ve had healthcare in 3 different countries in the world, and I have to say, the American system is the worst (by rather a lot) and one of those countries was a third-world nation. But life isn’t simple, and we can’t choose where we live *just* based on healthcare. You should try a couple other systems before you pronounce the only system you’ve ever tried as the champion.
#36 Phil Boncer
March 22, 2008

Fine. Believe what you will. Perhaps y’all will get your way and we will get a single-payer system here, and you’ll see what happens to medical development worldwide. I hope in that case that no one you or I know comes down with anything we don’t know how to treat yet.

But I hope, more than that, that we never go there, and you can just continue to think I’m wrong and I’ll never be able to prove otherwise. I could live with that.

PhilB
#37 Phil Boncer
March 22, 2008

P.S. Data, in order to be meaningful, has to be gathered in a structured fashion with care as to proper comparisons. factician, for example, provided some data a ways above without such care, and it was not just useless, but actually misleading. I care lots for useful data, but randomly selected bits aren’t useful data. And since I will admit that I am not willing to put in the effort to construct a real metastudy with controls on confounding factors, just to convince you two on this list, I’ve been talking about reality from my close knowledge of the industry in this country and how it relates financially to other countries as well.

It frequently amazes me, with the clear lessons of the last 200 years or so of history, that anyone still thinks socialism and top-down government control are good ways to solve societal problems. I understand the people in charge promoting those ideas, since they directly benefit from the power they can gather. I can see how people who have been misruled by non-socialist despots could fall for it still, as a promise of a better life (and in such situations, socialism may actually be able to fulfil that promise in the short term). But educated and well-off people who don’t work for the government ought to know better by now.

That’s all.

PhilB
#38 factician
March 24, 2008

But educated and well-off people who don’t work for the government ought to know better by now.

Heh. I guess you’re the educated, well-off fellow. Data? Oh, I forgot, you don’t like data.

As it happens, I’m rather well educated (PhD), reasonably well-off (I can afford dinner out from time to time, and pay my son’s daycare bills on time) and work for one of the largest medical schools in the country. And I know better. I’ve lived in countries with price controls on drugs (and they develop drugs there, too! Amazing!). You’d be surprised how lovely it is.

And since I will admit that I am not willing to put in the effort to construct a real metastudy with controls on confounding factors, just to convince you two on this list, I’ve been talking about reality from my close knowledge of the industry in this country and how it relates financially to other countries as well.

Oh, right. You don’t do data. You do “Trust me, I’m an adult”. But really, without data, you and I are just monkeys with keyboards.

It frequently amazes me, with the clear lessons of the last 200 years or so of history, that anyone still thinks socialism and top-down government control are good ways to solve societal problems.

What’s your definition of socialist? Do government subsidies count as socialist? Does having an agency regulate safety of drugs count as socialist? Does having a government regulate how long you can charge whatever you want count as socialist? Does having price controls on drugs count? (You know, patents are price controls, too – they’re price controls that push the price *up* rather than down).

Your scary ‘socialism’ buzzword doesn’t mean very much. You live in a socialist country, it’s just one that doesn’t use the same socialist laws as Canada, Europe and Japan. I haven’t been advocating for Americans to invite Castro over to rule the country (he’s far too ill, for one), I’ve been advocating for a simple change to patent laws with regards to drugs. It sounds a little like you’re over-reacting (or perhaps hoping that the buzzword ‘socialism’ will scare off undecided readers).

Good luck, sir. I’d suggest that you go visit some of these countries that you’re frightened of. Talk to the natives while you’re there. You might learn something.

Oh, and remember, datums are your friends.
#39 kanser
March 30, 2008

You also act as if they wouldn’t do any R&D outside the USA. You know full well that neither is the case. So why do you act as if?
#40 Phil Boncer
March 30, 2008

Sure some gets done. But about 75% of the world’s medical research now is done in America or for the American market. That’s an awful lot of potential progress to cut off at the knees.

PhilB
#41 James Hanley
April 1, 2008

OK, factician, you’re well-educated, and work at a medical school. I’d guess that means your PhD is in a medical-related field. In other words, your comments on government are not the comments of someone well-educated in government.
#42 guthrie
April 1, 2008

You know, I would take Philip Boncers posts more seriously if they actually had quotes of numbers and suchlike. Then claiming that facticians data is misleading without providing your own suggests you don’t have any.

Knowing that this is an imperfect world, I (although probably not the drug companies) would be happy enough if the patents were allowed to start from the trialling period or suchlike, as has been suggested above.

James Hanley- saying someone is wrong is not the same as providing a reasoned argument that they are. Would you like to try again?
#43 Philip Boncer
April 1, 2008

As I noted above, gathering meaningful data and processing it for confounding factors is an involved project, and is simply beyond the amount of effort I’m willing to expend on a blog comment. I’ve got my own business to run, my wife’s business to help with, a recently adopted teenager to focus on, and lots of other demands on my time. So I’ve just been providing my viewpoint based on my 16 years of experience in the field of medical development and how market forces relate to the viability and success or failure of a new medicine or medical device. You may believe me or not; you may take my writings as a basis to investigate for yourself or not.

I did provide arguments as to why factician’s data was not useful. I have tried to make my posts logical and informative. I see some value in putting an realistic overview out there. Even if I do not have the time to fully back it up, at least others will have been exposed to the ideas and viewpoint.

PhilB
#44 James Hanley
April 2, 2008

James Hanley- saying someone is wrong is not the same as providing a reasoned argument that they are. Would you like to try again?

No, not at the moment. And I recognize that makes me fair game for criticism–I won’t take it badly.

But, having a PhD in political science, I consistently see well-educated people assuming that having an education means their knowledgeable about government. In reality, what they know about government generally comes from the news, which is as bad a source for understanding government as it is for understanding medical issues.

And factician’s view of government seemed just too glib to take seriously. Government is not an objective, public-interest oriented, organization, no matter how much we’d (me included) would like it to be. And it consistently distorts markets and incentives.

I will say that the claim that US pharmaceutical consumers are effectively subsidizing pharma consumers in countries where the prices are more regulated is an accurate statement. The pharma countries are going to get their money somewhere, and if there’s only one (mostly) unregulated market–and it happens to be a wealthy one–that’s the one that’s going to pay extra.

Also, the criticism–at least I think it was a criticism–that pharmaceutical firms spent too much on advertising showed a fundamental misunderstanding of markets. Businesses can’t save money and lower prices by cutting back on advertising, because that just reduces sales. We only buy the things we are aware of, and advertising–for better or worse–is what makes us aware of products.

My own college cut back on advertising a few years ago, by drastically reducing its recruiting budget to cut costs. The result was our smallest freshman class in decades, and a larger financial deficit. Our new president dramatically expanded our advertising/recruiting costs, and the consequence is our largest freshman classes ever, and a budget well into the black. And that’s essentially the story for any business that can’t rely on word-of-mouth to bring in customers.

My general point is, this debate covers a lot more territory than medicine, and requires expertise in government and economics, as well as medicine. I have the first two, but wholly lack the second, so I can’t make much more detailed claims about the specific issue.
#45 garth
April 2, 2008

Where in this equation does the national institutes of health fit in? aren’t our institutions leaned on for big chunks of basic research? how do they factor in?
#46 gingerbeard
April 2, 2008

the need for advertising… is crap!
if you are producing needed medicines, then publishing your research in peer reviewed journals is really all the advertising you need to do. Of course allowing ALL research to be published would be a good start, rather then only publishing favorable research as is the current method.

A journal article or 5 showing that this new compound developed by (pick your company) inhibits the transmission of the HIV virus… is about all the advertising that would be needed.

the constant adds for a pill to help me get a hard-on, is crap.
Invent the problem, then sell the cure. Advertise like hell so people who didn’t even know they had a problem ( like shyness) now know it is a medical problem and they can be cured. Oh the research costs… boo hoo. Ignore that a lot of the initial research is performed in universities for real needed medicine. After all a cure for a disease that affects maybe a million people world wide.. no profit there, but for the scientist for whom this is a passion, they will do the research to help those people, because in most cases it is personal.

But create a pill to give guys a boner….well you know there is a big market, and how it goes, lets invest, lets market, lets cry poor us we try to do good but you won’t let us make enough money.

Why do we have weight loss medication… its an invented cure.. .advertised for profit.
Baldness cure….. for profit
I could go on, the list is egregious

now insulin…. oh yea research from a university to save lives…

gee why don’t people trust big pharma to be in our best interest????

you’ll note the lack of data, I’ve tried to follow phil’s example, lets see if he has any issues with it.
#47 MartinM
April 2, 2008

I will say that the claim that US pharmaceutical consumers are effectively subsidizing pharma consumers in countries where the prices are more regulated is an accurate statement. The pharma countries are going to get their money somewhere, and if there’s only one (mostly) unregulated market–and it happens to be a wealthy one–that’s the one that’s going to pay extra.

I don’t think the first statement actually follows from the second. There’s an implicit assumption that bringing US prices in line with others would either require increasing prices in regulated markets or cutting back on R&D. That hasn’t really been established.
#48 Dr Aust
April 2, 2008

Here is an article, written by an American academic at UMDNJ, that considers this issue and flatly refutes the contention that “countries other than the US are free-riding on US consumers’ drug pays and not paying their share of R&D costs”.

So the view from outside the US; this is a crock. And more than that: it is a smokescreen.

As has already been said above, the “basic research” in all countries is in large part tax-payer and medical charity-funded basic science research. The “development” is a bit different, but the free-ride argument still doesn’t hold up.

Essentially the free-ride argument is something US Pharma spokespersons and lobbyists trot out repeatedly to (i) try and pressure overseas govts to allow a full free market and direct-to-consumer advertising, and (ii) to divert attention from the obscene profits that, say, Genentech and Roche are coining from things like Avastin at $ 5 K a month. US consumers should ask the drug companies WHY their products cost so much, and not take “because all those other people aren’t paying what they should!” as an answer.

Apart from anything else, look up the figures for how much the Pharmas burn on direct-advertising pills to US consumers. The biggest spend these last few years, into the hundreds of millions of $ US, was on Nexium, a drug which is essentially a copy of a cheaper one that is just as good and is now off-patent.

And a free market in drug prices outside the US…. no thank you very much. We would rather get value for the money we are spending on the drug budget, value for money being something people in the US usually strongly believe in.
#49 Phil Boncer
April 3, 2008

Thank you James Hanley; it’s nice to see sense, especially from someone who is experiecned in what he’s talking about.

garth; already covered in this thread. Basic research is a small factor compared to the development costs to get to market.

gingerbeard; first, certainly not all (or even many) consumers read the peer-reviewed journals, in fact few doctors have the time. Without advertising and other marketing, it takes several years for the information to trickle out from the journals to the practitioners, years that the company doesn’t have on its patents. The rest of your “points” are just more ranting.

MartinM; no, that is well and clearly established. That’s mostly how prices are set here: how much do we need to charge, given the limited profits elsewhere, to cover our costs, pay our investors, pay for advertising to get it out there, in the remaining few years we’ve got for this drug? If they can make a fair share elsewhere, they won’t have to make most of it here.

And, Dr. Aust; of course from the outside you don’t want to buck up and pay your share. You’re happy with the free (or at least subsidized) ride, and making someone else pay the price. Socialism in a nutshell. Fairness and compassion and all that. :rolleyes

PhilB
#50 MartinM
April 3, 2008

MartinM; no, that is well and clearly established.

Because if some random guy on the internet says so, it must be true.

I enjoyed your comprehensive rebuttal of Dr. Aust’s post and the reference he cited, too.
#51 James Hanley
April 3, 2008

the need for advertising… is crap!
if you are producing needed medicines, then publishing your research in peer reviewed journals is really all the advertising you need to do.

Gee, then why are all these pharmas wasting so much money? If that was all they needed to do, then they must be really, really, stupid businessmen. Or, more likely, the average GP isn’t keeping up to date with all the research in the medical journals because they’re…..too busy. Heck, I know I can’t keep up with all the research in my own field, as much as I’d like to.

And your argument assumes that only doctors should know about what pharmaceuticals are available. I will fully agree with any claim that advertising to the masses (a) makes doctors’ jobs miserable because (b) dumb patients think they need the next great thing that hit the market. But on the other hand, it is the patient’s life and health at stake, not the doctor’s. They do have a right to participate in the decision-making. For my own case, I have twice asked my GP about a new medicine I saw advertised, wondering if it would be appropriate for me. Once it was not, and she explained why, and once it was, so we tried it and it worked better than what I was taking before.

But create a pill to give guys a boner….well you know there is a big market…I could go on, the list is egregious…gee why don’t people trust big pharma to be in our best interest????

Are you really claiming that you know what is in everyone’s best interest? I’d let individuals make their own decisions on that. And if literally millions of men rush out to get medicine that helps them have an erection, then isn’t that an indication that they see that as being in their interest?

What I see here is a real elitist snob who seems to think that government and/or university researchers should decide what’s important, and everyone should be required to work on only those projects. What’s implicitly proposed is nothing less than a form of central economic planning–an approach that has yet to prove itself superior to decentralized (market-based) planning in delivering what individuals really want. (And for a cite–since folks here are reasonably asking for such things, see Hayek’s “The Use of Knowledge in Society,” and the extensive literature on the “Socialist Calculation” debate–not to throw out the word socialist willy-nilly, but that’s what the debate about central vs. decentralized planning is called.)

I’m going to comment on the article Dr. Aust mentions, but I have to read it first. So I don’t know what I’ll say yet. It could potentially change my thinking, but it flies in the face of what most economists say, so it will have to be compelling.
#52 Phil Boncer
April 3, 2008

Thank you again Mr. Hanley.

And no, the article isn’t compelling.

It, among other things, fails to make a useful distinction between basic research and development, and how those have very different relationships to location. Their quote: “Although all types of research are valuable, it is basic research that leads to important therapeutic breakthroughs. Only a fraction of overall industry expenditure is on basic research, and it does not require the high prices currently seen in the US to support it.” Basic research can be done anywhere and apply; development in practice mostly has to do with complying with a particular country’s governmental rules, and is both much more specific and much more expensive.

And, although they claim to find no evidence of the price difference having an effect on research expenditures, they admit right in their article that “European Federation of Pharmaceutical Industries and Associations reported that, between 1990 and 2003, its members increased their research and development investments in Europe by 2.6-fold and in the US by fourfold.13 The federation concluded that this differential was due to multiple factors, such as the economic and regulatory framework, the science base, the investment conditions, and societal attitudes towards new technologies.” Take a look at how many of those cited factors relate to a more free market.

And, one of their main point is about profits on approved drugs being as high in other countries, but that’s not the right measure, because drugs that won’t be profitable don’t get developed. So they may make good money on the ones that can be developed profitably under their restrictions, but all of those that *could” have been profitable in a more free market just don’t get developed (at least not there) and those patients the unprofitable drugs might have helped are simply out of luck. (Unless the drug gets developed here, and we pay for most of that, and they then get it sold to them at a socialism-mandated discount.)

PhilB
#53 James Hanley
April 4, 2008

I have reviewed and commented on the article noted by Dr. Aust. The commentary is too long to publish here, but is available at http://www.adrian.edu/~jhanley/pharma.htm.

In a nutshell, the authors’ attempt an argument based on economics, but lack a competent grasp of economic theory. Consequently, their argument is wholly unpersuasive, although it is clear how it would be compelling to those without a fair amount of education in economics.
#54 James Hanley
April 4, 2008

OK, for some reason that link doesn’t work, although the address itself is right (must be some hidden code screwing it up?). Try this link to my critique.
#55 Robin Levett
April 5, 2008

@Phil and James

You do both realise that the reason that drug prices in the US are so high is because there is no free market operating there, don’t you? That in fact the US is further from being a free market than the EU?

It is true that the major distortions from a free market – government-legislated monopolies – are present in both. On the other hand, in the US the largest single purchaser of drugs is expressly forbidden from using its market power to negotiate on price. Oddly enough, the champions of capitalism and the free market are not only happy with the situation, they call anyone who seeks to allow that purchaser to exercise its market power a socialist. Go figure, as you say on your side of the pond.
#56 Robin Levett
April 5, 2008

@Phil & James

…and, of course, the second largest pharmaceutical company in the world is British…
#57 Phil Boncer
April 5, 2008

Bzzzt! The “largest single purchaser of drugs” you refer to is, of course, our government, which (agreed) is a problem with regard to having a free market in the first place, but not as badly as in EU-type single-payer systems. The government being “forbidden from using its ‘market power’ to ‘negotiate’ on price” is appropriate, because what the government has is not “market power”, but naked power. It’s “negotiations” would always be backed by the threat that (a) the company does not realistically have the option to decline to sell if it doesn’t like the price “offered”, and (b) that this same government controlls the company’s approvals and thus access to *any* markets.

So, (a) the U.S. is not farther from being a free market in medicine than the EU, and it’s silly to say so, and (b) allowing our own government to muscle in and would *not* be an improvement.

It would especially not be an improvement to the other half of the U.S. market (the non-government half) that would then have to deal with even higher prices to make up for the government “negotiated” discounts, which would then also increase the pressure from the public that would then get further screwed to push even harder for the wrong “solution” of taking the next step to a single-payer system. Those who are proposing the single-payer system now are perfectly aware of this effect, and thus also back the idea of government “negotiation” as a first step, thereby showing that they are perfectly willing to make the system worse and screw the normal consumer even worse in order to get their way.

Thanks, but no thanks.

PhilB
#58 Robin Levett
April 6, 2008

@PhilB

Boohoo; should Big Pharma really be worried about a 40% share of the market actually negotiating on price, rather than simply accepting what it is able to screw out of much smaller players? Remember, of course, that in those negotiations Bog Pharma is backed by government power in the shape of the legislate monopoly provided by patent law. One wonders quite how other suppliers of governments without monopoly power are able to put bread on the table… For example, it’s quite clear that defence contractors, who don;t have monopoly protection and are forced to compete on price and quality of goods for government contracts – which constitute the vast majority of their defence businesses – are unable to make anything approaching a decent profit out of that business.

To deal with your strawman – I am not suggesting that in order to produce something approximating more to a free market the federal government should be allowed to legislate prices; I am not even suggesting that your government should remove its thumb from the scales by removing Pharma’s monopoly power. I am simply suggesting that preventing the major purchaser from negotiating on the price it pays is a major distortion in the market – a distortion that is not present in the EU.

One “innovation” that has been mentioned above is an extension of the period for which pharmaceutical companies enjoy government protection of their monopolies to account for the time taken to obtain approval after patent-filing. Were you aware of the existence in the EU of Supplementary Protection Certificates, which have the effect of extending that monopoly power in the EU where it has lapsed in the US, given identical filing dates?

I accept that there are price controls, negotiated between the government and the industry, in the UK. Are you aware of the way they work? They are cost-plus schemes – they cover cost and allow a generous markup to those costs for profit.

The UK OFT carried out an investigation into UK pharma pricing; the home page of its report is at:

http://www.oft.gov.uk/advice_and_resources/resource_base/market-studies/price-regulation

Annexe D contains an interesting statistic. Above you have defended pharma for (in the US) spending 42% of sales income on advertising and marketing. In the UK, the figure is only 18% (para 2.46, which also references Annexe H – the same figure as, or rather higher than, global R&D – para 2.40). In the US, you have extensive DPM; here, we do not.

Annexe H shows the profit control structure. In that structure, a global (read US or UK-owned, operating in the US) company has an allowance of 22% of sales income for R&D (page 6); which is significantly higher than the actual figure of 15-18%. The profit limit (as calculated using these allowances) overall is 29.4% of capital employed, or 8.4% of sales. Adding back the overallowance, this means that those oh so dreadful price controls in the UK mean that the company “only” makes, in the UK, 12.4-15.4% profit as a %ge of sales. That is comparable to, albeit somewhat lower than, the US figures. This is in fact not surprising when one takes into account (i) the much higher marketing budget in the US and (ii) the existence of rebate schemes in the US which amount across the industry to 39% of list price weighted by volume (see appendix F Box 4.1).

Those controls, BTW, only apply to supplies to the NHS; which, while the majority purchaser in the UK market, is not a monopoly purchaser.

I used to read alt.sysadmin.recovery quite a lot. There are anecdotes there of sysadmins (and family) with chronic conditions, in employment and out, having to decide which available and prescribed drug not to take month by month because of the prohibitive co-pay requirements. Those are shocking anecdotes from the richest country in the world. Whether they reflect general conditions or not is irrelevant – that they can happen at all shows a systemic failure in health care.
#59 Phil Boncer
April 6, 2008

Your analogy to defense contractors is false, because they do not depend nearly so heavily on intellectual property as do pharmaceutical companies (and in cases where the intellectual property *is* critical, they get protected by patents for them in the same way). The main cost for a drug is not in the production, which is often very small compared to the development and the marketing. So a cost-plus scheme is not necessarily going to do the job.

And of course marketing costs in the UK are lower. (a) They only have one main customer to sell to, and (b) that’s not the country where they have to concentrate on making back their development money.

And lastly, yes it’s a tragedy when people can’t afford the medicines they need. But it is even more of a tragedy when the medicines they need don’t exist at all. And that is the question: Is it better to ensure that everyone now has the current medicines they need, even if that means currently incurable diseases mostly stay that way? The effective choice for new medicines becomes (a) that new medicines do get developed, but are only available to a wealthier few at first, and for more people later, or (b) they don’t get developed and everyone suffers equally.

I’ll take limited or uneven relief of suffering over none, especially since later the medicines go off patent and can become available to a much wider population.

PhilB
#60 Robin Levett
April 6, 2008

@Phil

“Depend”?!! Defence contractors are not given the same degree of protection from fair competition that pharma is given. They have to rely upon copyright, trade secrets and confidentiality to protect their products; to that extent, the comparison is false – it was unduly favourable to pharma. Defence contractors essentially have to compete on price; efficiency in manufacture and delivery; after sales support; etc. An individual pharma company may be first to patent, but utterly uncompetitive and incompetent in all other respects, meaning that the price paid is inflated even more than simply through the monopoly factor.

To characerise the US drug market as “free” and the EU market as “socalist” is utterly to misunderstand the degree of government regulation supporting drug prices.

You have – perhaps through inadvertence – not read what is meant by the cost-plus scheme of the PPRS -although I could have sworn I explained that it includes a far greater proportion of cost attributable to R&D than pharma actually spends.

I also explained that the NHS isn’t the only purchaser of drugs in the UK; perhaps you missed that too. The main difference in marketing, however, is the DPM in the US. That accounts, according to the NEJM, to 14% of the marketing spend in the US, or 6% of total sales income. Is it worth it increasing costs by that amount simply to provide a further source of uninformed pressure on doctors to prescribe thereby increasing sales (often unnecessarily)?

If R&D is covered (indeed over-covered) in the price paid for medicine in the UK – and by extension the 25% of the global market that references UK prices – why should medicines not exist?

The figures in the OFT study suggest that US prices (to the insurer) are maybe 30-40% higher than in the UK, after rebates; the higher marketing spend (42% of sales as opposed to 18%) in the US accounts for 28% of US pricing, which is comparable to the difference in drug pricing.
#61 James Hanley
April 7, 2008

Robin,

Did you read my commentary on the Light and Lexchin article? I simply critiqued the errors in their argument. Nowhere have I made the argument that the U.S. system is a perfect free market. So you’re throwing up a strawmann insofar as your comments are directed at me.

I will agree with Phil that the U.S. government’s power is not “market” power, althought it has power to affect the market. Some basic political theory is in order–government is based on force, regardless of whether it’s using it for good or bad. So even if we agree that it’s good for government to use its power to get lower prices from drug companies, it’s still force, rather than market power.

The references, on both sides, to defense contractors, are not wholly accurate. The U.S. government often requires defense contractors who successfully bid on a project to turn over their designs to competitors, so those competitors can have an advantage in future bidding by allowing them to catch up. It’s a self-conscious policy of trying to keep as many defense producers in business as possible, so the government doesn’t have to rely on one monopoly producer–not so much because of prices, but because monopolies don’t innovate well (being too protected from competition to have to worry about innovation). So I think on both sides that analogy doesn’t contribute.

And, Robin, let me say that to some extent you are certainly right–drug prices in the U.S. would be lower if the government “negotiated” with the drug companies. But that’s not the crucial question: the crucial question is whether that would be good for R&D investment and innovation, or not.
#62 Phil Boncer
April 7, 2008

As I noted, if the defense contractor has a patent, he gets the samew protection as any other patent holder (unless, as James notes, the contract requires designs to be avialalbe to competitors). If the defense contractor does not have a patent, then the comparison is not valid. Due to the high cost of getting the drug to market, compared to the lower cost of making the product, medicines depend strongly on patent protection to make them worth developing at all.

Robin: “To characerise the US drug market as “free” and the EU market as “socalist” is utterly to misunderstand the degree of government regulation supporting drug prices.”

I didn’t characterize the U.S. drug market as “free”; it’s about half free at best. But that is *more* free than the EU “market”, which is much more government-controlled than ours. And Imndidn’t miss the rest of your points; I just don’t think it really works out that way, due to the distortions caused by the government’s involvement, which are largely in opportunity costs and other factors that are unseen (especailly if you don’t look for them). How do you quantify the cost to society and to individuals of a drug that doesn’t get developed?

James: “And, Robin, let me say that to some extent you are certainly right–drug prices in the U.S. would be lower if the government “negotiated” with the drug companies. But that’s not the crucial question: the crucial question is whether that would be good for R&D investment and innovation, or not.”

Actually that would still be a choice. Either the rest of the market (the actual market part of the market) would conform to the government “negotiated” price, and R&D investment and innovation would suffer, OR the rest of the market wouldn’t, in which case the R&D could continue, but non-government purchasers of the drug would pay even higher prices to make up the difference.

PhilB
#63 Robin Levett
April 8, 2008

@Phil and James:

RL intervenes; I’ll be back more fully later.

In the meantime, please consider the implications of the facts that (i) the US government – as a virtual monopoly purchaser – negotiates on price with the defence contractors and they still make tidy profits; (ii) the PPRS allows (in the “cost” part of “cost-plus”) for R&D expenditure that is actually higher than Pharma’s actual spend, as a proportion of sales; and (iii) the extra sales income in the US appears to be largely matched (after rebate) by the extra marketing spend in the US – so the claim that the US bears more than its fair share of the R&D cost is rather harder to make on pricing alone.
#64 tom p
April 10, 2008

angrytoxicologist, I normally love your stuff, but here you’re talking rubbish.
The huge cost of drugs in the US is because the drugs companies waste vast sums of money on DTC advertising, encouraging people to seek medicine they don’t need for conditions which don’t exist.
If the US scrapped DTC for all but OTC pharmaceuticals then the costs would come down hugely and there would be fewer sales and marketing goons employed (so it’d be a win-win situation)
#65 Phil Boncer
April 10, 2008

tom p, please read the comments preceding yours; this has been discussed pretty extensively. But the bottom line is that your view is simplistic to the point of being simply wrong. Advertising is certainly a part of the high cost, but the advertising is necessitated by short patent protection combined with high development costs and low prices mandated in other rich countries. To fix this, without cutting the development of medicine off at the knees, any solution has to include some combinations of the following: full-length patent protection, more free markets in the EU/Canada/Japan/etc., and/or a much quicker/cheaper/easier approval process.

PhilB
#66 James Hanley
April 11, 2008

Although those not well-educated in economics often tend to blame advertising for high prices (after all–business have to cover their costs!), they don’t recognize that in the absence of advertising, consumers have less information about alternatives, and so they cannot force producers to compete with each other, which means producers can actually get away with charging higher prices.

If that sounds like pie-in-the-sky theory, let me just say that its actually been empirically documented. A study of states that allowed and did not allow advertising by opticians showed that in the states where opticians could advertise, prices were 25-40% lower than in states where they could not.

The source is Lee Benham, “The Effect of Advertising on the Price of Eyeglasses,” Journal of Law and Economics 15 (October 1972), pp.337-352. The findings are summarized in Todd Buchholz’s New Ideas from Dead Economists (1989), p. 189.

I recognize that the cost of advertizing intuitively seems to add to the cost of products, but, please, there are people who study these things, and they consistently refute that claim. Perhaps the number one lesson of scientific research–the reason for doing scientific research–is that what appears obvious isn’t necessarily true. After all, it still seems quite apparent to me that the sun is revolving around the Earth–and the only reason I know it isn’t is because I believe that astronomers who claim it isn’t have studied it.
#67 Jalee
January 13, 2010

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