No, they don't need that money for R & D (start over at the beginning
of this article if that was still your knee-jerk reaction). Pfizer, for example,
spent $9.4 billion on R & D (after taxes) and $9.7 billion on stock repurchases
to offset management's stock options (most
recent annual report). There seems to be more than enough money for management
to work with.
As the Republican Representative from Minnesota, Gil Gutknecht, said: "There's
nothing wrong with the word profit, but there is something wrong with the
word profiteer."
What to do? You could try buying drugs in Canada like many do, but Congress
and the FDA are working hard to prevent that:
... investigation suggests the FDA's actions against Canadian imports have
been part of a concerted campaign to simultaneously discredit its counterpart
agency in Canada, provoke fear among American consumers who buy their drugs
there, blunt an exploding political movement among local and state governments
to begin wholesale drug buys in Canada and ultimately preserve the inflated
prices charged U.S. consumers and taxpayers. [Why
We Pay So Much For Drugs Time Magazine subscription]
Oh, you believe their "safety" red herring? Then try this:
Each year an estimated 50,000 to 100,000 people die as a result of adverse
reactions from FDA-sanctioned pharmaceutical drugs sold in America. In
fact, mistakes in administering drugs, often in hospitals, are the fourth-
or sixth-leading cause of death in the U.S., depending on how the cases
are counted.
By comparison, the risk from defective, counterfeit or mislabeled drugs
from Canada is presumed but unproved by any evidence. When TIME asked a
spokesman for PhRMA, the drug-industry association, if there were any cases
of Canadian drug imports harming Americans, he said, "Yes, I believe
there have been some. I believe FDA has some on its website."
In fact, the FDA has no such record.
Article comments
— go to most recent comments1 - EcoDude
Your first point about the "imaginary" costs are referred to as opportunity costs by economists and every Econ 101 student learns the concept. The $402 million represents the cost of using the funds to develop the drug instead of investing in something else, which is a real cost. Ask anyone whether a new job offer of $1 million a year would make then think about quitting their current job. The $1 million is an opportunity cost (or "imaginary cost" as you put it) and can affect the decision of whether to stay at the current job.
For an alternative explanation go here:
http://www.marginalrevolution.com/marginalrevolution/
2 - Hal Pawluk
I understand what "opportunity costs" are, but the druggies don't mention that when they make their claims.
Instead, it comes out sounding like they spend the money. It's not a good consideration in the context in which they use the gross amount of $802 million/drug.
The $400 figure they use is very arguable, too. Their real average cost to bring a new drug to market, taking the government supported R & D into account, is in the range of $100 million. They don't tell us how much of that is normal marketing and manufacturing that any business would have to engage in, but even without that, they don't tell us how they turn this $100 million into $400, what assumptions they made about how they could have quadrupled their investment doing something else.
It's hard for me to come up with anything they could have done to make that kind of money when you consider that their profit margin is 6 times as high as the industry average (18% versus 3%). If they had invested at the 3% industry average, it would take 48 years to quadruple their money (using the Rule of 72).
It's still a Big Pharma scam.
3 - John Thacker
Suppose that you pay $1,000 now, and in two years you receive a computer. Call this Option A. Or, suppose that you instaed just pay $1,000 two years later when you get the same computer. Call this Option B.
Are Options A and B the same? Clearly not. The computer is cheaper with Option B. With Option A, you have to have $1,000 two years ago. By choosing Option B instead, you could take that $1,000, invest it, or even safely put it in a Certificate of Deposit earning interest, and then two years later pay for the computer but still have all the interest left over.
Drug approval is much more like Option A, with large sums of money invested at the beginning and middle of the process. It's silly to pretend that money later is worth the same as money now.
4 - EcoDude
I don't think you understand the fact that all costs are opportunity costs. The $400 million spent is also an opportunity cost. It represents the forgone opportunities of using the money to develop drugs as opposed to using the money for something else. This is the definition of a cost. When a consumer spends $5 on lunch, this is also an opportunity cost as it represents the value of the foregone opportunity to spend on something else. The same is true with the opportunity costs calculated in the paper by DiMasi et al.
5 - John Thacker
Hal, I'm also confused in what you're advocating. If all the drugs companies sell are so profitable with regards to investment, then drug companies should be investing even more to produce more of these magical profit-making machines. I'm skeptical of any claim of *real* economic profit being massively higher for an entire non-massively expanding industry than the "industry average." I suspect that 1) there's a case of accounting profits not reflecting economic profit, 2) that the pharmaceutical industry is indeed rapidly expanding, and/or 3) that there's been some cherry-picking going on of picking only the most successful companies in the industry.
Furthermore, I'm confused as to why you think that, were drug prices to be radically squeezed and profits cut, that drug companies would cut only say, executive pay, and not R&D at all. Cutting drug prices, especially on patented drugs, strongly reduces the returns available for newly developed drugs. It's naive to assume that R&D wouldn't be cut as well.
To the extent that drugs are more profitable, more R&D will be spent on drugs, and vice versa. That much is certainly true.
The safety argument is, of course, ridiculous, I grant.
6 - John Thacker
You'll also have to convince me, Hal, that we would be better off if the profit margin were lower but the rate of new drug discovery was also commensurately lower. Of course, no one notices the drug not discovered. (Just as people rarely take into account the massive improvements in life quality and time of life granted by modern drugs.)
The objection to Canada and other rich countries, like most of Europe, that negotiate marginal cost pricing, is that these deals reduce the total amount of R&D being done. Not that the US drug prices would be lower, but that there would be more drugs discovered thanks to the opportunity for additional profits from Canada and Europe.
The "citizen groups" you refer to are, as such groups always are, willing to sacrifice the health of future generations to get cheaper prices right now. Perhaps this is explained by those groups only having the currently living as members, and being skewed towards the middle-aged and elderly, and away from the young.
7 - Hal Pawluk
You've put a lot of words in my mouth that don't belong there, but let me address what seems to be the overall sense so far.
The "opportunity cost" issue is a non-starter here, and should not be counted as part of the cost of bringing a drug to market. The pharmaceutical companies are in the drug business because the opportunities were worse in other endeavors, such as semiconductors. I don't see the semiconductor industry (which is doing very well at the moment) whining about their R & D costs. What they are doing is exactly what the drug industry is doing - charging what the market will bear. There was a recent quote by a drug company CEO who said exactly that (I can't find the source immediately, but it was recent so it's available).
In a free market system, that's as it should be, but pharmaceuticals are not in a free market.
Pricing and pharmaceutical industry profits are skewed by heavy lobbying and the resultant legislation and regulation (e. g., the new Medicare Act).
They are also skewed by the fact that most drugs that do get to market are based on R & D funded by the government and taxpayer dollars, rather than out of drug company profits. The government pays for the research, then the drug companies cherry-pick the most-promising drugs they want to take further. Cutting profits for Big Pharma will not have nearly as much effect on new drugs as you imply; new drug discovery certainly won't be "commensurately lower."
The figures for an average profits were from Business Week and I'm certain they did no cherry-picking. Their numbers were the average profit for the drug industry (18%) and all U. S. industry (3%). And the drug companies are investing heavily, in Ireland, Japan, Singapore ...
Good question. Probably a couple of things.
1. Consumers shouldn't just buy their bs - they think about their claims, analyze the claims, separate the wheat from the chaff, etc. Critical thinking seems to be sorely lacking on this issue,
2. Let's get back to more of a free market in pharmaceuticals (we could start by repealing the latest Medicare Act). I think government-funded medical and pharmaceutical R & D is a good social policy, but let's let the benefits accrue to consumers, not CEOs.
As for your comments about "the citizens groups," I'm clear on what you think their motivation is, though I'm not sure what you think of their facts.
8 - Hal Pawluk
The CEO quote I mentioned:
9 - Boonton
I think Blogcritics was correct to deduct the $400M 'opportunity cost'. This is very real in an economic sense but it is deceptive since it is easy to mistake it for an accounting cost, which it is not.
However, one cost that should be factored in is a share of expenses for drugs that failed to make it to market place. A drug company must make their successful drugs pay for the cost of unsuccessful ones.
Here's an easy theory: Returns for all major industries should be roughly equal. This is because if putting $100M into inventing drugs gave more bang for the buck than $100M into making dish towels or computer games, more money would rush into the sector until returns were roughly equal.
Last I heard, Pharma companies did have higher margins than most other industries. This implies that there is some element of 'excess profits' but at the same time money is rushing into pharma companies so there's no obvious reason why the difference won't even out in the long run.
10 - Patrick
If the profit margin is so high, why don't more people and companies jump into it?
11 - Hal Pawluk
Your logic doesn't hold: the profits are high.
Period.
They are the highest for any industry segment in the U.S., and six times as high as the average profit for U. S. industry overall.
12 - Phillip Winn
This is great info. I'd be curious to hear how drug companies might respond to this.
Frankly, I don't knwo that I would have believed this ten years ago, but the pharmcos have done little to help their public image as they boasted record profits while the rest of the economy was in the toilet.
Anybody got a real defense?
For the record, I don't agree with a lot of the socialist suggestions in this thread. I don't have a problem with a company making big profits. BUT these companies are taking advantage of government-sanctioned monopoly power in the form of patents, and with that power comes responsibility. If they want to make the big bucks, they should have to face competition.
The existing medical patent system ensures that there really is no "free market" on most drugs.
13 - Hal Pawluk
I agree with Gutknecht that there's a difference between "profit" and "profiteering", and clearly we have the latter here, subsidized by taxpayers.
A free market would change things radically.
14 - Patrick
A free market? Should we do away with patents? Patents were created to reward people for inventing things. If you take that away, what incentive would anyone have to come up with new drugs?
15 - Phillip Winn
Patrick - that's a whole different topic, and IP issues are one of my biggest interests. The short version is: If you're going to keep patents (which were hotly-debated at the time they were put into the Constitution), recognize them as innovation-killing monopoloies, and limit them severely.
"what incentive would anyone have to come up with new drugs?" Gee, I doubt most kids growing up become scientists because they want to discover something that their company can patent and make a lot of money from. I suspect most kids who become scientists do so out of a thirst for knowledge, or a desire to help people. THe profit motive is not the only motive, and I suspect it's not even the biggest one.
Or you could ask all those companies making money off of drugs no longer covered under patent, from Bayer Aspirin and Tylenol and Advil to the old new purple pill people.
16 - Patrick
Limit them? They are limited. They get 20 years, right? Once a drug is brought to market (takes about 10 years or so to bring it to market) now the company has 10 years of monopoly power, right?
While profit isn't the only motive, it is a large part of it. Dr. Salk gave away his Polio cure for free, but what is keeping someone from doing that now? Don't see that happening much.
As for Aspirin, sure, they make money, but you don't see a whole lot of innovation in that area anymore, do you? Putting new colors in the packaging doesn't strike me as product innovation.
When you bring up the new purple pill, thats a whole different ballgame. Sure, something goes over the counter and its price goes down, but for whom? The person who had a $20 co-pay paid less when it was under prescription because insurance covered a portion of it, now, they have to pay for all of it.
The way to deal with me-to drugs is to limit what drugs go onto a formulary. If a drug won't be reimbursed, chances are a company won't strive to develop drugs in that area. The problem with that is now you have the govt. dictating healthcare. No one likes it when an insurance company dictates how someone is treated, and no one wants the govt. telling people how they will be treated.
I agree, the industry isn't perfect, and there are a lot of areas that should and can be improved. In my opinion, price restrictions would not be a good thing for healthcare as a whole.
One hot topic is that Medicare can't mass buy drugs, thus use their buying power to lower costs. With Medicare Advantage, the people will be shifted over to private insurance companies, who can use their buying power. Companies like UnitedHealthCare have pretty good buying power.
Like I said, I don't think the industry is perfect, but I think the argument should be about overall healthcare spending, not just prescription drugs. Focusing on prescription drugs is the hot topic, but it won't fix healthcare.
17 - Hal Pawluk
A free market? Should we do away with patents?
No.
Limit them? They are limited. They get 20 years, right? Once a drug is brought to market (takes about 10 years or so to bring it to market) now the company has 10 years of monopoly power, right?
Wrong.
The drug companies take a patented drug, make minor tweaks, sometimes only in the way the drug is manufactured, then get new patents and continue with their total control.
This instance should be fixed, but I'm all for copyrights and patents.
18 - Patrick
I am with you on patent extensions, this practice was a disgrace, finally, the industry is backing off trying to extend their patents, you have seen fewer of those challenges lately. I agree, most were baseless cases where the only motive was to make money, but laws were passed to restrict that from happening in the future.
As for tweaking the drug and applying for an additional patent, formularies can address that situation also. Keep in mind that the FDA looks at me-to drugs a little harder than novel drugs. It only makes sense, if there are 3 drugs on the market that do a reasonable job of controlling a condition, why bring a 4th one on if its not much better? You need to have probably 3 drugs on the market for a condition because some people don't respond to a drug for any number of reasons, you have to worry about drug availability and such.
19 - Patrick
An interesting Letter to Editor of Time Magazine. I know it was written by PhRMA, but interesting reading on this issue.
Open Letter to Time Magazine
January 30, 2004
Dear Editor:
Americans are spending more on medicines than in years past and it is reasonable to ask whether they’re getting real value from that investment. It’s also reasonable to closely scrutinize public policies that have a bearing on pharmaceutical costs. We welcome real debate on these issues, which is why we were so disappointed in your cover story, “Why We Pay So Much for Drugs.”
This story departed from Time’s long tradition of outstanding news coverage by using a veneer of objectivity to disguise what is, in truth, a political polemic.
The article repeatedly uses highly selective information to drive readers to its authors’ opinions, rather than offering readers information they could use to reach their own conclusions. Three examples demonstrate this unfortunate pattern.
First, the newly-passed Medicare law prohibits the government from negotiating directly with pharmaceutical companies. This provision originated in the Clinton Administration’s drug plan and subsequently was included in many proposals sponsored by Democrats (such as Tom Daschle and Dick Gephardt) and Republicans alike. Time conclusively presents this rule as having the purpose and effect of preventing patients from obtaining discount drugs under Medicare. That’s one view and we have no quarrel with it being reported.
However, there’s another, much better supported view that Time failed to report to its readers. Congress’s official scorekeeper, the nonpartisan Congressional Budget Office (CBO), determined that the bill will achieve large savings on pharmaceuticals. In fact, the savings projected for this bill were larger than the savings projected for a drug plan introduced by President Clinton and another supported by Senator Daschle. In part, these large savings result from the negotiations for discounts that will be conducted by powerful private purchasers with the incentives, tools and leverage needed to drive hard bargains. CBO also has concluded that repealing this provision would have a negligible effect on drug costs. This information from an authoritative, independent source flatly contradicts the article’s unsubstantiated claims, but the authors chose not to include it in their article. The authors also failed to report that the noninterference rule expressly protects patients from a government imposed national formulary that would restrict their access to medicines"or that the bills seeking to repeal the provision would repeal this patient protection.
Second, the article portrays importation of pharmaceuticals through Canada as safe and the Food and Drug Administration’s (FDA) opposition to importation as protecting industry rather than consumers. Nowhere does the article inform readers that FDA is enforcing current law, which a majority-Democratic Congress passed in 1988 after a multi-year investigation revealing threats to the nation’s drug supply, including importation. Nor does the article report that the Clinton Administration, as well as the Bush Administration, were unable to demonstrate under the law that importation could be done safely and would achieve significant savings. And while highlighting Springfield, Massachusetts’s illegal importation program, it fails to inform readers that Springfield requires its employees who purchase from Canada to sign a liability waiver so that the city will not be responsible for injuries from imported drugs"an odd requirement for a program that Time insists is safe. Likewise, the Massachusetts Group Health Commission concluded that any savings from importation would not be worth the liability risk and disruption to existing insurance arrangements.
Third, Time cites one General Accounting Office (GAO) report about a single drug to support its claim that the government plays a large role in discovering new medicines. Unfortunately, Time does not report that the company that manufactures this drug pays a royalty to the government and also played a significant role in the drug’s development. Equally important, while citing a GAO report about a single drug, Time does not inform its readers about a July 2003 GAO report finding that the government has licensing rights in only six brand drugs among the top 100 bought by the Department of Veterans Affairs and only four of the top 100 bought by the Department of Defense. And the National Institutes of Health has publicly reported that it had some role in developing only 4 of 47 top selling drugs. Simply put, pharmaceutical research companies discover and develop nearly all new medicines, but Time excluded the extensive evidence on this issue from independent, credible sources.
American health care is changing rapidly, as new medicines play a growing role in medical care. In recent years, new medicines have revolutionized care of heart disease, diabetes, rheumatoid arthritis, osteoporosis, depression, psychoses, and many other conditions. Physicians now have tools that can help maintain health, avoid hospitalizations and nursing home care, and preserve quality of life. More tools are on the way, as research pays off in the new medicines that will be needed to avoid the staggering human and economic costs of conditions like Alzheimer’s that will become more common as the Baby Boomers age.
These changes are accompanied by friction in our health care system, particularly since insurance coverage of the growing pharmaceutical sector is not as good as coverage of other types of medical care. The country has taken a step forward in addressing that issue and moving from 20th Century to 21st Century health care with passage of the Medicare prescription drug benefit which will provide drug coverage to 10 million previously uninsured seniors, along with better coverage for many millions more.
We welcome real debate about all these issues and more. Let’s have real analysis of the value of medicines, the effects of government-imposed price controls, and the dangers of drugs shipped through Canada from the Philippines and other countries all over the world. But Time does a disservice to its readers who seek thoughtful debate by cloaking opinion as news. Time sets a standard for excellence in journalism"a standard not met in this instance.
Sincerely, Alan F. Holmer
I would be very intrested in finding more information about the NIH's part in drug discovery. Hard to find much data out there in terms of what they do. I know their budget is 27 billion or so, but when they license out a drug to the pharma company, how much more work does the pharma company have to do to bring that to market? That really has a lot to do with R&D costs you see quoted out there.
20 - Hal Pawluk
how much more work does the pharma company have to do to bring that to market? That really has a lot to do with R&D costs you see quoted out there.
I don't think we'll ever be able to find that info, as it would be revealing data to competitors and I'd resist that if I were in their shoes - it's a reasonable position to take.
I am reasonably confident, however, that the average cost is less than the cost for the cherry-picked examples they used in their study, since these were developed with no taxpayers support.
Logically, that's not necessarily true, of course, but highly likely under the circumstances.
21 - Craig Lyndall
My friend just turned me onto this article. You should read it, Hal.
http://www.wired.com/wired/archive/12.02/view.html?pg=5
22 - Hal Pawluk
I read the article a few months ago, and had it in mind when I made my post.
23 - Patrick
Craig, that was a good article. Its true, politicians do and say things to either get elected or to get re-elected. Healthcare in the US is a serious issue, and hard choices need to be made. Making hard choices usually is not good for a politicians health (well, his political health). It is a very difficult issue, but I think that some of the beliefs out there (that I think are wrong) will end up hurting healthcare, instead of making it better.
24 - Hal Pawluk
Umm, not a few months ago - mixed it up with a different article - but I had read it.
Price discrimination is a different issue than what my original post addresses, and I'm not sure that I care one way or the other about what Lessig says about it. If I do, I'll post something.
25 - Craig Lyndall
You approach a topic about costs, but you leave out Price-discrimination as one of the points of topic? You CAN'T do that.
How is it a different issue?