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The Myth of High Drug Research Costs

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If you believe that drug prices are so high because of R & D, Big
Pharma has done their job. And they’re going to be in your pocket for a
long, long time.

MYTH: Drug prices need to be as high as they are to pay for research
and development.

REALITY: Drug prices are as high as they are to support unconscionable
profits, with much of the research paid for by taxpayers.

The big claim by Big Pharma is that it costs $802 million
to bring a new drug to market.

It’s not true.

The drug industry figure comes from a Tufts
University study
released in late 2001. There are some major problems
with the study (it affects your bank balance so it’s worth paying attention):

1. The $802 million included $400 million that had
nothing to do with bringing drugs to market
. It was an estimate
of how much the drug companies could have made by investing in some
other way. This is an imaginary number that the drug companies do not
pay.
After deduction: $402 million.

2. The remaining $402 million included about $230 million for clinical
trials, but many
drugs are simply revamps of existing drugs
so clinical trials are done
on only about 29% of drugs. That cuts the figure to $67 million, and we
can deduct another $163 million.
After deduction: $239 million.

3. The US taxpayer pays for 34% of that remainder through
a tax deduction drug companies take on R & D. I think encouraging R & D
this way is good policy, but it does reduce the cost of bringing the drug
to market by $81 million that’s paid for by you and other taxpayers, not
the drug companies.
After deduction: $158 million – $644 million
less than Big Pharma claims
.

Multiplying the real cost by a factor of 5 is a lot of "shading," but
even the last figure is still higher than the average cost to bring out a
new drug: the study was limited to a number of drugs that were developed exclusively
within the drug companies.

What’s wrong with that?

This: the reality is that the majority of drugs are
developed with government support, paid for by American taxpayers
:

A National Institutes of Health (NIH) internal document, dated February
2000 and obtained by Public Citizen earlier this year, showed that all
the top five selling drugs in 1995 received significant taxpayer backing
in the discovery and development phases. Investigations by the Massachusetts
Institute of Technology and The Boston Globe also have examined samples
of medically important and top-selling drugs and found that a vast majority
of drugs in each group received government support. [True
Figure of R&D Costs Likely Is 75 Percent Lower
]

The explanation for this situation may be grounded in the fact that the
Tufts Center for the Study of Drug Development gets 65% of their research
funding from drug companies
.

So when you hear spokesmen like Dr. Mark B. McClellan, commissioner of the
Food & Drug Administration [yeah, I know – he’s supposed to be working
for us]
, claim that "the US is is paying the lion’s share of the
cost of developing drugs" you can believe him. [Business
Week
subscription]

But remember that we’re paying twice: once in government-funded research,
and again in drug prices that are much, much higher than in other developed
nations.

That’s where those "unconscionable profits" come from.

The drug industry is the most profitable business segment in the US, with
an average profit of 18% while the US industry average is only about 3% (Pfizer
hit 28% in their latest annual report, nine times as high as Wal-Mart).

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.

At a June 2003 hearing, members of Congress quizzed William Hubbard, the
FDA’s associate commissioner [he’s supposed to be on our side, too],
on the issue: "As far as adverse events, where people have been harmed
by Canadian drugs coming across the border, did you bring any of those
examples for us?" asked Representative Burton of Indiana.

Hubbard: "We have very little evidence."

Later, Representative Gutknecht, the Minnesota Republican, pressed Hubbard
along the same line: "But the bottom line is, there’s no evidence
of anyone who has died from taking a legal drug from Canada. Isn’t that
a fact?"

Hubbard: "I have no evidence." [Why
We Pay So Much For Drugs
subscription]

Sounds like the drug lobbyists are earning their keep:

One reason the industry does so well in the capital is its potent lobby.
It maintains more than 600 lobbyists—more than one for every member
of Congress. It spent $435 million to influence Washington from 1996 to
2003 and handed out $57.9 million in contributions from 1991 to 2002, according
to Common Cause. Says Representative Pete Stark, a California Democrat
who has waged a decade-long war for lower Medicare drug prices, a move
that government auditors say could save taxpayers nearly $1 billion a year: "These
guys are awfully good. I only wish they were on the right side of the issues.
They don’t care about curing people. They only care about profits." [Why
We Pay So Much For Drugs
subscription]

So don’t buy into the drug companies’ claims. They’ve got a great PR effort
that has convinced the gullible that the high prices they charge are to pay
for research, and a lobbying effort that stops any legislation based on the
facts.

Let your Senators and House
Representative
know that you see through the myth. And your wallet
is tired of taking the shots.

 

The following is in the comments below, but I don’t want you to miss it:

Merck CEO Raymond Gilmartin, who attended the Tufts Center event in
Philadelphia, contradicted PhRMA’s assertion. Gilmartin said there
was no direct link between R&D costs and prescription prices. "The
price of medicine is not determined by research costs," Gilmartin
stated. "Instead, it is determined by their value in preventing
and treating disease." [Tufts
Drug Study Sample Is Skewed
12/04/2001]

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.

I support government-funded medical and pharmaceutical R & D as good social
policy, but let’s let the benefits accrue to consumers, not CEOs and stockholders.

[Printable
version on my site
]

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About Hal

  • 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/

  • http://www.tude.com/ 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • http://www.tude.com/ Hal Pawluk

    …. 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 …

    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.

    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.”

    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.

    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 …

    I’m also confused in what you’re advocating.

    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.

  • http://www.tude.com/ Hal Pawluk

    The CEO quote I mentioned:

    Merck CEO Raymond Gilmartin, who attended the Tufts Center event in Philadelphia, contradicted PhRMA’s assertion. Gilmartin said there was no direct link between R&D costs and prescription prices. “The price of medicine is not determined by research costs,” Gilmartin stated. “Instead, it is determined by their value in preventing and treating disease.” 12/04/2001

  • 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.

  • Patrick

    If the profit margin is so high, why don’t more people and companies jump into it?

  • http://www.tude.com/ 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.

  • http://w6daily.winn.com/ 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.

  • http://www.tude.com/ 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.

  • 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?

  • http://w6daily.winn.com/ 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.

  • 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.

  • http://www.tude.com/ 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.

  • 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.

  • 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.

  • http://www.tude.com/ 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.

  • http://www.filteringcraig.com 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

  • http://www.tude.com/ Hal Pawluk

    I read the article a few months ago, and had it in mind when I made my post.

  • 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.

  • http://www.tude.com/ 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.

  • http://www.filteringcraig.com 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?

  • http://www.tude.com/ Hal Pawluk

    How is it different? Just look at it – seems perfectly clear to me.

    My post was not on the entire universe of drug industry issues.

    I’ll likely get into other aspects at some time. That time might be hastened if you were to post an item detailing your position on Lessig’s topic.

  • http://www.filteringcraig.com Craig Lyndall

    Maybe I will. In the meantime, the price-discrimination is an actual cost that can’t be measured in dollars easily, but it is an actual cost. You sit here going over the cost. You can’t ignore the cost of doing this kind of pricing and you also need to have an understanding of monopoly pricing, which in it’s limited form with the patent situation is necessary.

  • Patrick

    The issue of pricing is complex. What is easy is to look at low costs in Canada v. US and say something is wrong in that. I agree, that doesn’t seem right. OK, how do you fix that? Canada has socialized medicine, which means that Canada’s govt. limits the costs associated with what they will pay for. There are also limitations to socialized medicine. They have longer waits for treatement in Canada. Some drugs available in the US are not available in Canada.

    The risk of limiting drug company profits here in the US is that could stifle drug innovation. Drug companies can sell cheap drugs in Canada, and continue to come up with new drugs because they can count on the profits from the US. It could all break down if the US limits those profits though. Not all drug companies profits are sky high. Just take a look at Wyeth (on of the top 15 drug companies in the world). Look at Schering Plough. Everyone looks at the top tier, but there are a lot of companies out there researching drugs with no revenue, holding out for the discovery they may make that might be able to bring a drug to market 10 years from now.

    Cutting profit incentives may save us money today, but what will it mean to healthcare 10-15 years from now when drugs that could have been brought to market don’t happen?

  • Patrick

    Hal, was reading some of Public Citizens stuff and had some problems with some of their ideas.

    Drug companies will shift priorities: The top U.S. drug companies actually take more of their income as profit (18.5 percent in 2001) than they spend on R&D (12.5 percent). Partially reversing this ratio can compensate for reduced profits due to price cuts.

    Why would they do that? Might they not cut R&D spending?

    Experience in Europe: To control drug costs European countries either impose price controls or limit drug company profits. Yet European drug companies – such as Glaxo, Aventis, AstraZeneca and Roche – are very successful, highly profitable and just as innovative as U.S. companies. From 1990-1999, European-based companies introduced 183 new chemical entities to the world market whereas U.S. drug companies introduced 161.

    I agree, Glaxo, Aventis, AZ & Roche are very profitable, but where do their profits come from? Are their profits coming from the US market? If thats the case, then this point should’t even be considered. Ask why very large facilities for these “foreign” companies are in Philadelphia, RTP, Bridgewater, Delaware and Nutley.

    Future research costs will decline: Drug company R&D is getting more sophisticated and cost-efficient. Technological advances in areas such as genomics and combinatorial chemistry allow researchers to investigate many more new molecules than they could in the past. This will allow manufacturers to reduce costs and increase their chances of finding promising new drugs.

    Future research costs will go down, true, but you can’t expect lower current prices on future savings, can you?

    R&D is the drug industry’s lifeblood: Without research, the drug industry cannot discover new and potentially lucrative drugs. It is counterintuitive that the industry would reduce R&D. If anything, the reduction of drug prices could intensify R&D prompting companies to come up with more discoveries that would sustain profitability despite reduced prices.

    So thoughts of declining profits would encourage even more investment? I know the NIH budget is $27 billion, pharma spends about $32 billion as it is, if they know they will make less money in the future, why would they increase the $32 billion? Also, couldn’t cutting their profits encourage me-to drug research, as that is less risky? Keep in mind that while me-to drugs do provide profits, they are not going to provide mega-blockbuster drug profits. They might take market share, but they will never own the market for that indication.

  • http://www.tude.com/ Hal Pawluk

    I have no idea what those ideas might be, as I haven’t read anything on their site except for scanning the page with the story about the Tufts study. That was the only source I had with the NIH data.

    Providing a link to that page is not an endorsement by me of anything they may think, believe or do. And since there may be a propensity for jumping to conclusions on BC, I’ll try to avoid them in the future :-)

  • Patrick

    I actually like PC’s section on medical malpractice, but hey, you have to make a lot of noise to get noticed I guess.

  • Timo

    Here’s a good source of info on the current David & Goliath war over American’s rights to reimport drugs from Canada if they can’ta fford domestic prices. http://www.rxsanity.org

  • Klug

    Dear Mr. Winn:

    You mentioned above:

    ” ‘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.”

    Speaking as a current graduate student in organic chemistry, I can assure you that the profit motive, if not the biggest, is the most universal of all motives among all students. (It most likely is the biggest, incidentally.) Do you know how long it takes and what kind of investment of money it takes to become a research scientist in medicinal chemistry?

    It takes four years of college, five years of Ph.D. studies (if you’re lucky) and likely a two year post-doctoral fellowship to be hired into the drug industry. During that time, students are accumulating debt and foregoing better salaries elsewhere.

    I might add that graduate students in the sciences are lucky enough to be paid during this time, but not paid very well. I earn around $20k a year for working six days a week with average ten hour days. (I might add that I get paid better than most around the country and my hours are not atypical.) I do not get any societal benefit from being a chemist (unlike the God-like treatment I would get if I were a medical student or a physician.) The only benefit I get (other that the respect of my peers, of course) is money.

    I write all of this to assert to you three things: First, there aren’t enough American students going into the sciences (medicinal chemistry included.) Second, those students that do go are motivated, yes, by a thirst for knowledge, but also knowing that being a scientist is at least somewhat lucrative in the future. Third, by forcing drug company profits down, you are killing R&D and either lowering my future salary or removing my job altogether.

  • http://www.tude.com/ Hal Pawluk

    Klug: by forcing drug company profits down, you are killing R&D

    Making the drug companies live in a competitive market would not kill R & D, and you’d still find work, though maybe not at quite the wages you’re anticipating now.

    I do think you need to read my original post again: most of the research is paid for by taxpayers. The drug companies then cherry-pick the drugs they want to develop further.

    Cutting their profits from the 18% they enjoy now to something closer to the level in, say, the semiconductor industry wouldn’t necessarily reduce R & D much. If they can spend more on supporting the value of management stock options than on R & D, they have plenty of wiggle room.

  • Klug

    Dear Mr. Pawluk:

    Unfortunately, we are at a classic impasse, where we disagree on the effects of cutting drug company profits. My brief experience working for a Pfizer subsidiary tells me that the moment the profits look like they’re taking a dip, R&D money tightens like a nervous sphincter. (Forgive the analogy, if you please.) Research projects are ended and efforts are only placed on the surest of sure bets. Sure, the bosses might take a pay cut, but really, when was that the response of any modern company? (Besides, any pharma company worth its salt could burn through one Fortune 500 CEO’s salary in six months. If you’ve gone to that, it’s too late.)

    As for your second point, I cannot find any documents to prove or disprove your assertion. (That’s not your fault, it seems that Public Citizen doesn’t have a copy of this NIH document online. Feel free to prove me wrong.) What do you mean, cherry-pick? And what do you mean by government support?

    If you’re saying that drug companies take advantage of initial discoveries by NIH-funded academic scientists, yes, then they cherry-pick. If you’re arguing, however, that the government pays for most of the research that turns the idea into a pill that you put into your mouth, though — you’re wrong. Some, yes, most, no.

    Taxpayers pay for basic science; drug companies risk their money for applied science. There’s a crucial difference there.

    Thanks for the response, Mr. Pawluk. Hopefully, this isn’t a dead thread.

  • http://www.tude.com/ Hal Pawluk

    Research projects are ended and efforts are only placed on the surest of sure bets.

    That’s where it’s handy to have the NIH doing a lot of the preliminary research – the drug companies can pick up the projects that showed the most promise on someone else’s nickel. This pays off for the drug companies twice: once in the drugs that were discovered; once again in the dead ends that were followed and turned up nothing. Knowing where not to spend your money is as important as knowing where to spend it.

    If you’re saying that drug companies take advantage of initial discoveries by NIH-funded academic scientists, yes, then they cherry-pick.

    Yes.

    If you’re arguing, however, that the government pays for most of the research that turns the idea into a pill that you put into your mouth, though — you’re wrong. Some, yes, most, no.

    No.

    Taxpayers pay for basic science; drug companies risk their money for applied science. There’s a crucial difference there.

    I understand that difference pretty clearly – my degree is in engineering, which I would never confuse with science. It was a long march between discovering that you could get thrust from combining two chemicals in a vented enclosure to generate thrust, and actually landing on the moon.

    And I don’t think we’re at an impasse because I’m not trying to get you to do anything :-) I don’t care whether we disagree or not and I don’t care whether, if we disagree, I change your mind or not. I’m just laying some facts and opinions out for others to consider.

    With that out of the way, you’re right that the flinch reaction of management may be to cut expenditures in areas other than their personal perks, certainly in the short term (they may cut advertising first).

    However, that can only go so far. They’re only going to continue to get those perks as long as stockholders are happy with their performance, so they can’t kill the goose that lays the golden egg, the development that brings new products to market. With enough reduction in taxpayer supported prices, they’d start looking at the management money, such as the $9.7 billion Pfizer spent in 2002 to support management stock options (as I said, more than their after-tax expenditure on research that year).

  • Patrick

    One thing to keep in mind about marketing and advertising expense. The goal of marketing is to increase revenue and thus profit. Marketing should not actually cause profits to drop (unless you do it poorly), it should cause revenue (and profits) to go up. If you squeeze profits, why would you drop or cut something thats purpose is to increase profits? (I know, companies do cut marketing when they are not doing well, sometimes companies do things that don’t make a whole lot of sense.

  • http://www.tude.com/ Hal Pawluk

    You’re right, Patrick, but I’ve spent a few years on the client side in marketing, and even more years as an outside consultant and advertising agency so let me tell you: many companies cut advertising when things start going wrong financially.

    From their perspective, as far as I can tell, advertising is a huge expenditure and there are no directly traceable (dollar-for-dollar) results. They do the cuts, and sure enough, things don’t change all that much for a short while.

    My counter has been that “advertising doesn’t cause sales”, and that when times are tough it’s time to let the other guys cut their budgets and take the competitors’ market share by continuing to advertise.

    It worked some of the time :-)

  • Patrick

    I think we agree of the advertising, kinda. Not saying that if profits were lowered, drug co’s wouldn’t cut advertising, but generally they tend to go across the board. (again back to companies not always doing the smart thing). While they probably shouldn’t cut marketing, they do. While they probably shouldn’t cut R&D, they probably would.

  • http://www.tude.com/ Hal Pawluk

    I’ve posted an update that reinforces the mythical quality of drug pricing supposedly based on research costs at:

    http://blogcritics.org/archives/2004/02/12/111829.php

  • Patrick

    So pricing a product according to its value is strange?

    I think the problem of healthcare costs is very frustrating. You look at Canada and their system of covering everyone at a lower level, and compare it to the US’s system. Which one is better, which one is worse? Its not an easy answer, but the fact is you have to ration healthcare somehow. Not everyone in the world can have the “best” healthcare available. Maybe this isn’t the place for my topic, but it gets at how to ration healthcare. A socialist system rations it in quality and speed of service. The average person in Canada is probably better off, but the quality is probably lower at the top end. In the US, the average is probably not doing as well in Canada, but if you can afford it, you can receive the best healthcare in the world.

    If you take out financial incentives, there is no doubt that quality suffers. I have read that doctors in Canada are attracted to the US market because their level of reimbursement in Canada is regulated, thus lower. Some drugs are not available in Canada (too expensive) and the time to receive treatement is longer.

    Would Pfizer stop R&D if you take their margins from 18% to 3%? Probably not, but you probably would stop companies like Imclone and other start ups. Would Amgen ever have been started if the profit potential had been 3%? Quite a few drugs out there that the big pharma companies end up selling come from these small companies.

    I am beginning to believe that the market can regulate drug prices better than the govt. can.

  • http://www.tude.com/ Hal Pawluk

    So pricing a product according to its value is strange?

    Not a bit.

    Read my original post again: I object to their making highly inflated claims, getting a huge free ride on taxpayer dollars, and profiteering rather than profiting while crying poor-mouth. Aside from that I’m sure they’re very nice people, love dogs, children, etc.

    Although I’m not totally sure, as after raising the price for an HIV drug 400%: “Abbott said in response that the price increase was long overdue because of Norvir’s ability to enhance other therapies”.[ Physicians Call for Abbott Boycott In Protest of Norvir Price Increase 2/12/2004]

    As to which system is better the answer is simple: Canada’s.

    Canada spends far less on health care than the US yet their infant mortality rate is lower and life expectancy is higher than in the United States. I discussed this in The Myth of Better US Health Care 1/16/2004.

  • Patrick

    So Canada has a better system? I am not sure I would agree with you on that one, but I could be biased because I have health insurance.

    I used to work with a guy who lived in Canada and he used to pay into our companies insurance plan. I knew that Canada provided insurance and couldn’t figure out why he would do that. He told me that if anything “serious” happened to anyone in his family, he wanted to be able to bring them to the US for treatement.

    Not sure if I would agree that Canada has a better system if it does not cover “serious” problems.

  • http://www.tude.com/ Hal Pawluk

    Would Pfizer stop R&D if you take their margins from 18% to 3%?

    Your words, not mine – I never said take their profit down to 3%.

    Read the piece again: I object to their falsely inflated claim for why drug prices are high and making profits (which include billions in taxpayer dollars) that even a Republican Congressman called “profiteering.”

    Probably not, but you probably would stop companies like Imclone and other start ups. Would Amgen ever have been started if the profit potential had been 3%? Quite a few drugs out there that the big pharma companies end up selling come from these small companies. … I am beginning to believe that the market can regulate drug prices better than the govt. can.

    What I’d like to see is an even field with other industries and an end to the “drug prices are so high because of R & D”.

    I’d like to seem them get the same kind of tax breaks as, say the semiconductor industry, and I’d like to see them pay back the government when they use government-funded research.

    I’d also like to see drug industry corporate welfare, like the new Medicare bill, stopped.

    At that point, with the market regulating drug prices as you suggested, the poor babies might have to suffer with a margin more like that in the semiconductor industry (currently about 11%).

    Competition wouldn’t stop startups. And our drug costs would be lower.

  • http://www.tude.com/ Hal Pawluk

    Not sure if I would agree that Canada has a better system if it does not cover “serious” problems.

    An anecdote doesn’t carry much weight.

  • Patrick

    I actually think the Medicare Reform work was pretty good. I agree that the govt. should be allowed to deal with pricing issues, but those issues will be shifted over to the insurance companies that pick up that on the back end. Was the reform perfect? No. Is Medicare better today than it was? Yes. Does it move more people into private insurance, yes. Is that a good thing, probably not. The only option is to go for a national health plan, and I just don’t think that would ever fly in the US.

  • http://www.tude.com/ Hal Pawluk

    My thoughts on the Medicon Bill.

    After reading that, you could read my update.

  • Earl

    Hal:
    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.

    Sorry, but that is part of the economic cost.

    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.

    Right — they charge what the market will bear. But here is the magic of capital: once the economic profit — notably distinct from the accounting profit that you see on those annual reports — hits 0, then the capital leaves the pharmacy industry. The OC is a clear part of the economic costs, because there is a guaranteed profit investing in government backed bonds. So the investment capital must be paid for bearing risk.

    The key here is that any investor can simply realize those gains — the normal rate of return — by investing in government bonds with 0 risk. In order to gain investment capital, the pharmacy companies *have to offer gains > normal rate of return* — significantly higher in fact, because of the risk born by the investors.

    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.

    But it is a real cost, because if the pharmacy companies stop paying it to their shareholders the investment capital disappears. It has to be paid, ergo it is a real cost. Or perhaps you are willing to loan money to high-risk ventures for no return, or even a return equal to the interest on government bonds or bank accounts? If so, we should talk.

    Klug: by forcing drug company profits down, you are killing R&D

    Making the drug companies live in a competitive market would not kill R & D, and you’d still find work, though maybe not at quite the wages you’re anticipating now.

    See, here’s your problem: you don’t understand smart people. Take your average scientifically inclined person with an IQ of, oh, 130 and a good work ethic. There is lots of profitable work that person can do: software development, health care, R&D in numerous fields. Assuming that these people are rational actors, they will act in their own self-interest. Now, when you have huge direct (tuition, books, living expenses) costs to educate yourself and even higher opportunity costs (4-12 years of foregone wages), you have to pay people a premium to convince them to undergo this education. Stop paying the premium and you lose the people. Or do you think that you can convince people to speculatively invest a conservative $250K in education without high wages on the far side?


    I do think you need to read my original post again: most of the research is paid for by taxpayers. The drug companies then cherry-pick the drugs they want to develop further.

    They perhaps take the best ideas, but there remain immense further costs before they get a penny of profit.

    Cutting their profits from the 18% they enjoy now to something closer to the level in, say, the semiconductor industry wouldn’t necessarily reduce R & D much. If they can spend more on supporting the value of management stock options than on R & D, they have plenty of wiggle room.

    You are free to forego using the drugs — that will certianly cut their profits. But I don’t see you doing that, do I?

    Hal, I really think you need to read an introductory economics text. See, for example, Case and Fair, chapters 4,5,6,7.

    -earl-

  • http://www.tude.com/ Hal Pawluk

    I’ve read the books.

    What you need to do is put them down and take a look at what is actually happening in the real world.

    It’s profiteering, supported by taxpayers in addition to consumers.

  • http://dirtgrain.com/weblog Dirtgrain

    I don’t see anyone complaining about the unnecessary waste in the Pharmaceutical industry in that they often are creating new drugs that don’t do anything better than the old drugs. It’s just a profit-making scheme (much like “New and Improved Raisin Bran: Now With Even More Raisins”) that drives up costs for the people and our government. The PBS show, “Now With Bill Moyers,” had an segment dedicated to issues like this: A Second Opinion – Marc Siegel on Drug Advertising. Dr. Marc Siegel, an Assistant Professor of Medicine at New York University, says the following:

      But the company that makes Prilosec knowing that it’s gonna lose a fortune, has come up with Nexium (PH). And now Nexium is loaded in the closet and its almost natural for a doctor to say, “Well I don’t have Prilosec here anymore, but I do have Nexium and it’s almost identical. It’s made by the same company and it has the same effect.” So the patient ends up switching almost inadvertently over to Nexium.
      This process of drug laboratories creating these new compounds that are slightly different than the old compound. This happens every year there’s a new drug on the market. Every year there’s only a slight or no improvement. Every year the drug that was on the year before is forgotten about totally. Physicians almost don’t even remember its name. And every year more and more millions of dollars are spent in advertising in order to promote the new kid on the block. There is an almost indecipherable difference between these new drugs and the drugs that came out before or that were out previously.

    I smell a rip-off.

    Then there is “Glaxo Chief: Our Drugs Do Not Work on Most Patients.” Aren’t we getting bilked–in many ways?

  • Earl

    Hal:
    I’ve read the books.
    What you need to do is put them down and take a look at what is actually happening in the real world.

    So basically you don’t have an answer to the part about you not understanding economics, investing, the stock market, or risk?

    Gotcha.

    This is the part where you admit that either
    1) that $400M is a real cost (since investors have to be paid to bear risk)
    -or-
    2) you would loan a pharmaceutical company money at the same interest rate you would get if you loaned it to the government

    -earl-

  • http://www.tude.com/ Hal Pawluk

    The $400 million is not “a real cost.”

    When you do a pre-investment economic analysis, there is no other business that’s going to generate the same returns as the drug industry.

    Investing in other industries, you would have lost the “opportunity cost” of the huge potential gains in pharmaceuticals, not vice-versa.

  • Earl

    The returns from investing elsewhere are irrelevant, or at least don’t matter to any intelligent investor. The only number that matter are returns *taking into account* risk. And yes, you can find similar returns — after you take risk into account — elsewhere.

    Do you somehow believe pharmaceuticals don’t involve risk? For a trivial counterexample, see fen phen — that’s 3.75B or some such straight out of the pockets of the shareholders.

    -earl-

  • http://www.tude.com/ Hal Pawluk

    The returns from investing elsewhere are irrelevant, or at least don’t matter to any intelligent investor.

    I’ve tried to be patient but that’s just pure nonsense. Their $400 million/drug claimed “opportunity cost” is based on theoretically investing elsewhere, maybe some magical kingdom that would turn their average $158 million investment into $558 million, but elsewhere.

    What is your interest? Are you a lobbyist, ad guy, PR agent for the drug industry?

  • Patrick

    Hal, I read up on quite a bit on the research that the NIH does, and how it gives away that research to Pharma. One example I read about was Taxol, the cancer drug that BMS received from the NIH and sold for billions of dollars. Pretty interesting stuff, and at one point, the NIH was going to shut down its funding of Taxol because it wasn’t going anywhere due to production problems, research problems and the like. BMS came in and was able to bring it to market. My point is, sure BMS saw huge profits there, but the fact is, the drug wouldn’t be on the market today (and its generic versions) if BMS had not stepped up and got it. While not a perfect drug, it does help some cancer victoms. Not sure if all the NIH/Pharma interactions work like this, as data is hard to find, but seems to me like this one worked out pretty well.

  • http://www.tude.com/ Hal Pawluk

    It looks like I need to clarify: I have no objection to government involvement in drug research.

    In fact, I was watching a show last night that indicated that NIH is only getting $28 billion this year, and my flinch reaction was: “Shit, we should at the least double that.”

    I think it’s good to invest in the health of the society as part of government policy (what are governments for?). Most of the work isn’t done by NIH, but is instead farmed out to universities and that’s a good thing, too, in my opinion.

    What I don’t like is the sleaze involved in campaign contributions, lobbying and then the resulting corporate welfare give-aways on top of it all to Big Pharma (e.g., the latest Medicare bill), only to have Big Pharma stiff the consumers with huge prices and humongous profits while crying “Woe is us.”

    Or something along those lines :-)

  • Patrick

    I agree Hal, for smart people, sometimes pharma does some really stupid things. I think maybe they are looking at hospitals and the condition they are in, and want to make sure that they don’t end up in the same cost cutting environment.

    I think what this country needs to do is take a hard look at what healthcare costs really are. The debate of prescription drugs is the hot topic (and has been for quite a while) but it still is only 10-15 percent of overall healthcare spending.

    Maybe what needs to happen is everyone looking at what healthcare costs really are, not just the co-pays, but learning how expensive things actually are. We don’t provide a prescription drug benefit to all for a poor person with hypertension, but we do give that same poor person treatement in an emergency room for their stroke.

    Also, smokers don’t like the fact that they have to pay $4 a day for their cancer pill, but willingly shell out $5 a day for their smoking habit.

    Something has to give, you can cut costs all you want, but personal responsibility will go a long way in “curing” our health crisis.

  • http://www.tude.com/ Hal Pawluk

    In a more macro view, I’m really bothered that for all the gobs of money we spend on health care we still have worse overall health as a nation (as measured by the generally-accepted standard metrics) than other developed countries (see my The Myth of Better US Health Care).

  • Patrick

    I totally agree Hal, its a very difficult problem. You can look at prescription drug costs, medical malpractice costs, the costs associated with treating illegal immigrants, the poor and it goes on and on.

    I am coming to believe that the only way to fix the problem (if it can ever be fixed) is to stop taking half steps and just scrap it and build something new.

    A national health plan is probably the way to go, and I would support that, where everyone pays into the system and everyone receives a base level of treatement. Hard choices will have to be made on what that base level is, but the fact is, not everyone in this country (or this world) can receive the “best” healthcare.

  • http://www.tude.com/ Hal Pawluk

    Check this out from the link I gave earlier:

    The non-profit Institute of Medicine, an advisor to government on health care issues, has published a new report with recommendations that could make that happen.

    Lack of health insurance causes roughly 18,000 unnecessary deaths every year in the United States. Although America leads the world in spending on health care, it is the only wealthy, industrialized nation that does not ensure that all citizens have coverage. To help policy-makers, elected officials, and others judge and compare proposals to extend coverage to the nation’s 43 million uninsured, the Institute of Medicine of the National Academies offers a set of guiding principles and a checklist in a new report, Insuring America’s Health: Principles and Recommendations [14 Jan 2004]

  • Earl

    Earl:
    The returns from investing elsewhere are irrelevant, or at least don’t matter to any intelligent investor.

    Hal:
    I’ve tried to be patient but that’s just pure nonsense. Their $400 million/drug claimed “opportunity cost” is based on theoretically investing elsewhere, maybe some magical kingdom that would turn their average $158 million investment into $558 million, but elsewhere.

    Sorry, but you are being deliberately stupid. It doesn’t matter if you can get a 50% return elsewhere, or even 100%, or even 1000% — what matters is risk. You are attempting to compare potential returns without taking into account risk, which is pure nonsense. To reiterate yet again, you can stick, say, $400M into the bond market or a FDIC insured set of bank accounts and get a guaranteed, 100% sure return on investment. Therefore, anyone who invests in pharmacy companies — and I hope you think there is risk involved — requires a higher rate of return.

    Hal:
    What is your interest? Are you a lobbyist, ad guy, PR agent for the drug industry?

    A brilliant return from someone who doesn’t understand the argument. For your information, I’m a student who actually understands something about mathematics, economics, and science. I’m not involved in the drug industry in any way except that I used to write PCR analyzation software for a former employer, where I was exposed to the immense cost and risk of doing this type of research. If you don’t believe me, feel free to follow my IP — it resolves to charter cable out of Madison, WI. There’s no pharma companies there that I know of. If you still don’t believe me, I can email from my student account.

    -earl-

  • http://www.prometheus6.org P6

    Therefore, anyone who invests in pharmacy companies — and I hope you think there is risk involved — requires a higher rate of return.

    Are they entitled to apply their rate of return to more money than they’ve actually spent?

    That’s the question, not whether or not the rate of return is appropriate.

  • Patrick

    Take a look at how low prices have affected vaccine production if you don’t think lowering costs could limit the quality of drugs in the future.

  • http://www.prometheus6.org P6

    Take a look at how low prices have affected vaccine production if you don’t think lowering costs could limit the quality of drugs in the future.

    Are you saying production is of lesser quality because the prices are low? Or just that they aren’t making a necessary medicine because it’s wouldn’t be profitable enough?

    The vaccines you’re talking about aren’t new, need no testing, there’s nothing about them that require the large investment, very little risk involved…I don’t know if that’s the example you want to use.

  • Patrick

    P6, not talking about the quality of vaccines, am talking about the supply. Why are there shortages of vaccines? Is it because of low prices?

    Also, there is limited research into new and novel vaccines, why is that? Could it be because of low prices?

  • http://www.tude.com/ Hal Pawluk

    “Why are there shortages of vaccines? Is it because of low prices?”

    It certainly could be, bit I don’t see how that has anything to do with the false claims of the costs to bring a new drug to market.

    “Also, there is limited research into new and novel vaccines, why is that?”

    Really? Which “new and novel” vaccines are these? The drug companies are keeping their research secret for competitive reasons.

  • Patrick

    Really? Which “new and novel” vaccines are these? The drug companies are keeping their research secret for competitive reasons.

    Thats my point, there are not many “new and novel” vaccines. You can’t sell something that is secret. The question is why are there few new and novel vaccines. Could it be that companies don’t have incentives to bring new and novel vaccines to market due to price caps?

  • Patrick

    One other comment about “govt. sponsored monopoly power”. This is a perversion of the term monopoly. Does Pfizer have a monopoly on the treatment of ED? Do they own this space, as a monopoly would imply? The only monopoly Pfizer has is a monopoly on its own product. Every company has a monopoly on its own products.

    It is political hype (and bad hype) to say that drug companies are granted a monopoly. Do any drug companies have a market share of more than 20%? If not, how is that considered being a monopoly?

  • http://www.tude.com/ Hal Pawluk

    Earl, based on your comments, I have no trouble believing you to be student.

    The fact is that “opportunity costs” are not an economic cost and do not affect profit and loss statements.

    When I spend $100 on going to a rock concert instead of buying seven CD’s, the cost of the CD’s is an opportunity cost. The drug industry would have us believe that I’m out $200 during this transaction by adding my expenditure plus the opportunity cost. My bank account tells me I’m only out the $100 I actually spent.

    Beyond that, in their claim of $802 million to bring a new drug to market, they also seem to have used a multiplier.

    I’m willing to admit that they may spend $239 million pre-tax (see above). Even using their bad accounting, the total would have been $478 million rather than $802 million, although that’s still not a valid claim for the cost of bringing the average new drug to market.

  • Patrick

    Hal, I usually ignore all the claims of the cost to bring a new drug to market, because I think they are really besides the point. But it is a fact that opportunity cost should figure in to the equation. If it doesn’t, why do financial companies always stress what investing today means to tomorrows retirement fund?

    Another question, if the profit margins of the drug companies are so unbelievable, why are their stock prices what they are? Shouldn’t they be higher? Shouldn’t their multiples be so much higher than they are compared to the rest of the S&P? Take a look at Pfizers stock performance, at their multiple, and you will see that it is not much different than Intel.

    I agree that the pharma industry talks about R&D costs quite a bit, and also talk about the safety of drugs re-imported from Canada. I am not sure why they ever started that, as this is not the real issue in terms of pricing. Safety can’t be assured here in the US, it can’t be assured from drugs brought in from Canada. Products are usually priced according to the value they bring to its user. Maybe they figured it was easier to talk about safety and R&D than to talk about the basics of economics.

    They fact is Americans probably do pay more for drugs than they should, not because of payoffs but because other nations have opted out of funding the R&D that is required for good drug discovery. I have no problem with 3rd world countries not having to pay for this, as they don’t have the resources for this. I do have a problem with developed nations that are willing to provide low level medical coverage to their citizens. Sure, everyone has the same basic treatement, but I am not sure Americans are willing to suffer anything but the best healthcare in the world.

  • http://www.prometheus6.org P6

    Patrick:

    I don’t remember ever seeing anyone say the alternatives to investing in drug research and development should not be considered. And that is what “calculating opportunity costs” is. That’s ALL it is. It is not a dollar amount that is actually spent, and anyone who claims it is should be either kept far away from the company’s books or locked away with them until he can prove he understands them.

  • http://www.tude.com/ Hal Pawluk

    But it is a fact that opportunity cost should figure in to the equation. If it doesn’t, why do financial companies always stress what investing today means to tomorrows retirement fund?

    No, it is not a fact, and in fact is wrong.

    What you are talking about is a different issue – that of determing your potentially best Return On Investment (ROI) before making an investment.

    Instead of going to that rock concert, you decide to invest that $100. At that point you look at mutual funds, CDs, semiconductor stocks, baseball cards, etc. and pick the one you think will give you the best ROI on your time horizon. (Do you want to cash out in a month, a year, 20years?). Whichever you pick, the alternative not chosen is not a cost.

    “Opportunity costs” and “ROI” are apples and oranges.

  • Patrick

    But business is run on the basis of ROI. Maybe the argument should be is healthcare best left up to business.

  • http://www.tude.com/ Hal Pawluk

    Patrick, I don’t understand your comments about the “new and novel vaccines.”

    Drug companies keep their research secret until they’re ready to market the drugs to gain a competitive advantage. They are constantly bringing out new drugs (not necessarily vaccines), and I find them to be “new and novel” when they are introduced.

    Is there some particular line of research you think they’re not following because of cost? If so, there are a lot of those.

    One thing they do is try to determine how many potential users there would be for a drug and if they don’t see enough, they don’t try to develop the drug, but that’s “just business.”

  • http://www.tude.com/ Hal Pawluk

    But business is run on the basis of ROI.

    Which has absolutely nothing to do with the economic construct of “opportunity cost.” There is no “but.”

    Maybe the argument should be is healthcare best left up to business.

    That’s so wrong it has to be a troll, so I’m out of here.

    It was interesting while it lasted.

  • Roger

    Oddly, Glaxo-SmithKline has been running a TV ad justifing the high cost of research. As far as patents, Schering-Plough the makers of Claritin and Clarinex had the Ace in the hole.

    As soon as Claritin became available over the counter they introduced Clarinex. Clarinex(desloratadine 5mg) when metabolized in the body is the exact equivalent as 10mg loratadine (Claritin). Not only are they still making money on Claritin the people who’s insurance was paying for it is now paying for Clarinex. The exact same thing. Pretty damn clever with sevaral more years of patent on Clarinex.

  • Patrick

    Not sure if this forum is dead, but one point about pharma taking advantage of research done by the NIH.

    Few of the biomedical products that federal agencies most commonly buy
    appear to incorporate federally funded inventions. In 2001 the government
    had licensing rights in only 6 brand name drugs associated with the top 100
    pharmaceuticals that VA procured and in 4 brand name drugs associated
    with the top 100 pharmaceuticals that DOD dispensed. GAO was unable to
    determine the extent to which the government had rights to other types of
    biomedical products because there are no databases showing the underlying
    patents for most of these products and such products may incorporate
    numerous components that might not be covered by identifiable patents.

    http://www.gao.gov/new.items/d03536.pdf

  • Janice

    Your point #2 makes absolutely NO sense whatsoever. Clinal trials are run on all new products and we ARE talking about new product development costs. Your point added in about revamping old products has NO relevence in this equation.

  • John Wilson

    “Opportunity Cost” is NOT a real cost. It is only useful as an aid in making investment decisions, designed to skew capital costs to reflect the leverage effect of earnings.