December 8, 2004
Take twoBy Steve Feinstein
With the election season finally over, it's time to turn our collective attention to some of the more pressing domestic matters facing the country. It would be illustrative to look again at the entire drug industry product development/cost structure to better understand the issues in play, especially now that Medicare contains a prescription drug component.
Let's begin with the notion popularly fostered by the mainstream media:
'The Big Drug Companies are ripping off the average consumer and making themselves rich at our expense.'
As is the case with most quick—hit soundbites, this is inaccurate and misleading. Only an infinitesimally small percentage of experimental formulations ever get even remotely close to becoming commercially useful pharmaceuticals. Scientists and researchers labor for years trying to find the next miracle drug. The cost is enormous to these companies, from maintaining state—of—the—art research facilities, paying for top flight PhD's and praying they stay with your company long enough to do something useful, investing in sterile, perfect manufacturing plants, and above all, struggling with never—ending Government regulations in an incredibly litigious atmosphere. What if only one out of one—thousand Honda or Sony products was a success, and they had to wait several years between each viable product?
Most people never give any of this a second thought. All they want to know is, 'When will 'they' have a cure for that?' US drug companies bring the vast majority of the world's useful medicines to market each year. Along with our food production, our medical/pharmaceutical technology is unparalleled by anything or anyone, anywhere in the world. Yes, these drugs aren't free. But it's a cost we should be happy to pay.
Now, say you want to get these drugs from Mexico because they're cheaper there? Or maybe from Canada?
The fact of the matter is that drugs imported illegally from un—US—regulated countries are not subject to FDA standards and inspection. Their quality, consistency, and safety are not guaranteed by our rigorous standards. Very often the drugs from Mexico or Canada are 'reject lots' that couldn't be sold in the US, gotten through shady 'third parties.' Do people truly understand this and want to take that chance?
As reported in Roll Call, the newspaper of Capitol Hill, earlier this year:
"...Canada's government will not certify the safety of the drugs being exported from its territory, and the Food and Drug Administration and U.S. Customs Service have seized thousands of fake, out—of—date or adulterated drugs at U.S. ports of entry, often ostensibly from Canada but actually from Latin American or Asian countries with minimal safety standards.'
In addition to the safety aspect of unregulated drug importation, there are the inescapable economic ramifications that artificially low pricing in price—controlled secondary markets has on free—market economies like ours. Here's a little lesson in Economics 101, real world—style. If any company sells its product at unprofitable levels for too long, it goes out of business. Let's say that consumers could get all the cheap drugs they wanted from Canada at one—third the US price. Demand would go through the roof, and shortages would develop in Canada overnight. Prices would skyrocket. Soon, there'd be no price difference at all compared to the US.
When a foreign government puts price controls on the drugs to keep the prices at or below a pre—determined 'consumer—friendly' level, the drug companies—or ANY company selling any product or service—will simply put a limit (or a complete stop) on what they shipped into that market, and would instead, ship more into other markets at higher prices where they made more money. Again, the supply of cheap drugs would dry up very quickly, as the pricing sought its natural market level. There's no panacea. It just doesn't exist in a free—market economy.
Again, from Roll Call:
"A recent Congressional Budget Office study found that importing drugs might not save consumers much money, especially if demand from the United States causes prices to rise in Canada and European countries, if those countries limit exports or if drug companies limit supply to those countries..."
The Miami Herald in October 2003 reinforced this in a report on drug maker Eli Lilly's plan for exporting drugs to Canada:
'There are three things at work here:
...it will limit sales of its drugs to amounts that Lilly estimates are sufficient to supply the Canadian market only."
...Why? Because of Canadian—set price controls...Government—imposed price controls simply create shortages and drive up prices in a market economy.'
Retail price controls will serve primarily to discourage the pharmaceutical companies from investing in the costly research and development needed to produce new drugs. If the US drug companies are financially handcuffed and dissuaded from such endeavors, the world will be denied vital new treatments for cancer, AIDS, Alzheimer's and Parkinson's that are currently in the critical research stages.
Politicians like to talk about being able to "lower the cost of prescription drugs," but what they are actually talking about is artificially bringing down the retail price. This is astonishingly ignorant and na�ve with regard to how companies develop and market their products. Based on the manufacturer's costs of development, manufacturing, and marketing, they charge the retailer a certain price. The retailer then marks up that 'dealer cost' from the manufacturer to a retail price level suitable to cover the store's fixed and administrative overhead.
When politicians talk tough about 'controlling the rise in drug prices,' they mean reducing the price that the drug companies can charge their retailer customers, so the retailers will lower their prices. This can't—and of course, doesn't—work, because if a particular business segment is unprofitable for a company, the company either exits that market or goes out of business.
As noted economist Thomas Sowell said in 2003:
No matter how much lower the government sets the prices paid to doctors, hospitals, or pharmaceutical drug manufacturers, none of this reduces the costs in the slightest.
It still takes just as much time, equipment, and training to turn a medical school student into a doctor. It still takes just as many hospitals to care for the sick. It still takes just as many years of scientific research and clinical trials to create a new medicine.
The only thing that will affect drug prices is lower development costs, not after—the—fact price controls. If the stranglehold of overwhelming Government regulations that American pharmaceutical companies face (it's estimated that drugs take three times longer to get FDA approval than in other Western countries) were lowered, that would dramatically reduce their costs and allow them to be more price— and time—competitive in the marketplace.
That will work, because it's the marketplace that counts in a free—market economy like ours. If a drug company had lower costs, they'd rush that lower—cost drug to the market to beat out their competition as fast as they possibly could.
When there's no potential for profit (and just as important, when there's no marketplace penalty for bad products), as in a socialist—oriented economy (like Russia or France or Cuba), there is very little incentive to produce great products —so they don't. Take a look in your house and see how many 'designed and manufactured in Russia' (or France) labels you have. Except for caviar or wine, the answer is essentially zero. It's the US drug companies who produce the life—saving drugs. If they can't make a profit on those drugs, they'll stop making them and stop developing new ones. Simple.
We could also introduce some real tort reform to get the trial lawyers off the backs of these companies. A huge development cost component is the liability reserve built into the price of any product or service. When the threat of frivolous lawsuits or malpractice looms overhead, costs go up. Like weeds sprouting up on a vacant lot, the ambulance—chasing contingent of the legal field is already filling the airwaves with countless 'Call us for the money you deserve' advertisements in the wake of Merck's voluntary recall of Vioxx.
Are the drug companies—or any company in any industry—perfect angels with only other people's best interests at heart? No, of course not. They need oversight and common—sense regulation. But as they pursue their profits, they do FAR more good than bad for their customers.
Expensive life—saving miracle drugs, or almost no new drugs at all. That's the choice. And it's an easy one to make. It's certainly not as much fun as a cheap, dramatic soundbite, delivered to the ignorant masses who are just dying to believe that the 'Big Drug Companies' are ripping them off. Sorry, no sale.
Steve Feinstein is a corporate communications specialist in Massachusetts