Add pharmaceuticals to the list of trade complaints

International trade is in the news these days, almost on par with the media pumping the tale of porno star Stormy Daniels.  Even so, there's still an aspect of trade that gets far too little attention.  This is surprising, given that it adversely affects millions of Americans.  It has to do with the pricing of prescription drugs.

One does not have to be a fan of Big Pharma to acknowledge that the industry spends a tremendous amount of money and effort on developing and testing new drugs.  Scientific American estimates that it now costs over $2.5 billion to bring a new drug to market.  This involves an arduous twelve-year approval process before the drug is green-lighted.

Along with these costs, patent law leads to high initial prices on drugs.  A patent gives its inventor twenty years of exclusive rights to his discovery.  But twelve years of this on average is eaten up by the approval process.  The result is that the pharmaceutical company is left with only eight years of a monopoly position before competitors can jump in and produce and sell low-cost generics. 

The bottom line is that pharmaceutical companies are not charities – but they are when it comes to international trade.  Or, rather, the American consumer is.

How so?

Foreign buyers of American pharmaceuticals are with few exceptions government agencies buying in bulk.  In the negotiations for new prescription drugs, these foreign governments demand a price far lower than what is charged in the U.S. market.  Remember: the price American consumers pay includes covering the upfront R&D effort.  

Why are the foreign buyers successful in getting the lower pricing?  As Steve Forbes explains, that in Don Corleone fashion, foreign governments make the drug companies an offer they can't refuse.  They say, If you don't give us the pricing we want, we'll allow a knockoff to be produced by another company.  And recall, the cost of actually manufacturing most drugs in minuscule.  The major cost is in developing them. 

As Forbes says, "[t]he U.S. should now make fair pricing of American drugs overseas a top trade priority: If you don't want to pay for our R&D, you won't get our pills.  Period.  And if you try the imitation game, we'll take painful retaliatory measures.  Success with this would mean significantly lower costs for the American consumer."

Hopefully, the Trump administration will add pharmaceuticals to its list of trade complaints to be resolved.  Americans should not be forced to subsidize foreigners for their drugs, some of which can literally be life-saving.

You have to step back and wonder how we got to this point.  Aside from subsidizing the world with our R&D drug development, we are also defending Europe over 70 years after WWII and 25 years after the collapse of the USSR.  And we allow the Chinese to subsidized their export industries, to dump their over-capacity into our markets, to erect barriers to our exports, and to blatantly steal our technology.  Other countries do much of the same, but not to the extent China does.

Until Donald Trump came along, nobody in government ever thought to make much of a stink over any of this.  That seems to be changing.

International trade is in the news these days, almost on par with the media pumping the tale of porno star Stormy Daniels.  Even so, there's still an aspect of trade that gets far too little attention.  This is surprising, given that it adversely affects millions of Americans.  It has to do with the pricing of prescription drugs.

One does not have to be a fan of Big Pharma to acknowledge that the industry spends a tremendous amount of money and effort on developing and testing new drugs.  Scientific American estimates that it now costs over $2.5 billion to bring a new drug to market.  This involves an arduous twelve-year approval process before the drug is green-lighted.

Along with these costs, patent law leads to high initial prices on drugs.  A patent gives its inventor twenty years of exclusive rights to his discovery.  But twelve years of this on average is eaten up by the approval process.  The result is that the pharmaceutical company is left with only eight years of a monopoly position before competitors can jump in and produce and sell low-cost generics. 

The bottom line is that pharmaceutical companies are not charities – but they are when it comes to international trade.  Or, rather, the American consumer is.

How so?

Foreign buyers of American pharmaceuticals are with few exceptions government agencies buying in bulk.  In the negotiations for new prescription drugs, these foreign governments demand a price far lower than what is charged in the U.S. market.  Remember: the price American consumers pay includes covering the upfront R&D effort.  

Why are the foreign buyers successful in getting the lower pricing?  As Steve Forbes explains, that in Don Corleone fashion, foreign governments make the drug companies an offer they can't refuse.  They say, If you don't give us the pricing we want, we'll allow a knockoff to be produced by another company.  And recall, the cost of actually manufacturing most drugs in minuscule.  The major cost is in developing them. 

As Forbes says, "[t]he U.S. should now make fair pricing of American drugs overseas a top trade priority: If you don't want to pay for our R&D, you won't get our pills.  Period.  And if you try the imitation game, we'll take painful retaliatory measures.  Success with this would mean significantly lower costs for the American consumer."

Hopefully, the Trump administration will add pharmaceuticals to its list of trade complaints to be resolved.  Americans should not be forced to subsidize foreigners for their drugs, some of which can literally be life-saving.

You have to step back and wonder how we got to this point.  Aside from subsidizing the world with our R&D drug development, we are also defending Europe over 70 years after WWII and 25 years after the collapse of the USSR.  And we allow the Chinese to subsidized their export industries, to dump their over-capacity into our markets, to erect barriers to our exports, and to blatantly steal our technology.  Other countries do much of the same, but not to the extent China does.

Until Donald Trump came along, nobody in government ever thought to make much of a stink over any of this.  That seems to be changing.