Scream this from the rooftops

by on November 15, 2006 at 6:40 am in Medicine | Permalink

We can’t just bargain down the prices of pharmaceutical drugs without adverse consequences.  It is hard to measure the effects here, but yesterday I came across this piece of serious empirical work:

EU countries closely regulate pharmaceutical prices whereas the U.S. does not.  This paper shows how price constraints affect the profitability, stock returns, and R&D spending of EU and U.S. firms.  Compared to EU firms, U.S. firms are more profitable, earn higher stock returns, and spend more on research and development (R&D).  Some differences have increased over time.  In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent.  During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate.  Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

Here is the paper.  Here is a non-gated copy.  Here is my column on medical R&D.  Here is a previous installment in the series "Scream this from the rooftops."

Zubon November 15, 2006 at 8:13 am

If I am reading this correctly, prices controls led to about a 30% drop in new medicines produced, although part of that is presumably a substitution effect of shifting new medicine creation to the US. Is that a fair reading?

I suspect that whether most people care is partially dependent on what those 46 fewer medicines might have been. While different versions of existing medicines are important to people who experience differing side effects, presumably the medicines foregone were the marginal ones. Would the typical new medicine be a statin inhibitor or a different version of Viagra? Still, it is hard to believe that you can drop 30% of new medicines without eliminating something valuable.

People may generally not care, because it is hard to feel the loss of something you never had. It is not as though drugs that people use were taken off the market; non-existent drugs have no constituency. We could say that one of them might have been a cure for cancer, but that sounds more than a little hyperbolic.

30% is the number I would want to scream from the rooftops, since 46 may or may not be a big thing without context. “You can have cheap drugs now, but you will lose 30% of future treatments every year, now and forever.” I wonder how many people would call that a good trade, since the EU had about 45% cheaper drugs in the last period shown. Hey, 45 is bigger than 30!

Chi November 15, 2006 at 8:23 am

Isn’t the real story that we won’t lose them all, but will pay royalties to Indian and Chinese pharma companies (where the “high-paying jobs” have gone as well)?

Are the American people subsidizing the drugs, the jobs, or both? Why not, it’s the American way?

EclectEcon November 15, 2006 at 8:42 am

I’m a bit confused by Tyler’s argument. If there are high potential profits in the US, why aren’t European pharmaceuticals doing R&D for drugs they can sell in the US?

Brock November 15, 2006 at 8:47 am

Since the market for pharmaceuticals is an international market, with negligible shipping costs, I don’t see how price controls in European markets can explain the relative shift in R&D between European and American firms.

Even if prices are controlled in Europe, drug companies, both European and American, have been able to sell their drugs in the US.

I would expect European price controls to have the same effect on drug companies profitability no matter where they were located.

theCoach November 15, 2006 at 9:01 am

The obvious point being that of course innovation will follow the relative money*, but did the extra money result in the most efficient incentives for innovation?

I have not read the paper in question, but from the excerpt this key question seems unaddressed.

For anyone interested in alternative ways of funding innovation consider the establishment of research prize for drugs that acheive some objective.

*Assume for illustration that innovation of drugs is constant. Assume that country A spends $100/year to companies developing drugs, and country B spends the same. Assuming also that there is some ability to work internationally, if country B were to up its payments to $200/year we would expect that more of the static amount of new drugs would come from country B.

jult52 November 15, 2006 at 9:08 am

TheCoach: “Alternatives that have a proven track record of success already exist–specifically, research supported by foundations, universities, and the government.”

These institutions don’t have a proven track record of bringing drugs to market. I’m also wondering whether any honest financial analysis has been done on the costs of academic “pure” research. I also genuinely doubt that gov’t funding can effectively and efficiently replace private-sector research. Baker’s solution is full of holes.

John Thacker November 15, 2006 at 9:12 am

Isn’t the real story that we won’t lose them all, but will pay royalties to Indian and Chinese pharma companies (where the “high-paying jobs” have gone as well)?

“Have gone?” The jobs that have gone to Indian and Chinese pharma companies already are not the high-paying or particularly research-oriented jobs discovering new compounds. The big market that’s already gone to India and China are things like “replicate lots of known compound X.”

If there are high potential profits in the US, why aren’t European pharmaceuticals doing R&D for drugs they can sell in the US? and

Even if prices are controlled in Europe, drug companies, both European and American, have been able to sell their drugs in the US.

From the first page of the paper itself, if anyone had bothered to read it:

“Although many pharmaceuticals are sold worldwide, EU (U.S.) firms typically sell proportionately more in the EU (U.S.) (see Vernon, 2005).” They also demonstrate a correlation between the proportion of drugs sold in the US and the rate of growth in R&D research among firms. The more a company sells to the European market compared to the US market, the slower the R&D growth.

Another story is how much of the R&D done by European pharmaceutical companies has switched to being located inside the United States, to be located closer to the target market. This paper measures by firms, so it doesn’t account for how much of, say, Glaxo’s research is being done in the US now.

Another two and a half dollars goes to industry profits and marketing–and to the legal costs, campaign contributions, and political lobbying needed to protect and extend the industry’s patent monopolies.

Ridiculous to imply that companies wouldn’t market or lobby if a different plan were implemented. In addition, marketing is designed to increase sales and profitability; good marketing pays for itself. Lots of drug marketing is designed at getting people who otherwise wouldn’t know that their condition is treatable to go see their doctor and get a drug. (For “lifestyle” diseases like allergies or impotence that people might choose to live with rather than seek treatment.) In cases like that, marketing simply increases overall sales of the drugs, spurring investment into research.

[A]lso, a copycat drug may incidentally benefit people who react poorly to the original drug. In a competitive market, however, pure copycat research would be dropped in favor of research funded by public sources and likely to produce real improvements.

The author sounds completely ignorant when he pretends that we can a priori know that whether a “copycat drug” will have fewer side effects or benefit people who react poorly to the original drug. In reality, that tends to be discovered at the end of the long, expensive process of research. There is absolutely NO way that public sources could determine at the onset whether a drug would be helpful in that way. Thus, there is no way to guarantee that one would fund only “real improvments,” and the inclusion of the comment convinces me that the author of the piece has no idea what he’s talking about.

A suggested compromise: People who believe that federally supported research is the answer should concentrate on federally supporting research into drugs aimed at diseases with small or poor (or both) patient populations, diseases that it is often unprofitable to develop a drug for. Unfortunately, like any political process, federally supported research money goes towards popular diseases suffered by the middle class and up, so it’s not really better than for-profit research as far as that goes.

Even in Europe, the track record of publically supported pharmaceutical research is very thin. Yes, there are plenty of stories of excellent basic research that does lead to drugs. But people constantly underestimate the amount of effort to take research demonstrated on a plate to a real drug.

John Thacker November 15, 2006 at 9:14 am

So where is the evidence — or even the theoretical argument — that demonstrates the connection between European price controls and European investment in R&D?

From the first page of the paper itself:

“Although many pharmaceuticals are sold worldwide, EU (U.S.) firms typically sell proportionately more in the EU (U.S.) (see Vernon, 2005).”

They demonstrate further a correlation between the rate of growth in R&D and the proportion of sales in the US as opposed to the EU.

There’s your theoretical argument. I’m sorry that it wasn’t contained in Professor Cowen’s post, but required you to click on the free link.

John Thacker November 15, 2006 at 9:21 am

but also drugs to counteract behaviours that have recently been medicalised – think Ritalin, for example.

Ritalin’s a bad example if you’re talking about recent research or recently medicalized behaviors.

1) Not on patent, available generically.
2) Invented in 1954.
3) Invented by a Swiss company (Ciba, a precursor to Novartis.)
4) Prescribed for hyperactivity starting in the 1960s.

However, one will concede that prescription of Ritalin did greatly increase in the 1990s in the USA, but it hardly has to do with patents or research or anything.

A great deal of the advertising for drugs has to do with “lifestyle” diseases or illnesses for which pharmaceutical treatment is a new development, though, yes. That’s because potential patients may not know that help is available. (If you have cancer, of course you’re going to get whatevertreatment; advertising is unnecessary.) This effect probably biases perception; since most of the advertising is for this kind of drug, people may heuristically assume that most new drugs are this kind.

cure November 15, 2006 at 9:36 am

Perhaps this is addressed somewhere else in the paper, but the fact that EU companies sell more of their drugs (proportionally) in the EU is entirely unrelated to the relevant IP question: what *variety* of drugs is available in the EU.

Here’s a thought experiment: Imagine the US is the only country with IP protection on drugs, and the protection is such that 100 drugs are profitably invented. Imagine another entity (call them the EU) decides to protect IP; they can either spend half what the US produces and incentivize the production of a further m<50 (diminishing returns of R&D) drugs, or spend the same as the US and incentivize n<100 further drugs. From the EU standpoint, they can get 100 drugs for free, 100<100+m<150 drugs for x amount of money, or 100<100+m<100+n<200 drugs for 2x amount of money. Sure, they miss out on some new drugs by not paying more, but international IP often allows a weak free rider problem.

The same logic applies to, for instance, China’s decision not to enforce many IP laws; they’re better off because of it!

John Thacker November 15, 2006 at 9:53 am

Sure, they miss out on some new drugs by not paying more, but international IP often allows a weak free rider problem.

I don’t think that anyone disputes the free rider problem issue. It’s absolutely there, and certainly in many cases it pays an individual country (especially a small one) to free ride on drugs. This merely demonstrates that price controls do have an effect on R&D, a contention often disputed. Also note that the EU has not “picked up the slack” with government-supported research, though again they may simply be free riding.

The free riding problem would only be magnified if all the European drug companies switch R&D production entirely to the USA. There would then be fewer political restraints on price controls there.

You do not need a 5th copy-cat version of Prozac.

Tell that to the person for whom all the other versions don’t work, or produce horrible side-effects, such as a tendency to suicide. You do realize that some people have depression but that SSRIs cause really awful adverse side effects in them, right? So some research into better SSRIs is entirely appropriate. In any case, in a private system, you do not need to STOP a drug company from researching a copycat version of Prozac, either. It either pays for itself or it does not. It’s not particularly hurting anything now since Prozac is off-patent and available generically.

Brant November 15, 2006 at 10:20 am

The only way to know if we need a 5th copy-cat version of Prozac is to see if people are willing to buy it.

bjak November 15, 2006 at 10:29 am

And the only reason Europe doesn’t have its own Intel and Sun is because the GSA doesn’t bargain when it buys servers? Isn’t this just libertarians calling for industrial policy for a favored industry?

Peter Schaeffer November 15, 2006 at 10:38 am

It’s not realistic to suggest that changes in drug patent law would actually reduce prices by 75%. European and Canadian prices are not nearly that low and the US isn’t likely to create a system more severe than Canada and/or Europe. Such a system is conceivable, but not likely.

The paper contains data showing that drug price increases are not market driven, at least in any conventional sense of the phrase. The election of Bill Clinton stopped all drug price increases for 5 years. As the 90s boom took off, political pressures on the drug industry eased and prices started going up again. They jumped as soon as Bush was elected.

I follow some of the broker analyst research reports on drug companies and the medical sector in general. A recurring theme after the 2000 election was “now we can raise prices†. Indeed, medical inflation took off after Bush won. This is evidence of an entirely non-market price determination mechanism.

This shouldn’t surprise anyone. Aside from the role of patents in drugs, much of the medical industry is non-competitive. Beyond that, the entire system amounts to producers (drug companies, doctors, hospitals, etc.) and patients “shopping with someone else’s credit card via third party payment systems (government and insurance).

A related point is that drug companies are not just raising prices but increasing volumes. I won’t go into the scandalous consequences of direct to consumer advertising. See the Boston Globe articles on the Nexium and Prilosec for a discussion of that fiasco. The larger point is that drug volumes are rising for standard demographic reasons (aging population, obesity, etc.). Since vast economies of scale exist in drug development and production, prices should be falling†¦ But they are not.

I could also go into abusive lawsuits used to sabotage introduction of generic competitors to existing drugs as they go off patent. That would require a whole new post… Marketing misdeeds (ever meet a detail agent who didn’t look good in †¦) would require another post as well†¦

Nonetheless, it is wrong to be entirely critical of “me too† drug development. “Me too† drugs are similar enough to treat the same symptoms but different enough for patients to respond to them in diverse ways. Let me use a deadly serious example. Bextra, Celebrex, and Vioxx are all COX-2 NSAIDs. Yet they proved different enough for the FDA review committee to recommend keeping Celebrex on the market by a 31:1 margin versus 17:15 for Vioxx and 17:13 for Bextra. Conflict of interest issues have been raised about these votes. Note that only Celebrex would have survived if the 10 voters with (alleged) conflicts had recused themselves. The committee was apparently strongly influenced by patient testimony about differential effects of these drugs with some patients literally begging to have Vioxx returned to the market.

This is not to say that “me too† drugs are cost benefit justified. Perhaps they are not. They are very expensive to develop and don’t represent truly new science. Conversely they do provide a limited degree of competition within the patent system.

The overall point is that the existing US system is breaking down. Drug prices have reached the point where society has to consider its overall allocation of resources. We simply can’t sustain a model of where new cancer treatment drugs cost hundreds of thousands of dollars for a few months of miserable “life†. The true ImClone scandal isn’t what Martha Stewart did or did not do. The scandal is how little benefit the drug provides. One study found that it added two months to the lives of cancer patients. See http://pipeline.corante.com/archives/2004/07/22/another_shot_across_the_bow.php.

John Thacker November 15, 2006 at 10:52 am

The paper contains data showing that drug price increases are not market driven, at least in any conventional sense of the phrase. The election of Bill Clinton stopped all drug price increases for 5 years. As the 90s boom took off, political pressures on the drug industry eased and prices started going up again. They jumped as soon as Bush was elected.

I follow some of the broker analyst research reports on drug companies and the medical sector in general. A recurring theme after the 2000 election was “now we can raise prices†. Indeed, medical inflation took off after Bush won. This is evidence of an entirely non-market price determination mechanism.

So, in effect, Peter Schaeffer, you’re arguing that industry reduced R&D (which went hand in hand with the lower price increases) in response to threats or expected imposition of price controls is precisely a reason to impose them? Of course there were non-market effects– politicians threatened price controls, which caused drug companies to shift to a lower price/lower R&D strategy. That does absolutely NOTHING to prove the rest of your claims at all. One could credibly threaten price controls in a perfectly competitive market and see exactly the same effects– producers leaving the market, temporarily price controls, then an increase in prices once the controls were not adopted.

Of course, your points about third-party payment are entirely reasonable as far the medical system as a whole goes, but certainly most of the EU also has third-party payment; the paper does a reasonable job of explaining the effects of price controls. Note that when drug prices have held flat, R&D spending has also decreased. It’s a simple choice between cheaper drugs now or more drugs later. I don’t morally condemn people for choosing one or the other, as they have different immediate interests.

My point was that the US will have high tech industries like Intel and pharma regardless of industrial policy.

Calling for the absence of price controls is hardly “industrial policy.” And I guarantee you that there are levels of price controls at which the US would not have a particular industry. In any case, the paper that prompted this post demonstrated that much of EU pharma production has fled the EU and come to the USA because of “industrial policy.”

John B. November 15, 2006 at 11:22 am

I could be completely wrong in thinking this but,I think one reason that the US pharma companies do not buy the drugs from eu pharma companies is the a lot of the drugs that the EU pharma companies probablky would not meet the same FDA quality control levels the drugs that are produced in the United States meet. And the cost that it would take the drug companies in the US to get the drugs from the Eu pharma companies to be allowed for consumption in the US does not meet the profit that the US drug companies would make.

jult52 November 15, 2006 at 1:00 pm

“Me-too” drugs should theoretically lower prices for treatment of a particular disease, because they offer competition to existing drugs. I’m puzzled by how anyone can simultaneously complain about “me-too” and high pharma prices, on a theoretical level. If “me-too” drugs don’t lower prices in reality, then there is another type of market dysfunction. The allegedly “wasteful” effort spent on the “me-too” drug then would not be the problem.

Lowrie Glasgow November 15, 2006 at 1:34 pm

Lets end the 1st world drug price scandle . The USA can do this fairly and unilaterally . We are about the largest market . There is little reason to have different price in various 1st world markets if they are indeed fair and transparent.Congress inacts a law limiting the price of drugs in the USA to no greater than the lowest price in the G 7 nations plus X .X would be 0-10 % to cover any unique American costs i.e. tort .The prices references would be set at the distributor level .Retail markups would be free to float .The drug companys would benefit by increasing their bargaining position with individual countries.They would know that any deal they made in country XYZ would apply in the USA .

nelsonal November 15, 2006 at 1:37 pm

On the libertarians and patents:
Most libertarians tolerate government when it solves a market problem. In this case the patent system generally is tolerated to reduce free riding that would occur due to the huge postive externality on innovation. I think most libertarians (like most people, really) would agree that the current implimentation of the patent system in the US is less than ideal.

joeo November 15, 2006 at 2:36 pm

If a drug has reasonable substitutes, the US will have alot of bargaining power. If a drug does not have reasonable substitutes, the US will not have alot of bargaining power. This can result in a shift in investments away from “me too” drugs. Not that the companies want to find “me too” drugs, it is just hard to find a cure for cancer.

Joe O November 15, 2006 at 2:45 pm

<"Although many pharmaceuticals are sold worldwide, EU (U.S.) firms typically sell proportionately more in the EU (U.S.) (see Vernon, 2005)."

This effect isn't going to be random either. If a drug does not have reasonable substitutes, EU (U.S.) firms won't have a hard time selling them in the U.S. (EU).

There is no free lunch; there will be a decline in R&D. But, this will be the result of market signals.

Half Sigma November 15, 2006 at 2:57 pm

Drugs are so expensive BECAUSE of government creates laws that free drug makers from having to compete in a free market like other companies selling normal products.

Given that the high profitabiltiy of drugs companies is because of government interference in the free market in the first place, why is it wrong for government to step in and say “enough is enough with these high prices”?

John Thacker November 15, 2006 at 3:18 pm

Also, a shift to a government-funded research system does nothing to solve the free rider problem. We haven’t seen European public investment in pharmaceuticals rise concomitantly with the price controls.

In fact, I’d argue that the free rider problem could be even worse with a system of price controls and government-funded research. Each government would still have a strong incentive to skimp on investment, since they would benefit from other governments’ investments. If politics in general is unable to resist the lure of taking advantage of being a free rider now, it seems unlikely that governments will be able to resist the lure of being a free rider in a purely government-funded research scenario, and drug investment will be underfunded.

Bernard Yomtov November 15, 2006 at 6:39 pm

We can’t just bargain down the prices of pharmaceutical drugs without adverse consequences.

OK, but is it fair to count only the adverse consequences? Let’s say Europe has less R&D. Still, it’s worth asking whether the extra money spent in the US is really socially beneficial. Suppose Europe spends that money on making health care more widely available, or that the lower prices themselves make the fewer drugs more widely available? Isn’t it possible that these are better ways to improve national health outcomes?

Suppose Europe spends the money on better law enforcement, and has less violent crime as a result? Might that not do more for health than some new medicines?

In other words, even showing that “price bargaining=>less pharma R&D” does not show that “less pharma R&D=less social welfare.”

econstudent79 November 15, 2006 at 11:11 pm

I also think that one must take into consideration how many new people are able to purchase the medicine at the lower price. For example, if 100,000 people were able to afford the medicine and because of this able to provide for their family. I think that the lower about of R&D and jobs is good. I feel that there is a high demand for researchers if they are willing to move or go where the job is.

Mr. Econotarian November 16, 2006 at 3:30 pm

http://knowledge.wharton.upenn.edu/createpdf.cfm?articleid=879

“the U.S. has one of the highest levels of generic drug use relative to total prescription volume [of eight countries], and that generic prices are lower in the U.S. than in all the countries except Canada, where the difference is 6%.”

Also that all drug prices on average come close to following GDP per capita purchasing power paritiy (i.e. price discriminated for high-income countries on basis of income):

“when we compare those price differences to the differences in income, we find that other countries’ prices are not out of line relative to income. If we are going to measure paying our fair share in terms of prices relative to income, then most of the Europeans are paying their fair share.”

Moreover,

“What we find is that yes, the prices for patented drugs in the U.S. are higher than in most other countries, but the generic prices are lower…The two are related. Generic prices are lower because we have a more competitive market.”

jult52 November 17, 2006 at 9:14 am

“We can’t just bargain down the prices of X without adverse consequences.”

True. The problem is to find a real market clearing price that isn’t jerry-rigged by various types of regulatory interference.

32rrfrtg October 8, 2007 at 2:11 am
hoojk December 2, 2007 at 8:38 pm

吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器
吴尊
阿穆隆
林志玲
尚雯婕
大人物
王睿
Mac DVD Ripper
火狐浏览器
Firefox浏览器

Anonymous October 13, 2008 at 11:51 pm

Comments on this entry are closed.

Previous post:

Next post: