Importing Prescription Drugs
Here’s the first editorial I wrote for the Daily Trojan in Spring 2004.
Enemy forces line up to do battle. On one side, evil drug companies, chanting their “creed of greed,” join with President Bush and fight to gouge Americans with outrageous prescription drug prices. Facing them are people like Democratic frontrunner John Kerry, who is “tak[ing] on the powerful interests that stand in your way” in order to “give America back its future.” At least, that seems to be the story Democrats use to explain the high prices Americans pay for drugs. Yet Kerry and his cohorts have it wrong. Allow me to introduce a different explanation: Blame Canada (and the Europeans, Australians, and others with socialized medicine).
That sounds odd, doesn’t it? After all, pharmaceutical companies are the ones setting the high prices for drugs. And because Americans can import less expensive drugs from Canada, it’s actually helping America, right?
Wrong. While this analysis sounds good, it ignores the economics of the pharmaceutical industry. It’s true that pills themselves cost very little to manufacture. However, the research and development costs for drugs are enormous. In 2001, the amount spent on R&D worldwide came to $44.5 billion, and it could increase to $57 billion by 2006. Pfizer, maker of such drugs as Lipitor and Viagra, spent over $7 billion on R&D in 2003. By comparison, technology leader Intel “only” spent $4 billion. According to Pfizer, it cost almost $500 million just to develop Viagra, and that’s on the low end of the scale. The average drug costs $900 million to get to market.
The reason for these extravagant amounts is that finding an effective drug resembles pulling a needle out of a haystack. Indeed, for every 5,000 compounds tested, approximately one will make it to market. On average it takes about a decade and sixty clinical trials for a drug to gain FDA approval, and 9 out of 10 drugs never make it beyond clinical trials. To add insult to injury, only about 30% of drugs that make it to market will ever be profitable. The high prices for drugs cover the enormous costs of these failures in addition to the costs of the actual drug being sold.
The enormous risks inherent to drug development necessitate that profits be large enough to encourage investment. Because price controls make it harder to recoup investments and earn a profit, they reduce the incentives to put money into developing new drugs. Price controls could significantly slow drug development. Who wants to spend billions of dollars over a decade when it looks like they might not get their money back? As Nobel laureate Milton Friedman wrote in an open letter signed by over 150 economists, “Even the threat of price controls reduces the incentive to develop new drugs.”
Unfortunately, price controls often look attractive. Who doesn’t like dramatically lower prices? For example, a 90-day supply of Celebrex, a popular arthritis medication, costs $200 in the US, but only $85 in Canada. Nexium, used to control acid reflux disease, costs $340 here, but only $140 in Canada. And as the country adds a $530 billion prescription drug benefit to Medicare, who wouldn’t be tempted to knock a few hundred billion off the price tag? People can easily see the money that seniors save and the lower taxes. What they can’t see is the research that is not done, the cures that are not found, and the life-saving drugs that are never developed. When countries impose price controls, the cost is in lives and suffering, not dollars.
Of course, politicians such as John Kerry don’t call for price controls outright; rather, they suggest that we allow importation of drugs from Canada, which constitutes de facto price controls. True, this would lower the price of drugs, but it comes at the cost of retarding future development. A better way would be for Americans to pressure countries with socialized medicine to pay their fair share.
As it is, those countries are leeching off of America. Americans bear the costs to develop medicines, while others reap the benefits. Countries such as Australia, Canada, and Britain simply force pharmaceutical companies to sell drugs at a low price. While the drug companies could choose not to sell to countries at a low price, these countries could revoke patents and authorize generic versions in response.
These prosperous countries have a responsibility to help pay for the drugs they benefit from. It is hardly compassionate to pay for their citizens’ healthcare at another nation’s expense. Although often reluctant, drug companies have been willing to forgo profits when truly poor nations need drugs. Last September at the World Trade Organization meeting in Cancun they came to an agreement to waive patent rights to allow AIDS-ravaged countries in Africa to obtain life-saving drugs at low cost.
The money that countries with price controls cut from the market price of drugs is money that Americans pay or that doesn’t go to find new medicines. If these countries paid their fair share, drug companies could more easily recoup their investments, spend more on developing new medicines, and charge Americans less. That’s a win-win situation.
Rather than demonizing drug companies, politicians ought to find ways to put pressure on our freeloading friends to pay up. Let’s see our leaders stand up for something that is truly in America’s best interests.
