Editore"s Note
Tilting at Windmills

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March 28, 2006
By: Kevin Drum

HEALTHCARE AND INNOVATION....Andrew Sullivan is unhappy at the prospect that someday the federal government may be allowed to negotiate prices with drug manufacturers. This strikes me as nothing more than the way free enterprise normally works i.e., both buyer and seller negotiating prices rather than one side dictating to the other but Andrew predicts doomsday:

We'll soon shift to a system of fantastically expensive free drugs of all kinds for all seniors and a crippling of the pharmaceutical industry's research and development arm. The trade-off will be complete: a collapse in research in return for free drugs for the most pampered senior generation in history.

That's an odd argument, isn't it? Are these drugs going to be fantastically expensive, or are they going to be so cheap they cripple the pharmaceutical industry's R&D efforts? I'm confused.

At any rate, big customers in the private sector routinely negotiate low prices with their suppliers, and it's not clear to me why things would be much different in this case. In fact, I can't think of any good reason to believe that the notoriously inefficient federal government should prove to be a steelier negotiator than, say, Blue Cross, which also buys in enormous volumes and has the added advantage of being a private company with plenty of incentive to negotiate the lowest prices possible. Ezra Klein has further arguments along this line here.

In the meantime, it occurs to me that there must be some natural experiments that could provide us with some data on this very legitimate question: does centralized control of healthcare spending reduce innovation? In the United States, Medicare funds healthcare for everyone over 65, so if single-payer healthcare really does stifle innovation, we should expect less innovation (and slower adoption of innovative technology) for new procedures and new drugs that are useful predominantly for older patients.

Surely someone has found some clever way to test this? I'll take a look around and see if I can find anything. Comments are open if you know of any relevant data.

Kevin Drum 1:23 AM Permalink | Trackbacks | Comments (133)

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Comments

As a 63 year old senior I say Fuck Andrew Sullivan!

Posted by: R.L. on March 28, 2006 at 1:35 AM | PERMALINK

Are these drugs going to be fantastically expensive, or are they going to be so cheap they cripple the pharmaceutical industry's R&D efforts?

Kevin, it's going to be fantastically expensive for us taxpayers who have to subsidize a welfare program for the elderly just because they weren't responsible enough to take care of their own bodies. But it's going to be free for them. That's what Sullivan means.

At any rate, big customers in the private sector routinely negotiate low prices with their suppliers, and it's not clear to me why things would be much different in this case.

What a big government SOCIALIST you are. The private sector is NOT the government. Conservative like myself believe prices should be negotiated by private enterprises in the free market not by the government.

In the meantime, it occurs to me that there must be some natural experiments that could provide us with some data on this very legitimate question: does centralized control of healthcare spending reduce innovation?

Of course it does. That's why there are so many Canadian citizens who have to come to the United States to get good quality healthcare because it takes so long in Canada. Your big government plan to control healthcare would make us just like Canada so that everybody would be standing just to see a doctor for a routine checkup.

Posted by: Al on March 28, 2006 at 1:39 AM | PERMALINK

As a person living in a country with state run health care, wouldn't the fact that the US is not the only place that drugs and new procedures and techniques are discovered be some sort of proof of something? I mean, innovative drugs and surgical techniques are coming out of France, Germany, Great Britain and Sweden (just to name a few) all the time. I particularly hear, perhaps because I am in Norway, news stories that begin, "Medical researchers in Sweden have come up with a new..." quite often.

I work in a hospital here and, while I am not a researcher, there is plenty of research going on here at my university hospital.

Posted by: platosearwax on March 28, 2006 at 1:44 AM | PERMALINK

R.L. >"...I say Fuck Andrew Sullivan!"

(Yuck !!!)

Be my guest

I was kinda hopein someone had some real data to argue over

Oh well, almost time for the Daily Show

"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." - John Maynard Keynes

Posted by: daCascadian on March 28, 2006 at 1:48 AM | PERMALINK

Platosearwax: Sure, that would be helpful too. But the United States provides a very nice test bed because we have both single-payer healthcare and private sector healthcare in the same country. It makes the comparison a lot easier, since you don't have to worry as much about all the differences between countries that might account for adoption rates of new technologies.

Posted by: Kevin Drum on March 28, 2006 at 1:51 AM | PERMALINK


AL: Kevin, it's going to be fantastically expensive for us taxpayers who have to subsidize a welfare program for the elderly just because they weren't responsible enough to take care of their own bodies. But it's going to be free for them. That's what Sullivan means.

It figures that you'd understand what Sullivan meant, since he didn't make sense.

Kevin's point, which you didn't understand, is that if the drugs are going to be "fantastically expensive" for anyone--taxpayers or consumers or insurance companies--why would the R&D of the drug companies be crippled, as Sullivan asserts?


Posted by: jayarbee on March 28, 2006 at 1:52 AM | PERMALINK

There's a big difference between "big customer" and "only customer." Odd how the liberal allergy to monopolies seems to vanish when it's the government stifling competition and market forces.

If the government is the only major customer for pharmacy companies, and the prices are forced down across the board, something is going to get cut back. The profit margins on pharmacy companies aren't nearly what you imagine they are.

Check out big pharmaceutical companies overseas. Look where they do a lot of their research, and sell a lot of their products.

We get a lot of good for the load of money America spends on health.

Posted by: tbrosz on March 28, 2006 at 1:54 AM | PERMALINK

"the most pampered senior generation in history"

My favorite line. Talk about inane rhetoric. Obtaining needed drugs, often for survival, often just for livable comfort in no way qualifies as pampered. I'm thinking that Andrew doesn't know many elderly people. All the elderly I know, including my grandparents, live around the poverty level, have worked hard their whole life, and think DVD players are an unnecessary luxury (even at $29.95). The rhetoric simply doesn't work for most Americans who have heard Grandpa complain about paying $68 for this bottle of pills and $97 for that bottle. Fund the drugs and do it wisely. It's the least we can do for them.

Posted by: kj on March 28, 2006 at 1:56 AM | PERMALINK

My recollection is that a very sizable proportion of the money spent by drug companies is actually on the marketing and advertisement of their drugs, and relatively little on actual R&D.

Don't have the numbers in front of me, though.

Posted by: frankly0 on March 28, 2006 at 1:58 AM | PERMALINK

These fascist bastards should be hunted down, immobilized, and this crap tattooed across their chests.

"The profit margins on pharmacy companies aren't nearly what you imagine they are."

No, they tend to be about 500x what an average person imagines they must surely be.

Highest of any business I can think of that's not illegal.

Posted by: Marion Delgado on March 28, 2006 at 2:02 AM | PERMALINK


That's a pretty slick looking brochure you linked to, tbrosz. Just what one would expect from a company that specializes in slapping together "evidence" to rationalize the profits of pharmaceutical companies for them. They are marketers, and you present them as if they are some sort of independent consumer watchdogs.

TBROSZ: The profit margins on pharmacy companies aren't nearly what you imagine they are.

Who says so? Got another brochure for us? Oh, I see. Rather than rely on my imagination I should rely on yours, eh?


Posted by: jayarbee on March 28, 2006 at 2:07 AM | PERMALINK

Kevin,

this isn't exactly what you're looking for, but econometrics ninja David Card has used the age 65 medicare cutoff to study healthcare utilization and health. (He finds higher usage of healthcare but no change in self-reported health or mortality.)

You can read the study here: http://www.rand.org/pubs/working_papers/WR197/

Posted by: A-ro on March 28, 2006 at 2:10 AM | PERMALINK

Bottom line is that there's a two-tiered system of medicine in the U.S., and the "pampered" folks are benefitting from the innovation of drugs like Viagra, Prilosec, and new drugs for diabetes, Alzheimer's, etc. Meanwhile, millions of seniors and the younger uninsured have to pick and choose which medicines they can actually afford. Innovation will not be stifled if there are some stricter regulations on certain drug company practices. In addition to all the money spent on marketing to doctors and consumers, the drug companies have elobarate ways of extending patents by just making an extended release version of the same medication, or just tweaking the chemical slightly so that it is a different chemical with the same effects. Then there's the "me-too" drugs that do pretty much the same thing as other drugs on the market and don't seem to reduce the prices through competition since they usually price based on what people or insurance companies will pay. Hence almost $10 a pill for Viagra, Levitra, and Cialis. $3 a pill for Prilosec, Nexium, Aciphex, Protonix, and Prevacid.

Posted by: Raj on March 28, 2006 at 2:10 AM | PERMALINK

Tbrosz. How would the U.S. be the only customer? I assume people in other countries take drugs as well. And doesn't a monopoly apply to the one selling the product, not the one buying it. I don't think the govenment "monopoly" on buying military products has hampered the defense industry too much. I have a feeling they'll still make out okay.

As for profit margins on big pharma, what do you imagine it to be? I actually know them to be highest amoung American industry. And if they have to cutback, the first thing to go will be marketing and that would be a net positive. R & D is their bread and butter for the future and it'll remain robust no matter who's buying the drugs.

Posted by: kj on March 28, 2006 at 2:15 AM | PERMALINK

Here are some answers:

But while the rhetoric is stirring, it has very little to do with reality. First, research and development (R&D) is a relatively small part of the budgets of the big drug companiesdwarfed by their vast expenditures on marketing and administration, and smaller even than profits....

Second, the pharmaceutical industry is not especially innovative. As hard as it is to believe, only a handful of truly important drugs have been brought to market in recent years, and they were mostly based on taxpayer-funded research at academic institutions, small biotechnology companies, or the National Institutes of Health (NIH). The great majority of "new" drugs are not new at all but merely variations of older drugs already on the market....

I have heard this many times before: The drug companies cash in on university research they get for free -- but which is "fantastically expensive" for taxpayers.

Posted by: JS on March 28, 2006 at 2:17 AM | PERMALINK

Gee, the private sector controls costs 'cos its their money. The public sector is funded by taxes.

Somehow the public sector will starve research, while handing out vast amounts of generics/Vitamins for free that people throw a way.

If they don't do it straight away, wait till the Vitamin people start lobbying.

Posted by: McA on March 28, 2006 at 2:58 AM | PERMALINK

Somehow the public sector will starve research

Has that happened with fighter jets? Tanks? Submarines? Nuclear bombs?

Posted by: JS on March 28, 2006 at 3:25 AM | PERMALINK

Yes, Kevin, there is such evidence of stifling of onnovation. Germany has become aware of this problem in its pharmaceutical industry.

Posted by: Tymbrimi on March 28, 2006 at 4:05 AM | PERMALINK

As a constant viewer of DW news, I am aware of European politics, business, and economics. Public sector investment is now known in Germany to be a poor substitute for private sector investment, even in such areas as higher education.

Posted by: Tymbrimi on March 28, 2006 at 4:09 AM | PERMALINK

wait till the Vitamin people start lobbying.

Auuggh! The Vitamin people are coming! Helllp meeee

Posted by: brooksfoe on March 28, 2006 at 4:21 AM | PERMALINK

Are these drugs going to be fantastically expensive, or are they going to be so cheap they cripple the pharmaceutical industry's R&D efforts?

As frankly0 pointed out above, big Pharma's advertising costs have surpassed their R&D costs by a wide margin since the early 1990s.

Until this changes, they can just cry me a river about the high cost of research. They might be able to make a case that I should help underwrite their research costs, but I'm not gonna pay artificially high prices just to support their normal costs of doing business.

I feel particularly stronly about this every time I sit next to a pharmaceutical sales rep on an airplane. If there is one person in this country selling drugs who is a decent person, I have yet to see evidence of it.

Posted by: Jay on March 28, 2006 at 4:22 AM | PERMALINK

"The profit margins on pharmacy companies aren't nearly what you imagine they are."

Actually, Big Pharma is routinely among the most profitable industries.

Hey, here's a thought: maybe the government will also subsidize research, then. Oh wait, they already do? Then what's the frigging problem?

Posted by: ArC on March 28, 2006 at 4:38 AM | PERMALINK

wait till the Vitamin people start lobbying.

Auuggh! The Vitamin people are coming! Helllp meeee

Posted by: brooksfoe on March 28, 2006 at 4:21 AM | PERMALINK

Ok. How's this.

1. Republican's fuck everything up

2. If you pass government controlled healthcare they will control the executive more often than not

3. They will fuck everything up more often than not

------------

Has that happened with fighter jets? Tanks? Submarines? Nuclear bombs?

Posted by: JS on March 28, 2006 at 3:25 AM | PERMALINK

How much is a Stealth bomber? 2 billion each?

How much is a B-52? 20 million?

That's probably the only thing on Earth that could beat health care inflation.

----------------

My health care solution is better. Ban talking about healthcare, advertising, complaints, praise. Outsource healthcare to the 3rd world and borrow their professionals on Guest Worker passes. Shoot anyone who disagrees.

It works in Cuba!

Posted by: McA on March 28, 2006 at 5:45 AM | PERMALINK

The federal government negotiates prices for military equipment, and Lockheed seems to do OK.

Posted by: Ronn Zealot on March 28, 2006 at 6:11 AM | PERMALINK

Are these drugs going to be fantastically expensive, or are they going to be so cheap they cripple the pharmaceutical industry's R&D efforts?


pharmaceutical industry's research and dev..is funded in large part by federal research tax-payers dollars...

Posted by: animosity on March 28, 2006 at 6:14 AM | PERMALINK

One of the problems with Sullivan's thesis is the fact that the British National Health Service, monument of Fabian socialist centralisation and bugbear of right-wing commentators, coexists with a very successful pharamaceutical industry. OK, it makes its money in ths soft US market rather than the hard UK one, but the research ecosystem is flourishing.

By the way, what's the evidence that the current drug research effort is optimal? The handful of genuinely new compounds that make it to the market, the unscientific secrecy of company laboratories, and the colossal marketing expenditures of Big Pharma, suggest to me that the current setup is very inefficient.

Posted by: James Wimberley on March 28, 2006 at 6:48 AM | PERMALINK

An entirely anecdotal comment:

I have noticed that life expectancy and quality of life for senior citizens appear to bear a significant positive correlation with access to skilled surgery -- for repairs of worn-out or damaged items such as hearts, hips, knees, ocular lenses, et cetera.

I haven't noticed any such correlation with access to prescription meds. If there is a correlation, it may be negative. My purely personal assessment is that many seniors are profoundly overmedicated, and that almost no attention is paid to the critically important issue of adverse interactions attendant upon polypharmacy.

--

Posted by: marquer on March 28, 2006 at 6:48 AM | PERMALINK

platosearwax said... "I mean, innovative drugs and surgical techniques are coming out of France, Germany, Great Britain and Sweden (just to name a few) all the time."

And, Cuba! Better believe it.

JS got it right. Innovation is happening in US universities. Pharmaceuticals buy the rights cheap. They spend the big dollars on reinventing another company's patented pharmaceutical so they can get in on the market that's already been established. It's why me-too cold and headache medicines were "invented" over and over again until old people maladies like impotence captured everyone's attention.

Posted by: dennisS on March 28, 2006 at 6:58 AM | PERMALINK

I can't imagine what Mr. Sullivan is dreaming up. The government "negotiates" the prices it pays for all kinds of things. Like fighter jets. Last I heard, we didn't have a problem with R and D for new fighter jets.

The problem is that Mr. Sullivan doesn't understand that Medicare is really in essence a single-payer health system for seniors and it will work better when everyone just stops pussyfooting around that fact.

Posted by: kokblok on March 28, 2006 at 7:23 AM | PERMALINK

Tymbrimi wrote:

As a constant viewer of DW news, I am aware of European politics, business, and economics. Public sector investment is now known in Germany to be a poor substitute for private sector investment, even in such areas as higher education.

Id be surprised to see that on DW.
You see, I am a German and living in Germany. What Im hearing in the media is worry that public spending for basic research and higher education is too low.

Posted by: Detlef on March 28, 2006 at 7:41 AM | PERMALINK

Kevin,
I doubt any relationship between reimbursement rates and medical innovation. In the US, the docs in practice do not do most of the research. The research enterprise in the US is funded by the NIH, charitable foundations, medical societies, and big pharma. Changing reimbursement does change doctors activity...small drops in reimbursement increase the numbers of patients seen while large drops decrease the number of medicaid/medicare patients seen, but I don't think this impacts upon innovation.
Josh

Posted by: jab1000 on March 28, 2006 at 8:28 AM | PERMALINK

Now this is hilarious:

tbrosz: We get a lot of good for the load of money America spends on health.

Hey, Mr. Brosz, Mister Small Government, I have a proposal for you!

How about this: all Americans will pay an additional 50% for their drugs.

Now, I've spoken to the CEOs of the top ten pharmaceutical companies, representing 45.9% of the market, and they swear on a stack of bibles that they will spend all that extra money on R&D; not a drop of it will go to any extra profits or marketing.

And here's the part I know you particularly will love: that R&D will benefit everyone throughout the world!

So how about it? Sounds like exactly the sort of program you love best, Americans paying truckloads of extra cash for diffuse and uncertain benefits accruing to the whole world, relying heavily on the charity of corporate entities beholden to no one.

You love it, right? I mean, you just said you did...

Posted by: S Ra on March 28, 2006 at 8:32 AM | PERMALINK

Platosearwax . . . the question isn't whether companies in Sweden produce new drugs; it's where those companies expect to make the bulk of their profits. Companies tend to be very close with that kind of data, for obvious competitive reasons, but everything I've seen suggests that while the US is only a fraction of European pharma's volume, it accounts for an extremely outsized segment of their profits. The fact that more and more pharmaceutical companies are moving the bulk of their operations to the US may be indicative . . . or it may just have something to do with cost of living and quality of life.

The idea that pharmas are just free-riding on univseristy research is ridiculous. Lots of industries use academic research, but no one suggests that, say, developing a car is the same thing as doing research into aerodynamics. Developing a drug is a very different process from finding active targets; society needs both of them. Moreover, the vast majority of research costs come from the FDA trials. Someone has to do them (I presume that everyone here is on board with testing the toxicity and efficacy of the drugs we take), and they're monstrously expensive.

As for the fact that pharmaceutical companies have big marketing budgets, that's somewhat misleading, as more than half of those budgets are for free samples given to physicians. I don't know about the rest of you, but as someone who's enjoyed the benefits of sampling a drug before I buy, I'd rather not end that practice. And if we want to outlaw direct-to-physician selling, or consumer advertising (which, contrary to popular belief, is a trivially small portion of overall revenues--pharmaceutical companies only bother advertising a small fraction of their formulary), why not just outlaw them, rather than slashing the returns on new drugs and hoping against hope that the pharmas decide to cut their marketing budget, rather than their highly risky R&D ventures?

Posted by: Jane Galt on March 28, 2006 at 8:39 AM | PERMALINK

Well, let's do a little thought experiment.

If universal coverage is going to be the 800-pound gorilla in the drug-buying world, why wouldn't that be a tremendous incentive to develop a new drug we needed?

Shouldn't a drug company be truely 'incentivized' by the prospect of selling, with no advertising costs at all, to a market of 350 million?

And shouldn't that famous research go a little faster if all of the advertising dollars were devoted to development, because the sales of exty-million units are already guaranteed?

Think of how fast we would have electric cars if the government said, Build it and we will buy 20 million. You might think that if the drug companies were really concerned about bringing us new cures, they would welcome a scheme that would ensure a margin of profit.

But maybe they don't think the margin would be big enough.

Posted by: serial catowner on March 28, 2006 at 8:41 AM | PERMALINK

Yeah, that single-payer system has brought Boeing to its knees.
But I think Andy's heart really isn't in this one. It's time to placate the real sugar daddies, the ones who front all that Heritage dough, so he's dressed up some boilerplate and shoved down the pipe. It doesn't have anywhere near the enthusiasm of one of his little purges of the treacherous elites who he'd endow with a new coinage---"pharmafascists"?

Posted by: Steve Paradis on March 28, 2006 at 8:45 AM | PERMALINK

Oh, and:

tbrosz: The profit margins on pharmacy companies aren't nearly what you imagine they are.

Pfizer 2005 results: $8 billion profit on $51.2 billion sales, $7.4 billion R&D expenses

GlaxoSmithKline 2005 results: 4.8 billion pounds profit on 21.6 billion pounds sales, 3.1 billion pounds R&D expenses

Merck 2005 results: $4.6 billion profit on $22 billion sales, $3.8 billion R&D expenses

Those are the top three; feel free to look up the others. They're publically traded.

And your constant insistance that somehow without the huge cash cow of the prostrate American health consumer, medical research would simply vanish is, like the rest of your assertions, utterly false.

Medical research is focused here because there are huge profits to be made, but the barriers to medical innovation are not financial as much as they are technical. Without the huge profits medical research will continue unimpeded.

You want more medical advances, faster? Tackle the mess that our patent system has become. Address the problems in the current FDA approval system. But simply handing cash to private industry is stupid.

Very Republican, though. They're all about the handouts.

Posted by: S Ra on March 28, 2006 at 8:52 AM | PERMALINK

Conservative like myself believe prices should be negotiated by private enterprises in the free market not by the government.

Al believes in a free market, he just thinks it should be freerer for some people than for other people.

If the gov't is the biggest customer, why shouldn't they be able to negotiate a cheaper price ?

Posted by: Stephen on March 28, 2006 at 9:00 AM | PERMALINK

Now, here's a little relevant data- Americans think they can ignore their health until they're almost dead, and then take a pill to make everything all right.

So we force GargantuanBurgers down our throats (with an antacid for a chaser) until our arteries look like our septic tanks, and then we want to buy a pill.

Or maybe we work off the burger by jogging, which wears out our knees...and we want a pill.

Overweight? Well, take this pill and eat all you want. Depressed by your crap job in megurbia? Take a pill. Worried about the coming oil shock? Take a pill.

Probably the only pill we really should be taking is one that ends these psychotic delusions of pharmaceutical grandeur. Most of what ails us is created by ourselves over the decades of our life, and even if you could take a pill at age 70, that's not going to get back the years you wasted eating at burger chains and selling/buying/making/servicing useless crap.

Spend half an hour at your local landfill and be amazed- that stuff coming in by the truckload is stuff we never needed to make. Stuff that may leach poisons into your water supply, giving you a disease that makes you want to...take a pill.

Posted by: serial catowner on March 28, 2006 at 9:00 AM | PERMALINK

Apologies (or, not) to Andy Sullivan:

We'll soon shift to a system of previously expensive low cost items of all kinds for all WalMart customers and a crippling of the American industrial base. The trade-off will be complete: a collapse in American production capacity in return for "Always Low Prices -- Always" for the most pampered American consumers in history.

So it's the sacred free market when WalMart negotiates with Levi-Strauss, or Vlassic, but Satan's own Socialism when the federal government negotiates with Merck?

Posted by: John on March 28, 2006 at 9:01 AM | PERMALINK

Suggest y'all, especially Sullivan, read "The Truth About Drug Companies - How They Deceive...". Available at your favorite book store.

Posted by: gopher on March 28, 2006 at 9:02 AM | PERMALINK

Kevin's research assignment for us is basically flawed. The question was whether government spending inhibits innovation, which he thinks might be answered by comparing a Medicare population with a non-Medicare population.

The problem here is that Medicare patients are just allowed to suffer or die, while private-pay patients, who in America are by definition rich, spend money to stay alive.

This is like saying that when the government gets involved dental care suffers, because studies show that people who can't afford dental care lose their teeth.

The "research" would be further distorted by the fact that pensions, for the workers in the military-industrial part of the economy, have been plush for the past 30 years. Today's seniors are enjoying pension levels that allow them to buy new Cadillacs, fly around the country visiting grandchildren, and water acres of lawn.

That would be some mighty fancy "research" that could untangle these threads.

Posted by: serial catowner on March 28, 2006 at 9:17 AM | PERMALINK

I think we can all agree that the Cuban drug industry is centrally controlled. Yet it's industry is producing many innovative vaccines and chronic disease treatments that are marketed at reasonable costs throughout the world.

Perhaps if drug R&D were centrally controlled we wouldn't be faced with the production and marketing of designer drugs and the concurrent discovery of heretofore unidentified disorders that just happens to be treatable by the designer drug.

Posted by: Chris Brown on March 28, 2006 at 9:20 AM | PERMALINK

Subtext of Sully's bullshit:


He is concerned that the potential changes he is writing about will mean that HIV infected individuals (like Sullivan and myself) will be significantly disadvantaged as more attention and recourses are focused on the elderly.

I disagree.

Posted by: Keith G on March 28, 2006 at 9:22 AM | PERMALINK

"That's an odd argument, isn't it? Are these drugs going to be fantastically expensive, or are they going to be so cheap they cripple the pharmaceutical industry's R&D efforts? I'm confused."

Seriously, aren't you intentionally trying to see past his argument? His concern is that fantastically expensive drugs to create(you know, like AIDS drugs that saved his life) will be forced lower there prices to the point that other companies seeing what you now get for innovating won't bother.

I'm not sure if that is what would happen, but you're clearly not taking his argument seriously by these glib statements.

Posted by: Chad on March 28, 2006 at 9:23 AM | PERMALINK

Something tells me Andrew just cashed a check from a pharmaceutical company again . . .

Posted by: Thomas Garvey on March 28, 2006 at 9:23 AM | PERMALINK

And, BTW, who did Sullivan have to blow to get that job?

I mean, really, the guy takes a handful of PR brochures from the drug companies, spends half an hour putting a "new" spin on threadbare talking points, and this becomes respected journalism?

Surely by now there is some kind of computer program that could update and regurge propaganda in a real-time basis for people who need that.

Posted by: serial catowner on March 28, 2006 at 9:23 AM | PERMALINK

And pulleeze...why would we, as a nation, have any interest in developing fantastically expensive new drugs to treat HIV while with the other governmental hand we discourage the use of condoms?

That would be like trying to heat your house with the furnace while the doors and windows are open.

When did we go insane? When did we forget that an ounce of prevention is worth a pound of cure? Does it have anything to do with letting drug companies deduct advertising costs from taxable income, or letting churches campaign for specific candidates from their tax-free pulpits?

Well, duh....

Posted by: serial catowner on March 28, 2006 at 9:33 AM | PERMALINK

We have a few issues going on here. Like many political conversations, people use different points of reference to try to communicate similarity when, in fact, there is nothing quite like the healthcare need.

First, we really need to understand and accept that our quality of care as a nation is relatively poor, even for those with insurance. There was an article on CNN.com (sorry I don't have the link) that speaks to this issue. If I remember correctly, the difference in % of quality of care between insured and uninsured is hovers in the 50's, with the uninsured being only a single-digit difference from the insured.

Second, free markets are not the enemy. The longer we villify the free market, the more ridiculous we look in our argument. For instance, there have been comments about how Lockheed seems to be doing ok. That's an irrelevant response to the issue. The market issue is one of several things. First, it's insured vs. uninsured with insured consuming more health care while uninsured is paying a profit premium for drugs and services -- remember, there's a difference between the price insurance companies charge vs. the U&C (usual and customary) which is mostly higher and sometimes the same. Second, it's about health care freedom. Employer-based is a bad idea for the reasons Kevin has mentioned in the past. Single payer doesn't change healthcare for those who can afford it. In those instances, the rich will continue to pay for the best doctors, while the poor will use the system's less qualified doctors for their procedures. Think of it as the rich shopping at Neiman Marcus while the poor go to Wal-Mart.

Third is the personal responsibility angle. I'm sure there are studies that talk about the differences in obesity rates for socioeconomic classes. Yes, we make poor choices. Yes, this makes health care more expensive. Could we make a system where there would be certain penalities for smoking or being chronically overweight? Who knows, but I'm sure we can come up with some way to solve the problem.

Finally, we all have to begin to admit that we're all paying for the health care system anyway. For those employed and paying their own insurance, you're helping to contribute to someone's triple bypass, with the insurance company counting on you to stay healthy. With a rise in health care costs and consumption, we pay more for it through a reduced raise or a greater healthcare burden through our employers. Insurance, in most respects, is just an optional welfare system where you contribute a little to the pot for the chance to take a bunch out if you need it.

What I see is a two-tiered healthcare solution. The first stage is universal health care maintained by the government. This stage will force conservatives on serious debate on the provision of services. After time, conservaties will be able to create a plan that will reduce costs through the private sector. Eventually, we'll most likely have a private solution that distributes working capital more effectively.

Posted by: abcjr on March 28, 2006 at 9:45 AM | PERMALINK

"most pampered generation"

Ah, Andrew, once again dreaming of the world of Logan's Run - But, Andy, would you attempt to be Logan 5? or Andrew 4 or 5 or 6 walking meekly into the theater when you turn 30?

"pharmas not making the big profits"

Keep up the Comedy, Tom - Comedy Central might book you, yet.

Posted by: thethirdPaul on March 28, 2006 at 9:56 AM | PERMALINK

Funny how conservatives whine and complain about how inefficient government is.

Then they whine and complain when government tries to save money, say by using its purchasing power to negotiate better prices.

It's OK for Wal-Mart to hammer suppliers, but not Medicare? And then complain when government services are too expensive.

If you didn't know better you might think they want to set up government to fail. But that would be disloyal, so that can't be true, can it?

Posted by: tomtom on March 28, 2006 at 9:57 AM | PERMALINK

I think the phrase "fantastically expensive free drugs" is priceless.

We really don't need to worry too much on the R&D end of drug companies. Big Pharma spends far, far more on lobbying, patents, and advertising than on R&D.

Of course, that's the general trend with R&D in all industries. It's marginal return isn't sexy enough, so most companies don't do any of it at all anymore. "Making things well" really isn't considered a virtue in the American capitalist system.

Posted by: Rick on March 28, 2006 at 10:04 AM | PERMALINK

...Blue Cross, which also buys in enormous volumes ...

Blue Cross does not purchase drugs from pharmaceutical companies or negotiate with them. It negotiates rates with retail pharmacies and hospitals who dispense drugs, and insures members who purchase them. That is an entirely different dynamic.

Also, Blue Cross is not a single monolithic "private company". The Blue Cross Blue Shield Association is an alliance of 38 individual (and mostly not-for-profit) companies operating locally. Most call themselves something along the line of "Blue Cross of Illinois" or "Blue Shield of California".

Posted by: Nonplussed on March 28, 2006 at 10:06 AM | PERMALINK

Marketing expenses of drug companies dwarf the amounts spent on R&D. If drug companies need more money for research, they could stop giving doctors goodies to peddle their products and eliminate all the ads for drugs to treat erectile dysfuction and acid reflux from TV.

One more thing... Europe has most of the largest drug companies, all with very centralized health care systems. They shift the cost of drug R&D to Americans, who live in the only country left that doesn't control drug prices.

Posted by: Chuck Miller on March 28, 2006 at 10:06 AM | PERMALINK

kevin

dunno if anybody has pointed it out yet, but, a bunch of very, very smart guys have looked at exactly the medicare/innovation issue. link here.

http://www.nber.org/~afinkels/papers/acemoglu%20et%20al%20nber%20wp%20jan%2006.pdf

the punchline is that they find no evidence that medicare *induced* innovation, but, none that it stifled it either.

joshb

Posted by: joshb on March 28, 2006 at 10:16 AM | PERMALINK

The government already sets the standard for medical pricing for a good chunk of the nation (without intending to) and I have seen no signs of the apocalypse yet, Andrew Sullivan's concerns notwithstanding...

Medicare physician fee schedules (and to a lesser extent, hospital DRG payments) obviously comprise all Medicare payments, but they are also the linchpin to many insurer fee schedules. Fee schedules that pay a percent of Medicare (i.e., 115%of Medicare) for commercial members are all too common for physicians. Even HIAA and MDR schedules can be linked to a crude approximation of Medicare.

If the largest payor on the planet can negotiate a good deal on Drug X with Company A, I have every confidence that Company A will be able to hold their own in negotiations and will probably bring far savvier negotiators to the table. If Insurer B sees the published schedule for Drug X and realizes they are paying a good bit more, they can go open up negotiations with Company A and discuss things. Again, I feel positive that Company A and Insurer B are big boys, and have been around the block a few times and can take care of themselves without their mommy to watch after them.

Posted by: DK on March 28, 2006 at 10:17 AM | PERMALINK

What a good thing if the drug companies did go bust. Let the people do the research, unrestricted by the expectation of profit, empowered to go anywhere the science takes them. The organization that represents the people is, of course, the U.S. government.

The unsupported platitudes coming from the trolls on this blog amount to nothing more than outdated ignorance.

Every place the U.S. government touches health care, it does it better than the private sector. In research, NIH is the gold standard. The best scientists take pay cuts to work there. A significant portion of the raw research goes free to the major drug companies, who then get high on the profits, stiffing the taxpayers who payed for the original research.

Statistics prove The VA delivers the best health care. Surveys show seniors are happier with Medicare than other Americans are with their private plans. Then there are the national healthcare systems in other countries, which all outshine us in the quality of overall care. Figures and statistics dont lie, trolls.

No one can serve two masters. Wherever anyone does medicine for profit, caring gets sacrificed on its altar.

Posted by: James of DC on March 28, 2006 at 10:28 AM | PERMALINK

As a person who works closely with the Pharma industry and follows the industry markey trends actively, I can say there is some truth in everything said here from both the right and left.

The Pharma industry is maturing, and going through some of the same aches and pains that have plagued other big industries in recent years. Yes, profit margins have been above average over the past decades, but the Pharma business operates in a much highere risk catagory and thus many believe a higher than average profit margin is justifiable. For example, a major Phamra compay may have 100 drug canidates they are actively researching for a paticular indication, maybe 20 of those go into the clinic, maybe 5 get past proof of concept, maybe 1 goes commercial. They spend a lot of money on the 99 that go nowhwere, this bottleneck is the nature of the business, and why it comes with a risk premium. When a drug does go commercial, competition ususally follows in a matter of months, so it's race to chase ROI before patent expiriation and generics take over. I have always believed that extending patent protetion beyond 17 years (of which 10-12 are eaten up in development) would help lower drug prices overall as the industry could smear profits out over a longer period and would provide less incentive for the "blockbuster" race. However, I can point to real data to support this, it's just a hunch.

Big Pharma has been vertically integrated for years, but that is now changing. The high risk part of the business (early and pre-clinical stage development) is slowly being defragmented away from from the majors and into smaller start-up companies, bio ventures, and private equity based firms. Thus, the risk is being passed on to those seeking high ROI and the profit margins of major pharma are expected to slowly decrese in the next decades as the risk premium is somewhat removed from their business. It is true, that big Pharma still spends a lot of money on R&D (and employs a lot of scientists and engineers), but the the productivity by any measure (one being # of new molecualr entities / R&D budget) of the research has diminshed substantially over the past decade (which seems to be a common problem for innovators of all industries as they mature and grow). Basically, the evolving strategy of major Pharma is to acquire new canidates via acquisition or in-licensing new entities developed externally (and this now accounts for a major part of R&D expenditures in the form of milestone payments,royalties, etc) for which they can apply their tremendously efficient marketing and commercialization strategies and bring needed medications to the marketplace. So, Big Pharma is becoming primarily a marketing and sales operation with substantial R&D, but the R&D portion is slowly being moved and funded with more risk averse capital (similar to the often mentioned NIH and NSF funded work).

Now, how does any of this reduce the price of prescription drugs? It doesn't. The fact is that drug discovery and developemnt is a high risk/high reward business. If you revmove the incentive of higher than average margins, nobody in their right mind would invest in drug developemnt. The commercialization stratgey for global Pharma companies will continue to focus on launching new products in the US where the marketplace allows for a high rate of return (watch where Novartis, GSK ,and Roche launch). Chinese and Indian generic manufactuers will continue to nip at the heels of the majors and eventually acquire the knowledge base to compete for the high margin proprietary drug business, and the critiacally important early stage R&D and pre-cliniucal work will be outsourced from major pharma to more efficient and creative entities.

In my opinion, we should should be focusing on how to make our pharmaceutical and associated industries more competitive, not trying to regualte it into oblivion. Any government intitiative to fix the price of drugs in the US would be a disater for which the global ripple effect would be substantial.

The current model, albeit expensive for some, has contributed to the increase in standard of living in this country and all over the world and will continue to do so if properly managed.I would put my trust in the scientists, doctors, and investors that make this industry click, and keep the governemnt role focused on safety, quality assurance, and oversight where it belongs.

Posted by: BlaBlaBla on March 28, 2006 at 10:31 AM | PERMALINK

It's anecdotal, but may Dad's hospitalization has cost medicare about 500,000 over the last year. This includes some very new fangled drugs, monoclonal antibodies, hormones, etc. that weren't available 2 years ago -- some of which are being used off label.

Posted by: toast on March 28, 2006 at 10:31 AM | PERMALINK

If you revmove the incentive of higher than average margins, nobody in their right mind would invest in drug developemnt.

How many prescriptions are paid for with medicare\medicaid\VA dollars ?

If no one can afford these expensive drugs without government aid, then would the removal of government aid (to patients) reduce the incentive to develop these drugs ?

Without the government, there wouldn't be a market for these expensive drugs.

In my opinion, we should should be focusing on how to make our pharmaceutical and associated industries more competitive, not trying to regualte it into oblivion.

Allowing the government to negotiate prices for the drugs it pays for is not regulation. Insurance companies do it all the time.

Posted by: Stephen on March 28, 2006 at 10:45 AM | PERMALINK

"How many prescriptions are paid for with medicare\medicaid\VA dollars ?"

I am not sure of the breakdown, but I'm certain it is substantial. More importantly, what is the breakdown in purchasing of proprietary vs generic drugs?

Posted by: BlaBlaBla on March 28, 2006 at 11:01 AM | PERMALINK

these are games like never before. they has gotten much better in the past few years. The best example for this is the best room ever.

Posted by: George on March 28, 2006 at 11:03 AM | PERMALINK

Kevin - why in god's earth are we wasting time even discussing Andrew Sullivan's opinions on economics? Krugman more than once made him look like an idiot on economics. I mean the stupifying ignorance on the issue is just astounding:

Does he consider who actually funds most basic research? No, it's the governments, NIH in the US.

Does he consider where corporate research mainly goes to? No, it's copy cat drugs.

Many commentators have added examples of what an absurd analysis that Sullivan is throwing out.

Really, Kevin, please save your time.

If you don't think Sullivan's an idiot after the Bell Curve, the Clinton Health Care articles, the I hate Al Gore ranting, Iraq, and now this, I really don't know what someone needs to do to prove that they are an idiot.

Sullivan is like Tony Blair - he sounds good, but it just doesn't make sense.

Posted by: Samuel Knight on March 28, 2006 at 11:05 AM | PERMALINK

The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.

John Galbraith

And BTW. Do fuck Andrew Sullivan if you want to.

Posted by: lib on March 28, 2006 at 11:05 AM | PERMALINK

I don't understand. So it is just fine for Wal-Mart to negotiate rock bottom prices with its suppliers, but somehow when the government does it with drug companies, that is wrong? Huh?

One other thing on the "drug companies won't have any money to create new drugs issue"... doesn't the government already subsidize drug R&D? So if there is some need for a particular drug, the government health care insurance could just pump a bit more money into the research pipeline. With all the cost savings from negotiating prices, we'd have plenty of public research money. Also, with a single payer type plan, one could imagine that all those hundreds of millions the drug companies spend on advertising could be used for research since they would hopefully not be relying on one or two "blockbusters" to keep the company shareholders happy.

Posted by: Paul S. on March 28, 2006 at 11:07 AM | PERMALINK

"I don't understand. So it is just fine for Wal-Mart to negotiate rock bottom prices with its suppliers, but somehow when the government does it with drug companies, that is wrong? Huh?"

This is apples and oranges. Wal Mart is in the business of efficient mass distribution of commdities. Proprietary pharmacueitcals are bioactive articles of innovation with sometimes limted raw material supplies, constrained manufacturing and formulation capacity, complicated supply chains (sometimes requiring a 10-15 step chemical synthesis), unlimited shelf life (often very expensive storage conditions) and unpredictable market demand and value.

Posted by: BlaBlaBla on March 28, 2006 at 11:17 AM | PERMALINK

"Companies tend to be very close with that kind of data, for obvious competitive reasons, but everything I've seen suggests that while the US is only a fraction of European pharma's volume, it accounts for an extremely outsized segment of their profits."

??? Where's your data coming from here? The US is ~50% of worldwide pharma sales.

"As for the fact that pharmaceutical companies have big marketing budgets, that's somewhat misleading, as more than half of those budgets are for free samples given to physicians."

Err, not really. Out-of-pocket costs for the free samples run around ~10% of the cost marked on the financial statements (sample costs are priced at the market cost in the financial statements).

Also, I'd like a cite for your claim that such costs account for 50% of marketing budgets. There are some really dodgy numbers knocking around on pharma industry costs (such as those from Tufts University), and one has to see the methodology before regurgitating the conculsions.

Posted by: Urinated State of America on March 28, 2006 at 11:18 AM | PERMALINK

Oh yes, forgot one other data point that Sullivan forgot: the US pays the highest pharmaceutical prices in the industrialized world. And there isn't that much evident that the US rolls out cutting edge drugs all that much faster.

And again the basic work on those breakthrough drugs mainly comes from NIH, not the pharma companies.

But really why refer to Sullivan on economics, national defense or almost any other issue?

Posted by: Samuel Knight on March 28, 2006 at 11:34 AM | PERMALINK

This is apples and oranges. Wal Mart is in the business of efficient mass distribution of commdities. Proprietary pharmacueitcals are bioactive articles of innovation with sometimes limted raw material supplies, constrained manufacturing and formulation capacity, complicated supply chains (sometimes requiring a 10-15 step chemical synthesis), unlimited shelf life (often very expensive storage conditions) and unpredictable market demand and value.

Its not apples in oranges. Business negotiate prices on goods that match these criteria all the time.

Inusrance companies negotiate prices for dugs as well as prices for other medical services all the time.

Posted by: Stephen on March 28, 2006 at 11:41 AM | PERMALINK

That's an odd argument, isn't it? Are these drugs going to be fantastically expensive, or are they going to be so cheap they cripple the pharmaceutical industry's R&D efforts? I'm confused.

I disagree with Andrew Sullivan's overall position, but isn't Kevin being purposefully obtuse here?

Clearly Sullivan is talking about drugs that are fantastically expensive to develop given away for free.

Posted by: lib on March 28, 2006 at 11:50 AM | PERMALINK

I read Sullivan every day, and he often does make sense, but you have to ignore anything he says about drug companies. As was pointed out above, he basically owes his life to drug companies. I just don't think he's capable of casting a critical eye in their direction, and I don't know if I would, were I in his situation.

Posted by: Steve H. on March 28, 2006 at 11:56 AM | PERMALINK
This is apples and oranges. Wal Mart is in the business of efficient mass distribution of commdities. Proprietary pharmacueitcals are bioactive articles of innovation with sometimes limted raw material supplies, constrained manufacturing and formulation capacity, complicated supply chains (sometimes requiring a 10-15 step chemical synthesis), unlimited shelf life (often very expensive storage conditions) and unpredictable market demand and value.

BlahBlahBlah is right. His example is apples and oranges. The point I and other commentators have tried to make is that WalMart is to the government as Levi-Strauss is to Big Pharma.

BlahBlahBlah has instead argued that WalMart is to Big Pharma as, what, Levi-Strauss is to a dual overhead camshaft...what?

Posted by: John on March 28, 2006 at 12:08 PM | PERMALINK

"Where's your data coming from here? The US is ~50% of worldwide pharma sales."

Is that sales in dollars or pills? You are only being responsive to Jane Galt if it is in pills.

"As was pointed out above, he basically owes his life to drug companies. I just don't think he's capable of casting a critical eye in their direction, and I don't know if I would, were I in his situation."

Nice. I presume you realize that makes his point about innovation.

Posted by: Sebastian Holsclaw on March 28, 2006 at 12:14 PM | PERMALINK

From the Kos article on Medicare plan D:

The drug prices offered here in Southern Maine by the ten leading private insurance plans for the ten prescription drugs with the highest sales are, on average:

Almost 80 percent higher than the prices the federal government negotiates for the Veterans Administration;

More than 60 percent higher than what consumers pay in Canadian pharmacies; and

More than 5 percent higher than what they cost when purchased from a reliable Internet dealer.

Funny how some conservatives argue that "free market" shouldn't apply to Big Pharma. US Pharma companies live in a highly protected market with little foreign competition. The government cannot negotiate drug prices under this new plan. Free enterprise anyone?

Posted by: Broken on March 28, 2006 at 12:14 PM | PERMALINK

Kevin,

I don't have data, but I do have a possible source.

Medicare doesn't pay for drugs, but does pay for procedures; looking at the ratio of new drugs/new procedures at ages below 65 (where the payment system for both is the same) versus above 65 (where government pays for one but not the other) might be a helpful study.

Posted by: SamChevre on March 28, 2006 at 12:19 PM | PERMALINK

"US Pharma companies live in a highly protected market with little foreign competition"

This is not correct. There is tremndous foreign competition in the pharmaceutical market. Where do you think most generic manufacturing takes place (and soon to be proprietary)? Why do you suppose Merck and Pfizer are rushing to cut costs, close facilities, and get more effiecient while GSK, Novartis, and Roche are growing? I think one can make the argument that the US Pharmaceutical MARKET is not a pure "free" market, but that US companies have any advantage is absurd.

Posted by: BlaBlaBla on March 28, 2006 at 12:23 PM | PERMALINK

Kevin -

Look to the prices that other countries national healthcare plans negotiate.

How about what Medicare in Canada negotiates with the drugs companies? That would be a great example.

Posted by: RC on March 28, 2006 at 12:25 PM | PERMALINK

I don't recall ever seeing Andrew Sullivan weigh in on Walmart and the heavy handed way in which they deal with their suppliers, getting rock-bottom prices from them by using all their considerable weight on the side of consumers, but I have to assume from everything I know about his views that he would hold this up to be a great example of the wonders of the free market at work. So I am confused at why he is upset at the prospect of the US government acting like big business. I mean, hasn't that been the principled conservative case against government getting involved in things like paying for perscription drugs? That they don't act like big business, focusing on the bottom line, enforcing discipline? So, when they do start acting like big business all of sudden the world is going to come to an end? When you try to have your cake and eat it too all you end up with is fertilizer.

Posted by: Majun on March 28, 2006 at 12:26 PM | PERMALINK

SAMUEL,

I could not agree more, from the bottom of my heart.

We need to include people like tbrosz, referring to brochures to proof a point. Al, who never has a logical argument and so on.

They just don't make sense.

It is just a waste of time to discuss anything with them.

Posted by: Rnate on March 28, 2006 at 12:38 PM | PERMALINK

Lotta confusion here. Sullivan doesn't owe his life to the fact that drug companies make profits and were motivated to find a cure for Sullivan.

Sullivan owes his life to activists in the gay community and the medical community nd the drug policy reform community. Without those activists there would have been no drug-cocktail protocols or caregivers to administer the drugs or hospices where people who were expected to die could keep living. The real bulk of the hands-on did not occur in drug company promotional cocktail parties, but in the government funded hospitals and clinics that provided treatment, and in the mostly government funded universities where basic reasearch was done.

Those drug protocols did not "just happen", and they wouldn't have happened if it had been left up to America's drug industry.

Posted by: serial catowner on March 28, 2006 at 12:44 PM | PERMALINK

"Lotta confusion here. Sullivan doesn't owe his life to the fact that drug companies make profits and were motivated to find a cure for Sullivan."

And you know this, how?

Posted by: jibjab on March 28, 2006 at 12:52 PM | PERMALINK

If you revmove the incentive of higher than average margins, nobody in their right mind would invest in drug developemnt.

And yet, at the bottom line here, we have the major pharma companies making astounding profits year after year -- profits that exceed their entire expenditure on R&D. Where's the "risk" if you can duplicate those profits over an indefinite period of time. Presumably, already factored into the equation yielding this profit is whatever they may have to put up to acquire IP and technology from others (which I suspect is ALSO a very small number). You say that their major function is becoming sales/marketing -- again costs which exceed their entire expenditure on internal R&D.

So we are spending a huge amount of money for drugs just so we can have advertising campaigns blaring in our faces? THAT'S what's important, and the big favor the unregulated market is doing for us at great expense?

To me, pharma companies sound like they represent the most decadent excesses of the free market, the sort of industry that demonstrates convincingly that some things ONLY work well in a tightly regulated market.

Posted by: frankly0 on March 28, 2006 at 12:55 PM | PERMALINK

"And again the basic work on those breakthrough drugs mainly comes from NIH, not the pharma companies."

First, you offer no evidence in support of this claim. And second, "basic research" is only part of the cost of bringing new drugs to the market, so your claim is of limited relevance even if it's true.

Posted by: jibjab on March 28, 2006 at 12:56 PM | PERMALINK

The R&D budgets of Big Pharma basically produce new patents for trivial variants of the same old drugs. Or inferior new drugs. Big Pharma is a scam. It should be burned to the ground. The good research is academic and govt. funded.

Posted by: SqueakyRat on March 28, 2006 at 12:59 PM | PERMALINK

"The R&D budgets of Big Pharma basically produce new patents for trivial variants of the same old drugs. Or inferior new drugs. Big Pharma is a scam. It should be burned to the ground. The good research is academic and govt. funded."

Agreed! Anyone who works for these scam Pharmas should be sent to prison along with Bush and the rest of the white, christian, hetero, male Republicans.

Posted by: Freedom Fighter on March 28, 2006 at 1:15 PM | PERMALINK

We could save the drug companies a lot of money by prohibiting advertising for prescription drugs aimed at the general public.

Posted by: B on March 28, 2006 at 1:17 PM | PERMALINK

"And yet, at the bottom line here, we have the major pharma companies making astounding profits year after year -- profits that exceed their entire expenditure on R&D. Where's the "risk" if you can duplicate those profits over an indefinite period of time. Presumably, already factored into the equation yielding this profit is whatever they may have to put up to acquire IP and technology from others (which I suspect is ALSO a very small number)."

You aren't factoring the risk properly at all. You need to count the thousands of failed pharma research firms in the investment equation. The return on the successful ones must be high enough to compensate the incredibly high risk you take when you invest in someone that does pharma research. The profit must be enough to cover all the losers or else people will put their money in something much safer--like a restaurant. Even if you only focus on post-acquisition issues (where they buy IP from smaller companies) there are still risky trials to be done afterwards (see the recent UK disaster for what appeared to be a very promising drug). That is a very costly risk. If you want people to invest some of their money in risky things you have to compensate it better than not-as-risky things. No one will invest in something with the risk profile of pharmaceutical research if you only get near the returns of something with the risk profile of government bonds. In fact no one would invest in something with the risk profile of pharmaceutical research if you only get near the returns of something with the risk profile of you average manufacturing plant.

Posted by: Sebastian Holsclaw on March 28, 2006 at 1:19 PM | PERMALINK

"The R&D budgets of Big Pharma basically produce new patents for trivial variants of the same old drugs. Or inferior new drugs."

I suspect (hope) that this is a sarcastic comment. But in case it isn't, 'me-too' drugs are either cheaper (yay cheaper) or have different side effect profiles. Having a different side effect profile can be very helpful to people who have serious problems with the side effects of the initial drug. That isn't typically trivial. As a general rule, inferior new drugs don't replace better older drugs.

Posted by: Sebastian Holsclaw on March 28, 2006 at 1:24 PM | PERMALINK

OMG, I think Sebastian has finally gone off the deep end. (I know, finally?)

So, those 20% profits aren't really that much, because while Company X made 20% profit, Company Y went bankrupt.

Well, at least now I understand the problems at GM- it's because Studebaker and Packard went bankrupt.

Right, that and a dollar-and-a-quarter will get you kicked out of any coffeehop in the city- "Your money's no good here, because we don't want to listen to your blather".

Or maybe the real Sebastian went broke and only the brand-name survived a leveraged buyout.

Posted by: serial catowner on March 28, 2006 at 1:37 PM | PERMALINK

The FDA regime, which requires scientific proof of efficacy, appears to be a key element driving pharma research. Countries like the U.S. and Germany, which have such regimes, have big pharma industries. Countries, like Italy, which do not, have aspirin and Carter's (liver) pills and the like.

Pharma, like a lot of other industries, involves huge sunk cost investments. How, or if, sunk cost investments can be recovered in price, is a problem in economics and business; finding the "right business model" is the central topic in business school, and usually, it means finding a way to generate revenue to cover a sunk cost investment and/or fixed cost overhead. It is a real problem, but one, which Big Pharma, at the moment, appears to have "solved" by simple expedient of buying control of Congress.

Uncontrolled, Big Pharma's R&D is distorted, and this should not be ignored. The "ideal" drug, from a business standpoint bears a strong resemblance to heroin -- cheap to produce, highly desirable to significant numbers, and very addictive. The "ideal" drug from a public welfare standpoint, though, is more like penicillin or the polio vaccine. Cheap to make, cheap to administer, and you take it over a short time.

Big Pharma gives us expensive antacids as a treatment for chronic ulcers, which might be better cured by a targeted antibiotic. Big Pharma keeps reinventing more expensive and more dangerous forms of aspirin.

Posted by: Bruce Wilder on March 28, 2006 at 1:37 PM | PERMALINK

And, BTW Sebastian, you are so full of it. I've worked in the industry for 30 years and the major constant is the replacement of older drugs by new ones that are no better, and often worse.

And as long as the FDA refuses to systematically monitor adverse reactions, the observations of people who actually administer the drugs are going to be better than the observations of internet gadflies who don't actually work in healthcare.

Posted by: serial catowner on March 28, 2006 at 1:42 PM | PERMALINK

Why do the drug companies have to spend so much on selling and advertizing? Aren't their clients mainly physicians, who presumably make decisions on the basis of scientific evidence? Are these physicians swayed by TV commercials?

In recent years, every time I go for a doctor's appointment (in a large urban hospital) the place is always crawling with drug company salesmen. Or, rather, salesgirls. Most are pretty, dressed to kill, and look like flight attendants after a flight -- wheeling their carry-ons behind them. They give freebies to the doctors -- and to their staffs, who are always happy to see them for that reason. When I asked my own doctor about this he said that it's a racket -- one he claims not to participate in. Selling budgets of drug companies are larger than their profits and R&D budgets combined.

Posted by: JS on March 28, 2006 at 1:55 PM | PERMALINK

serial,

You're exactly wrong--that Company Y went bankrupt is clearly relevant.

If I offer you a deal--give me $100; next year you'll get back either $120 or nothing--you clearly need to know how often which happens to know whether it's a good deal. The company Y's are the times you get nothing.

Posted by: SamChevre on March 28, 2006 at 1:56 PM | PERMALINK

"US Pharma companies live in a highly protected market with little foreign competition"

This is not correct. There is tremndous foreign competition in the pharmaceutical market. Where do you think most generic manufacturing takes place (and soon to be proprietary)? Why do you suppose Merck and Pfizer are rushing to cut costs, close facilities, and get more effiecient while GSK, Novartis, and Roche are growing? I think one can make the argument that the US Pharmaceutical MARKET is not a pure "free" market, but that US companies have any advantage is absurd.

Oh, really?

Then why are the same name-brand drugs so much cheaper in Canada?

Posted by: Broken on March 28, 2006 at 2:00 PM | PERMALINK

Yes, JS, drug company sales expenses are high--almost certainly unnecessarily so. But don't forget what was mentioned upthread--half reported sales expenses is free samples, at market value--and I find free samples extremely helpful.

Posted by: SamChevre on March 28, 2006 at 2:00 PM | PERMALINK

"Oh, really?

"Then why are the same name-brand drugs so much cheaper in Canada?"

I think you are missing my point. Certainly the Canadian and American Pharmaceutical MARKETS are different, but a US based Pharmaceutical has no advantage over a European or a Japanese based company in selling drugs to either market.

The orignal argument was that US based companies were getting some advantage over others, they do not.

Posted by: BlaBlaBla on March 28, 2006 at 2:08 PM | PERMALINK

Sam, my understanding is that most of the free samples go to health care workers (doctors, their families, and their staffs). I have never been offered a free sample by my doctors -- only by doctors who are friends. If this is true, then these free samples are really kickbacks, and they introduce less than scientific incentives into medical decision-making.

Posted by: JS on March 28, 2006 at 2:13 PM | PERMALINK

Sebastian Holsclaw, your analysis makes no sense that I can see.

Look, I expect that the current model of payoff for smaller innovative drug companies is they are being bought out by the Big Pharmas. Some of those companies will succeed; some will fail. For those small companies to be a worthwhile investment, taking into account the risk, the buyout amount has to be a such a premium over investment that it more or less covers the losses of those small firms that fail to payoff. If people invest in the small companies, it's because they can see the premium built into successful buyouts makes their losses on failed companies worth it.

The point is, most of the risk is ALREADY taken into account in the buyout price, which is ALREADY factored into the larger equation, producing the huge profits for Big Pharma. And, as far as the risk in the tests go, that TOO is clearly accounted for by the fact that OVER MANY YEARS the profits of Big Pharma are simply outsize and astounding. There is perhaps some risk involved in these tests individually, but over the aggregate of tests across a company, very little risk is involved, and, again, the proof of the pudding is that YEAR AFTER YEAR the profits are enormous.

Some risk, you know?

Posted by: frankly0 on March 28, 2006 at 2:20 PM | PERMALINK

My favorite recent pharma reference is the one I saw discussing the fact that they're aggresively pursuing attractive female cheerleaders to sell to docs...nobody does 'innovation and science' like cheerleaders, right?

Also, since I'm currently reading 'The Constant Gardener' I'm possibly not in the right frame of mind for this topic....

I have had docs charge me for stuff clearly marked 'Sample - Not for Resale' - classy shit.

Posted by: CFShep on March 28, 2006 at 2:21 PM | PERMALINK

On issues of theology and morality, Sullivan has some credentials. On issues of mathematics and economics, he seems to be a parrot for supply-side shills.

One clue is his misuse of the term "exponentially," as though costs will grow in that way. This suggests that Sullivan either never took, or largely ignored, his first year calculus class. We already know that he is not qualified to talk economics.

And yes, the European drug industry is doing very well, thank you very much, and no, it is not because it makes all its profits from American users (and if it did, isn't that reason enough to reconsider our own system?).

It seems to me that Sullivan is attacking the practical approach of having a buyers' agent negotiate drug prices by using the extreme strawman argument that the government will become, in essence, one of totalitarian socialism.

There are several arguments all being swirled together in confusion: For example, the concept of universal coverage could be accomplished under some multi-payer system; alternatively, a single payer system could allow for different coverage options (for example, the single payer could offer basic coverage, with additional options payed for by users or by supplementary insurance policies). The latter approach exists in England, where private practice is allowed to coexist with National Health to a certain extent.

And yes, it is true that nearly thirty billion dollars goes through NIH to pay for research each year. It might be interesting to suggest that drug companies should have to enter into patent sharing agreements with the government (ie: the people) who paid for the basic research that makes their efforts possible. After all, the basic concepts that lead to new drugs come about through public expenditure. If you don't believe that, look at what drug companies accomplished before large scale public expenditures. Even penicillin came about through the research efforts of one man, and he wasn't named lilley or Pffeiser.

Posted by: Bob G on March 28, 2006 at 2:28 PM | PERMALINK

Doesn't anyone see a huge conflict of interest with an entity who grants pharmaceutical companies DRUG PATENTS, also being the same entity which negotiates prices for state health care?

The Patent System riggs the market so that drug companies can charge monopolistic prices. So we're going to trust that the same people who are giving Big Pharma drug monopolies are going to negotiate fair prices?

On the other hand, they can't do much worse than my health insurance provider is right now. . .

Posted by: Osama_Been_Forgotten on March 28, 2006 at 2:43 PM | PERMALINK

"And yes, the European drug industry is doing very well, thank you very much, and no, it is not because it makes all its profits from American users"

I bet that a majority of revenue from GSK, Novartis, Sanofi Aventis, etc comes from sales in the US, and is certainly where they make their margin.


"After all, the basic concepts that lead to new drugs come about through public expenditure."

Sorry, but this is absolute BS. While it is true that the concept of strcuture based design to small molecule drug developemt has roots in academia, it was big Pharma, primarily Merck (with a few Europena and Japanese comapanies), who made it a reality. Some of the tools (primarily novel organic reactions) used in drug development have been developed in University Chemistry departments, but many have been discoverd in the private sector as well. And don't worry, if a University devleopes some technology that is later used to produce a pharmceutical sold commercially, the Unviversity receives a nice royalty and usually a hefty licensing fee.

Posted by: BlaBlaBla on March 28, 2006 at 2:49 PM | PERMALINK

Just to put my previous post more sharply, the basic point is that all the risks involved in creating new drugs are ALREADY aggregated at the level of Big Pharmas, and are far more than fully covered by the outlandish prices charged for their drugs.

That is, the risks investors take in small innovative companies is covered by the great premium paid for them when bought out by Big Pharma (or, alternatively, by the royalties those companies charge Big Pharma for licensing the IP); likewise, the risks taken in individual tests by Big Pharma are aggregated so that the payoff of the successful tests far more than fully covers the losses of the failed tests.

The fact that real risks in this, at the Big Pharma level, are miniscule is reflected in the stupendous profits they collect quarter upon quarter, year upon year.

Everything else is obfuscation -- the well known trick of lobbyists and shills everywhere.

Posted by: frankly0 on March 28, 2006 at 3:15 PM | PERMALINK

JS,

I have no idea whether your experience or mine is more typical, but I have gotten a sample of every medicine prescribed for me in the last ~10 years except for antibiotics.

Posted by: SamChevre on March 28, 2006 at 3:15 PM | PERMALINK

"The fact that real risks in this, at the Big Pharma level, are miniscule is reflected in the stupendous profits they collect quarter upon quarter, year upon year."

Cephalon: Price on March 13th 2006 - $81.50

March 15th -Cephalon falls 4 pct, FDA to assess drug risks
March 16th - Cephalon drops amid ADHD drug
concerns
March 21st - ADHD drug warnings could cause undue worry-doctors
March 22nd - Cephalon Drops on Drug Uncertainty

Price on March 28th - $60.00

Lost 1.2 billion in market cap in 2 weeks.

No risk whatsoever.

Nothin

Posted by: BlaBlaBla on March 28, 2006 at 3:29 PM | PERMALINK

The government isn't just another customer any more than your social security tax is a "contribution".

It costs about $400 million in R&D for every drug that makes it into the market and is successful. Drug discovery and development are getting more expensive as the pharmaceutical companies attack more and more difficult diseases (and as infectious disease populations acquire resistance.) Various people who have never put even a single useful drug into the market have tried to argue that the figure of $400 million is wrong or unnecessary, but nobody with actual experience in pharmaceutical R&D accepts those criticisms.

The bottom line is that, if drug prices are reduced the inflow of money will slow, and the $400 million (and useful drug introduction) will be spread out over more years. Where prices are controlled, the rate of new drug introduction is slower than in the US, even adjusting for population and GDP. The EU has a much slower rate of new drug introduction than the US, despite having the same access to the results of US federally funded research that US companies have access to.

Posted by: republicrat on March 28, 2006 at 3:40 PM | PERMALINK

blablabla,

Cephalon is pretty damn small potatoes compared to, say, Pfizer of Merck or GlaxoSmithKline, don't you think?

Show me a goodly number of truly BigPharma firms that lose money year to year, and maybe you've got a case.

And do you seriously expect that EVERY drug company is going to succeed? In what industry has that EVER been true? Where are the extraordinary risks among the BigPharma firms, showing that they go under, or lose money, far more than in any other industry?

As usual, you argue by single anecdote, the last resort of a shill.

Posted by: frankly0 on March 28, 2006 at 3:40 PM | PERMALINK

From what I can gather, Cephalon brought in a little over $1B a year, whereas true BigPharma firms, such as Pfizer of Merck or GlaxoSmithKline each brought in more in the neighborhood of $50B a year.

I think what we can conclude is that Cephalon did a poor job of aggregating risk, or it was just generally run incompetently.

How it signifies anything for the industry at large I can't begin to see.

Posted by: frankly0 on March 28, 2006 at 3:44 PM | PERMALINK

"Lost 1.2 billion in market cap in 2 weeks."

You can't even imagine how happy that makes me.

Posted by: SqueakyRat on March 28, 2006 at 3:45 PM | PERMALINK

That was the first to come to mind, and perhaps the most recent.

Of course risk is spread amongst large Pharma companies, that's why companies try to expand their pipelines. But you idioitic statements about their being no risk in large Pharma is a non starter (Merck/Vioxx).

I do not expect that every drug company will succeed, I also don't believe big pharma will go on earning "astounding" profits forever. How often has that ever happended? And since when is it a crime to earn money year over year? Today's profit on Liptor may be tomorrows investment in the next cancer drug.

Posted by: BlaBlaBla on March 28, 2006 at 3:51 PM | PERMALINK

Robert Kuttner:

Economist Dean Baker has calculated that only about one dollar in five that US consumers spend on inflated drug prices go to finance drug research. Baker adds up all the money contributed by taxpayers to drug companies through Medicare, Medicare, the Veterans Administration, and NIH. He concludes that it would be more cost-effective to pay for all drug research through government grants and then put the results in the public domain.

Ah, but that would be socialism.

Are we getting inferior warmaking technology because we have a single-payer system for defense?

Posted by: JS on March 28, 2006 at 3:58 PM | PERMALINK


Frank

Maybe Schering Plough is more your speed:
2005 - Rev 9.5 bil; Net income 183K
2004 - Rev 8.2 bil; Net loss (981K)
2003 - Rev 8.3 bil; Net loss (93K)


No risk.

Posted by: BlaBlaBla on March 28, 2006 at 4:01 PM | PERMALINK

"He concludes that it would be more cost-effective to pay for all drug research through government grants and then put the results in the public domain. Manufacturers, as in the case of aspirin, doxycycline, and other off-patent drugs, would then earn only a normal profit, and all drugs would be far cheaper."

Ths is a complete joke. This is a guranteed recipe for moving the entire pharma industy to China or India and the outsourcing cries would start again. Who the hell would invest the money it takes to get through 7-12 years of clinical trials for a normal profit, especially when 90 out of 100 canidates get rejected by the FDA?

"Scientists would still innovate. The pioneers of antibiotics weren't in it to get rich. Nor was Dr. Jonas Salk. Their breakthroughs quickly went into the public domain to help the greatest number at the lowest cost."

ROTFLMAO. Yea, scientist don't mind working for free.

Was this article written by Howard Dean?

LMAO

Posted by: BlaBlaBla on March 28, 2006 at 4:16 PM | PERMALINK

The government isn't just another customer any more than your social security tax is a "contribution".

How so ?

The bottom line is that, if drug prices are reduced the inflow of money will slow,

What, no more Super Bowl commercials fo Viagra ?
Maybe we shouldn't let insurance companies negotiate lower prices either.

Where prices are controlled, the rate of new drug introduction is slower than in the US, even adjusting for population and GDP.

Would be interested in seeing that data, do you have a link ?

The EU has a much slower rate of new drug introduction than the US, despite having the same access to the results of US federally funded research that US companies have access to.

Same access ?

Posted by: Stephen on March 28, 2006 at 4:31 PM | PERMALINK

Maybe Schering Plough is more your speed:
2005 - Rev 9.5 bil; Net income 183K
2004 - Rev 8.2 bil; Net loss (981K)
2003 - Rev 8.3 bil; Net loss (93K)

So the worse case you can come up with of ANY real size is a company that essentially broke even over 3 years?

What other industries don't have any number of companies in far worse shape?

Posted by: frankly0 on March 28, 2006 at 4:44 PM | PERMALINK

"So the worse case you can come up with of ANY real size is a company that essentially broke even over 3 years?"'

Your right, we need to start punishing companies for being sucessful.

BTW - the reason why their are only around 6-8 major Pharma companies is becuase the weak ones have been merged or acquired a la Bristol_Myers_Squibb, Glaxo_Smith_Kline, Sanofi_Aventis, Schering_Plough, Pfizer acquired Phamracia and UpJohn, etc, etc...

Posted by: BlaBlaBla on March 28, 2006 at 4:56 PM | PERMALINK

"OMG, I think Sebastian has finally gone off the deep end. (I know, finally?)

So, those 20% profits aren't really that much, because while Company X made 20% profit, Company Y went bankrupt."

Ok lets break it down then. To keep it simple we will assume you only get 1 year and have $1,000 to invest. Let's say you can invest in McDonalds franchises. Let's say you get a 95% chance of a 10% return, a 3% chance of breaking even and a 2% chance of losing everything. Your expected return is .95(1,000+1,000*.1)+.3(1,000)+.2(0)=$1,075 or a 7.5% return.

Lets say you could invest in government bonds with a 100% chance of a 4% return. Your expected return is $1,040 or a 4% return on average. Now lets go for a somewhat greater risk.

Let's give a 5% chance of losing 10% and a 5% chance of losing everything. This is not hugely more risky than the hypothetical McDonalds franchise. The formula for figuring 'X' where X is the required good return to make up for the chance of loss and get to an even investment with McDonalds is .9(1,000+1000X)+.05(1,000-[1,000*.1])+.05(0)=$1,075. For this level of risk you would need a 14.44% return. If you gave merely a McDonalds level rate on the times you make money but on a riskier return chance you would get .9(1,000+1,000[.1])+.05(1,000-1,000[.1]) which equals and expected return of $1,035. This is lower than the government bond rate. So you need to get 14.44% in the riskier investment just to get even expected returns with the McDonalds investment. And of course that isn't enough because you are taking a larger chance of losing money on the riskier investment. You could just invest in McDonalds and have the same overall expected return with a lower chance of losing everything. In order to cover that risk you have to be earning even more in the riskier investment.

I don't actually know what the McDonalds expected return is, but the average market return over long periods of time is about 11%. In my example we were comparing to a 7.5% expected return.

So yes, the overall risk in the family of pharma companies is much greater than in lots of other potential investments. As such you have to pay a higher return or there won't be investment unless you know in advance which ones are going to be the winners. And you don't.

Posted by: Sebastian Holsclaw on March 28, 2006 at 4:58 PM | PERMALINK

Ths is a complete joke. This is a guranteed recipe for moving the entire pharma industy to China

OK, so has the argument been reduced to the fact that if we change the current system drugs would get cheaper but the manufacturing would go to China? Maybe it would be better to have cheap drugs than cheap sneakers? (Or perhaps the IP could be made available for free only to US companies?)

ROTFLMAO. Yea, scientist don't mind working for free.

This is a distortion. What he was saying is that scientists work for a salary, not for a profit. (Though this has admittedly been changing, and many university professors now see their research as a pathway to riches).

Posted by: JS on March 28, 2006 at 5:08 PM | PERMALINK

...the 10 drug companies in the Fortune 500 topped two key
measures of profitability in 2002. Collectively, the pharmaceutical companies in the Fortune
500 reported:
A profit of 17 cents for every dollar of revenue, compared with a Fortune 500 median of
3.1 cents per dollar of revenue. [See Figure 2]
A return on assets of 14.1 percent, compared with a Fortune 500 median of 2.3 percent.

From here.

Posted by: JS on March 28, 2006 at 5:12 PM | PERMALINK

The EU has a much slower rate of new drug introduction than the US, despite having the same access to the results of US federally funded research that US companies have access to.

Same access ?

Yes. Federally funded research is published in English language journals and read around the world. Federally funded researchers are invited around the world to give talks on their research. The US makes about 20% of the material wealth of the world, and it makes about 35% of new drugs. With a lower total GDP than the EU and a lower total population than the EU, the US introduces more new drugs than the EU.

Posted by: republicrat on March 28, 2006 at 7:28 PM | PERMALINK

"What he was saying is that scientists work for a salary, not for a profit"

That's why the good ones leave Big Pharma and shitty post-docs for the stock option opportunities of venture companies. Yea, OK, you keep thinking that.

Posted by: BlaBlaBla on March 28, 2006 at 7:34 PM | PERMALINK

BlaBlaBla
I think developing new drugs is much much less important than allowing greater access to those drugs that we have already invented. So I'm even willing to concede your point about lowered innovation, even though I think you're grossly exaggerating the facts.

I don't give a shit. Fine, yes, there are tradeoffs. From a public health perspective, it don't matter. Most of the real nasty stuff that does real damage has been figured out years ago. To say that the lack of new drugs is the problem is idiotic. Many of the "new" drugs that come out on the US market are just slight tweaks of older drugs. Most of those drugs will work fairly well, the new ones are simply slightly more convienient in some way or another than the older ones.

I'm sorry, but I can't get that worked up about it. Every year, the new drugs that come out are more underwhelming than the last year. It's only natural--humans are defeating most of the serious diseases that plague them pretty well. Pasteur did the bulk of the work, now Pharma finds itself in the position on a defense contractor in the waning years of the Cold War--how do I justify these absurd profits given that the threat I am supposed to be fighting has diminished to such a great extent? Year after year, the value of new drugs will diminish relative to the value of easing access to old drugs. This is a natural result of the fact that our attention to pharmaceutical development has been growing exponentially while the threats we face have remained more or less stable. The pharmaceutical industry will likely be a victim of its own success.

Posted by: kokblok on March 28, 2006 at 8:07 PM | PERMALINK

As other commenters have pointed out, there is simply enormous survivor bias in the sample. Because of the huge capital requirements of pharmaceutical development and manufacturing, and the extremely long cycle time on research, companies that have a few bad experiences die or get acquired . . . which is why we're discussing ScheringPlough, GlaxoSmithKline, etc. The companies that survive have high profit margins, but the ones that disappear don't show up in the sample, making it look like a pharmaceutical company is a license to print money. My classmates in business school made the same erroneous conclusion about startups in the late 1990's, for the same reasons, with some disastrous results.

Pharma is an intellectual property business, which generally have higher margins than other industries. Even Apple, which has a large hardware component to its business, has margins of about 10%, compared to roughly 6% for a company like Dell. The reason that margins are so high is that they're short lived; a patent is basically only a ten year monopoly. Companies in businesses with short product lives that are hard to replicate tend to see high margins. This is why pharma critics should be *happy* about "me-too" drugs . . . it's a lot harder to charge a premium for your product if there are three or four others out there that do the same thing.

Frankly, I don't understand why people who think that all the drugs are simply "me-too" drugs, or no better than older versions, are upset. If this is true, then there is absolutely no reason to buy the new drugs . . . and Americans can buy the old drugs, aka generics, even cheaper than in Canada. It seems to me that the only coherent argument for battering down the prices of new drugs is if they are much better; otherwise, there's no problem.

Fulmination about the excessively high ROA (return on assets) of pharmaceutical companies is based on ignorance of accounting. Pharmas have very high ROA not because they have discovered some magic money machine, but because of an accounting quirk: their major assets, patents, are not carried on the books unless they have been acquired from another company. There is a (arguably) good reason for this: without an outside transaction, it's very easy to play around with the value of patents, so conservative accountants prefer not to count them entirely. But because their major asset is not counted in the financial statments, this gives the pharmaceutical industry an extremely high ROA that does not truly reflect the return on invested capital.

Posted by: Jane Galt on March 28, 2006 at 8:16 PM | PERMALINK

"The pharmaceutical industry will likely be a victim of its own success."

Can't argue with you there - the innovator's dilemma...

Posted by: BlaBlaBla on March 28, 2006 at 8:18 PM | PERMALINK

Jane Galt--

This thread is about allowing the Federal government to negotiate drug prices. What are you talking about?

Posted by: kokblok on March 28, 2006 at 8:20 PM | PERMALINK

Jane

Excellent point on ROA.

Posted by: BlaBlaBla on March 28, 2006 at 8:23 PM | PERMALINK

"I think developing new drugs is much much less important than allowing greater access to those drugs that we have already invented."

Sounds good if there is already a drug available for your particular affliction. I'm gussing cancer patients may have a different opinion.

Posted by: BlaBlaBla on March 28, 2006 at 8:31 PM | PERMALINK

There is a non sequiter that the righties have been trying to peddle here. Drug companies spend huge amounts of money trying to come up with copycat drugs so they can compete in the income sweepstakes with their rivals. They also spend huge amounts of money coming up with patentable replacements for drugs that are coming off of patent. That's why there are so many expensive (and expensively advertised) pills for stomach acid, when generic pepsid works fine for most people. That's why there are so many statins from different companies.

The New Yorker did a very nice story on how one pharmaceutical giant went to great lengths to come up with a replacement for its stomach acid drug. It turns out that the ten-cent alternatives work just fine, but there goes the bottom line, so this company spent hundreds of millions of dollars to develop a modest variation and to publicize it.

When the righties talk about how much it costs, and incentives, and all that, remember that most of the time, the incentive is not to come up with a treatment for a previously untreatable condition, but to come up with a competitor for what is already out there.

There are some exceptions; drugs like epogen and the like are novel and worthwhile. Still, it is the case that the basic biology generally comes from basic research that has been governmentally funded. Blablabla tries to make a case for small molecule constructs coming from the private sector, but the basic chemistry involved in x-ray crystallography was done at research universities. The pharma companies mostly scavenge on the basic science that has come out of the public sector.

The really curious thing is why the righties on this thread feel so compelled to defend the current system. There are lots of other ways the system could exist and be equally, if not more, productive.

By the way, it is common that drugs come onto the market in Europe earlier than in the U.S. due to regulatory differences. We could cut the R&D costs for drugs simply by reducing the testing requirements. It's not necessarily a good thing, but it is possible.

Posted by: Bob G on March 28, 2006 at 9:46 PM | PERMALINK

When the righties talk about how much it costs, and incentives, and all that, remember that most of the time, the incentive is not to come up with a treatment for a previously untreatable condition, but to come up with a competitor for what is already out there.

A recent article in the journal Science wrote about the cost and length of time to developa new anti-TB drug. A new anti-TB drug is absolutely necessary due to the spread of multi-drug resistant TB strains. It's recent, within the past 3 weeks (I have already discarded my copy, so I can't track the reference. You can go online, but you have to pay for content at www.aaas.org.) Short answer? millions more will die of TB before the next good drug comes along.

Everybody always says that the US could develop drugs faster and cheaper, but nobody actually does it.

Novartis recently introduced Glyvex that successfully treats about 90% of cases of acute myelogenous leukemia, previously treatable (in a manner of speaking) only by bone marrow transplants. Equally effective new drugs for other cancers are highly desirable. Novartis is not technically in the EU: it's Swiss and American.

These companies are not primarily interested in minor modifications of existing drugs; it's just that science works that way almost all of the time, advancing just a little at a time.

Posted by: republicrat on March 28, 2006 at 10:56 PM | PERMALINK

Big Pharma doesn't do R&D. Research is done at federal labs, academic institutions, and biotech startups which are subsequently purchased by the likes of Merck. So the only thing that will be reduced is the ability to sell out to the Man. I'm not sure that's something I care to fund with my health care dollars.

Posted by: pjcamp on March 29, 2006 at 12:00 AM | PERMALINK

Fuck Drum are you a complete fucking moron?

Sullivan is a fag who likes to lick the blood off gaybashers fists.

He was dangerously obscenely wrong on the illegal aggressive invasion of SW Asia.

Finally he is clearly clueless on nationalized health care that can save lives immediately AND be easily paid for by cuts in the huge wasteful military budget. ( So leading toward the libertarian ideal of lower smaller leaner government )

Three strikes and yr out!

Andrew Sullivan is out!

Drum - you are on thin ice as a Vichy democrat.

Posted by: professor rat on March 29, 2006 at 12:50 AM | PERMALINK

"They also spend huge amounts of money coming up with patentable replacements for drugs that are coming off of patent. That's why there are so many expensive (and expensively advertised) pills for stomach acid, when generic pepsid works fine for most people. That's why there are so many statins from different companies."

If the generic works exactly as well, use it. If you are one of the unfortunate many who experiences side effects, you might want a drug that doesn't have (for you) side effects.

Posted by: Sebastian Holsclaw on March 29, 2006 at 1:54 AM | PERMALINK

Wow,
Did industry pay for penecillin research? polio? TB? leprocy? How about transplants in the early days? Did they pay for the majority of HIV research in the early 80's? The pharmacuedical industry is very competant at profitting from the results of GOVERNMENT funded university based research. This doesn't include government susidies direct to the industry and enormous tax incentives. Their biggest expense is marketting not research and development.
Over the last 25 years as government funding direct to university researchers has dropped and subsidies and incentives to companies risen, R & D has become ever more restricted to those areas that serve the wealthiest while research that would benefit the general population is neglected.

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Posted by: 989 on March 30, 2006 at 11:36 AM | PERMALINK




 

 

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