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Tilting at Windmills

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June 27, 2007
By: Kevin Drum

PHARMA, PART 2....Andrew Sullivan returns to the Big Pharma debate today, stepping back a bit from yesterday's claim that European pharma companies have been "decimated" by Europe's widespread adoption of universal healthcare. And a good thing too. After all, the market for pharmaceuticals is global. Every pharmaceutical company, no matter where it's based or where it conducts R&D, sells into the exact same market. If European national healthcare had really decimated European pharma companies, it would have decimated American companies too.

But it hasn't. So today Andrew moves on to a different, and more common, conservative claim. With some coaching from Mark Kleiman, he argues that the real issue is drug innovation, which he thinks is driven largely by profits from U.S. sales. If we introduce national healthcare in American and start bargaining down the price of drugs, Big Pharma will no longer have an incentive to invest lots of money in R&D. Result: no new drugs.

On its face this sounds reasonable. Pharma companies are like anyone else: they invest in R&D to the extent that they can earn a return from the drugs they develop. If drug company profits are driven mostly by high-priced U.S. sales, then the rest of the world is getting a free R&D ride on our backs.

But I don't think that's quite what's happening. There's a free ride happening, but it's not a free ride on innovation. It's a free ride on pricing.

As Mark points out, pharma companies have to raise capital in the same markets as everyone else, and that means their overall pricing has to be high enough to provide them with the risk-adjusted returns on equity that the market demands. So what happens if prices in America are gradually pushed down? Answer: prices everywhere else will be gradually pushed up. Americans will pay a bit less and Europeans will pay a bit more — which suits me just fine — and both profit levels and risk-adjusted returns will remain constant, just as basic economics demands. The only difference is that Europeans will be forced to pay their fair share of pharma R&D budgets. No more free ride on pricing.

Now, the scaremongering alternative to this is that basic economics will fail because governments around the world are such ruthless bargainers that they'll literally drive pharmaceutical companies into the ground with their demands for ever lower prices. But seriously, how likely is this? The global aerospace industry is highly dependent on military sales, and their profits haven't been driven into the ground. Quite the contrary: Europeans are forever complaining that Boeing, for example, is essentially subsidized by the U.S. government because its high-profit defense business is more lucrative than its civilian business.

The fact is that selling to the government — or, in this case, to a hundred separate governments — is every bit as profitable as selling to private industry. (Does anyone seriously want to make the case that federal procurement is more ruthlessly efficient than, say, Wal-Mart?) Right now, the only reason European countries can get such low prices on drugs is because pharma companies know they can make up for it in the United States. If we stopped acting like chumps, they wouldn't be able to do it anymore.

So in the end, pharma profits will remain healthy and innovation will continue apace. What's more, as Mark points out, we already spend a lot of federal dollars on basic pharma R&D. If it turns out that lower U.S. prices have an impact on innovation after all, "then we need to budget some public R&D funds (as grants, as prizes, or as patent buy-outs) to make up for that loss." Dean Baker has more on that here.

Kevin Drum 2:52 PM Permalink | Trackbacks | Comments (101)

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Comments

This is just an excellent debate... what the blogosphere does best. I'm biased, but advantage Drum!

Posted by: Wagster on June 27, 2007 at 2:56 PM | PERMALINK

The big losers with price management will be the networks, magazines, medical journals, and resort towns that are raking in the money from the money that pharma spends on marketing. I'm not sure about the rest of the world, but in the US pharma spends more on marketing ethical drugs than on developing them. They could cut out the entire marketing segment and no harm would come to their customers, prices could drop, profits could remain robust, and innovation could continue to thrive.

Posted by: freelunch on June 27, 2007 at 2:57 PM | PERMALINK

Whenever anyone argues that government involvement in healthcare would stifle innovation, I ask them to explain the exceptional innovation that has existed for years in American military technology.

Posted by: DNS on June 27, 2007 at 2:59 PM | PERMALINK

Exactly.

Our drug policy is a direct subsidy from US citizens to foreign governments like FRANCE!!!!

Why can't we have a law that requires drug companies to sell their drugs in the US at a price not higher than the average price sold to the EU and Japan?

I don't like the idea of my health insurance premiums and payments for prescription drugs to help reduce health care costs in Europe and Japan.

Posted by: neil wilson on June 27, 2007 at 3:05 PM | PERMALINK

Kevin, every now and then you surprise me with how insightful you can be. This is one of those times.

Good points.

Posted by: sdh on June 27, 2007 at 3:05 PM | PERMALINK

Even if taking away Big Pharma's ability to set prices at will does indeed lead to less R&D (and not just less non-productive marketing and smaller dividends), that's the way the f-ing free market works when you strip away monopoly rents and allow consumers the power to negotiate.

Sullie should know better.

Oh, wait, I forgot that his love of free markets stops at where the paychecks from Big Pharma begin.

Posted by: Disputo on June 27, 2007 at 3:08 PM | PERMALINK

OT: The OVP and White House just subpoenaed by Leahy.

http://www.forbes.com/feeds/ap/2007/06/27/ap3862945.html

Posted by: grape_crush on June 27, 2007 at 3:09 PM | PERMALINK

All I want to know is whether or not this will curb Viagra spam.

Posted by: RodSherwood on June 27, 2007 at 3:13 PM | PERMALINK

If the US had a system similar to Germany's, Pharma wouldn't be allowed to advertise presription drugs publicly (only to doctors). That would free a huge amount of money for R&D.

Posted by: Jörgen in Germany on June 27, 2007 at 3:15 PM | PERMALINK

A couple of corrections to the nonsense spouted by the pharma lobby and its apologists on the know-nothing Right.

-- Marketing expenses are about TWICE what R&D expenses are for the big pharmacos. (Look at publicly available financial disclosures if you don't believe this.) R&D is not going to suffer at big pharma if revenues are cut slightly.

-- Risks for INDIVIDUAL programs may be very high, but across a PORTFOLIO of programs, such as every big pharmaco holds, they are much lower. The outlandish returns they used to command -- in excess of 20% annually on stock -- are not justifiable based on risk. (And this is even more the case now that big pharma basically depends on startups to de-risk programs before they take them on.)

-- One of the main reasons we pay more for drugs in the US is that we do not have a centralized buyer. (Well, we do in Medicare, but it is forbidden by statute from using its market power to negotiate for prices.) Most other governments do. It's just simple trade economics, and it has nothing to do with wild-eyed rantings about conspiracies to defraud the red-blooded American consumer to benefit the perfidious French.

Posted by: bleh on June 27, 2007 at 3:18 PM | PERMALINK

you can see big pharma's innovation is underappareciated, that *must* be why they spend more than twice as much on advertising as on r&d.

and you can see how the governments around the world are already ruthless bargainers, just look at any big military contract. "we agree to pay you, whether or not you meet the specs, but you can whine for more money any time and often get it" clause really helps out.

Posted by: supersaurus on June 27, 2007 at 3:19 PM | PERMALINK

Maybe I'm wrong about this, but doesn't some percentage of R&D happen at the university level?
Taxpayer funded universities - and if so, factor that into the "free price ride" equation. Anyone have any insight into that?

Posted by: highlow on June 27, 2007 at 3:19 PM | PERMALINK

This is a sensible take, but I still think it likely that exploring this from the side of slow experimentation with lower degrees of patent protection would likely produce better results. It is the patent, after all, which gives a pharmaceutical company pricing power, and having patent lenghts adjusted very occasionally would seem to be less intrusive, and less subject to distortive political effects, than much more frequent price negotiations. Excessive intellectual property protection, in many forms, may be doing quite a bit of harm to our economy, I think.

DNS, you may wish to examine the use of capital vs. the rate of innovation, within the Department of Defense, before touting it as a model for technology innovation. Having Trent Lott direct capital flows is not a happy prospect.

Posted by: Will Allen on June 27, 2007 at 3:22 PM | PERMALINK

Conservatives will never argue about changing the political economy to favor the consumer or average person. Conservatives will argue about changing or preserving the political economy to keep corporate profits high, and will use consumer protection defenses to do it if it benefits their strategy.

Posted by: Brojo on June 27, 2007 at 3:24 PM | PERMALINK

The global aerospace industry is highly dependent on military sales, and their profits haven't been driven into the ground. Quite the contrary: Europeans are forever complaining that Boeing, for example, is essentially subsidized by the U.S. government because its high-profit defense business is more lucrative than its civilian business.

Not a real good comparison, since the mil aerospace business has tech performance as critical and cost as less of a driver than commercial, which is why the Boeings and Lockmarts love it so much. If the drug companies were responding to an RFP for a new drug, it would fit.

Whenever anyone argues that government involvement in healthcare would stifle innovation, I ask them to explain the exceptional innovation that has existed for years in American military technology.
Posted by: DNS

Have to be careful about that analogy. Over the history of mankind war has been the prime driver of technological innovation. Even in the medical realm.

If drug company profits are driven mostly by high-priced U.S. sales, then the rest of the world is getting a free R&D ride on our backs.

An obvious example where this occurs is in textbook pricing on college campuses. What my students pay $100.00 for, a student in India can get for $15 in paperback. There are laws preventing the bringing back of these textbooks.

Posted by: Red State Volunteerer on June 27, 2007 at 3:24 PM | PERMALINK

This is inane. I agree that BP (Big Pharma) gets huge profits from the US. What these profits allow them to do is pay less money to managed care nations. If we were all on the same playing field, prices in Europe would rise, as they would have less room to negotiate low prices.

So, my prediction is that they would not be able to go as low in Europe, and Europeans would pay more.

I thus state: If you hate managed care in Europe, adopt it here, and make European managed care groups pay more.

Posted by: POed Lib on June 27, 2007 at 3:24 PM | PERMALINK

I had not read all of Kevin's post before writing mine. I see that he came to the same conclusion that I did.

And that is because American profits drive the whole system. We pay less, others will need to pay more.

If you hate the French, make them pay more by adopting single-payer here.

Posted by: POed Lib on June 27, 2007 at 3:27 PM | PERMALINK

I am not sure why no one mentions this, but most drug R&D for innovative drugs is subsidized by underpaid graduate student labor in federally funded university labs. The results are then appropriated by the graduate advisors, and if the students are canny they can get in on the action; hence all the little research firms that spring up around university campuses headed up by professors who manage to garner wads of federal research funds. These little firms then sell their "product, fully paid for by the US government, to Big Pharma. Most Pharma R&D is for alternative uses for drugs once the patents start expiring so they can renew the patent on a "novel" usage. So we have Prilosec becoming Nexium the big Purple Pill (I suppose Nexium means NEXt Incredible Usage Medically).

Since most R&D in Europe is also subsidized by their governments, there really is a "chump" market here in the States.

Posted by: Carol on June 27, 2007 at 3:27 PM | PERMALINK

Kevin's argument seems a bit simplistic. If we lower prices, then Europe wil raise prices just as much as we lower them? Really??

I would think that our lower prices would constitute a decrease in demand, which would eventually lead to a decrease in supply.

I still think we need to lower prices, but there will be good and bad consequences. The good consequences are that we'll have enough money to buy groceries and that young blondes will learn a skill other than smiling at doctors. The bad consequence is that less money will go into R&D.

Posted by: reino on June 27, 2007 at 3:28 PM | PERMALINK

"I would think that our lower prices would constitute a decrease in demand, which would eventually lead to a decrease in supply."

Umm, according to what economic theory do lower prices curb demand?

Posted by: junebug on June 27, 2007 at 3:41 PM | PERMALINK

Can we curb this notion that pharma cares about cultivating R&D. Almost all biotech R&D comes from government grants, WHO, academia; essentially if a conservative truly hates the institution in a Norquist kind of way, the institution is probably researching a compound. The bios that do do research are gobbled up as soon as their COO's hit the links and blab to a bigger pharma's CFO about something coming around the corner.

And Bleh, average marketing expenditures aren't 2x R&D, they are closer to 3x.

Oh, and I've worked in pharma research for the last 10 years. Unlike a sales rep, my business cards have never had a Pharma's logo on it.

If pharmas were in the market of drug research (and not marketing, gauging, & patent protecting) they wouldn't by trying to outsource their R&D en masse to third parties (and now, increasingly, to the third world.)

But they're not. Please, someone, anyone, stop this lie.

Posted by: * on June 27, 2007 at 3:53 PM | PERMALINK

I will be counterintutive. Patents give companies monopoly rights, althought only temporary. These rights are needed for R&D in intellectual property to give incentives for innovation. But the temporarty monopoly due to patent protection is a monopoly while it lasts, and this restricts output below what would be in a competitive market, all other things equal.

If the monopoly effect of a marginal unit of patent protection is very large compared to it's value in spurring new innovation, the the loss from restriction in supply may outweigh the benefits of more innovation. So, if this is the case and we reduce patent protection, we could get an increase in supply of existing patented drugs. R&D wouod probably go down, but there is a trade off, and who knows if we are right point now.

Four comments: First, talk about shares of R&D in US vs rest of the world in previous discussion does not address the real question of total innovation and supply worldwide, so I don't think the 'slowly dying industry in Europe' means much. It just means US is comparatively more attractive place to do the resarch, not whether the total amount is what it should be.

Second, what is going on with international drug patents, as opposed to US? That seems like an important factor that has not been discussed.

Third, I remember reading that Big Pharma not only gets higher average profit rates, but also the variation in rates is lower than in industries with similar average profit rates. Is this true? If so, that would be evidence that something aint efficient, and that the combo of patent protection along with low risk from large portfolio of patented drugs is giving these companies excess profits. But then I read in the papers that some companies do not have that big a portfolio, and they get very nervous when their one or two blockbuster drugs are near end of patent. So is picture from industry averages misleading in terms of incentives for individual companies?

Fourth, some one mentioned the fact that making money off of treating disease may make the companies more money, but may be socially less efficient than preventing or curing the disease. This is a real issue, and econ papers have been written analyzing the problem, particularly with respect to contagious disease. The use of patents to ensure innovation produces certain incentives regarding strategic thinking about the most profitable way to approach disease control, that might be real good for individual companies or industries but not so good for society and individual patients. A real world example would be the use of acute care hospital services before and after medicare introduced capitation for most admissions. That is also something to think about. Libertarian fantasies aside, market mechanisms are products of human design that have to be made though group social decision making. What we use now may not be the best for all time and in every situation.

Posted by: counterintuitive on June 27, 2007 at 3:56 PM | PERMALINK

I suspect that the money that now goes to marketing will switch to lobbying, enriching lobbyists, politicians and health care bureaucrats at the expense of pharmaceutical reps, doctors and insurance company employees. Meanwhile, someone will be better off because my drug prices are lower, but it won't be me, because my insurer was paying those prices. I guess the people who are filled with rage at the thought of doctors getting freebies from drug companies will feel better, though their material well-being will be unchanged.

Meet the new boss, same as the old boss.

Posted by: y81 on June 27, 2007 at 3:57 PM | PERMALINK

If we stopped acting like chumps, they wouldn't be able to do it anymore.

If that's the bet that you want to make, you should provide some reason for thinking that the EU would negotiate higher prices for drugs. Like you, they may well believe that there is absolutely no penalty for cheap drugs.

And in the end, pharma profits will remain healthy and innovation will continue apace.

That is what you don't know. Would you be unhappy if that prediction turned out not to be true? What if, say, the rate of drug innovation dropped by 25%, and companies (with less confidence of success) became even more conservative than they are now?

Note also that reduced money flows to the Pharms translates into reduced state, federal, and local sales, property and income taxes paid by the companies and their employees, and the companies and employees that they buy from. You won't gain the total amount of savings that you are planning on -- some, but less than what you calculate a priori.

I'm not saying I know for sure that you are wrong, but I am saying that it is a gamble, and not a "sure thing".

There is the possibility that the Pharms could maintain their pace of discovery by doing more research in the Caribbean and China, where almost all costs are reduced. You might want that, or you might not.

Posted by: MatthewRmarler on June 27, 2007 at 3:57 PM | PERMALINK

Does the boatload of cash Pharma spends on marketing serve a dual purpose? In addition to creating new, often spurious, customers, does it also ensure velvet glove treatment by the media?

Sorry, Kevin, but this elephant can not be ignored in any discussion if Pharma. Your posting comes across as more of an exercise in economic theory than a serious consideration of how to significantly unburden the American consumer. The right said, 'look over there!' and you did.

Posted by: Michael7843853 G-O in 08! on June 27, 2007 at 4:01 PM | PERMALINK

DNS: Whenever anyone argues that government involvement in healthcare would stifle innovation, I ask them to explain the exceptional innovation that has existed for years in American military technology.

The government provides strong subsidies for research and development in military weaponry, and pays at least "cost plus a markup", and covers most cost overruns.

Kevin is proposing to reduce the money flow to Big Pharma.

More money vs. less money is the explanation that you seek.

Interestingly, innovations in computing in the last 25 years have come much faster in the private sector than in the military sector, despite plenty of funding for the military sector.

Posted by: MatthewRmarler on June 27, 2007 at 4:02 PM | PERMALINK

Counterintuitive, I wouldn't go too far in making assumptions about a libertarian consensus regarding intellectual property protection. There are extremely varied opinions about the topic in that camp. You are correct, of course, in saying that there is no reason to think that people elected to Congress have magically found the sweet spot, via current patent law, between innovation and price competition, and it seems to me that very gradually experimenting with lower levels of patent protection would be a better avenue to pursue.

Posted by: Will Allen on June 27, 2007 at 4:06 PM | PERMALINK

junebug--"Umm, according to what economic theory do lower prices curb demand?"

I'm not saying that lower prices cause less demand, I'm saying that less money paid is less demand. Think about it.

Posted by: reino on June 27, 2007 at 4:08 PM | PERMALINK

>...textbook pricing on college campuses. What my students pay $100.00 for, a student in India can get for $15 in paperback...

The concept is called segmented pricing, capturing all the profits available by seperating your customers into groups by ability to pay.

In any event, as many have mentioned, big pharma and textbook printers are similar in several ways:

1) They sell products whose content is developed mostly at public expense through universities.

2) Those products have a low cost of manufacture and rely on copyright/patent monopolies also granted by the government.

3) The corporate partner's part of the "added value" mostly consists of legal work (IP defense), and useless or even socially destructive marketing.

4) They use market segmentation to squeeze every last drop from each national market's customers.

But they do differ. Textbook printers are next to useless and will eventually be run out of business with no loss of value to society. While Pharma companies are required, but given free reign their tactics kill people. Lots of people.

Single-payer in the US will probably just make much of the marketing budget pointless. That's a good thing.

Posted by: Bruce the Canuck on June 27, 2007 at 4:10 PM | PERMALINK

Over the history of mankind war has been the prime driver of technological innovation.

Examples?

Posted by: Brojo on June 27, 2007 at 4:15 PM | PERMALINK

For all of the huge stupidity that is most of the bashing of Europe, it seems that it'd help us achieve a lot of our goals as Democrats. If France has the best health care system in the world, and Americans still consider themselves better than the French in so many ways, wouldn't an effective selling point be a disgusted comment like, "And we're below the French? Come on, as Americans, we can do better," or something like that? Or maybe that was five years ago.

Posted by: Brian on June 27, 2007 at 4:16 PM | PERMALINK

Will Allen: sorry for the excess snark. I apologize.

I have read arguments that IF there are large excess profits, the reduced patent protection may increase R&D effort. Companies would have to produce more new material in order to keep revenues flowing. A variaion on the show business prinicple of 'get new material or get a new audience.' I don't know whether that is a realistic case, though. If it is then the current system is the worst of both worlds.

The whole system doesn't need to be changed too fix all shortcomings of the current system. Moderation is a vritue here and I am wary of those who say it is obvious that Big Pharma are robber barons and should be put out of business, or the idea that the current system is obviously best. It does bother me that on a political policy level, people often talk like there is something magic or sacred about the current IP system and patents. It is not just about the drugs being 'my stuff and I own it, and I make money off it and the market does the rest.' Patents produce distortions in the market, there are costs, and costs have to be weighed against benefits.

Posted by: counterintuitive on June 27, 2007 at 4:17 PM | PERMALINK

I'm not sure Europe is really getting a "free ride" on our R&D endeavors. In many cases, it is we who get the free ride. I am an angineering currently working on three products for the orthopeadics market. Of those three products, two will be introduced in Europe before they reach the US market. We are doing this because it is much easier to get approval in Europe than the US. So, we will do a small (and cheap) clinical study to meet the European damands and then start selling in Europe. We will then use the profits from our European sales to fund the far more expensive US clinical studies. When those studies are complete (5 years minimum) we will be able to release our product in the US. So for us, the European market provides us with a "practice market" and some revenue to keep us going through the US development cycle. Also, the European release for our products gives our investors more confidence in the products and reduces the apparent risk of the US clinical study. In short, it would be far more expensive and risky for us to devlop products if we didn't have the European market to give us a "free ride" on the R&D. Of course, that's for two of the three products I'm working on. The third product is one whose technology was developed first in Europe and we are adapting to meet the more stringent FDA demands. So much for the argument that R&D has collapsed in Europe. Of course, we will be making improvements that will be marketable in Europe. So we will still re-release the product in Europe to help fund our US clinical studies. Europe will benefit from our R&D, but the product is still a European innovation to begin with.

As for the cost differnce between the US and Europe, nuch of it reflects the difference in government regulation. As I mentioned before, we spend far more money on clinical studies in the US than we do on studies for Europe. These studies carry a lot of risk. Sometimes you spend 10 million dollars before you learn that your product doesn't work. We have to charge the US market more to justify the much higher risk we face in the uS to bring a product to market. If we want to find a way to reduce the cost of drugs, streamlining the FDA process would be a good place to start. But that would increase the risks to US patients. Fortunately for us, we can use the European patients to test out our products before we really know they are safe and effective. In essence, the Europeans are paying a price for their lower prices in that they are accepting a higher risk on the safety of their products. And we get a "free ride" for their willingness to do so.

Posted by: fostert on June 27, 2007 at 4:29 PM | PERMALINK

stepping back a bit from yesterday's claim that European pharma companies have been "decimated" by Europe's widespread adoption of universal healthcare.

Sullivan usually overstates his case, and almost always in histrionic language. I had to quit reading him. Even when he's right he's wrong (but not as bad as Ann Coulter in that regard.)

Posted by: MatthewRmarler on June 27, 2007 at 4:30 PM | PERMALINK

when I went to Switzerland a few years ago, I was struck by the lack of pharmaceutical commercials on TV (despite a strong phama industry in the country).

After reading this post I checked Pfizer's SEC reports and this was very interesting to me:
Research Development 7,599,000
Selling General and Administrative 15,589,000
(above number in thousands)
Their sales and marketing costs are twice thier R&D. I dont think there is a real fear that R&D will drop. THe fear is that if the govt clamps down, they wont be able to market new diseases for which they happen to have cures.

Posted by: yep on June 27, 2007 at 4:31 PM | PERMALINK

LMAO! I guess you guys just don't understand the difference between marketing and administration, and I can see it is a waste of time explaining it. Why don't you guys go read some SEC filings from any corporation in the United States and learn the difference.

The short of it is this: marketing comes no where close to the budgets of R&D. Companies must have administration (human resource departments, IT departments, etc) even if they have no marketing at all. And for marketing, this includes a sales force, and you people are complete and utter fools if you think a sales force is a waste.

And the other fallacy I see repeatedly is the one about academic research funded by the government providing most of the R&D of drug discovery and development. This is complete, unadulterated bullshit. If you don't believe me, then look at the yearly budgets of the NIH and the total R&D expenditures of just the 10 biggest pharmaceutical/biotech companies. And the 10 largest companies don't even constitute half of the private R&D expenditures.

On the content of Kevin's entry. Pushing down of the prices charged in the US does not necessarily mean that other countries will pay more, and it certainly does not mean that the changes will cancel out. We won't know the effect without doing the experiment.

Posted by: Yancey Ward on June 27, 2007 at 4:35 PM | PERMALINK

It's too bad you're not Senate Majority Leader, and I'm not Speaker of the House, counterintuitive, for I largely agree. Then again, I'm not a masochist, and have no reason to hate you, so I retract the remark.

What alternately amuses and irritates me about so many people who defend the current regime is they seem top have some sort of weird belief that the current level of IP protection came about through millions of decentralized decisions, and thus approximates the aggregate preference of our society, as opposed to it merely being the output of an extremely small number of people who managed to get 50% plus one vote in an election.

At the same time, a slow move towards allowing more drugs to be moved more quickly to such a decentralized marketplace, while observing the reaction in capital markets, would seem to be so much more wise, than adopting a system where the same small group of people are heavily involved in negotiating individual prices on drugs, under the current patent protection system.

and changesrates

Posted by: Will Allen on June 27, 2007 at 4:38 PM | PERMALINK

In these discussions about American prices and drug innovation is that the concept of elasticity never seems to come up. Embedded in Sullivan's assertion (and that of Kleiman) that reduced drug prices or demand in the US would cause drug companies to reduce new drug production is the assumption that drug companies demand for new drugs is at least fairly elastic, and that new drugs are a commodity with fairly high subsitutability (sp?). I think this assumption is at least debatable, and probably incorrect, given the huge profits that drug companies make. Even if you cut profits on a given new drug in half, what could the companies do with their capital that would generate a better yield? And no, they can't become oil companies.

In thinking about this a little more, I realize that the profitability of drugs is highly skewed, and that a few superstar drugs account for much of the profits of the drug companies. That may influence my thinking on this, but I think the general argument still stands.

Posted by: Jim H on June 27, 2007 at 4:42 PM | PERMALINK

Yancey Ward,

I understand perfectly well the difference between marketing and SG&A. FYI- SG&A on an SEC report does include marketing. As far as the General and administrative portions of the number, I do not believe that their costs of copiers, rent, salaries for HR and support staff would be the bulk of the 15.6 billion dollar number (maybe 600 million).

In the context that I was using the term I was referring not only to tv commercials, but also to the sales force as a marketing instrument (in the context that sales people market the product...duh).

Now, obviously they are a brilliant company and they are spending money on SG&A because it brings them a return in revenue and profit.

My observation was in the context that rather than being an R&D company that markets their products, they are obviously a sales company that does some R&D.

I appologize if I didnt connect the dots for you. I erroneously assumed that it the dots were close enough together that a mo-ron could draw that line.

Posted by: yep on June 27, 2007 at 4:46 PM | PERMALINK

Yancey Ward,

I understand perfectly well the difference between marketing and SG&A. FYI- SG&A on an SEC report does include marketing. As far as the General and administrative portions of the number, I do not believe that their costs of copiers, rent, salaries for HR and support staff would be the bulk of the 15.6 billion dollar number (maybe 600 million).

In the context that I was using the term I was referring not only to tv commercials, but also to the sales force as a marketing instrument (in the context that sales people market the product...duh).

Now, obviously they are a brilliant company and they are spending money on SG&A because it brings them a return in revenue and profit.

My observation was in the context that rather than being an R&D company that markets their products, they are obviously a sales company that does some R&D.

I appologize if I didnt connect the dots for you. I erroneously assumed that it the dots were close enough together that a mo-ron could draw that line.

Posted by: yep on June 27, 2007 at 4:47 PM | PERMALINK

Over the history of mankind war has been the prime driver of technological innovation.

Examples?
Posted by: Brojo

Computers, internet, Radar, airplanes and related technologies, nuke power, space technologies, GPS, ship technologies, emergency medicine techniques, WD-40, and so on.

Posted by: Red State Vol on June 27, 2007 at 4:54 PM | PERMALINK

Yep,

So, do the fricking analysis for Pfizer, for example. How big is the sales force compared to the other employees included in SGA?

However, before you start claiming that marketing is 2 times the R&D budget, educate yourself. Otherwise you look like a complete fool spreading misinformation.

Posted by: Yancey Ward on June 27, 2007 at 4:55 PM | PERMALINK

How could anyone write a little article like this without mentioning the effects of "generic" drugs and expect to be taken even the tiniest bit seriously?

Mind-boggling.

The comparison with the aerospace industry is especially amusing. Of course, copying an F16 is *exactly* the same as copying a blood pressure pill!

What a worthless waste of pixels.

Posted by: a on June 27, 2007 at 5:01 PM | PERMALINK

Jim H,

Let's say that profit was cut in half. Drug companies might look into other alternatives that generated higher profits rather than continuing a level of investment in R&D. You stated that they can't become oil companies, but this is an assertion that is clearly not true. Innumerable companies have changed their business profiles in the past, and many have evolved far beyond what they initially did, and usually for the same reason- they found more profitable avenues of investment.

Posted by: Yancey Ward on June 27, 2007 at 5:02 PM | PERMALINK

YW: I don't claim any special knowledge in this, and I took your suggestion and checked NIH vs. pharma industry research expenditures. They seem to be about equal. NIH reports $28B/yr as its research support. The figure for the pharma industry varies between $20B and $40B -- the former is an NSF estimate, the latter an estimate from an industry group.

Is this your understanding too? You seemd to imply that the companies spend much more than the NIH on research. The numbers I found would seem to support the notion of a subsidy of sorts -- assuming the results of all NIH research are available to the pharma companies free of royalties, which I'm not sure is true.

Posted by: JS on June 27, 2007 at 5:06 PM | PERMALINK

No atlatl?

Posted by: Brojo on June 27, 2007 at 5:08 PM | PERMALINK

I don't get where people thing the marketers will go away. No matter how the price is fixed, you still have to convince doctors to prescribe the drug and patients to ask for it. How is that going to change.

One issue I've always been curious about is how we can induce or motivate drug companies to pursue therapies that are difficult to patent or are not patentable. Two examples that spring to mind are DMSO as an agent, and Phage Therapies. Phage therapy in particular seems to hold promise as germs develop resistance to antibiotics, but I know they are difficult to patent due to the nature of the therapy (rapidly evolving phage used against rapidly evolving germ).

Posted by: Red State Volunteerer on June 27, 2007 at 5:08 PM | PERMALINK

No atlatl?
Posted by: Brojo

I forgot how to type it.

Posted by: Red State Volunteerer on June 27, 2007 at 5:09 PM | PERMALINK

Yancy,

I have never said that marketing is twice R&D. I said that (and backed it up with fact) SG&A is twice R&D.

You said: "So, do the fricking analysis for Pfizer, for example. How big is the sales force compared to the other employees included in SGA?"
You are the one looking like a fool because you cant provide the information you claim disproves my point.

You seem to be suggesting that Sales and Marketing are not the bulk of SG&A. PROVE IT!!! If you would like me to believe that I am wrong, I am open to that, but back it up with fact.

The fact is that marketing and sales is a HUGE part of the pharma business and a broader point that I tried to make but you did not address is that a lot of that marketing is in creating diseases in the public conciousness that they have a cure to.

restless leg syndrome? I am sure someone legitimately has this disease but the point of the commercials (whoever makes them, not Pfizer) is to convince people who may or may not have the disease to ask their doctor for a drug they dont need.

Posted by: yep on June 27, 2007 at 5:15 PM | PERMALINK

The fact is that marketing and sales is a HUGE part of the pharma business and a broader point that I tried to make but you did not address is that a lot of that marketing is in creating diseases in the public conciousness that they have a cure to.

I don't see where that sort of marketing would be changed by single payer.

Posted by: RSVol on June 27, 2007 at 5:18 PM | PERMALINK

JS,

You don't have to take NSF estimates. Just look up the top ten pharmaceutical companies income statements and fine the line item R&D expenditures. Pfizer, by itself, spent $7.5 billion on R&D in 2006. J&J spent $7.1 billion. With just two firms, I have already made it to half of the NIH budget. If I included the next 8 largest US pharmas, I get over $40 billion in R&D in 2006. And that will still be less than half of the total in the private sector since it ignores all of the smaller firms and the startups, many of which are not even publicly traded, but are privately held. The totals in the US alone are not even close.

Posted by: Yancey Ward on June 27, 2007 at 5:20 PM | PERMALINK
....I guess you guys just don't understand the difference between marketing and administration.........Wancey Yardat 4:35 PM
You could research pharmaceutical company costs

...Washington, D.C. - A new report by the consumer health organization Families USA refutes the pharmaceutical industry's claim that high and increasing drug prices are needed to sustain research and development. The report documents that drug companies are spending more than twice as much on marketing, advertising, and administration than they do on research and development; that drug company profits, which are higher than all other industries, exceed research and development expenditures; and that drug companies provide lavish compensation packages for their top executives.
The report comes on the heels of a recent Families USA analysis that found prices rose more than twice the rate of inflation last year for the 50 most-prescribed drugs to seniors.
Among the nine pharmaceutical companies examined in the report - Merck, Pfizer, Bristol-Myers Squibb, Pharmacia, Abbott Laboratories, American Home Products, Eli Lilly, Schering-Plough, and Allergan - all but one (Eli Lilly) spent more than twice as much on marketing, advertising, and administration than they did on research and development, and Lilly spent more than one and one-half times as much. Six out of the nine companies made more money in net profits than they spent on research and development last year...

You could ascertain how much they depend on universities or small labs

...At least a third of the drugs marketed by industry leaders were discovered by universities or small biotech companies, writes Angell, but they’re sold to the public at inflated prices...


Posted by: Mike on June 27, 2007 at 5:24 PM | PERMALINK

Yep,

My apologies. I was responding to the following quote by the commenter * who wrote the following:

average marketing expenditures aren't 2x R&D, they are closer to 3x.

When I wrote my first comment, I had not read all the way down the comments to they one you left just above my first one. The misunderstanding was my fault.

Posted by: Yancey Ward on June 27, 2007 at 5:24 PM | PERMALINK

While a drug is on patent, the producer is not operating on its supply curve for producing that drug. So arguments about profitability and comparisons with competitive industries are tricky.

Most research takes the trouble to separate promotion to MDs, direct promotion to consumers, sales force and detailing, and management expenses like HR. Here are two.

Promotion Of Prescription Drugs To Consumers Meredith B. Rosenthal , P H .D., Ernst R. Berndt , P H .D., Julie M. Donohue , B.A., Richard G. Frank , P H .D., Arnold M. Epstein , M.D. New England Journal Of Medicine, 346:498-505 February 14, 2002

Do Pharmaceutical Sales Respond to Scientific Evidence? Pierre Azoulay, Journal of Economics & Management Strategy Volume 11 Issue 4 Page 551-594, Winter 2002

Here is a good overview of patents and drugs and policy choices.
The Patents-Based Pharmaceutical Development Process Rationale, Problems, and Potential Reforms -H Barton, EJ Emanuel - 2005 - Journal of the Am Med Assoc (JAMA)

Posted by: counterintuitive on June 27, 2007 at 5:27 PM | PERMALINK

"I'm not saying that lower prices cause less demand, I'm saying that less money paid is less demand. Think about it."

Okay. I've thought about it, and your point about lower prices & less demand still doesn't wash. The thread is based on the premise that the US government should negotiate for lower prices. I have no idea where you came up with the idea that this has anything to do with a diminishment in Americans' appetite for prescription drugs.

Posted by: junebug on June 27, 2007 at 5:31 PM | PERMALINK

A study using 2002 figures claims the following for pharma research expenditures:

Industry: $49.4B
Federal Govt: $31.3B
University, local govt, and other non-profit: $11.2B

Again, this seems to suggest rough parity between industry and non-profit support.

Posted by: JS on June 27, 2007 at 5:37 PM | PERMALINK

Yep,

Fair enough. Pfizer employs over 100,000 people (go to pfizer.com). It had a sales force of 11,000 people in 2006 before if cut it by 20% (see http://www.usatoday.com/money/industries/health/2006-11-29-pfizer-cuts_x.htm).

Pfizer spent $2.6 billion on advertising in 2006 (see http://www.pharmexec.com/pharmexec/article/articleDetail.jsp?id=414223&ref=25).

Considering that Pfizer employs 12,000 in research, and wages and salaries of researchers is just a small fraction of the costs of R&D (I know, I work in R&D at a pharma company), there is no way that advertising and the sales force expenses even match the R&D budget of the company. In other words, SGA is overwhelmingly composed of management, support staff, their equipment, rent, other sundry expenses. This includes all of the emloyees other than the 12,000 in R&D.

The belief that marketing is twice or more the R&D budget is just simply not true, and it is probably fair to write that Pfizer spends more on marketing than any pharmaceutical company in the world.

Posted by: Yancey Ward on June 27, 2007 at 5:49 PM | PERMALINK

I've been making this argument for years, on both right-wing and left-wing blogs. The most interesting part of this exercise has been the fact that when I engage a pharma industry shill, the minute I start with the argument Kevin makes here the shill goes away.

Kevin is exactly right. For *far* too long, Big Pharma has been getting a free ride on the American consumer of medications that it doesn't get with European governments. It is long past time for that to stop. Instinctive lovers of free enterprise and competition should be at the head of the line to urge free and open markets in pharmaceutical goods.

Posted by: BlueStater on June 27, 2007 at 5:50 PM | PERMALINK

junebug--
If you used to be able to sell a product for $100, and you now can sell it for only $10, then that is a decrease in demand.

A decrease in demand is when fewer people want to buy a product and/or people are not willing to spend as much money on the product.

Until you factor in the price, the demand for BMWs is greater than the demand for Camrys even though more people buy Camrys than BMWs.

If you define demand strictly in terms of the number of people who want to buy a drug, which is simpler than the way it is usually defined, then demand for pharmaceuticals does not change much based on the price. If you charge two cents a bottle for blood thinners, most people still won't buy them. If you charge $100 a bottle for blood thinners, some people still will buy them.

Kevin claimed that if we lower prices, then other countries will raise them so nothing will happen. I claim that if we lower prices, then there will be less profit in new drugs, and the result will be smaller/fewer pharmaceutical companies and fewer new drugs. I think that slowing down research is worth it because we can't spend all our money on drugs.

Posted by: reino on June 27, 2007 at 6:02 PM | PERMALINK

"Fortunately for us, we can use the European patients to test out our products before we really know they are safe and effective. In essence, the Europeans are paying a price for their lower prices in that they are accepting a higher risk on the safety of their products. And we get a "free ride" for their willingness to do so."

Yes. Europe: home of the human lab rat. In other news, the FDA seems to come up short in warnings about Avandia in this matchup with EMEA:

http://www.eyeonfda.com/eye_on_fda/2007/05/compare_and_con.html

Posted by: contra_ fostert on June 27, 2007 at 6:03 PM | PERMALINK

JS,

I don't know where that researcher is getting her numbers, but they don't add up to what pharma/biotech companies reported in 2003 as R&D expenditures in their SEC filings, and this applies only to the publicly traded companies. I can get to over $50 billion spent in R&D in 2003 (the earliest year I can get income statements now) just going by the US based firms I can list easily off the top of my head (20 of them), and I am forgetting half of the ones I actually know. And I intentionally left out the ones that are incorporated outside the US, even though they often conduct the bulk of their research in the US, and this includes at least two of the 4 largest pharmaceutical firms in the world. In other words, I think it clear that the study you linked to is underestimating the amount of R&D spending by private firms by at least a factor of 2. And even if she is correct, it still supports my point that most R&D is not funded by the government.

Posted by: Yancey Ward on June 27, 2007 at 6:07 PM | PERMALINK

Supply and Demand states that if you charge less for a widget, more people will be likely to buy that widget. That means demand goes UP.

There are X people who need a particular drug. If you charge $100 for that drug, a certain number x-n, will be able to afford that drug. If you charge $10 for that drug, x-m (m

Also, if you provide the drug for free through Private Health Insurance - again, the price is immaterial; because your demand has shifted from the drug (x people must have drug to survive) to the Private Health Insurance (x people must have PHI to survive). So now, it's a question of how much you pay for Private Health Insurance.

Simple supply/demand reasoning does not apply to products that are necessities of life, and which are protected by government-granted monopolies (patents), and which are purchased through group medical insurance plans.

Posted by: osama_been_forgotten on June 27, 2007 at 6:26 PM | PERMALINK

Yea, Drum, but the key is to Shift the prices, not just to lower in the US. For example, if Congress just passed a law mandating that noone could sell drugs in the US at prices higher than the price in certain key non-US markets (Canada, the UK, France, Switzerland, Japan, etc), then that would shift the prices paid from US customers to Canadian and other customers.

Alternatively, placing just plain old price controls on the drugs here (without reference to other markets) would just reduce incentives for creating new drugs as there would be no shifting of the price.

Posted by: pnut on June 27, 2007 at 6:27 PM | PERMALINK

Yancy,

the 20% reduction included elimination of positions not yet hired for (makes wallstreet happy). and maybe you can shed some light on this, since you work in R&D in a pharma company - what do you thin the average employee costs in R&D?

Sales - average is probably close to 100k, plus car allowance plus a very expensive entertainment budget. not to mention all those marketing materials and free samples. I would assume that a budget for a sales person is around 200k (salary plus everything else). so lets assume the sales force is 10,000 - that makes an expense of around $2 bil). What this doesnt include is the support people for the sales people - travel coordinators, accounting associated with paying for the sales force - and thats why SG&A is all in one line on an SEC report. It also includes some very hefty executive packages (nothing wrong with that, but it clouds the numbers for our discussion).

I have to admit, though. running the numbers like this, makes me wonder something else. if 10k in sales and 11k in R&D, what do the other 80k people do? (are they manufacturing? or do they outsource it?)

At any rate - I dont know if this creates more questions than answers. It is a very complex issue.

By the way - in regards to your overall 40-60bil dollar quesiton of R&D expenses. You got close to 40 bil with the top companies but I would assume that they follow the 80-20 rule in that the top companies would account for 80% of the overall market.

Posted by: yep on June 27, 2007 at 6:33 PM | PERMALINK

"If you used to be able to sell a product for $100, and you now can sell it for only $10, then that is a decrease in demand."

If, by "a decrease in demand," you're obliquely referring to competition that results from the expiration of a patent, then, yes, "demand" for one particular brand of that product will decrease. If that was your point, that's one whale of an allusion.

"If you define demand strictly in terms of the number of people who want to buy a drug, which is simpler than the way it is usually defined, then demand for pharmaceuticals does not change much based on the price. If you charge two cents a bottle for blood thinners, most people still won't buy them. If you charge $100 a bottle for blood thinners, some people still will buy them."

You seem to be contradicting yourself. You classified a price reduction as a decrease in demand, but now you're saying that the demand for certain pharmaceuticals remains static, no matter the price.

"Kevin claimed that if we lower prices, then other countries will raise them so nothing will happen. I claim that if we lower prices, then there will be less profit in new drugs, and the result will be smaller/fewer pharmaceutical companies and fewer new drugs. I think that slowing down research is worth it because we can't spend all our money on drugs."

What this has to do with demand -- "simpler" version or no -- remains unclear. Color me interested in the more complicated version, though.

Posted by: junebug on June 27, 2007 at 6:45 PM | PERMALINK

On the topic of R&D vs. marketing expenditures, it's necessary to get below the summary line-item level to get an accurate picture. For example, "advertising" is only a small part of marketing. More important are sales costs (reps must be highly trained because of FDA regs) and sales discounts (often called "cost of sales," which BTW is different from "sales and marketing" costs).

Also, it's a mistake to count the salaries of all technical personnel as R&D. Many MDs at pharmacos, for example, spend a lot of their time on commercial analyses and positioning, rather than on the development side. And of course, when considering slaries of professionals generally -- apart from G&A -- many of them are purely commercial and have nothing to do with development.

As to advertising, expenditures have grown spectacularly recently, since direct-to-consumer was re-legalized, but the bulk of them tends to be on top-producing (aka "blockbuster") products, or on new products that companies hope will become blockbusters. (Journal ads directed at MDs, for example, are much cheaper than big public campaigns.) Public campaigns can easily exceed $100M per year, which ultimately exceeds the R&D cost of a drug by many-fold. (Of course, for every "blockbuster," there are several failed drugs, whose costs must be offset by the sales of successful ones, so it's not fair to consider the ratio of marketing to R&D for any one drug.)

Posted by: bleh on June 27, 2007 at 6:59 PM | PERMALINK

To say that the top ten pharmaceutical companies spend $Xbillion on R&D doesn't necessarily mean a lot. How much of that R&D goes into copycat products? I think a lot of it represents a mad rush to get into newly established markets started by some other innovator. Likewise, how much R&D goes into bringing to market marginally new or improved products the main purpose of which is to game the patent system and steer people away from generics?

Lastly, I think it's false to assume that all of those Pharma R&D billions is money well spent. Pharma R&D is about chasing profits. Primary research, like that done by the NIH, is more focused on making the most people as healthy as possible. If you doubled the NIH's budget do you think they would spend it on finding new ways to give old men hard-ons (Viagra, Cialis, Levitra, et al.)? Or would they do something really useful with it like address diabetes, or some other illness equally devastating and unprofitable to treat?

Posted by: Joe Bob on June 27, 2007 at 6:59 PM | PERMALINK

Having grown up in New Jersey, I know several people who used to work for large pharmaceutical companies. Without exception, they were significantly more highly compensated than their counterparts at other similarly sized corporations in other industries. And I'm not talking about sales reps--that's another story altogether.

Posted by: undecided on June 27, 2007 at 7:02 PM | PERMALINK

I was convinced by the pricing argument until the Economist reported on the rapidly increasing expenses for marketing. Such as the number of pharma reps doubling from 96 to 00 or so. Marketing budgets could shrink substantially in a more regulated market, and companies could still make tons.

Posted by: Wolf on June 27, 2007 at 7:06 PM | PERMALINK

Phrma produces its own estimates of R&D as share of sales. How do their own figures fit into peoples' arguments.

They used to report their own estimates of marketing and advertizing expenditures, separated out from administration, but not that I can see since 2003. Anyone can back order the old Industry Outlook reports.

http://www.phrma.org/

Marketing journals have published studies on the interaction of advertizing and detailing and sales rep expenditures and effectiveness of each and synergestic effects. Any good study or report should tell how how they define the expenditures and where the data come from -regardless of what interest group may do in their blurbs and handouts.

Posted by: counterintuitive on June 27, 2007 at 7:13 PM | PERMALINK

Sorry for the multiple posts, but a few other relevant facts that seem to be lacking:

-- The vast bulk of R&D expenditures on drugs occurs in the late phases (principally 3 and 2a) of "clinical development," which is the period in which candidate drugs, having been found safe for testing and apparently efficacious at treating the condition they're supposed to treat, are given to many, many patients, to establish that they are statistically significantly safe and efficacious. These trials involve hundreds, sometimes thousands, of patients, each of them under the care of a doctor, for the duration of treatment. If the condition being treated is a "chronic" (i.e., long-lasting) one, each patient can be in treatment for months, or even years. All the treatment is paid for by the pharmaco, and in addition it must all be documented analyzed. This is enormously expensive -- typically hundreds of millions of dollars for a single drug. These expenditures dwarf -- by orders of magnitude -- the expenditures on scientific research and early clinical development. It is thus incorrect to suggest that industry does not bear the large majority of the costs of drug development.

-- It is true that profit is an important consideration in drug development. Market size, competition, positioning, pricing, etc., all figure into internal deliberations about what projects to pursue. However, it is not correct to suggest that it is the only, or the paramount, consideration. Regulatory, ethical, and commercial forces drive efforts toward areas of "medical need," including ones without large sales or profit potential. In fact, the extreme position -- i.e., that medical need does not figure materially into decisions at all -- is demonstrably false. A candidate product that does not address a medical need will not be approved for use, and may not even receive intellectual property protection (a key consideration in the industry). Moreover, the ultimate buyers are MDs, and think what you may about pharmacos, the vast majority of MDs are not going to base their prescribing decisions on how much money flows to a pharmaco.

Posted by: bleh on June 27, 2007 at 7:20 PM | PERMALINK

The solution to price equality between markets is to allow arbitrage to occur. Since pharmaceuticals like to create artificial markets through geographic restrictions, this essentially means allowing free export and re-importation.

Posted by: MLE on June 27, 2007 at 7:45 PM | PERMALINK

Dump all the salesman and mass advertising. There is no valid added. A government run well-constructed website could provide a place where doctors could easily find all the information they need. Pharma could have significant input. A good product sells itself. Sales is all about personality and collateral benefits, not the product itself. Health care is no place for snake oil salesman.

Posted by: Michael7843853 G-O in 08! on June 27, 2007 at 7:51 PM | PERMALINK

I'm trying to make a simple point, though I'm not doing a good job.

When we pay less for drugs, they will be less profitable. When they become less profitable, less money will go into developing them.

As far as the other argument going on here about advertising, pharmaceutical advertising gets more criticism than other types because it is uglier. When you give away a lot of freebies to rich people, the public reacts negatively. When the value of products is supposed to be scientifically measurable, progressive types will argue that you should stick to the facts rather than buy free lunches for the office staff. I think that arguments against marketing should be based more on whether they lead to bad decisions by doctors rather than on the dollar amount spent.

Posted by: reino on June 27, 2007 at 7:52 PM | PERMALINK

This situation is even worse than most people realize.

Humana is the insurance corporation Walmart owns to provide Medicare Part D insurance. Humana pays the pharmacy 1/2 what the private consumer would pay for the same drug. They send you a nice monthly summary that shows the SRP, what they actually pay, and how much you pay as a Humana insured.

Now, you can bet that the drug companies and the pharmacies are not losing money dispensing at the Humana reimbursement levels. IOW, the drug companies could cut the SRP price to about half of what it is, and still be making money. Humana is very big, and Walmart pharmacies dispense at Humana prices, so you know the drug companies can't be taking a "loss leader" hit on all those prescriptions.

The average American who steps up to the counter and pays the regular retail price is paying about double what they should. That's a lot of money.

Posted by: serial catowner on June 27, 2007 at 7:56 PM | PERMALINK

Maybe I should make that clear- you as a private person cannot go to a Walmart pharmacy and get Humana prices. If you are insured by Humana you can. My point being that Walmart is not going to set up Humana in such a way that they lose money every time a Walmart pharmacy dispenses to a Humana insured.

Posted by: serial catowner on June 27, 2007 at 7:59 PM | PERMALINK

If we introduce national healthcare in American and start bargaining down the price of drugs, Big Pharma will no longer have an incentive to invest lots of money in R&D. Result: no new drugs.

What, instead of the company's president and his wife having enough money to be able to go to every single performance of every opera at their local venue, they'll only have enough money to go to the ones they actually have free time to go to, so they won't want to develop new drugs?

Posted by: Swan on June 27, 2007 at 8:02 PM | PERMALINK

Nobody ever seems to give the US taxpayer enough credit for the basic R&D done on major drugs before, by law, the research is handed over to Big Pharma. As to other countries, take Australia where the recent free trade agreement with the US requires the Australian committee that sets/ombuds prices for drugs used in the national health system to take on a representative of the US Big Pharma. A move that the US demanded but every Australian regrets.

Posted by: Lightflyer on June 27, 2007 at 8:22 PM | PERMALINK

YOu know, I've been to Africa. People there are poor. Really, really poor. I don't mind subsidizing drugs for them. Hell, millions of them don't even have shoes, it's the least I can do.

But Germany? Fuck Germany, man. I've been there. Not only are they fine, they have, like, six weeks of vacation or something. They're doing GREAT.

When the Germans start paying for my 6 week vacations, I'll think about paying for their drugs. But until then, screw that. It's time for Americans to start negotiating as a nation with the drug companies, so they don't keep making up their German losses by gouging Americans.

Posted by: anonymiss on June 27, 2007 at 8:36 PM | PERMALINK

If the debate is really "no new drugs" vs. "old drugs I cannot afford" then I see NO DEBATE. I'm getting drugs I can afford every time. Besides worrying about US Big Pharma is a WASTE of time. US Big Pharma is already a piece of dead meat if they cannot compete in a global market. The global market is ALREADY nations negotiating for drugs. The fact that we are not doing so in the US is just another indication of how NON-competitive the US is about health care on the global market.

US Big Pharma is whining about how tough it is out there? Suck it up or disappear. That's how the world works. Just don't take your country down with you because you're a bunch of greedy unpatriotic bastards.

Posted by: Glen on June 27, 2007 at 8:49 PM | PERMALINK

There are very few "new" drugs being developed. The vast majority are 1) either existing drugs with a molecule moved here or there so that the pharma company doesn't lose the profits from the original patent when it clears or 2) existing drugs that are now being marketed under a slightly different formula for a so-called "off-list" use. For instance, that drug they advertise on TV for Super Dupe Psychotic PMS? It's really Prozac.

Posted by: Susie from Philly on June 27, 2007 at 9:09 PM | PERMALINK

So today Andrew moves on to a different, and more common, conservative claim. With some coaching from Mark Kleiman, he argues that the real issue is drug innovation...

Yeah, that marked a real departure from his initial claim that as excerpted here yesterday:

The European health systems have, of course, been free-riding on private U.S. drug research for decades. Name a great new drug developed in Europe these past ten years.

As to the accuracy of that claim, I probably ought to update my talking points, but this was from 2002 and I doubt we have switched to peaches and cream since then:

I would like Europe to become a centre of excellence and a focus for pharmaceutical research once again," stated EU Research Commissioner Philippe Busquin today at the annual assembly of the European pharmaceutical industry (EFPIA) in Bruges. "

...In recent years, the competitiveness of EU pharmaceutical industry has decreased. The fact is that the US, with a bigger market for drugs, in particular those based on advances in bio-medicines, has overtaken the EU in total research investment. "The EU has been late in grasping the potential of biotechnology for the development of new drugs," says Commissioner Busquin. "But Europe is catching up:...

...Of course we cannot expect the pharmaceutical industry to invest as much in research as in the US, if the value of the EU market remains at only about half of that of the US, particularly if it does not seem to encourage the introduction of innovative drugs," adds Commissioner Busquin.

Golly, why does Europe not seem to promote new drug development? Gosh, these are tough questions... the article does mention price controls on new drugs and limited capital markets.

From the post:

So what happens if prices in America are gradually pushed down? Answer: prices everywhere else will be gradually pushed up. Americans will pay a bit less and Europeans will pay a bit more which suits me just fine and both profit levels and risk-adjusted returns will remain constant, just as basic economics demands.

Do tell. So right now the pharmaceutical companies have the pricing power to raise prices in Europe but choose not to since they are making plenty of money in the US; later, when the US is less profitable, they will tap their previously unused pricing power to jack up prices in Europe.

That was easy! As to why that are so forebearing today, I can't even begin to imagine - is it the prevailing lib fantasy that Evil Big Pharma is not really all that greedy or profit-maximizing after all? I had no idea.

I can't resist this exchange ending with Brojo at 4:15:

Over the history of mankind war has been the prime driver of technological innovation.

Examples?

A toughie! How about DARPA's initial funding of a secure communications network known today as... the internet! (With Al Gore's help.)

Geez, you really have to be wilfull or clueless to argue against the interplay of war and innovation.

Posted by: Tom Maguire on June 27, 2007 at 9:10 PM | PERMALINK

I am constantly amused by the slow-witted posters who think that the government should not interfere in the "free market" of drugs, in spite of the massive interference that is demonstrably needed even before we get to pricing (do we really need to go over the effects of caveat emptor on human lives again?), yet these same clowns are not only willing to tolerate, but actively encourage, the government murdering people far away.

So, government improvements in the lives of Americans? Bad ju-ju. Government arbitrarily taking the lives of foreigners? Sign me up for some of that.

These people deserve all the contempt rational people can dump on them.

Posted by: noel on June 27, 2007 at 9:12 PM | PERMALINK

with the risk-adjusted returns on equity

But big Pharma makes huges profit - far and above their "risk-adjustment".

Oh please, that is the same bull shit you get from big oil. OPEC and US oil cuts production to keep the price up. It's just that simple.

When Sara Lee move their frozen food production overseas, putting lots of US employees out of work, I didn't see a single drop in the price tag of Sara Lee goods in the frozen section of the store, nope, not one bit. BUT I'm sure Sara Lee's profit margin went up, and their stock must certainly look more attactive now too.

Boeing, for example, is essentially subsidized by the U.S. government because its high-profit defense business is more lucrative than its civilian business.

Boeing is subsidized because the US doesn't want a second class war plane. AND really Airbus is subsidized by France too. But too often I've noticed that US puts production over and above innovation. This is why leading technology KEEPS coming from outside the US.

Posted by: Me_again on June 27, 2007 at 9:28 PM | PERMALINK

It's worth noting that the reported sales/marketing expenses for the largest pharma companies (Glaxo, J&J, Pfizer until just recently, Bayer etc.) include marketing for non-prescription OTC meds. No national health plan proposal I've seen would touch out of pocket costs for branded aspirin or anti-histamines, so this is marketing money that will still be spent.

Posted by: DA on June 27, 2007 at 9:39 PM | PERMALINK

I am not sure why no one mentions this, but most drug R&D for innovative drugs is subsidized by underpaid graduate student labor in federally funded university labs.

It's been mentioned, but you'll never hear the pharma companies admit to it. In fact, they reap an enormous windfall from publicly funded basic research.

You won't hear it from darling Andy either. Hard to say whether that's because it is documented that Sullivan has taken pharma pay-offs, or because of his profound and often flaunted scientific ignorance. If I hadda guess, I'd say both corruption and stupidity.

Posted by: sglover on June 27, 2007 at 9:41 PM | PERMALINK

If you step back and look at the big picture the Pharma companies are playing all American for chumps. And conservative politicians and commentators are just aiding and abetting the con.

Wadda country you got there.
The Soprano's is the American Experience.
All about kicking points upstairs and greasing the right people; all in the name of God and for the children of tomorrow, etc...

Posted by: Northern Observer on June 27, 2007 at 10:46 PM | PERMALINK

This whole debate is bogus, and perpetrates the demonstrably false talking point that high prices support pharma's R&D. They do not. High prices support pharma's profits.

Pharma companies do not need the incentive of inflated American prices to pursue new drugs. All they need is a drug that will a) find a large market (i.e., no point in trying to cure bone cancer since not enough people get bone cancer), and b) cure nothing and require the user to use it forever.

Pharma doesn't do basic research. Hell, they don't really do any research, piggybacking on university and other research that is often tax-payer subsidized. I guess we get it coming and going.

Kevin, I know it's fun to play with Sully, but you've got to stop validating his wrong-headed premises.

Posted by: Jim Pharo on June 27, 2007 at 11:42 PM | PERMALINK

(Last comment; I promise.)

For the record, Jim Pharo is completely, risibly wrong.

Believe me, if a pharmaco could get hold of a cure for bone cancer, they'd jump at it like a ferret in heat. The scientists, the doctors, the marketeers, the financiers, they'd be so excited -- even over the 10+ years it would take to get it to the point of approval -- you'd have to crowbar them away from work. And the VCs would be trying to do just that, if only to buy out their positions.

It's unfortunate that viewpoints like Jim Pharo's are as widespread as apparently they are.

Posted by: bleh on June 28, 2007 at 12:23 AM | PERMALINK

I am not sure why no one mentions this, but most drug R&D for innovative drugs is subsidized by underpaid graduate student labor in federally funded university labs.

those unpaid graduate students go to work for Pharma when they graduate. Then they get paid a lot.

Posted by: MatthewRmarler on June 28, 2007 at 1:00 AM | PERMALINK

But the temporarty monopoly due to patent protection is a monopoly while it lasts, and this restricts output below what would be in a competitive market, all other things equal.

A part of the price for the patent is complete disclosure of the details; confidentiality prevails only while the patent application is being decided. Without patent protection, companies would keep their secrets (as Google does with its search engines) instead of publishing them. It is not clear what system actually puts information into the public domain faster, all things considered.

Posted by: MatthewRmarler on June 28, 2007 at 2:08 AM | PERMALINK

I work in the non-R&D portion of big Pharma. I can tell you that the bulk of the big money in SG&A goes to marketing, especially direct to consumer advertising. Sales forces are being cut back, but the money to continue the sales commissions, perks for physicians, all-expense-paid resort seminars, etc., comes from forcing more hours on the backs of employees, contracting out most support and IT work, and using contract research organizations (CROs) for most R&D. Big profits are necessary not for R&D but for multimillion$ retirement packages for ceos who send the stock into the toilet, buying small drug innovators, and merging with other behemoth pharma companies to exploit their successes. Waste and inefficiency abounds in every project I've seen, while limos and helicopters ferry the top execs from one useless meeting to another. ROI trumps R&D every time, though; if these guys could make a billion selling pills that make shit smell like lavender, believe me that's where the R&D bucks would go, and the commercials would be everywhere telling you why stool odor is a medical condition that requires treatment.

Posted by: Dano on June 28, 2007 at 8:53 AM | PERMALINK

On its face this sounds reasonable. Pharma companies are like anyone else: they invest in R&D to the extent that they can earn a return from the drugs they develop. If drug company profits are driven mostly by high-priced U.S. sales, then the rest of the world is getting a free R&D ride on our backs.

So what happens if prices in America are gradually pushed down? Answer: prices everywhere else will be gradually pushed up. Americans will pay a bit less and Europeans will pay a bit more — which suits me just fine — and both profit levels and risk-adjusted returns will remain constant, just as basic economics demands.

Alternatively, Pharma will concentrate their research dollars (which need to be spent years to decades before the profit from a given program of research is available) on therapeutic areas which are mostly likely to have very large markets of well-heeled consumers. We'll get more lifestyle drugs, and treatments for "diseases" like obesity.

Posted by: TW Andrews on June 28, 2007 at 9:12 AM | PERMALINK

The argument that government/non-profit funded R&D is roughly equal to commercial R&D overlooks the fact that most commercial R&D is geared to "novel" uses of old drugs, and slight changes in old drugs to make them "new".

I would argue that commercial R&D is largely non-innovative. I hold up Nexium as an example.

Posted by: Carol on June 28, 2007 at 9:57 AM | PERMALINK

I would assume that a budget for a sales person is around 200k (salary plus everything else). so lets assume the sales force is 10,000 - that makes an expense of around $2 bil).

The amount of money pumped into each pharmaceutical salesperson is insane. I know people who do it. The car (and gas), the phone, all the lunches and dinners (complete with hefty speaking fees for the doctors), the mountains of free samples, the training flights across the country (Pfizer's training HQ is in Rye, NY - all their sales people go there), the trips to the Carribeans for the top earners, etc.

Is this really necessary? I remain skeptical. I know someone whose job it is to try to convince doctors to prescribe expensive Celebrex instead of cheap generics like Naproxen. But if Celebrex was so much better than Naproxen it would easily be worth the price premium... the fact that Naproxen still gets prescribed at all is what you need to know. On the other hand nothing sells itself. But do we need that many NSAIDs in the world? Would the world be that much worse off if Celebrex (or Vioxx for that matter) never existed?

No doubt Pfizer is dropping lots of cash on the next NSAID formula to replace Celebrex when the patent runs out. If this is the R&D we are paying through the nose to support, I want out.

Posted by: Joshua on June 28, 2007 at 10:05 AM | PERMALINK

Yep,

Sorry, but I couldn't get back to you any earlier.

You asked how much an R&D employee costs a pharmaceutical company. I can give you idea based on my own costs. My company tells me that I cost about twice my gross money salary, which would be $270,000/yr. What is included in this cost? Salary, insurance, training, employer payroll taxes, etc. Are they including some costs from SGA when making this estimate? I don't know, this isn't an explicit accounting. I am in the upper end of research staff, so a safe estimate of the average R&D employee would likely be $150-200 K year. Sorry, but I can't be any more accurate than that.

As for the 80-20 rule, I don't know what "top companies" means in this regard. Does it mean the top 10% or the top 20%? Going down the list I find that even lower tier biotechs are adding $250 million a year in R&D, and these are extremely small companies, and I have no idea how many of these exist that I simply have never heard of. I do know that when I did the accounting for 2003 above, I was only picking companies that a lot of people would have heard of. For 2006, I got to 40 billion without getting all of the top 10. After that, the next 30 or so might add another 20-30 billion.

Posted by: Yancey Ward on June 28, 2007 at 10:22 AM | PERMALINK

"ROI trumps R&D every time, though; if these guys could make a billion selling pills that make shit smell like lavender, believe me that's where the R&D bucks would go, and the commercials would be everywhere telling you why stool odor is a medical condition that requires treatment."
Posted by: Dano on June 28, 2007 at 8:53 AM

Mad TV or Saturday Night Live should be able to come up with a really good parody related to that. :)

Posted by: Doc at the Radar Station on June 28, 2007 at 10:56 AM | PERMALINK

Yancey Ward -- I appreciate the info that you're bringing to this, but I wonder if the aggregate numbers you're citing really capture the type of research going on in public and industry labs? Isn't it fair to assume that basic research is largely funded by various government agencies? Granted, the line between applied and basic research may be a lot more fuzzy than it once was....

Posted by: sglover on June 28, 2007 at 12:09 PM | PERMALINK

One more thing about ' marketing' costs. These are not only for sales reps and samples but also for numerous TV ads pushing drugs to susceptible consumers. Did anyone ever read a description of a disease and not check yourself out for it? After you are exposed to all those TV spots, you feel like calling your PCP and begging for scripts. The other marketing costs are less obvious. Those are the costs of 'campaign contributions' which are nothing less than institutionalized bribes to congress. Big Pharma is Big Contributor
... * The drug industry spent $262 million on political influence in the 1999-2000 election cycle: $177 million on lobbying, $65 million on issue ads and $20 million on campaign contributions.
* The industry hired 625 different lobbyists last year to buttonhole lawmakers – or more than one lobbyist for every member of Congress....
* The bill for this team of lobbyists in 2000 alone: $92.3 million – a $7.2 million increase over what the industry spent for lobbying in 1999. Brand name drug companies spent $90.0 million, generic drug companies spent $2.3 million.
* The drug industry spent more (based on available data) on lobbying and other political persuasion than any other industry in 1999-2000....

Posted by: Mike on June 28, 2007 at 1:00 PM | PERMALINK

Most R&D expenses go to gaming the patent system: most of the money is spent, not on developing the actual version that goes to market, but on testing all the other major possible variants of the drug sufficiently to secure patent lockdown and prevent a competitor from developing a rival version.

Posted by: Kevin Carson on June 28, 2007 at 10:02 PM | PERMALINK

Tom McGuire

That's actually a well trodden myth re ARPANET and the military purpose thereof.

The scientists who designed it specifically were creating a scientific communication and information net, with peaceful purposes.

The defence story has become one of the most durable about the history of the net (I've spread it myself) but

The book to read is 'Where Wizards Stay up late' as below. It is immaculately well researched: the author spoke to all the key players.

www.amazon.com/Where-Wizards-Stay-Up-Late/dp/product-description/0684832674

Aerospace would be a better example of military driven innovation. Or working on accident trauma, as a close to home. Or radar. Or oceanography.

Posted by: Valuethinker on July 3, 2007 at 5:49 AM | PERMALINK




 

 

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