Letters

From the July 2001 issue

(Page 3 of 5)

Suppose my gross profit for the year X is $10,000. If I spend $8,000 that year to earn the $10,000, and can write that entire amount off as current expenses, then my net profit is $2,000. But if I depreciate $2,000 of my expenses over five years, then I can only write off a fifth of that $2,000 in year X, i.e., $400 of it. My books will then show a net profit of $3,600. It does not seem to be the case that I or anyone else would show a higher profit after subtracting an expense in its entirety.

This isn't the only instance of baffling logic in the piece. Drug firms argue that higher profits than in most enterprises (9 percent to their 5 percent) is justified given the start-up costs, and that important among these is the pursuit of possible products down what often prove to be blind alleys. But it is precisely at this stage in the game, Bailey points out, that federal subsidies most come into play. By funding the research, the government steps in to shoulder the risk. You might argue that government shouldn't be in the business of doing this, but so long as public money serves this function, it is difficult to see how the drug companies can make a case for higher profits to offset higher risk.

Mr. Bailey approvingly quotes Frank Lichtenberg's assertion that his study of newer versus older drugs showed that newer on the whole meant better, lowering "mortality, morbidity, and total medical expenditure." But it is not at all clear how Prof. Lichtenberg gets from those conclusions to his remarkably counterintuitive one with which Mr. Bailey follows it: that using generic drugs instead of brand-name ones "would increase total treatment costs" and lead to "worse outcomes." Any generic drug my physician may authorize is by definition identical to the brand-name drug for which it is a substitute.

The first line of defense against junk science is peer review by scientifically informed people. When dealing with cutting-edge technology issues where there are many opportunities for confusion even without anyone deliberately creating it, may we trust Mr. Bailey to see clearly and report well? Alas, the epistemological heffalump-traps in his drug article do not assure me that this will be so.

Nick Humez
Montclair State University
Upper Montclair, NJ

After enjoying REASON for over 20 years, I am finally moved to write. I liked "God-damn the Pusher Man": More consumers and voters need to understand how drugs reduce overall medical costs.

I do have a couple of concerns. First, Bailey claims that if pharmaceutical companies depreciated their research and development expenditures, their reported annual profits would decline. Over the longer term, I do not see how this would make any difference, other than to smooth out the impact of changes in R&D funding.

My second concern regards his arguments supporting the 20 percent profit level (or 9 percent, if he's right about the above). Drug discovery and development may well be very risky. But if the large drug companies are consistently making a 20 percent annual profit, it would seem they have figured out how to take the risk out if it. In a free market, this should lead to increased competition, unless there is some barrier to entry. Maybe it's size; one needs to be able to fund many projects and have a large, specialized R&D division to find a winner that pays for all the effort. Bailey quotes a figure of $300 million to $500 million to bring a single drug to market. Does that include a share of the R&D spent on products that never made it? Would a new company need to spend many times that to produce one marketable product?

Bailey quotes George Whitesides as saying, "Start-ups take 50 percent of the risk out of a product by taking it up to clinical trials." For every start-up that gets this far, there must be many that fail. Too bad Mr. Bailey does not focus on this aspect. It would be interesting to calculate the overall industry profit level after including all of the costs of the start-ups.

Jim McIntosh
Toronto, Ontario

Ronald Bailey makes a common error. Nowhere in the Hippocratic Oath does the injunction "First, do no harm" appear, nor is there any language that translates simply into that advice. It is certainly an admirable approach, and doctors (to say nothing of legislators) should heed it, but it's not in the oath.

Dan Karlan
Waldwick, NJ

Ronald Bailey replies: Some drugs do cure disease. Stomach acid-blockers combined with antibiotics can eliminate ulcers. Many future medicines will be targeted toward correcting underlying physical maladies. The Institute of Medicine study, To Err Is Human: Building a Safer Health System, estimated that as many as 98,000 people die annually from medical errors that occur in hospitals. While tragic, these errors are hardly the fault of drug companies. As for the alleged numbers from The New England Journal of Medicine, an editor from the journal assured me that they have published no such study. Dr. Krieger may be misquoting a line found on many alternative medicine Web sites, attributed to NEJM: "During 1983 to 1992, between 90,000 and 110,000 Americans died from reactions to prescription drugs." Note that it's 110,000 per decade, not per year. Finally, I agree with Dr. Krieger at least in that patients should be able to choose whatever therapies they want.

With regard to Xalatan, economist Frank Lichtenberg was only addressing the impact of R&D subsidies on the govern-ment's budget. In terms of the govern-ment's bottom line, taxpayers who do not use Xalatan were not ripped off by the R&D subsidy, and those who do use the drug presumably benefited enough to make any taxes included in the drug's cost >worthwhile. Mr. Jones raises a reasonable question as to whether such subsidies are justified. Certainly, corporate income taxes should be abolished. As for medical marijuana, I'm all for it -- and tax-free too.

The confusion over the calculation of drug company profits arises from my colloquial use of the term profit margin. Expensing R&D would indeed lower profits and profit margins, but this is not necessarily true for profit rates -- returns on investment -- which are generally considered to be the best figures to compare profits across industries.

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