Competition Is Better Than Drug Price Controls Says Congressional Budget Office Again

Ronald Bailey | January 11, 2007

But House Democrats beg to differ. As part of their 100 hours, the House plans to pass legislation that would enable the federal government to negotiate Medicare Part D drug prices. The acting director of the Congressional Budget Office (CBO) replied to a query by Rep. John Dingell (D-Mich.): "The secretary would be unable to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained" by the plans under current law.

The CBO made the same arguments when Congress passed legislation authorizing the new health care subsidy. The pharmaceutical industry embraced Part D because it contained a clause forbidding the feds from "interfering" with private drug price negotiations. Now we are all learning that the feds can always change their minds. When will people ever understand that price controls are inevitable whenever the government gets involved in providing a "service"?

Disclosure: As far as I know I don't own any "Big Pharma" stocks--not enough upside potential. I do own small amounts of a number of innovative (one hopes) biomedical companies. Almost none have products on the market. My stockbrocker spouse will only have pity for you if you make investment decisions based on anything I invest in.

Comments

|1.11.07 @ 1:20PM|#

So, giving both parties in the transaction a say in what constitutes a fair price is "price control". Letting the seller set the price and forcing the buyer to purchase by law is the good libertarian position?

Sam Franklin|1.11.07 @ 1:28PM|#

So this pricing stuff doesn't affect the stock price of smaller pharma companies? You'll have to excuse my slowness, I hit my head when I fell out of the turnip truck just now.

|1.11.07 @ 1:29PM|#

Well, as long as the drug company is:
1. Using government funded research in drug development
2. Using government granted monopolies in patent processes to stop other companies from marketing the same drug

It hardly sounds like government is taking a hands off approach to it or promoting competition between drug companies. So government involvement is fine as long as it's the drug companies taking advantage of it. But it turns bad once someone else takes advantage of it.

Mike|1.11.07 @ 1:38PM|#

The real problem seems to be patents: how does a buyer effectively negotiate when there is only one supplier? Without competition there can be no free market.

Which is not to say eliminating patents would be better: without them the incentive to develop new drugs is significantly less.

But it really seems like you can *either* have free markets *or* you can have patents. But the two together seem irreconcilable.

Memnon|1.11.07 @ 1:41PM|#

Patents are weird and arbitrary, and many of us feel divided about their philosophical foundations. But come on "government funded research", how much does that help the pharmaceutical companies when compared to what they pay in taxes? And do you think the computer industry should be regulated because of government funded research in chemistry, physics and information science?

|1.11.07 @ 1:43PM|#

Sam,

By "this pricing stuff", I guess you mean allowing the gov. to negotiate a fair price? I suppose it might have a negative effect on smaller pharm companies-- but since when do libertarians advocate greater gov't spending for what amounts to corporate welfare?

Guy Montag|1.11.07 @ 1:45PM|#

Multiple large producers, with their economies of scale, competing to sell to multiple large purchasers sounds like a great way to go to me.

Just because it is intuitive does not make it wrong.

Gilbert Martin|1.11.07 @ 1:50PM|#

Without patent protection, no drug company would ever engange in any drug research & development.

It is extremely expense to get a new drug approved by the FDA. And a lot of expensive drug research doesn't pan out and the costs have to be written off.

Price controls will also reduce drug resarch. What incentive would a company have to engage in expensive research if it wouldn't have any chance of making a substantial profit for successfull drugs?

|1.11.07 @ 1:55PM|#

"Price controls will also reduce drug resarch. What incentive would a company have to engage in expensive research if it wouldn't have any chance of making a substantial profit for successfull drugs?"

None. But voters will never know the drugs that are never researched and thus won't miss them. They will however know all of the current drugs Congressman good for nothing got them at a "fair price", which is why I am not optimistic about this.

|1.11.07 @ 1:56PM|#

How is it a greater threat to free markets for the government, as a large buyer, to negotiate discounts with the seller, than for Wal-Mart to do the same thing?

|1.11.07 @ 1:58PM|#

I agree with bchurch, why shouldn't the government be able to negotiate like any big company? If, due to the fact that they are such a big purchaser, this lowers prices overall, then bully I say...Wal-mart could do the same (and does to a degree)

Guy Montag|1.11.07 @ 2:03PM|#

How is it a greater threat to free markets for the government, as a large buyer, to negotiate discounts with the seller, than for Wal-Mart to do the same thing?

I don't mind when the government does that, the same way they bargain for lots of other things.

My objection is to the description I have heard of the way the VA deals with drug companies. If it is false that they direct the price that the drug companies charge, then I withdraw my objection.

Swillfredo Pareto|1.11.07 @ 2:05PM|#

How is it a greater threat to free markets for the government, as a large buyer, to negotiate discounts with the seller, than for Wal-Mart to do the same thing?

[Draws deep breath preparing to explain some of the multitude of ways a private corporation differs from the Federal government, not the least of which is that Wal-Mart does not have a standing Army, now currently occupied in Iraq and elsewhere]...Naah, waste of time.

|1.11.07 @ 2:11PM|#

Swillfredo,

Another difference is that the government, unlike Walmart, is forced to purchase these prescription drugs by Medicare D. Either repeal Medicare D, or let the government negotiate-- to do neither is the worst of both worlds.

Also, as far as the CBO goes-- I'm glad that they've used their psychic powers to determine that negotiations are useless. I don't see why anyone would negotiate anything at all, when the CBO could just tell them what the fair price is and be done with it.

Josh|1.11.07 @ 2:15PM|#

My objection is to the description I have heard of the way the VA deals with drug companies. If it is false that they direct the price that the drug companies charge, then I withdraw my objection.

Precisely. This is exactly what they do when it comes to medical treatment, why expect a different outcome here? Drug companies are a bit different than hospitals though - they don't have to give you the medicine (at least, not right now). If 40% of the market gives you a low-ball offer - many will stop making drugs for old people. Some will get out of the drug business altogether. Very few will meet the government's price.

And then, the government will accuse those "greedy" drug companies of killing gomers, and they'll be forced to offer drugs at the government's price. Then the insurance companies will say "if they get away with it so can we," and drug research will bottom out. We'll have the same drugs in 200 years that we do now.

That's my guess.

thoreau|1.11.07 @ 2:17PM|#

Does anybody want to argue that a gov't program shouldn't seek out the lowest bidder, or try to get the best possible price from a supplier?

Yeah, anybody who wants to can find plenty of examples (representative examples, even!) of that principle being violated. But it's still better to have that as a goal than to not have it as a goal. What makes pharmaceuticals so radically different that they should be bought from the highest bidder?

Josh|1.11.07 @ 2:21PM|#

thoreau,

Another problem is that the purchaser (Guv'ment) doesn't actually give a shit about the consumer of the product (Old Fart). They're negotiating with other people's money for a product they won't use. All Guv'ment really cares about is how they can get more money.

It's as if I gave a stranger $50,000 to buy me a car, any car, and he could keep whatever is left over. I shouldn't expect much more than a Hot Wheels.

That's Guv'ment's mission when they're out buying a drug plan.

|1.11.07 @ 2:21PM|#

Ken

There is a difference between the government or any other purchaser negotiating a price and the government saying "you will charge THIS MUCH and no other price." [Actually, where there are comparable substitutes, corporations kind of like mandated prices as it eliminates any competitive pricing.]


For those who doubt that the market and the profit motive benefits the consumer, would they mind explaining why the vast majority of new drugs and medical are developed in the US?

"It shouldn't be like that.", the commonest answer of my Canadian compatriots, is not acceptable.

|1.11.07 @ 2:22PM|#

Josh,

"very few will meet the goverment's price"

Gee, the government might have to raise it's price to be able to find enough sellers. Maybe like some sort of back and forth dialogue to find a fair compromise price... what's the word for that again?

Sam Franklin|1.11.07 @ 2:23PM|#

It is extremely expense to get a new drug approved by the FDA.

Don't pharma's need to do safety testing anyway, whether there is an FDA or not?

I mean, if there is a drug with deadly side effects, then don't the pharma's need to know this info so that they can warn physicians and patients and thereby avoid getting bankrupted on defective product judgements in civil court?

I am no fan of the FDA, but I am not sure that there is a huge cost savings. A less regulated market might make safety testing somewhat more efficient and rational, but I don't think it eliminates the need for it.

Guy Montag|1.11.07 @ 2:28PM|#

Another difference is that the government, unlike Walmart, is forced to purchase these prescription drugs by Medicare D. Either repeal Medicare D, or let the government negotiate-- to do neither is the worst of both worlds.

While this is a common description it is a little inaccurate. The 'force' mentioned is an imposition that elected officials of the government imposed on an agency of the government.

Almost like saying "I only like Dodge so I am prohibited from buying GM".

|1.11.07 @ 2:34PM|#

the government...is forced to purchase these prescription drugs by Medicare D

The best laid plans, eh? According to the post the Federal government agreed that they would not interfere in price negotiations and would accept the prevailing price schedules. There is insufficient detail here to really examine the issue, but it looks like the CBO is not using psychic powers, it is predicting that the current prices negotiated by insurance companies are as good as the pharmaceutical companies are going to provide without coercion.

The Medicare Modernization Act is a bad idea anyway. The main two ways to save money on prescription drugs for Medicare recipients would be to either shift the costs over to the private insurance sector, which is at best a zero-sum game, or go in and strong-arm the pharmaceutical companies into lower accounting profits. Neither of those sound like a good thing. Unless you like the idea of higher insurance premiums, higher payroll taxes, and fewer and more expensive new drugs.

|1.11.07 @ 2:35PM|#

How is it a greater threat to free markets for the government, as a large buyer, to negotiate discounts with the seller, than for Wal-Mart to do the same thing?

Well, I'm not generally opposed to the idea, but let's be straight. Wal-Mart can't have inspectors from a few dozen agencies start showing up and looking intently for the smallest irregularities in the seller's operations if Wal-Mart doesn't like the seller's offer. Wal-Mart can't create new regulations that just happen to primarily affect (and impair) the seller so that they get the hint to lower their prices.

The threat may (and may usually) be worth the risk, but there is a threat there.

|1.11.07 @ 2:37PM|#

I don't think the problem with this is that the market forces of the government is going to bring down drug prices. The problem is that when the government is involved it brings in a whole slew of extra market influences.

If the government wants your drug and your not willing to sell it the government can bring extra market pressures to bear such as more rigorous testing requirements for your new drugs or even breaking patents. They are a government invention after all. If the government decides to revoke them who are you going to complain to?

|1.11.07 @ 2:40PM|#

How is it a greater threat to free markets for the government, as a large buyer, to negotiate discounts with the seller, than for Wal-Mart to do the same thing?

Please. Wal-Mart sells consumer goods and clothing. Take a guess at the relative cost of developing a prescription drug and those of blue jeans or lawnmowers.

Wal-Mart gets such good results out of its bulk-purchasing downward pressure on prices because its suppliers can still make money selling at those prices and don't have to reserve a significant portion of their revenues to spend on product development.

Repeat after me: "Engineered products and specialty chemicals are not widgets."

Josh|1.11.07 @ 2:41PM|#

Gee, the government might have to raise it's price to be able to find enough sellers. Maybe like some sort of back and forth dialogue to find a fair compromise price... what's the word for that again?

Wishful thinking, bchurch. Typically when the guv'ment doesn't get the price it wants, it mandates a price control. Again, this is what has happened with medical service under Medicare.

|1.11.07 @ 2:42PM|#

Guy,

To stay with your analogy: Sure you might be stupid to force yourself to buy a Dodge-- but on top of that, how does refusing to haggle with the dealer help things?

|1.11.07 @ 2:45PM|#

"Typically when the guv'ment doesn't get the price it wants, it mandates a price control."

So you are willing to pay higher taxes for drugs under Medicare D, on the chance the the government might, at some point in the future, set up a price control?

Josh|1.11.07 @ 2:48PM|#

So you are willing to pay higher taxes for drugs under Medicare D, on the chance the the government might, at some point in the future, set up a price control?

No. Thankfully, your premise is a false dichotomy.

|1.11.07 @ 2:51PM|#

"but it looks like the CBO is not using psychic powers, it is predicting that the current prices negotiated by insurance companies are as good as the pharmaceutical companies are going to provide without coercion."

Well, we needn't take the CBO's word for it (Aren't libertarians supposedly distrustful of top down gov't proclamations?). Luckily, there is a way to be sure about this-- actually let the government negotiate. The drug companies can always turn down prices they feel are unfair, and if the government does turn to coercion, then you can come back and scream bloody murder about it.

|1.11.07 @ 2:56PM|#

Josh,

Sorry if I've misread you-- my understanding was that you were against reforming Medicare D to allow government to negotiate its price, because there is a chance the government might set up price controls. Is your position something else? Or do you take issue with the premise that negotiations will lead to lower prices?

|1.11.07 @ 2:58PM|#

The drug companies can always turn down prices they feel are unfair, and if the government does turn to coercion, then you can come back and scream bloody murder about it.

It's not a matter of turning down unfair prices. If pressed hard enough, the pharma companies will agree to lower prices and simply stop developing new drugs--or move their research facilities overseas to some place more hospitable to innovation, like Estonia. Then we'll be stuck with the same medicines we have now, because a smart pharma company will wait until the patents for any new innovative drugs it develops overseas expire before marketing them in the U.S., if price controls are the rule over here.

Guy Montag|1.11.07 @ 2:59PM|#

To stay with your analogy: Sure you might be stupid to force yourself to buy a Dodge-- but on top of that, how does refusing to haggle with the dealer help things?

As you can plainly see from another post, I have no objection to bargaining for a better price/deal.

I was pointing out an inconstancy in a statement that one part of the government was 'forced' to do something, whn in fact it was a government choice to begin with.

Gilbert Martin|1.11.07 @ 3:03PM|#

"I am no fan of the FDA, but I am not sure that there is a huge cost savings. A less regulated market might make safety testing somewhat more efficient and rational, but I don't think it eliminates the need for it."

Who said anything about eliminating the FDA?

The point is that developing new drugs and proving they are both safe and effective is an expensive and riskly proposition - with or without an FDA. There will be many research efforts that don't pan out. Drug companies have to make enough off of the ones that do to cover the costs of the ones that don't AND make a decent profit, or they will not engage in new research.

Either removing or severly limiting patent protection or the government initiating mandatory price controls would eliminate the incentive to undertake that research.

Josh|1.11.07 @ 3:05PM|#

Sorry if I've misread you-- my understanding was that you were against reforming Medicare D to allow government to negotiate its price, because there is a chance the government might set up price controls.

I am against that, but not for taxes. I'm much more in favor of the thing going bankrupt and scrapped. Short of that, I'd like to see Medicare patients get their drug benefits slashed considerably.

Guy Montag|1.11.07 @ 3:06PM|#

Why we need all of these new drugs when the 'tussin is workin' fine is beyond me. Maybe a little Windex if the 'tussin didn't work.

|1.11.07 @ 3:13PM|#

DB,

There's a few issues in your post. First, the most logical cut for a company that wanted the contract would be advertising, sales, and administrative costs-- which already account for over twice the money spent on R&D at places like Pfizer. Also, as long as current US patent laws stay the way they are, pharma companies will be able to basically set their price to the feds until the patent expires after a few years. Once the patent expires, they may not be able to match the best price on a generic drug-- but that is a risk of R&D whether or not the government is involved. R&D is still extremely valuable, since new products under patent would be the only situation that the drug company could set it's price to a captive consumer (the guv).

Guy,

Sorry, didn't realize you were just making a narrow point there.

|1.11.07 @ 3:17PM|#

BCHURCH,

Where'd you get your data on the relative expenditures on advertising vs. R&D?

I wouldn't be very comfortable with the notion that the patent laws will not change, given other governments' tendencies to ignore such protections, especially in the case of pharmaceuticals.

When the government's involved in negotiations, the only potential captive is the non-governmental party.

|1.11.07 @ 3:25PM|#

db,

This article from business week online:

http://www.businessweek.com/magazine/content/05_09/b3922001_mz001.htm

According to the article, the 16.9 billion Pfizer spends on adminstrative and sales costs is twice as much as they spend on R&D. Not sure if that sales number includes the extra $3 billion they spend on advertising, but I imagine it includes their 38,000(!) salespeople, tasked with wining and dining doctors into prescribing their name brand meds.

I am equally wary that the government might abuse its negotiating power, eventually changing patent laws and setting up price controls. But, IMO, that fear does not justify accepting the current status quo. I'll be complaining to my Congressman if/when they abuse the negotiating power-- until then, I'd rather not continue to get reamed.

|1.11.07 @ 3:48PM|#

Another difference is that the government, unlike Walmart, is forced to purchase these prescription drugs by Medicare D.

Actually, the mandate runs in a different direction. I'm pretty sure that a pharmacist who participates in Medicare is required to take what Medicare pays for the drug.

Gilbert Martin|1.11.07 @ 4:08PM|#

"until then, I'd rather not continue to get reamed."

The government making you pay for some other folk's medicine just because they happened to have reached a certain age constitutes being "reamed" to begin with.

|1.11.07 @ 5:14PM|#

We may all be in agreement but confused over the facts. Here's what I think is going on with this issue from a factual basis (I may be wrong, and that may change my evaluation of it): the government, like many big companies, covers the cost of prescription drugs for those in the program (whether the government should do this at all is a seperate issue; and yes, the government has a standing army, blah, blah, but unless the government is using its 'right' to use force here to make companies give them drugs for a certain price then this is not the issue is it?). Now, should the government 'shop around' for the best price (that's what negotiation means here isn't it). I'm sure big companies use their buying power to get deals the average Joe (or Ken) could not get. I don't think there is anything wrong with that, does anyone? Now if so, would it be wrong for the government, when making its purchases, to use its large buying power to do the same?
If the CBO is right then the government is getting the best price they could from the market, buying power be damned so to speak. But I should think they should try...

|1.11.07 @ 8:44PM|#

The government making you pay for some other folk's medicine just because they happened to have reached a certain age constitutes being "reamed" to begin with.

Indeed, this is going to be the question of the future.

What is it about this magical age (65 at one time, 67 for me) that makes it so it's OK for an able-bodied person to quit working and sponge off of young people?

|1.11.07 @ 10:06PM|#

"Drug companies have to make enough off of the ones that do to cover the costs of the ones that don't AND make a decent profit, or they will not engage in new research."

Or maybe they'll have to think real hard and come up with a more efficient approach to marketing than carpet-bombing doctors with gewgaws and trinkets and freebies, and sending an unending string of ex-cheerleader sales reps for visits.

When a waiting room for a single physician contains more chit-chatting sales reps than actual patients, and there are more arriving, there is something very wrong.

I wonder what would happen if pharma firms all ended the marketing orgy, and tried marketing like, say, paper companies market to print shops.

For one, I'm pretty sure the patients would get better care, if they were prescribed the medicine they needed instead of the medicine with the most persistent or flashy marketing.

And more people would get older, cheaper drugs that work just as well as the newer, patent-protected, expensive drugs that are actively marketed.

|1.11.07 @ 10:07PM|#

" that makes it so it's OK for an able-bodied person to quit working and sponge off of young people?"

If you're 65 and fully 'able-bodied', you probably had a pretty easy life.

|1.11.07 @ 11:21PM|#

If you're 65 and fully 'able-bodied', you probably had a pretty easy life.

You're obviously not paying attention to trends.

70 is the new 40 and all.

Gilbert Martin|1.12.07 @ 9:04AM|#

"According to the article, the 16.9 billion Pfizer spends on adminstrative and sales costs is twice as much as they spend on R&D. Not sure if that sales number includes the extra $3 billion they spend on advertising, but I imagine it includes their 38,000(!) salespeople, tasked with wining and dining doctors into prescribing their name brand meds."

So what?

What's the ratio of research spending to admin and sales costs for General Electric or General Motors or Microsoft? I doubt the ratio is any higher for those companies.

There is nothing "special" about the drug industry that dictates they should spend less on admin and sales than any other industry.

The Big Three Killed My Baby|1.12.07 @ 10:01AM|#

What's the ratio of research spending to admin and sales costs for General Electric or General Motors or Microsoft? I doubt the ratio is any higher for those companies.

yeah, that is one problem with allowing antitrust. Companies get fat and lazy r & d wise (or, more likely, downright hostile to any sort of disruptive innovation). then naive libertrians are tricked into thing that is as good as it gets.

The Big Three Killed My Proofr|1.12.07 @ 10:02AM|#

"allowing antitrust" should be --allowing rampant antitrust violations--

Sam Franklin (expands on the B|1.12.07 @ 10:33AM|#

You will notice that Bailey has disclosed that he invests in smaller (read: more competitive) pharma companies. Maybe he can tell us what their R&D to fluff budget is.

I am guessing: lots of R&D. Cuz competition'll do that.

Gilbert Martin|1.12.07 @ 10:42AM|#

"Companies get fat and lazy r & d wise (or, more likely, downright hostile to any sort of disruptive innovation)."

So General Motors, General Electric and Microsift don't have any competition - and it's all due to "rampant anti-trust violations"?

You'll have to explain that one.

The FDA|1.12.07 @ 10:49AM|#

You'll have to explain that one.

Competition is not a binary quality. Nor is market power. O, and I didn't say they didn't have "any" competition.

Gilbert Martin|1.12.07 @ 10:53AM|#

You haven't proven that they're guility of "rampant anti-trust violations" either.

Sam franklin|1.12.07 @ 11:00AM|#

You haven't proven that they're guility of "rampant anti-trust violations" either.

I would do an anti-trust turorial here, and at great length over many threads if: (1) it wouldn't (understandably) cheese off the HnR management; and (2) anybody around here really cared.

Nobody is going to care about the details of antitrust law until they understand that concentrations of market power cause real harm to the economy. So that is where we are on this thd. Baby steps.

I can't tell you how sad it has made me that Larry has apparently sold out to MS. I hope he knows stuff I don't. he was my teacher on this stuf (well him and Areeda and SCOTUS).

|1.12.07 @ 11:04AM|#

You will notice that Bailey has disclosed that he invests in smaller (read: more competitive) pharma companies.

I see no reason that smaller should imply more competitive -- especially for pharma, where small companies have somewhere between zero and one product to market.

I am guessing: lots of R&D. Cuz competition'll do that.

No. Having zero products in an industry where getting a product to market takes seven years while you live off capital will do that.

Frankly, I think that seeing a higher marketing and sales budget as an indicator of not being competitive is pretty hilarious.

Gilbert Martin|1.12.07 @ 11:15AM|#

"Nobody is going to care about the details of antitrust law until they understand that concentrations of market power cause real harm to the economy."

Well I'm not a lawyer and I don't know a whole lot about the details of antitrust law but I'm guessing that if the violations of it were all that "rampant" the government would have already procescuted and convicted those involved.

Sam Franklin|1.12.07 @ 11:19AM|#

Frankly, I think that seeing a higher marketing and sales budget as an indicator of not being competitive is pretty hilarious.

we are talking about the ratio: R&D/Marketing. We are not talking about the absolute size of the marketing budgets, except in the sense that I am guessing that this ratio is bigger for smaller sized pharma corporations.

Sam Franklin|1.12.07 @ 11:28AM|#

Well I'm not a lawyer and I don't know a whole lot about the details of antitrust law but I'm guessing that if the violations of it were all that "rampant" the government would have already procescuted and convicted those involved.

This is pretty much the exact opposite of the reason that Milton Friedman flipped on antitrust law (pro to con) sometime in the middle of his career.

Gilbert Martin|1.12.07 @ 11:35AM|#

"we are talking about the ratio: R&D/Marketing"

And I have yet to see any evidence that the ratio is out of line with the same ratio in other industries - or any rationale as to why it should be.

"This is pretty much the exact opposite of the reason that Milton Friedman flipped on antitrust law (pro to con) sometime in the middle of his career."

Well that's very cute but there is still no proof that there are "rampant" antitrust violations going on throughout the land. Having a large market share in an industry is not defacto proof of an anti-trust violation.

|1.12.07 @ 11:46AM|#

we are talking about the ratio: R&D/Marketing. We are not talking about the absolute size of the marketing budgets, except in the sense that I am guessing that this ratio is bigger for smaller sized pharma corporations.

As well you should... but it has nothing to do with competition.

You are a drug company. When your R&D discovers a drug and patents it, you start a 17 year clock. R&D then works on that drug for 7 to 10 more years getting it through trials, into production, and past the FDA. Now you have 7 to 10 years where you can reap patent-protected profits, followed by an indeterminately long period where it is worth continuing to provide the drug under your brand in competition with generics.

The products in your portfolio that are in the second and third phases of this lifecycle consume nearly zero R&D money and nearly all of the marketing budget. Small companies have something between 0% and 33% of their products in the selling phases. Large companies have something between 66% and 90%.

Of course the large companies will have a greater marketing to R&D ratio! And if it has anything to do with competitiveness, it's because larger companies have to be more competitive since they are dealing with more drugs dealing with more indications with less patent protection.

Sam Franklin|1.12.07 @ 11:55AM|#

You are a drug company. When your R&D discovers a drug and patents it, you start a 17 year clock. R&D then works on that drug for 7 to 10 more years getting it through trials, into production, and past the FDA. Now you have 7 to 10 years where you can reap patent-protected profits, followed by an indeterminately long period where it is worth continuing to provide the drug under your brand in competition with generics.

This is not accurate.

IIRC, the deal in the US is that they give pharmaceuticals back a portion of the term. The law is complicated, but I think the upshot is that the drug pretty much gets 14 years no matter how it goes in the FDA.

Sam Franklin|1.12.07 @ 12:05PM|#

And I have yet to see any evidence that the ratio is out of line with the same ratio in other industries - or any rationale as to why it should be.

Okay: here is a rational: we would normally expect the demand for drugs to be highly inelastic. You buy insulin because you are diabetic. you don't buy insulin because the insulin maker gave your physician a golf bag. You don't buy insulin because you saw it on tv.

because the demand is inelastic, marketing would need to be minimal, at least when compared to something like pepsi or an SUV or a gun or a toy.

Of course, there are exceptions. Viagara seems pretty discretionary (altho I hear its fun). then again, if the r&d we are talking about is yielding products like Viagara, rather than insulin, then do we really want consumers of government funded drugs funding things like Viagara? when ppl here get all sanctimonious about the special importance of pharma r&d research, are they really talking about viagara?

the kind of drugs I care especially about need minimal marketing money. the drugs that need beaucoup marketing money, conversely, I could care less whether their r&d gets continued or not.

If we are going to make special concessions (eg, forbear from consolidating purchasing power) for the sake of r&d, then maybe they ought to deconsolidate the pharmas such that the viagara company is not the same as the insulin company.

|1.12.07 @ 12:16PM|#

The law is complicated, but I think the upshot is that the drug pretty much gets 14 years no matter how it goes in the FDA.

Gets up to 14 years.

Fair enough. Change "7 to 10 years" to "7 to 14 years" and now argue that larger drug companies' higher marketing budgets are due to their being less competitive than smaller companies.

Gilbert Martin|1.12.07 @ 1:39PM|#

"Okay: here is a rational: we would normally expect the demand for drugs to be highly inelastic."

Not necessarily. There are often mutliple drugs from different companies targeted toward the same diseases. They are in competition with each other.


"do we really want consumers of government funded drugs funding things like Viagara? "

A better question is why do we want the government to be paying for drugs for a selected segment of the population to begin with?


"the kind of drugs I care especially about need minimal marketing money. the drugs that need beaucoup marketing money, conversely, I could care less whether their r&d gets continued or not."

If you don't like the drug companies business model, I suggest you start your own drug company and see if you can compete rather than expecting that the government should force the drug industry to change to accomodate you personal preferences.

Sam Franklin|1.12.07 @ 1:54PM|#

Not necessarily. There are often mutliple drugs from different companies targeted toward the same diseases. They are in competition with each other.

R&D spending for me-too drugs, sure. but which way does that cut?

A better question is why do we want the government to be paying for drugs for a selected segment of the population to begin with?

I have said it before here at HnR, I will say it again: liquidate social security. However, I think the presumption on this thd is that gov't is going to be doing a lot of drug buying whether I like it or not. the question here is how big of a corporate welfare component this purchasing will have.


If you don't like the drug companies business model, I suggest you start your own drug company and see if you can compete rather than expecting that the government should force the drug industry to change to accomodate you personal preferences.

Market power is what makes this much less do-able than it should be. That is why market power is bad. That is why antitrust laws were put on the books in the 1st place. that is why the economy will improve when the executive and judicial branches start actually enforcing these laws again.

Gilbert Martin|1.12.07 @ 2:14PM|#

"when the executive and judicial branches start actually enforcing these laws again."

What proof do you have that they aren't enforcing those laws?

"R&D spending for me-too drugs, sure. but which way does that cut?"

Past drug consumers most likely paid for part of the intial R&D costs of some of those drugs that you "care about".

Revenue from drugs that treat certain diseases can and does fund research for new treatments for other diseases that currently have no treatment. It's not all about Viagra.

|1.12.07 @ 2:27PM|#

R&D spending for me-too drugs, sure. but which way does that cut?

I don't know. Sometimes you decry the lack of competition, but here you seem to decry the increase of competition.

I am sorry that the pharmaceutical industry doesn't match your preconceptions about how economies work. But then, what industry does?

|1.12.07 @ 2:40PM|#

Can't speak for others, but my original purpose in posting the ratio of sales budget to R&D was to deflect concerns that government haggling would necessarily force big pharma to cut R&D. In fact, as those number show, a big drug company looking for a gov't contract would be much smarter, and have much more to gain by cutting administrative and sales than they would R&D. After all, how much advertising does Lockheed-Martin need to do?

This does not amount to the govt "forcing" drug companies to cut marketing. Pfizer would be perfectly free to keep it's bloated sales dept should it so choose. But it would be a competitive disadvantage if it were going after government money vs. another large company with no sales budget. They could always choose to not pursue gov't money and continue bribing doctors the old fashioned way, if they really want keep their big marketing budget.

My impression from this debate is that there are libertarians who actually hate and distrust the government more than they believe in market principles. That the very presence of the government as a customer (by itself, and without coercion) somehow means that the principles behind market forces and competition are no longer valid. It's a corporate twist on the liberal welfare argument-- how will those poor, poor drug companies get by if they actually have to compete with each other for a contract?

There's just no substitute to hearing libertarians of all people complain about how the market just wouldn't be fair to the poor small drug companies, and that they need an artificial advantage when it comes to government money.

|1.12.07 @ 2:45PM|#

That the very presence of the government as a customer (by itself, and without coercion) somehow means that the principles behind market forces and competition are no longer valid.

For the record, I'm of the "Medicare should be able to negotiate prices" crowd.

Sam Franklin|1.12.07 @ 2:59PM|#

I don't know. Sometimes you decry the lack of competition, but here you seem to decry the increase of competition.

What I like is markets where the buyers and sellers are roughly equal in number, size and power. I explained at length how this applies to the (sadly inevitable) issue of gov't purchases of drugs in a previous thd on the subject earlier this week here at HnR.

Now some people on that thd and this one seem to be arguing that the gov't should not consolidate its purchasing power to the extent that I would prefer because pharma R&D is so special and important.

the point about me too drugs is a minor one, which is that not all pharma R&D is earth shatteringly important. As I stated above, some (like Viagara research) is even less important than me too drugs. So really, i am arguing that because pharma research is not, on balance, as important as the shills would have u believe, that the government should not hesitate to consolidate its purchasing power to the optimal extent from a balanced market power perspective (which optimal extent I explained in that previous thd).

I am sorry that the pharmaceutical industry doesn't match your preconceptions about how economies work. But then, what industry does?

Those that did business in the US between 1890 and 1980.

Gilbert Martin|1.12.07 @ 3:08PM|#

"That the very presence of the government as a customer (by itself, and without coercion) somehow means that the principles behind market forces and competition are no longer valid."

LOL

The government is not a customer "by itself and wihout coercion". It has coerced some people into paying taxes to fiance the payment of consumption of drugs by another group of people. That is a distortion of market forces from the get go.

A factor of the demand for drugs (or anything else) is the ability of the potential customer to pay. The dynamics of the drugs on the market and drug development would undoubtedly be quite different if there were no government involvement at all and drugs were simply treated as another consumer commodity.

|1.12.07 @ 3:39PM|#

"The government is not a customer "by itself and wihout coercion". It has coerced some people into paying taxes to fiance the payment of consumption of drugs by another group of people. That is a distortion of market forces from the get go."

That has nothing to do with the transaction between gov't buyers and pharm/insurance companies. And even if it did, how does distorting market forces even further (by forbidding the gov't to seek the lowest bidder) correct this in any way? I still don't see an argument anywhere in there against allowing government negotiations.

"A factor of the demand for drugs (or anything else) is the ability of the potential customer to pay. The dynamics of the drugs on the market and drug development would undoubtedly be quite different if there were no government involvement at all and drugs were simply treated as another consumer commodity."

Yeah, this system has worked great so far. Checked your insurance premiums lately? By the way, it's evidently insane to talk about "demand" for life saving drugs to be a function of affordability. You know lots of people saying, "That price is outrageous! Take me to the morgue, immediately!"?

Kevin Carson|1.13.07 @ 2:33AM|#

Gilbert Martin,

Most of Big Pharma's R&D expenditure is directed, not to developing fundamentally new drugs, but to jiggering around with the formulas of existing drugs just enough to allow repatenting when the old patents are about to expire. That is, most of their development budget goes into "me, too" drugs rather than new molecular entities.

And most of the expense of developing even fundamentally new drugs is not the cost of developing the version that actually winds up being sold, but doing enough R&D on all the potential major variants of the drug to secure patent lockdown on all of them.

In other words, most of the "high cost of developing new drugs" is actually the cost of gaming the patent system.

News flash: when the government creates a honey pot by enforcing a special form of monopoly privilege, business gravitates toward the honey pot. It's called rent-seeking.

"The High Cost of Developing Drugs"

Sam Franklin|1.13.07 @ 11:34AM|#

. . . gaming the patent system.

There are patent games that do on with drugs. However, the fed. Cir. appellate court has been pretty good on some of these games, such as metabolite patenting, dosage patenting and drug cocktail patenting (on this last one see the Richardson-Vicks case, one of my favorites of the past decade).

If drug companies are acquiescing to each other's invalidatable patents on a routine basis, that, to me, is more a sign of consolidation in the private sector than a problem with the patent law. We can't force these companies to bring the suits neccessary to clear out the bad patents. If they don't want to do it, they don't want to do it.

More troubling to me is this idea that companies are getting new patents by jiggering formulas. Well, I am not so much disturbed by the idea that this may be happening, so much as I am disturbed that anyone would think this is a bad thing. Why is jiggering the chemical formulas a good thing?

First of all, that is what drug design is all about. Changing the chemical formula sometimes leads to substantively better results. we want scientists to find all the formulas that work and compare them. This kind of optimization is not trivial -- it is difficult, but sometimes very useful n-- useful in that "special and important drugs" way that we all respect.

Second, jiggering the formulas gives competitors a chance to get into a market they couldn't otherwise get into. If the original patent by company A lists the first formula discovered, then Company A has that market sewn up. However, if company B discovers a variant that works better (and patents it) and company c finds a variant that works better (and patents it), then you suddenly have 3 competitors in the market, rather than just one. In other words, competition can exist even in the realm of a patented pharmaceutical, so long as multiple patentable chemical formulas accomplish substantially the same time. Now pharma companies may not really act in this manner in reality. the question is why. (and you probably know by now what I think the why is.)

Robert|1.14.07 @ 6:09PM|#

"My impression from this debate is that there are libertarians who actually hate and distrust the government more than they believe in market principles."

I've noticed that a lot. They're more anti-gov't than pro-freedom. In most cases it comes to the same thing, but in some cases not.