Drugs Bring on Paranoia

The stock market is up slightly in response to election results, but drug company investors are freaking out. The simple, semi-paranoid explanation is that Dems are more likely to force lower drug prices with soft price caps, demands for cheap generics, and permission for more importation from Canada. This means lower profits in the short term, less R&D in the long term.

Stolen, intact, from Greg Mankiw. 

Comments

Jeff P | November 9, 2006, 2:28pm | #

That's okay. The economy will be prescribed a daily dose of Relaxadryl, the blood pressure/social anxiety/restless capital drug that makes you feel good.

(side effects may include vomiting, wholesale relocation of R&D facilities to India, nannystate demands for safety caps on everything, all painkillers going Schedule A, mandatory vaccines, and a ban on on-air drug advertising sometime before Superbowl Sunday.)

Sam Franklin | November 9, 2006, 2:32pm | #

The more complicated explanation is that these stocks were overpriced relative to the economic benefits they are likely to deliver over the next decade or so because of scientific and technological difficulties, and that the market is adjusting rationally to this new predictive information.

Another possibility is that the pharmaceutical market is top heavy and uncompetitive, like a trust, and that Elliot Spitzer just became a governor.

So many possibilities. Like John Wetton sed, only time will tell.

The Libertarian Guy | November 9, 2006, 2:35pm | #

Now that Pelosi and her gang of thieves is in control, look for the long-dessicated corpse of "Hillarycare" to be re-animated, zombie-style.

God help us.

metalgrid | November 9, 2006, 2:38pm | #

And I'm still waiting for pharmaceutical companies to give us refunds for all our tax funded research they use in making new drugs.

T.W.L. | November 9, 2006, 2:45pm | #

Metalgrid-

They gave you that "refund" by not charging you to cover those costs in the first place.

Hunter | November 9, 2006, 2:48pm | #

Or it could be the Dem's biggest financial supporters are the trial lawyers.

Oh and metalgrid, you need to get a bit more educated about how all that tax funded research works. It doesn't go to the drug companies for the most part, and if you don't like taxes funding research you should have voted republican.

metalgrid | November 9, 2006, 2:50pm | #

They gave you that "refund" by not charging you to cover those costs in the first place.

Ah, so in other words, since I haven't used more than aspirin or ibuprofen through 40+ years of my life, I haven't made back those taxes while the sick people have. Sounds like socialism to me - charge everyone for R&D for the benefit of a few.

joe | November 9, 2006, 2:53pm | #

Or maybe it has something to do with pharma stocks becoming overpriced by the Republican Medicaire Part D bill, which directed the government to purchase large quantities of drugs, and forbade it from negotiating price like any other bulk buyer.

If you're so concerned about a loss of stock value from this, Ms. Ward, what do you propose we do about all the hospitals, private HMOs, and other insitutions that engage in profit-lowering, R&D squelching price negotiations when they make bulk purchases? Or it it only when buyers are spending our tax dollars on Big Pharma's products that you object to negotiating to get the best deal?

glenn | November 9, 2006, 3:01pm | #

Haha, pushing generics is the best way to get drug companies working on novel R&D rather than marketing "me toos".

Andrew Ian Dodge | November 9, 2006, 3:02pm | #

Well a bit of a dip in the stock market thanks to the Democrats might focus the mind of all the stay-at-homes so they get off their arse next time and vote.

Jon H | November 9, 2006, 3:05pm | #

Yeah, I figure Pfizer and the rest will cut back on the R&D, until all their profitable drugs go out of patent protection, then will just give up and shut down.

Or, maybe they'll adapt to slimmer profit margins; plenty of industries manage to exist and even thrive on comparatively anorexic profit margins.

Jason Ligon | November 9, 2006, 3:08pm | #

I can't think of too many ways of straight out attacking pharma's revenue line that makes me happy. The dollars for R&D are the dollars for R&D. It all has to come out of revenue.

Tell me where the replacement dollars for R&D will come from, and I might reconsider.

Lamar | November 9, 2006, 3:12pm | #

"They gave you that "refund" by not charging you to cover those costs in the first place."

Didn't the Republicans just get smacked for being disingenuous and believing their own political justifications? Why is it that you are willing to say the above-quoted crap even though the drug companies have said over and over and over that the reason drug prices in the United States are so relatively high is because they have to recover their R&D costs? To respond to metalgrid's post by asserting that the drug companies didn't "charge" for the R&D costs in the first place goes against the admitted strategy of the industry.

Sam Franklin | November 9, 2006, 3:29pm | #

Tell me where the replacement dollars for R&D will come from, and I might reconsider.

The non-R&D portions of the pharmaceutical company's budget. That was easy.

wingnutx | November 9, 2006, 3:30pm | #

Thank god I just sold all my Roritor stock.

Anyone got a stummies?

fyodor | November 9, 2006, 3:43pm | #

Lamar,

Sometimes things are not all one way or all the other way but rather a combination of the two.

Prices are related to costs in any industry. One would assume that if there were less government funded research, drug prices would be even higher than they already are. The notion that government research likely acts to bring down prices does not somehow mean that drug prices cannot in any way be explained by R&D costs. Put another way, the two ideas are not mutually exclusive, unless you for some reason think drug prices are as high as they possibly could go.

All that said, for the purposes of public policy, the better way of looking at the relationship between price and cost is that higher drug prices are a carrot for more R&D, at least when the two are economically linked. Again, this is NOT somehow contradicted by the claim that government research brings down prices. (Note: whether government research brings down prices in a manner that's worth the taxation necessary for it is something that I and most folks here would doubt.)

Daniel Haszard | November 9, 2006, 3:44pm | #

My issue is Zyprexa which is only FDA approved for schizophrenia (.5-1% of pop) and some bipolar (2% pop) and then an even smaller percentage of theses two groups.
So how does Zyprexa get to be the 7th largest drug sale in the world?

Eli Lilly is in deep trouble for using their drug reps to 'encourage' doctors to write zyprexa for non-FDA approved 'off label' uses.

The drug causes increased diabetes risk,and medicare picks up all the expensive fallout.There are now 7 states (and counting) going after Lilly for fraud and restitution.

--
Daniel Haszard

Chris | November 9, 2006, 3:48pm | #

Lamar | November 9, 2006, 3:12pm | #

"They gave you that "refund" by not charging you to cover those costs in the first place."

Didn't the Republicans just get smacked for being disingenuous and believing their own political justifications? Why is it that you are willing to say the above-quoted crap even though the drug companies have said over and over and over that the reason drug prices in the United States are so relatively high is because they have to recover their R&D costs? To respond to metalgrid's post by asserting that the drug companies didn't "charge" for the R&D costs in the first place goes against the admitted strategy of the industry.

I thought they got smacked for Iraq after people figured out that fighting a war is--God forbid--difficult.

I believe that TWL is referring to the R&D costs paid by government research. That is the logical way to interpret his statement. Of course logically interpreting his statement means that you can't continue the rant against the drug companies. You need to work on your straw men for future arguments.

Perhaps a review of Reason's April 2001 article "Goddam the Pusher Man" may help shed some light on the industry, including the extent of government funding, and how R&D money for specific products comes back to the government.

Lamar | November 9, 2006, 3:50pm | #

fyodor:
I have no problem with your post or how the economics of R&D-dependent industries work. I do have a problem with people saying any old bullshit to win an argument.

fyodor | November 9, 2006, 3:51pm | #

Jon H,

You seem to be engaging in all or nothing thinking. No one is claiming that the policies cited will bring R&D to zero. But the less return on R&D that can be expected, the less of it there will be. The way this works is that drugs that seem like relatively sure winners will continue to be researched, while those that seem more iffy (those on the (drum roll, please) MARGIN), will not be. Regardless of whether drug companies are saints or ogres, the possibility that R&D could be cut back in response to such policies is a realistic one and one that folks may want to consider before enacting such policies.

Lamar | November 9, 2006, 3:54pm | #

"I thought they got smacked for Iraq after people figured out that fighting a war is--God forbid--difficult."
Or perhaps there was a teensy weensy issue about shifting war rationales and lies about intelligence.....otherwise, there would be equal war weariness about Afghanistan. Chris, you think I'm ranting against the drug companies, but I'm not. And, by the way, the exit polls said corruption was the issue. Explain away...

fyodor | November 9, 2006, 3:54pm | #

Lamar,

Well for all I know, maybe you're right about TWL's motivations, I don't have such good mind reading abilities. But I see nothing inherently bullshitty about his comment, in and of itself. (It may be oversimplified, but in the context of this thread, ie, who wants to read a textbook, I think that's perfectly justified.)

carrick | November 9, 2006, 4:02pm | #

Gross profits are meaningless. Does anyone have links to actual ROS/ROI on pharmaceutical companies?

Sam Franklin | November 9, 2006, 4:03pm | #

But the less return on R&D that can be expected, the less of it there will be.

Depends on what other investment opportuniies there are. If pharmaceutical companies are making returns well above market, then investment in R&D may be less elastic than you think.

If there are gross inefficiencies in the way large pharmaceutical companies operate, then this may also make pharma R&D somewhat inelastic with respect to the stock prices at the margin we are discussing in this thd.

Jon H | November 9, 2006, 4:07pm | #

fyodor: "Prices are related to costs in any industry."

Related yes. But things can be tightly related, loosely related, closely related, or distantly related. The relations aren't fixed and inflexible.

"The way this works is that drugs that seem like relatively sure winners will continue to be researched, while those that seem more iffy (those on the (drum roll, please) MARGIN), will not be. "

They're *already* doing that, though. So it seems to me the solution to that problem is orthogonal to this issue.

fyodor | November 9, 2006, 4:10pm | #

investment in R&D may be less elastic than you think

Unless the elasticity is zero, unless there is NO relationship between expected return and incremental investment, which isn't bloody likely, my statement stands.

Jason Ligon | November 9, 2006, 4:14pm | #

Sam,

You are a genius. Slashing operating and or marketing revenue to make up R&D. It almost makes you wonder why everybody doesn't do it. Ugh.

Sam Franklin | November 9, 2006, 4:15pm | #

Unless the elasticity is zero, unless there is NO relationship between expected return and incremental investment

That is the all or nothing way of looking at it. I think is important to get past that level of thinking and probe the relative strength of the correlation, though. If a $10 drop in stock price comes $9 out of publicity budgets and $1 out of R&D, then that is a lot different to me than the situation where these numbers were reversed.

fyodor | November 9, 2006, 4:15pm | #

But things can be tightly related, loosely related, closely related, or distantly related. The relations aren't fixed and inflexible.

I don't see your point.

They're *already* doing that, though. So it seems to me the solution to that problem is orthogonal to this issue.

LOL. You got me to look up "orthogonal". I guess most mortals would have simply said "tangential"!

Anyway, of course they're already doing that. But if you enact price caps or cut back on patent protections, they will be doing so under different circumstances. These circumstances would likely discourage R&D in the manner I described.

StatID | November 9, 2006, 4:15pm | #

I'm getting tired of hearing "research and development" will suffer if drug companies are forced to become more price competitive" It's a talking point right out of every pharm company's board room and I don't buy it one bit.

I also find it hard to believe that my fellow libertarians have a problem the free market system which specifically includes to ability for purchasers (the govt.) to negotiate the best possible price with suppliers (the drug companies).

Lamar | November 9, 2006, 4:18pm | #

fyodor:
OK, fine fyodor. No government funded R&D gets passed on to customers. Sound stupid? Because it isn't true. Regardless of TWL's motivations, it's a bullshit comment and needed to be called out. PS: How does accusing me of being a mind reader make TWL's statement more valid? You want oversimplification: if you pay any of the gov't funded R&D costs, his statement is bullshit and is contrary to what the industry has been saying for years.

fyodor | November 9, 2006, 4:18pm | #

Sam,

Sure it's different, but so what. $1 less R&D is $1 less R&D and means fewer new drugs on the market in the future.

Jason Ligon | November 9, 2006, 4:19pm | #

Here are some of the figures Carrick was looking for. See Management Effectiveness for ROI for Merck and Industry as reported from Reuters.

http://stocks.us.reuters.com/stocks/ratios.asp?symbol=MRK.N

Jason Ligon | November 9, 2006, 4:20pm | #

"... for purchasers (the govt.) to negotiate..."

That should have been your red flag.

fyodor | November 9, 2006, 4:24pm | #

I also find it hard to believe that my fellow libertarians have a problem the free market system which specifically includes to ability for purchasers (the govt.) to negotiate the best possible price with suppliers (the drug companies).

While coerced funds don't figure into most free market models, I wasn't intending to address that practice but rather the ones mentioned in the original blog post (though I'm not sure where I stand on the importation issue). I don't really understand what the rationale is for that rule, and in lieu of hearing some argument for it, I'd probably say I'm against it. Now, patent protection may not be a pure free market either, that's debatable, but it seems fairly clear that drug companies would have less incentive to innovate without it. Who care who else says so?

carrick | November 9, 2006, 4:30pm | #

Jason, thanks very much.

They appear to be a well run company, but their numbers are far from outrageous.

fyodor | November 9, 2006, 4:30pm | #

Lamar,

Now I'm confused. We may have interpreted TWL's comment differently. I thought he meant that drug prices were lower as a result of government research, thus the "refund". Personally, I don't care if what I say agrees with what drug companies say (StatID's beef) or contradicts what they say (your beef). They may say what they say for political reasons, and they may be right and they may be wrong.

Lamar | November 9, 2006, 4:35pm | #

fyodor:
I suspect that TWL was trying to say exactly what you say he was trying to say. My beef is that he tried to spin it to appeal to his intended audience, and in the process said something very specific that wasn't true and thought nobody would notice. That, in my view, is Rovian GOPism. If we let these things go, they eventually become accepted, though still not true.

Dr. Kenneth Noisewater | November 9, 2006, 4:39pm | #

With the arrival of Medicare Part D the government will soon be purchasing 60% of all pharmaceuticals sold in the US. For certain drugs that target maladies that are overwhelmingly those of old age, I'm guessing that the government exercises monopsony power. In this instance, I believe that "allowing the government to negotiate bulk discounts" should be called by it's better known name -- a price control.

Jason Ligon | November 9, 2006, 4:55pm | #

Bailey-esque disclosure:

I'm not a Merck shareholder. It was the first company I thought of when I Googled for drug industry return on investment.

Jason Ligon | November 9, 2006, 4:57pm | #

Sam:

Please note in the Noisewater post the correct use of the term 'monopsony'.

thoreau | November 9, 2006, 5:04pm | #

The thing with predicting the effects of Medicare Part D is that there's a tradeoff between quantity and price. To the extent that it encourages or expands the use of medications it would seem to increase drug company revenues. To the extent that it consolidates purchasing power it may lead to lower prices per pill. I don't know what the aggregate effect on drug company revenues will be. Does anybody know?

If we consider one effect or the other in isolation it's easy to characterize it however we like, as either an infusion of cash or a revenue reducer. If we consider both effects it isn't clear to me how it will play out.

joe | November 9, 2006, 5:15pm | #

40,000 Americans died last year in automobile accidents. And yet, the government is allowed to negotiate prices when it purchases traffic lights, orange cones and barrels, and those little blinkly light things. In doing so, it deprives the traffic-control manufacturers of the precious capital they could be investing in researching better traffic control devices.

Obviously, libertarians need to demand that the government stop being so cheap with our tax dollars in these purchases. After all, as the largest buyer, if they negotiate prices, it will amount to price control.

Say it with me: more money for cones! More money for cones!

Jason Ligon | November 9, 2006, 5:19pm | #

joe:

I don't think you really want to go in that direction. The implication is that we want medical care on a par with road construction.

thoreau | November 9, 2006, 5:23pm | #

Another thing to consider is that many elderly people already had private insurance providing drug coverage before the prescription drug benefit was passed. What if some of those private insurers had joined forces to negotiate lower prices? Would anybody worry about the effect on innovation, or would we instead laud the power of the private sector to make medical care more affordable?

What if two pharmacy chains were to merge and use their market power to negotiate lower prices, which they then pass on to consumers as a way to beat out the competition and make their money from volume rather than price? Would anybody worry about the effect on innovation, or would we instead laud the power of the private sector to make medical care more affordable?

I am not here to make a libertarian case for Medicare, just raising questions about the effects that we're worrying about.

carrick | November 9, 2006, 5:30pm | #

joe, I understand the issue is open for debate, but at least bring something worthwhile to the dicussion.

Developing drugs is a heavily-regulated, capital-intensive, high-risk R&D effort where you can't even sell the product until the government says its OK. Even then, an undetected flaw in the product can result in a class action suit that can bankrupt the company.

Traffic deaths are the result of many contributing factors including the innate stupidity of some drivers. Your analogy is totatly worthless. Bring on something worth discussing.

joe | November 9, 2006, 5:39pm | #

Jason Ligon,

"joe:

I don't think you really want to go in that direction. The implication is that we want medical care on a par with road construction."

If you want to argue that we shouldn't have any public health care programs, have at it. But what you are arguing is that such programs, when they do exist, have a duty to overpay for drugs.

carrick,

Don't insult me when you don't know what the hell you're talking about.

"Developing drugs is a heavily-regulated, capital-intensive, high-risk R&D effort where you can't even sell the product until the government says its OK. Even then, an undetected flaw in the product can result in a class action suit that can bankrupt the company."

Google "AASHTO" or "Uniform Manual of Traffic Control Devices," and then tell me how different they are from "a heavily-regulated, capital-intensive, high-risk R&D effort where you can't even sell the product until the government says its OK. Even then, an undetected flaw in the product can result in a class action suit that can bankrupt the company."

Government spending on traffic control devices is exactly the right analogy for bulk purchases under Medicare Part D.

Dr. Kenneth Noisewater | November 9, 2006, 5:43pm | #

Jason, you beat me to the punch regarding the "more money for cones" nonsense. If joe wants to compare the amount of innovation that takes place in the traffic control realm to that which takes place in the pharma industry, he's not nearly as clever as we've been led to believe.

And THIS libertarian isn't interested in forcing the gov't to pay more money for drugs. I'm interested in abolishing Medicare Part D. The calls for price controls, and the stifling of R&D spending and innovation that will accompany it, are simply the inevitable results of instituting the handout in the first place.

thoreau | November 9, 2006, 5:46pm | #

Government spending on traffic control devices is exactly the right analogy for bulk purchases under Medicare Part D.

Um, wouldn't the analogy be more apt if they paid for our oil changes?

Don't get me wrong, I'm skeptical of anybody who criticizes bulk purchasing power on the grounds that prices will go down and thereby inhibit innovation. If anything, public sector purchasing doesn't exactly have a reputation for getting the lowest possible price.

thoreau | November 9, 2006, 5:48pm | #

And THIS libertarian isn't interested in forcing the gov't to pay more money for drugs. I'm interested in abolishing Medicare Part D.

Fair enough. What will you say if private insurers or pharmacy chains merge and negotiate bulk discounts?

I'm not suggesting that you should applaud Medicare or call for coercive remedies to block mergers of pharmacy chains or insurers. I'm just curious if you'll lament the possible effects on innovation if private firms merge and leverage their market power.

The place to look is the FDA, if you want to lament the difficulties of developing new drugs on a budget.

fyodor | November 9, 2006, 6:09pm | #

I may have missed something. Was "force lower drug prices with soft price caps" in the original post taken by everyone to be code for repealing the Medicare Part D bill? Because aside from the possible exception of two posts critical of things joe said while attacking the bill, I haven't seen any specific endorsement of it in the comments.

John | November 9, 2006, 6:13pm | #

What if two pharmacy chains were to merge and use their market power to negotiate lower prices, which they then pass on to consumers as a way to beat out the competition and make their money from volume rather than price? Would anybody worry about the effect on innovation, or would we instead laud the power of the private sector to make medical care more affordable?"

thoreau,

They would be called monopolist and people like Pelosi would be demanding a DOJ investigation and Elliot Spitzer would be suing them.

People who slam on the drug companies amaze me. Fine, lets make producing drugs as unprofitable and unpopular of a business as possible. Then lets see how much research is actually done and how many drugs we actually get. Its not hard to figure out. It is about incentives. Why the Democrats seem hell bent on driving them out of business is beyond me.

Dr. Kenneth Noisewater | November 9, 2006, 6:24pm | #

Fair enough. What will you say if private insurers or pharmacy chains merge and negotiate bulk discounts?

I think it's pretty clear that monopsony power will results in less innovation and less quality. I'm not a Wal-Mart basher, but I don't shop there because, although their buying power gets them stuff cheap, much of what they sell is crap. Thank god I can go to Target or Sears or Best Buy or ...

If there's competition among insurers and pharmacies, drug companies can always refuse to deal with those customers that don't want to pay the freight. The insurers and pharmacies will then have to make sure that their lack of coverage for Drug X doesn't send customers to one of their competitors.

In fact, my insurance company refuses to cover the allergy medication that's most effective against my indoor and outdoor allergies because the price isn't right for them. So I can either purchase Zyrtec out-of-pocket, or settle for substandard-but-covered Allegra. It sure would be nice if insurance weren't tied to employment and I could choose a different plan that might cover Zyrtec in exchange for a slightly higher premium or a different coverage regime.

If having the government use their "buying power" to "negotiate" lower prices is such a swell idea, let's do it for everything: computers, appliances, groceries, books... Why should the good citizens of America be forced to pay retail when the Federal Consumers Union can just purchase everything on our behalf and pass the savings on to us!

Lamar | November 9, 2006, 6:30pm | #

"lets make producing drugs as unprofitable and unpopular of a business as possible."
John, pharmie-world was one of the few profitable industries during the recent recession. While I don't know enough about proposed regulations to give a prediction, I know that the industry is heavily regulated and highly, highly, highly profitable in spite of the dire predictions of the type quoted above.

joe | November 9, 2006, 6:53pm | #

Dr. Kenneth Noisewater,

"If having the government use their "buying power" to "negotiate" lower prices is such a swell idea, let's do it for everything: computers, appliances, groceries, books..."

They do. When a school district or government agency is buying a large number of computers, appliances, groceries, or books, they bid the purchase out and select the lowest responsible bidder.

joe | November 9, 2006, 6:55pm | #

thoreau,

"Um, wouldn't the analogy be more apt if they paid for our oil changes?"

I'm just talking about purchases of products. Obviously, the government's involvement in transportation is quite a bit different than its involvement in medical care, but there are some similarities.

thoreau | November 9, 2006, 7:02pm | #

Guys, I'm not a fan of Medicare Part D. I list it as one of George W. Bush's 3 biggest sins (right along with the detention of Jose Padilla and related offenses, and the invasion of Iraq).

But I don't see the consolidated buying power as the main problem. To me, here's what's going on:

You've got the elderly, most of whom had prescription drug coverage from private insurers before Congress gave it to all of them. And most of them own real estate, have savings, have pensions, etc. And, most importantly, they vote.

So you've got these people who have plenty of money and vote a lot. And you've got the pharmaceutical industry, which is not exactly hurting for money. And the elderly and the pharmaceutical industry come together and decide to loot the younger taxpayers so that the pharma companies can get more customers (the minority of old folks who couldn't afford drugs) and the elderly can all get free stuff.

And what is the response here? "Oh, no, the pharma companies might find their prices regulated!"

If there's one thing we know about public sector purchasing, it's that the feds have never, ever, EVER negotiated the lowest possible price for ANYTHING. Ever hear of the $500 screwdriver?

In all likelihood, a deal will be struck so that the pharmaceutical companies keep getting money, the elderly keep getting pills, and the young keep getting screwed.

If you are worried about the cost of drug development, the place to look is the FDA. And one might observe that the hurdles imposed by the FDA might arguably serve as barriers to entry, impeding competition in the pharmaceutical industry.

We act out the worst stereotypes of libertarians when our first response to Medicare Part D is not "Stopping taxing the young to subsidize the elderly and Big Pharma" but rather "Oh no! Big Pharma might not get enough money!"

Rad Geek | November 9, 2006, 7:09pm | #

Mangu-Ward: This means lower profits in the short term, less R&D in the long term.

Maybe so. If so, so what? The government's duty is not to maximize the amount of new pharmaceutical research going on in the world. It's to get the hell out of the way and let individual drug-makers and drug-takers bargain freely over how much the new drugs are worth to them. Which would require, among other things, that the government not ban all competition for 20 years, or indefinitely ban efforts at arbitrage through buying drugs in foreign markets.

Noisewater: In this instance, I believe that "allowing the government to negotiate bulk discounts" should be called by it's better known name -- a price control.

... as opposed to the government using taxes to buy up ~100% of the supply of a particular drug at the price set by drug companies for a now effectively non-existant retail market. Which we should call, what, market pricing?

In reality, whenever the government buys nearly all of a particular good, using tax dollars without any individualized control by the people forced to pay them, any price whatsoever that the government pays for the good will effectively be a price control. This is true whether the government allows itself to "negotiate" with the sellers or passively takes whatever prices they name. The only solution is to stop having the government do all the buying, not to substitute a higher price-controlled price for a lower one.

Sam Franklin | November 9, 2006, 7:33pm | #

correct use of the term 'monopsony'.

Being a buyer for 60% of the products in a market is monopsony power. Check. Think we will have a hard time explaining that to Timothy, though. As I recall, he uses 100% as the standard.

Or are there different monopsony standards for governmental market participants and private market particpants?

Sam Franklin | November 9, 2006, 7:39pm | #

If anything, public sector purchasing doesn't exactly have a reputation for getting the lowest possible price.

What do you think whole thing about buying Canadian drugs is about, T.?

Not every government purchse is like a $500 screwdriver. Some are, some aren't.

TWL | November 9, 2006, 7:48pm | #

Lamar, I'm . . . confused. Your contention is that pharma companies are passing along the cost of government funded R&D? That, absent government R&D, drug prices would be exactly the same?

That's . . . total nonsense. It's like arguing that UPS owes me a refund because they use tax-funded roads. Only, UPS never charged me for the cost of road maintanence . . . much like no drug company has ever charged me to cover the cost of primary research funded by the government.

carrick | November 9, 2006, 8:21pm | #

carrick,

Don't insult me when you don't know what the hell you're talking about.

. . .

Google "AASHTO" or "Uniform Manual of Traffic Control Devices," and then tell me how different they are from "a heavily-regulated, capital-intensive, high-risk R&D effort where you can't even sell the product until the government says its OK. Even then, an undetected flaw in the product can result in a class action suit that can bankrupt the company."

joe --

When designing traffic lights is as complicated as designing cancer drugs I'll sell my cars.

When the federal government decides to bulk purchase every traffic light in the country and distribute them to municipalities I'll consider your arugment.

Until then, you are full of shit.

I can't see any reasonable argument that a single supplier of a traffic control products will need to invest hundreds of millions of dollars to create a single product that cannot be sold until a federal agency says it's OK.

If you know of a case provide a reference. Otherwise, shut up.

Jason Ligon | November 9, 2006, 8:50pm | #

Sam:

Correct to the extent that it refers to the correct half of the equation, unlike other assorted uses of the term we hear in these parts.

carrick | November 9, 2006, 8:54pm | #

joe, you deserve a better answer than my previous post. So let's give in another try.

Regarding the AASHTO development environment for traffic control products:

Is it a a heavily-regulated business:

Absolutely.

Is it a capital intensive business:

Don't know, perhaps you can say. Does a single supplier need to:

Spend a $100 million to build a high-tech facility to develop products?

Populate it with scores of PhDs?

Support the PhDs with hundreds of technicians and engineers?

Invest half a billion or more do develop a single product?

Is it high-risk:

Don't know, perhaps you can say.

Does a single supplier need to spend upwards of a decade getting a federal agency to review is product?

Will it loose its half-billion dollar investment if the agency says no?

Are they in a race with their competitors to be first to market?

Will they loose most of the market and therefore most of their investment if they're not first?

Does it face bankruptcy if a a jury of non-technical citizens decide it owes hundreds of millions of dollars to thousands of people based upon technical arguemnts they don't understand.

So joe, please enlighten us on the intricacies of designing stop lights, and barrels, and orange cones.

Jason Ligon | November 9, 2006, 9:00pm | #

I'm down with shortened patent life and other forms of patent reform (i.e. what we consider an innovation on an existing drug is probably a tad generous).

So the discussion is that once the government seizes 60% of a market or better, it is only logical that it 'negotiate' prices down to the margin? Why do you suppose they don't do that with military procurement?

"Senator joe, you did a bang up job buying a whole air force for $15.75. I can't help but notice that our air jockeys are falling from the sky like rain. Thoughts?"

"Well, sir. I realized that with 100% of the market in our pocket, we had the perfect opportunity to use price negotiating techniques to save the people money."

Harpua | November 9, 2006, 10:21pm | #

Kind of a far flung discussion from an innocuous post. A 1 day drop in any sector could mean almost anything. Could be that investors are worried that Rumsfeld's new job could be in the Pharma industry with less than profitable results.

Call me naive, but I suspect the elections will have less of an impact than most people think. It'll be a narrow mojority in both houses with ample opportunity for nothing to get done. The D's best prospect would be to hold up GWB like they did to Poppy (calling George Mitchell) so they can get tax hikes in return for funding the "War on Terr". Or is that terror, I can never tell. Anyway, the health care/drug war (that's legal drugs) won't take place in earnest til 2008.

joe | November 9, 2006, 10:34pm | #

carrick,

Since none of the factors you mention are remotely relevant to the issue of whether drug companies are entitled to pad their profits with tax dollars, I'm not going down the rabbit hole with you.

joe | November 9, 2006, 10:36pm | #

Jason Ligon,

Exaggerating an argument into a barely-recognizeable cartoon of what your opponent is saying is a trick you play when you can't debate the question on its merits.

The question is not whether the government should negotiate its purchases down to absurd levels, but whether it should negotiate them at all.

Do you have any thoughts on that question, or are you ceding the field?

carrick | November 9, 2006, 10:38pm | #

40,000 Americans died last year in automobile accidents. And yet, the government is allowed to negotiate prices when it purchases traffic lights, orange cones and barrels, and those little blinkly light things. In doing so, it deprives the traffic-control manufacturers of the precious capital they could be investing in researching better traffic control devices.

joe, the topic as you clearly understood is whether government purchase of products reduces funding available for R&D.

Is your attention span really that short?

thoreau | November 9, 2006, 10:41pm | #

FWIW, I never thought that everyone's biggest fear upon a Dem victory would be that the Dems might spend less money on something.

Me, I'm pretty sure that the relationship between Big Pharma and Big Old Folks (AKA AARP) won't be as adversarial as you'd think with the Dems in charge. I suspect that they'll unite against a convenient victim: Young taxpayers.

Sam Franklin | November 10, 2006, 6:59am | #

Thoreau: have you ever compared your private health insurance rates to those of a person in their 50s? Don't blame politics for discrimination against the young. This kind of discrimination sure exists, but it is actually worse in the private sector. At least with the government, I get a vote. Never got that at PacificCare or Kaiser, nope.

Sam Franklin | November 10, 2006, 7:00am | #

Correct to the extent that it refers to the correct half of the equation, unlike other assorted uses of the term we hear in these parts.

IIRC, I tried that argument on Timothy. It made him think I was even crazier than he thought I was b4.

Sam Franklin | November 10, 2006, 7:02am | #

I'm down with shortened patent life and other forms of patent reform (i.e. what we consider an innovation on an existing drug is probably a tad generous).

True, but the existing drug goes generic at the end of the initial term, at least if the market is working.

Lamar | November 10, 2006, 9:43am | #

"Your contention is that pharma companies are passing along the cost of government funded R&D?"

TWL: Pharma companies pass along all of their costs to consumers. Surely I don't have to explain how costs and profits work? The pharmaceutical industry is a international fixture that operates under various states of regulation which creates highly complex pricing models.

Metalgrid said he/she wanted a refund for all the US funded R&D, and YOU said that the "refund" is reflected in the fact that they don't charge customers to cover those costs in the first place. This is pure BS. We pay a higher amount of R&D than any other country. Any US funding barely compensates for foreign drug discounts. I can't stand simplistic bullshit like "they don't charge you to recover the costs of gov't funded research." That's the same simplistic, justification driven crap that just got the GOP bounced. Not every argument can be won on a bumper sticker.

Dee | November 10, 2006, 11:08am | #

I work for one of the listed pharma corps in the graph. I can see many reasons for the expense of drugs being so high. You have to consider that the patent expires based on the date the molecule or compound was patented. So basically everytime a drug company R&D dept makes a new discovery of a compound they patent it right then and afterwards see what it might be able to treat. This takes years in house then years more doing clincal trials on potential useful drugs and even more time awaiting FDA approval. All of time the patent is aging towards expiration. By the time the drug is finally made available to the public there are usually only a few years left to make money off it before patents expire and generics are made.

Take into account the number of drugs that have money spent on them that never see a dime in profit because they are shot down in clinical trials or by the FDA. A few months ago our company put the average cost of getting a drug from R&D to consumer is around $1.34 billion. The percentage of drugs that never make it is high but someone has to pay for them to be investigated.

Yes they have to much corporate bloat that adds to expense but the real expense comes in the form of meeting regulatory requirements. I work at a production plant in the animal health division making ectoparasiticides aka insecticides that go on the outside of animals from your house dogs flea and tick treatments to horse and cattle wash etc.

As an example of the cost over regulation try this on for size and stupidity. The majority of the products we make are liquids that go on the outside of animals, animals that are covered from head to toe in fur coats. Yet we still have to wear hair nets in the plant. Whats the odds a cow or horse is going to complain about a stray human hair in their bug wash? I could go on and on with more examples but the bottom line is regulatory is so expensive and even the regulators themselves can't give you anything more then their interpretation of the regs. Try to get anyone at the FDA, DOT or OSHA to be precise or exact in the regs meanings, I wish you luck.

Years ago industry dreaded government regulation. Now we embrace it like a long lost lover and go above and beyond the regs. My company actual goes beyond what most regs call for in hopes that there is no way they can be accused of being lax on compliance. The reason big corps love regs now is because they realized the advantage of having a automatic built in cost of doing business as a way to ensure no one else even attempts to enter the same field.

Notice if you will that over the past 5-10 years many companies have merged. These companies then look around at small R&D companies and as soon as one has a drug with any promise they buy the company or the right to produce the drug. Thus the big companies are spending less on R&D directly but instead spend money to acquire startup companies who themselves could not afford the expense to setup for product according to the regs.

Eventually we will see only a dozen or so major pharmas as they merge and take one another over.

That being said many big companies such as mine own other companies that make the generics when the patents expire in an effort to try and maintain some market presence even if at a reduced price. So the profits are not as large but still come back to the house.

The new trick for patent extension is to combine two drugs that are about to expire into a new drug and claim they work better together then individually, which gets them at least a patent extension if not a new patent all together.

People will spend $4 on a cup of coffee with glee. How much research money do you think Starbucks spends coming up with the latest Mochalattefrappachinocrap and how much does it cost to get that to market? I am betting it averages a lot less than $1.34 billion per drink. Then think what amount of regulation they are forced to comply with and how little that costs them. If the cost to get the Mochacrappie to market was 1.34 billion and they spent half that much on other drinks that never made it to the counter how much would your $4 cup of coffee cost now? I am willing to bet a lot more than $4.

Sam Franklin | November 10, 2006, 11:28am | #

All of time the patent is aging towards expiration. By the time the drug is finally made available to the public there are usually only a few years left to make money off it before patents expire and generics are made.

Sort of. Here is the real deal on that:

http://tinyurl.com/yzlvgp


You say you work in the industry?

Dee | November 10, 2006, 11:46am | #

Yes I said pretty clearly I thought that I work for one of the listed corps. The real deal huh, and try to find someone to explain that "real deal," to you. your link only points out exactly what I was refering to with regards to long winded laws and regs that even those that wrote them can not explain without using the word interpretation. Not long ago I was looking for clarification of a reg so I call the agency and talked to several people. No one person could say anything other than according to their interpretation this is what it said. I prefer words like precise, exactly, difinitively. The word interpretation by its very definiton is open to interpretation. Add to this lawyers and presto you have unclear ever changing midstream regs that no one can follow not even the authors.

So please SAM make it plain and simple from that link you posted what the "real deal," truly is on patents. Oh and just FYI that is just one listing of one law covering one aspect of a patent extension.

I came back to post this cut from todays pharma industry email.

Bayer Outlines New Global R&D Structures, to Cut 800 Jobs in U.S. Bayer HealthCare announced a structural realignment of its global pharmaceutical R&D organization. The company also outlined its future U.S. pharma site plan and said that New Jersey will be home to its U.S. headquarters for pharmaceuticals. Bayer also said it will cut about 800 jobs from its U.S. operations to reduce costs following its acquisition of Germany's Schering AG. Bayer will eliminate 600 positions, primarily in research, and cut an additional 200 U.S.-based workers over time in an overall reorganization, the company said. After one-time costs of about $350 million, Bayer said it will be able to cut overall R&D expenses by more than $210 million per year by the end of 2008.

Sam Franklin | November 10, 2006, 11:59am | #

The statute is explained by a former patent commissioner here:

http://www.fdli.org/pubs/Journal%20Online/54_2/art2.pdf

at page 190.

Lamar | November 10, 2006, 12:29pm | #

Dee,
Regarding the $1.34 billion to develop a drug, does the company perform an analysis to ascertain whether any government funding went into the specific project? If so, does the company reduce the price to reflect that government funding?

Jason Ligon | November 10, 2006, 1:32pm | #

joe:

I'm not ceding the field. What I'm getting at is that in the case of military procurement, for example, there may be some negotiating, but it isn't immediate obvious what the results of such may be. The government sets a price that is very very generous, and probably above market so that they can maintain cutting edge equipment. The emphasis in procurement is on top quality gear. I'm arguing for a similar emphasis in the medical realm, which means not punishing the bottom line.

Also, there is no negotiating. The government dictates a price when it makes the market. You are saying 'negotiate a little'. What does that mean if not down to marginal costs? How do you know when to stop? What is the right price?

Jason Ligon | November 10, 2006, 1:36pm | #

Lamar:

Just to clarify for me, are you saying that public university R&D costs are also costs of pharma companies? I thought the $1.34 billion was AFTER public domain research.

Lamar | November 10, 2006, 1:52pm | #

I'm using Dee's figures here. "A few months ago our company put the average cost of getting a drug from R&D to consumer is around $1.34 billion."

Dee | November 10, 2006, 2:46pm | #

Sorry I am not the one to give a break down of where the total 1.34 billion is derived from thats just the figure they released. I am a engineer in a production plant not a bean counter.

When it comes to R&D I think the mindset these days is for the big corps to put almost all their funds into blockbuster drugs, those which they can find the most people in need of or at least be made to believe they need the drug.

Statins for example are the big money makers these days as far as preventative meds. If you look at the data from studies on cholesterol levels over the years you will see the recommended numbers for good cholesterol have been lowered several times. Good science or just a means to the end to make a larger market for statins? As for drugs that are more specifically targeted at illnesses suffered by lesser percentages of the population those are more the small companies I was speaking of that are bought up by the big guys when something looks promising.

There are many drugs that would likely help people in rare instances that will never see the light of day because of the return on investment to get it approved. You can't make 6 billion a year off a drug if you only have a few hundred or thousand patients using it.

I think drugs are expensive without a doubt. How to reduce that expense is a difficult challenge. From my aspect the regulatory costs are a major expense and I don't think they should be spending so much on ads. I once saw 3 commercials in a row for my company. If you notice the majority of commercials these days are for drugs, lawyers looking for class action lawsuits against drug makers and insurance to cover your drugs.

No company that produces a product is going to sell it for a loss and no company is going to get neck deep in federal regs to make minimal returns on their products thats just business.

Sure they can force the drug companies to lower prices, end patent extensions all together or make the time shorter. But if no profit is being made they can't keep the companies doors from closing. Unlike the government most business models can't absorb $500 billion a year losses and still keep trucking like everythings ok.

The real question is do you want Pelosi and Reid doing the R&D for your new government manufactured meds? After all they have done such great work on everything else they stick their fingers in, right.

It is kind of like the gun makers being sued by the anti-gun crowd to try and close them down. Seems like a good anti-gun route to take until you consider that fact that the US government quit making guns decades ago and buys them all from the same companies they wanted to put out of business. Put the company in a position of non-profitability and it makes them close their doors. Closed doors means no product no matter how much $$$$ you have along with no new innovation. But don't worry I am sure the FDA will do a bang up job regulating and policing the governments drug busniess and new discoveries and any problems that may arise will be sure to be addressed and remedied quickly without any cover ups. Yeah good luck with that.

Ask your doctor if its right for you!