Does less restricted drug pricing in the US subsidize the rest of the world?

[astro]

Per the article referenced below many industrialized nations, including Canada, seem to have much lower drug prices via their quasi-nationalized health programs that have drug price ceilings of various sorts. The price differential is so marked that some US states like Illinois are seeking to buy drugs for some of their health programs in Canada. Pharmaceutical companies have apparently agreed to these price ceilings as they sell new, first line drugs to these nations for much less than they sell them for in the US.

Obviously a lot of cash is needed to develop and approve new drugs. Are other nations getting a bit of a free ride research and development wise on the ability of drug companies to charge the maximum of what the open market will bear in the US or is this an incorrect perspective?

Illinois Might Purchase Drugs From Canada, Saving Millions (http://www-tech.mit.edu/V123/N40/long2_drugs.40w.html)

The cost of prescription drugs in Canada and most other industrialized countries is regulated by the government, unlike in the United States. Last year, drug prices in the United States were 67 percent higher than in Canada, a report by a Canadian health agency found.

But the FDA bars people from importing drugs that have not been approved by the agency, and bars the resale of drugs made here, exported elsewhere, then returned here.

“We’re concerned about the dangers here,” said William K. Hubbard, associate commissioner of the FDA. He said there could be risks from drugs bought in Canada, including those not approved by the FDA and not made in the United States, those that have expired or were improperly stored and those without labels.

On Tuesday, agency officials plan to meet with Mayor Michael J. Albano of Springfield, Mass. Springfield began buying drugs in Canada this summer for those of the city’s 7,000 workers and 2,000 retired workers who chose the optional plan.

Depending on how many workers participate, the city could save at least $4 million a year, Albano said. So far, he said, some 1,000 employees have signed up.

[Alien]

I'm no expert on the pharmaceutical industry, but it seems to me that the problem is exactly the opposite of what you presume. Meaning that the US drug market appears protected from foreign trade, thus US pharmaceutical companies can sell their products for a higher price. When they go abroad they are challenged by a global and more competitive market, and therefore has to lower their prices.

Where I live, and as far as I know in other parts of Europe as well, pharmaceutical companies sell their products for whatever price they like. As for prescription drugs, in countries with "health programs" (national health care) the government is simply picking up some of the cost when the consumer buys prescription drugs at the drugstore.

The reason behind rising health care cost in the US seems IMO to be that it's not really a market-driven system. When consumers pay for health care with insurances instead of based on actual consume, then sellers can charge whatever they like and send the bill to the insurance company. The concept of insurance is to be protected against something that could happen (car accident), not something that will happen to everyone (become ill).

[adaher]

You've got it 100% right.

[Sam Stone]

Paradoxically, lower drug prices in other countries may actually LOWER drug prices in the United States.

What the drug companies are doing is called "disciminatory pricing" (not 'discriminatory in a bad way, but in the sense of not treating your customers as one bloc).

Think of it this way: How do you price a product? Let's say you have a new CD by Warren Zevon. At what price do you sell it? Well, there are a lot of very rich Warren Zevon fans who would pay $1000 for a collection of new songs from him. But then you lose the hundreds of thousands of sales from people who can't afford that.

On the other hand, if you sold it for $1, you could probably make millions of sales, but you'd leave a lot of money on the table from the people who would have paid more but didn't have to.

The ultimate pricing scheme would be one where, A) you could keep people from re-selling products amongst themselves, and B) you could set the price for each person based on what the product is actually worth to them. The poor could pay $1, and the rich $10.

But in a free market, you can't do this. You can't sell the same product to one person at one price and another at a different price. And even if you could, you'd be immediately undercut by the poor people re-selling the product.

Nevertheless, discriminatory pricing is so valuable that manufacturers do all kinds of things to achieve it. For example, this is why Toyota has a Lexus division, and most electtronics companies take the same basic electronics, improve the specs slightly, put a different faceplate on them, and sell them as premium brands. This allows them to set one price for the wealthy, and a lower price for the poor.

If you can't discriminate on price, you have to compromise and set a price that maximizes profit. You lose some people on the bottom who now can't afford it, and you leave money on the table by providing the product to the rich at a price lower than they are willing to pay. But you make up for it by volume in the middle class.

Back to pharmaceutical companies. Within the United States, they can't engage in discriminatory pricing. The market is homogenous. But borders give them the ability to set different prices, and export restrictions prevent the cheap products from moving to the high-priced areas. So this allows them to charge more in the U.S., and less in Africa. The prices in both countries are set by supply and demand, which maximizes profit.

So, what happens if the barrier goes away? Well, the company will start to face competition from its own product being sold back into the country at a lower price. How does it prevent that? Well, it can either raise prices in the other country, or lower them at home. But if both prices are set by supply and demand, the company will lose profit either way. But my guess is that the domestic market is so large that the most effective thing to do will be to simply raise prices in other countries, which will cut demand and lower sales. That in turn lowers profits.

Now, the big thing here is that the demand for these drugs in the U.S. may be relatively inelastic, which means it doesn't move much with price. In which case, the companies may seek to regain the lost profit by raising prices in the U.S. If they can't do that without losing enough sales to lower overall profitability, then all they can do is leave prices where they are, but factor the lower profitability into their decisions for R&D and other new drug development plans.

Either way, I don't see re-importation resulting in widespread availability of cheaper drugs.

[bri1600bv]

Drug companies can't raise prices easily in other countries. If they could they would charge what they do in the US. It isn't supply and demand in foreign countries. Foreign gov'ts have socialized medicine and determine what price they will pay. The price is much less than what the drug companies want but still much higher than their marginal cost. If it costs a drug company 10 cents to make a pill then they'll sell it for 25 cents if they can rather than sell none at all. In the US maybe they'd sell it for $1. The price has to be higher than marginal cost, though, (on average) to cover the upfront cost of development.

The OP had it exactly correct. Drug companies make huge profits from US sales and much less from foreign sales. They are (foreign countries), in effect, a free rider. The US market pays for the drug company profits, which then go to fund new drugs. Also the expected profits from a drug take into account the windfall profits to be made in the US during the 17 year patent protected period.

It's not that there is "no competition in the US", that is the reason for high drug prices. There is no competition by definition, on patented drugs during the patent protection period. AFter the period is up, there is plenty of competition through generics. This is true in foreign countries as well though.

So what happens if US consumers want (and get) lower drug prices via importation etc.? Well, in the short run they win and the drug companies lose. In the long run the drug companies lose and the consumers have less new drugs coming to market as the lower prices won't cover the 1 billion dollars it costs to develop a new drug.

[Alien]

What Sam said.

Originally posted by bri1600bv
[B]It isn't supply and demand in foreign countries. Foreign gov'ts have socialized medicine and determine what price they will pay. The price is much less than what the drug companies want but still much higher than their marginal cost.

Do you have a cite for this? It may be true in some countries, but I haven't heard of any Europen or Asian countries telling drug companies they wont get paid in full for their products.

[bri1600bv]

I don't have a cite. But in European countries the gov't is typically the largest if not the only purchaser. So prices are set by negotiation. There is no competition per se, for a drug that is in its patent protected period.

The drug company could, I suppose set a take it or leave it price, but then the foreign gov't is free to "leave it". There doesn't seem to be as much pressure to have the latest and greatest drugs as there is in the US.

There was a show on PBS about this not too long ago. I can't remember the name though.

[Alien]

Originally posted by bri1600bv
I don't have a cite. But in European countries the gov't is typically the largest if not the only purchaser. So prices are set by negotiation. There is no competition per se, for a drug that is in its patent protected period.

The drug company could, I suppose set a take it or leave it price, but then the foreign gov't is free to "leave it". There doesn't seem to be as much pressure to have the latest and greatest drugs as there is in the US.

There was a show on PBS about this not too long ago. I can't remember the name though.

I'm sorry bri1600bv, but I'll have to ask you to go and get a cite for this. You said: "in European countries the gov't is typically the largest if not the only purchaser". In which European countries? I'm asking because in those European countries I have lived (granted, it's not that many) I have paid for my medicine myself with my own money at the drugstore. The only difference is that for some drugs the government is picking up part of the tab (doesn't that happen for elderly in the US too), but the manufacturer still gets paid in full.

Governments might negotiate a cheaper price when they buy drugs for use in public hospitals, but that's different - I bet private hospitals are doing the same. I don't know of any European country where the government is buying drugs which are later sold at drugstores. I think you have the wrong idea of what national health care really is, could you elaborate?

[mack]

bri1600bv is generally correct. If you want to sell a drug in a particular country, you have to play by that country's rules. Rule #1 is the drug has to be approved by that country's version of the FDA, or whatever cooperative might exist between a group of countries. Rule #2 is you have to abide by whatever price control exists in that country.

One thing I'm not sure about, though, is how much domestic (US) prices would come down if price caps were lifted abroad. I mean if someone pays $5 for a viagra pill in the US and $1 in, say, Italy now, why wouldn't pfizer charge $5 for a pill in the US, and charge $5 a pill in Italy if the caps are lifted, if they can get it?

by Alien:
.....but the manufacturer still gets paid in full.
The manufacturer gets paid the full amount that has been negotiated for that particular country - not the full market value.

[SuaSponte]

Originally posted by Alien
What [b]Sam said.

quote:
--------------------------------------------------------------------------------
Originally posted by bri1600bv
It isn't supply and demand in foreign countries. Foreign gov'ts have socialized medicine and determine what price they will pay. The price is much less than what the drug companies want but still much higher than their marginal cost.
--------------------------------------------------------------------------------

Do you have a cite for this? It may be true in some countries, but I haven't heard of any Europen or Asian countries telling drug companies they wont get paid in full for their products.

Here's the cite. (http://rxpolicy.com/studies/gr_countries_041101.pdf)
In Canada, the government determines drug prices, not the market.
In France, a drug company may set any price. However, if they want the national health care system to reimburse the customer for the cost of the drug - IOW, if they want anyone to actually buy the drug - they must charge a lower, government-negotiated rate. Because they are "negotiating" with a monopoly, the prices are considerably lower than in the US.
Germany's government sets the price of older (introduced pre-1995) drugs.
Italy's system is roughly the same as France's, except that there are no negotiations - the maximum drug price is a 12-nation European average price.
Britain regulates drug prices by setting maximum profits a drug company can earn in Britain, though individual drugs prices are not regulated.
Japan's government determines drug prices.

So yes, astro, American consumers are subsidizing Canadian, European and Japanese consumers. It's like a balloon - drug companies need to cover their R&D costs, cover their manufacturing costs, and make a profit. If prices are squeezed down in one country, they'll inflate in another country.

Sua

[SuaSponte]

Originally posted by mack
One thing I'm not sure about, though, is how much domestic (US) prices would come down if price caps were lifted abroad. I mean if someone pays $5 for a viagra pill in the US and $1 in, say, Italy now, why wouldn't pfizer charge $5 for a pill in the US, and charge $5 a pill in Italy if the caps are lifted, if they can get it?

Price competition. For most drugs, even drugs under patent, there is usually an alternative. For every Wellbutrin, there is a Prozac. If prices are freed in other countries, drug company profits will increase in those countries, and drug companies will be able to afford to cut US prices to gain market share.

Sua

[SuaSponte]

An interesting article on drug pricing in Europe.

http://www.nzz.ch/2003/07/10/english/page-synd4022158.html

[RickJay]

Originally posted by bri1600bv
Drug companies can't raise prices easily in other countries. If they could they would charge what they do in the US. It isn't supply and demand in foreign countries. Foreign gov'ts have socialized medicine and determine what price they will pay. The price is much less than what the drug companies want but still much higher than their marginal cost. If it costs a drug company 10 cents to make a pill then they'll sell it for 25 cents if they can rather than sell none at all. In the US maybe they'd sell it for $1. The price has to be higher than marginal cost, though, (on average) to cover the upfront cost of development.

The OP had it exactly correct. Drug companies make huge profits from US sales and much less from foreign sales. They are (foreign countries), in effect, a free rider.
This is only partially true; there's two vital things you're leaving out.

1. Other countries cannot logically be a free rider or else drug companies would not bother to sell there. Clearly, the pharmaceutical manufacturers are making SOME money in Canada, Europe et al., or they simply would not have any reason to ship drugs there.

2. Sam's point about price discrimination is a critical one. Americans will pay higher prices than Canadians to some extent because Americans have more disposable income and seem willing to pay more for medical care. Americans, in fact, have more disposable income than just about anyone; all other things being equal, the equilibrium price for a given drug in the USA will be higher than in most other countries. This doesn't account for the entire difference between US and Canadian drug prices, but it does account for a little bit of it, and the extent to which this matters becomes even more pronounced if you compare the U.S. to countries that aren't as wealthy as Canada. Price discrimination is a powerful thing. You're NEVER going to make as much money from the average Spanish consumer, even if Spain abandons all price controls, until such time as Spain's economy is pe capita equal to the USA.

The US market pays for the drug company profits, which then go to fund new drugs.
Clearly, overseas customers must also pay for funding new drugs if they're buying drugs. If the drug companies aren't making a profit off them they wouldn't be selling to them.

They may not pay AS MUCH per customer, but overall the income is doubtlessly quite substantial from overseas, being as there is a much larger market outside the USA than in.

[Sterra]

Rather than subsidizing R&D American prices are subsidizing advertising. The budget for advertising in companies is often bigger than the R&D budget.

[bri1600bv]

Well there is alot of advertising, that's true. But if a drug company will make less money b/c of it's less free to charge what it wants, then there will be less reward for the R+D dollars, and many drugs simply won't be researched. The profits are the reward for the R+D with or without advertising.

As per RickJay's point about drug companies making money in Canada, etc. You're right, they do.

If pills cost 5 cents to make and Canada offers them 20 cents, they'll take it. Meanwhile in the US we might pay 50 cents. But the 5 cents is a marginal cost; ie the cost of one more pill. To get up and running takes roughly a billion dollars. So in order to make back the initial billion they need to price higher than say, 5.01 cents.

Logically, they'd take any price higher than 5 cents a pill, even though the average cost (with R+D) might be 20 cents or whatever. Of course the average cost goes down with more pills being made too.

So you're right, Canada is paying for R+D too, just not as much.

[SuaSponte]

Originally posted by RickJay
This is only partially true; there's two vital things you're leaving out.

1. Other countries cannot logically be a free rider or else drug companies would not bother to sell there. Clearly, the pharmaceutical manufacturers are making SOME money in Canada, Europe et al., or they simply would not have any reason to ship drugs there.

While it is certainly true that drug companies make a profit in Europe and elsewhere, it does not change the fact that lower (government-mandated) prices overseas drives up prices in the US. Because drug companies make less profit than they otherwise would overseas, there is less margin for price competition in the US, so prices remain higher.

2. Sam's point about price discrimination is a critical one. Americans will pay higher prices than Canadians to some extent because Americans have more disposable income and seem willing to pay more for medical care.
Actually, discriminatory pricing has absolutely no role to play when the customer is not actually paying for the drugs. If the government is paying for the drugs, as in France, Italy, Britain, Japan, etc., discriminatory pricing is irrelevant.
It may(and probably will) be that, if foreign governments were to deregulate drug prices - and stop paying for the drugs - we would discover that Spanish customers simply aren't willing to pay the same price Americans are for drugs, and the cost of Lipitor in Spain will be lower than in the US.
But that is a hypothetical; the current fact is that drug prices are lower in other industrialized countries because foreign governments mandate that they be lower - and US customers end up paying more.

Sua

[duality72]

Why do people keep saying that countries that have negotiated a better deal are being subsidized by the U.S.? Are the members of Sam's Wholesale Club subsidized by patrons of regular stores? The U.S. pays more because it's willing to pay more.

[Alien]

Originally posted by SuaSponte
In Canada, the government determines drug prices, not the market.
In France, a drug company may set any price. However, if they want the national health care system to reimburse the customer for the cost of the drug - IOW, if they want anyone to actually buy the drug - they must charge a lower, government-negotiated rate. Because they are "negotiating" with a monopoly, the prices are considerably lower than in the US.
Germany's government sets the price of older (introduced pre-1995) drugs.
Italy's system is roughly the same as France's, except that there are no negotiations - the maximum drug price is a 12-nation European average price.
Britain regulates drug prices by setting maximum profits a drug company can earn in Britain, though individual drugs prices are not regulated.
Japan's government determines drug prices.


Good post SuaSponte. It appears there is some sort of governmental control on drug prices in several European countries, so I was wrong. The reason for my scepticism was that those drugs I'm familiar with comes with pretty much the same price tag as in the US, and I've been paying for it myself. But then again, I've never had any need for heart medicine, cancer treatment etc, probably big sectors for American pharmaceutical companies.

[SuaSponte]

Originally posted by duality72
Why do people keep saying that countries that have negotiated a better deal are being subsidized by the U.S.? Are the members of Sam's Wholesale Club subsidized by patrons of regular stores? The U.S. pays more because it's willing to pay more.

1) The drug industry is somewhat unique in that (a) it must spend a larger percentage of its revenues on R&D, and (b) most of those R&D expenditures are effectively wasted, because most drugs do not survive testing and development. So drug companies have to make large profits on the relatively few drugs that actually make it to market. If drug companies cannot make those large profits in Europe, etc., they have to make them in the US, in order to continue to fund R&D;

2)Because if drug companies were earning more profits abroad, they would have more leeway to compete against each other in the US on price, thus lowering drug prices in the US.

Sua

[hawthorne]

I'm just going to do a drive by because it's late here. SuaSponte, your point 1 is where the issues are. They're complex. A key point to remember in this debate is that the people who are actually consuming and prescribing the drugs are not typically the ones directly paying for them, and that this makes a big difference in the operation of markets.

This argument, however:2)Because if drug companies were earning more profits abroad, they would have more leeway to compete against each other in the US on price, thus lowering drug prices in the US. can't be right. Companies look to maximise profit, not meet some desired level of profit. Increased profits from other places would not give firms "leeway" to reduce prices - it would just allow them to increase profits. OTOH it might make some lines of currently unprofitable drugs profitable.

[SuaSponte]

hawthorne, sure it can, if the company has a minimum return on investment goal for a particular drug (which I'm pretty sure drug companies do). If the maker of Prozac is able to increase profits in Europe, it may decide to try to increase its US market share of antidepressants by undercutting Wellbutrin's price - and still cover its minimum ROI goal.

Sua

[Maeglin]

If the maker of Prozac is able to increase profits in Europe, it may decide to try to increase its US market share of antidepressants by undercutting Wellbutrin's price - and still cover its minimum ROI goal.

True, Sua, but it would only do so if increasing its market share allowed it to optimize its profit. If increasing its market share were a matter of indifference or would cause a loss, a given pharmaceutical company would not make this choice. Furthermore, if a firm could increase its market share by lowering the cost of its goods thereby increasing its profit margins, the price of the good sold in another location wouldn't really matter. If a new price solved the dynamic optimization problem, the firm would select the new price regardless.

I think the fact that the pharmaceutical industry has enjoyed by far the highest profit margins in the US for years bears witness, at least circumstantially, to the industry's adeptitude at dynamic optimization.

[SuaSponte]

I'm going to concede on point 2. I'm not certain that I'm wrong, but I am damn certain that my knowledge of economics is woefully inadequate to the task of supporting and defending my position.

Sua

[The Ryan]

Originally posted by duality72
Why do people keep saying that countries that have negotiated a better deal are being subsidized by the U.S.? Are the members of Sam's Wholesale Club subsidized by patrons of regular stores? The U.S. pays more because it's willing to pay more.
This is a poor analogy for two reasons:
1. In the case of drug companies, we are discussing the same country selling drugs in different countries. Therefore, having two different stores in your analogy is not appropriate.
2. Overhead is not nearly as important to a store as it is to a drug company. I would guess that overhead constitutes, at the very most, 20% of the price that you pay at Walmart. That's a very generous estimate. For a drug company, however, 80% would be conservative estimate.

If there were a store which had overhead as its most significant cost, and it offered substantial price breaks to some customers, then yes, the regular customers would be subsidizing the ones with the price breaks.

Suppose you and two of your friends were to rent some movies and watch them. If you pay $.25, and they each pay $2.00, don't you see how they are subsidizing you? Would it be accurate to say that since you aren't paying nothing, you aren't really freeloading?

SUaSponte: I think that your point number 2 is incorrect as stated. However, higher drug profits will motivate more companies to start drug research, which will increase competition and lower prices in the long run. It's a long pipeline, though. Furthermore, the US government subsidizes drug companies. So it could reduce those subsidies and replace them with income from other countries by demanding that those countries pay their fair share.

[duality72]

Your points are interesting, Sua, but irrelevant. Regardless of the profit that needs to be made, a company will try to get that profit wherever it can. The company is not obligated to try to get the same amount of profit from each customer; nor are low-paying customers obligated to pay a higher price because other customers didn't negotiate as good a deal.

In The Ryan's example, if two friends and I collectively rent some movies, pay $4.25 as a group and I only pitch in $.25, sure they're subsidizing me (although this is still their choice). This isn't really analogous, though, because the countries do not get together and buy drugs collectively. A better example would be if my two friends and I all go to the video store and each rent a movie, individually paying $2.00 for each of them and $.25 for me. For whatever reason, I got a better deal from the video store, but my friends aren't subsidizing me; they're just getting suckered and, knowing I payed only $.25, it's their choice.


Originally posted by The Ryan

1. In the case of drug companies, we are discussing the same country(?) selling drugs in different countries. Therefore, having two different stores in your analogy is not appropriate.

I think you meant "same company" here since it's the company, not country, selling drugs and it doesn't really matter where it's located. Also, it's not clear why selling to different stores is not analogous to selling to different countries. The same company sells its products to Sam's Club and to a retail store in the analogy, so....? Sam's Club negotiates better deals and passes the savings on to its members; retail stores don't and so it's customers are those willing to pay more.

In short, if you say that every time someone buys something on sale they are being subsidized by everyone who paid the full retail price, I think it's safe to say you're using a pretty extreme definition of subsidize.

[Shalmanese]

Incidentally, this is also why drug companies are being demonized by people with a poor grasp of economics for not providing "cheap" AIDS drugs to Africa. The fact is that drugs are practically ideal for smuggling. Any cheap drugs sent to Africa would not actually get into the hands of any Africans but would end up significantly marked up on the US black market.

[smiling bandit]

Incidentally, this is also why drug companies are being demonized by people with a poor grasp of economics for not providing "cheap" AIDS drugs to Africa. The fact is that drugs are practically ideal for smuggling. Any cheap drugs sent to Africa would not actually get into the hands of any Africans but would end up significantly marked up on the US black market.

Nitpick: another way to look at it:

From the point of view of the company, the the drugs won't bring them any profit (or even meet the cost of making and shipping), and may cost them actual money by eroding their patents. It may not be the US markets that get the smuggled drugs, but Eastern European, Asian, and South American ones. And not every country would find this smuggling illegal or objectionable, either.

Clearly, overseas customers must also pay for funding new drugs if they're buying drugs. If the drug companies aren't making a profit off them they wouldn't be selling to them.

Matter of scale. In a technical sense, yes, but if the comany is making a low portion of its profits on European sales, then they may not be meaningfully contributing.

For example. I develop Lemonade Formula A-1x. I sell it at my lemonade stand. Anyone who comes by pays me $1.00 cup. R&D cost me 35 dollars and I spent another 15 in lemons and cups. I make 100 sales and have 50$ (100 +[-15] +[-35] = 50). Now, a group people come by, and tell me they want lemonade, but they only want to pay 25 cents per cup. I've already recouped my investment, and other sales don't seem to be increasing, so I have no reason not to accept the sale at their price. 100 of them buy my lemonade, on which I get 25$. I now have 75 dollars in profit.

Now, they've only contributed a third of the total funds to my pile o cash. Since lemonade sales are down, and my nighbors are setting up their own copycat lemonade, I want to make new formula. For Lemonade v. A-2, I spend 60 dollars on R&D. But wait! Now I can barely recoup my investment on the same amount of sales as for Lemonade A-1x. So I can either survive on a thinner margin, raise prices, or lower them to attract more customers. If I perceive my market as being at willing to pay more for lemonade, I might increase my prices to $1.50.

But then that group comes back again. I've already bought cups and I'm easily paying for my materials, but they aren't giving me any more money. Well, OK, we'll say they are willing to pay me .50 cents now. Cups and lemons don't cost me too much, so I am making more moeny, but they are increasingly less profitable. But as long as I am making and absolute amount of money, its not too bad a deal. Still, they aren't contributing meaningfully towards the creation of lemonade v. A-3 or even Lemonade version B.

Ok, that was much simplified and extreme, but maybe that summarizes the issue?

[The Ryan]

Originally posted by duality72
In The Ryan's example, if two friends and I collectively rent some movies, pay $4.25 as a group and I only pitch in $.25, sure they're subsidizing me (although this is still their choice). This isn't really analogous, though, because the countries do not get together and buy drugs collectively. A better example would be if my two friends and I all go to the video store and each rent a movie, individually paying $2.00 for each of them and $.25 for me. For whatever reason, I got a better deal from the video store, but my friends aren't subsidizing me; they're just getting suckered and, knowing I payed only $.25, it's their choice.
It is only because of your friends that the store can afford to rent a movie to you for $.25. Moreover, your new analogy misses the point of mine: in mine, the marginal cost of you watching the movie is neglible. That is not the case in your analogy.

I think you meant "same company" here since it's the company, not country, selling drugs and it doesn't really matter where it's located.
Yes.

Also, it's not clear why selling to different stores is not analogous to selling to different countries.You said "Are the members of Sam's Wholesale Club subsidized by patrons of regular stores?" "members" and "patrons" refer to people who buy from the stores, not the people who sell to the stores. I think it should be obvious why buying from two different stores is not analogous to selling to two different countries.

The same company sells its products to Sam's Club and to a retail store in the analogy, so....?
:confused:
Perhaps you, like me, thought one thing and wrote another?

[erislover]

I am a part of this industry, and I would like to say a lot here as this issue is both interesting to me and important to my livelihood.

I used to firmly come down on the side of "yes, obviously!" but now I think the situation is more ambiguous.

As far as I have come to know, there isn't any sense in which companies "recoup" development costs, and in any event, approximating what really went to development is a wildly varying figure depending on which bean counters you ask at which companies.

The company wants to make a profit. So it will set prices at what it can and still generate a profit that satisfies it, or if that price cannot be met, then remove the product from the market (not sure if this has ever happened with drugs, though). But companies also want to stay in business, and for pharmaceutical companies this means patented drugs.

In the beginning of R&D phases, there are millions of molecules manufactured to be tested. Hell, companies exist whose only purpose is to turn out variations on a molecular theme: combinatorial chemists find a type of molecule that can show variations and vary it. Vary the hell out of it.

Now all these have to be tested in some way. how these millions (and I am not exaggerating) of molecules are best tested is a matter of debate, science, and friggin' divination. Accurate results with current technology are, in the scale of millions of tests to run, sloooooow. So finding target drugs is a hit or miss process. Most companies pretty much try and do as much as they can to get a drug out. If you actually look at what pharmas put out in terms of new patents (not reformulation patents, the dirty bastards :mad:) you'll see it isn't exactly a bustling field. There are a lot of big pharmas that only release a pretty damned small number of drugs, and they need to ride that patent as long as they can.

Most estimates for drug development run about five years, start to finish (FDA approval). Since current technology basically means "try a bunch of 'em and pray one is good enough for something that we're researching", we're talking some pretty hefty "luck" here—part of why biotechs aren't stable stocks in the slightest.

Of course, finding a drug isn't a matter of just creating one and checking its properties. You have to also check them against targets: what you want the drug to do. And that's the other half of the research: finding drugs that do something we are looking into. For all you know you have the best weight-loss drug ever, but if you're checking into how it affects cancer or something, you'll never know.

Currently, most pharmas do things backwards (in my opinion, but I'm not alone). They have diseases etc they're researching, and find molecules that seem to have the desired affect, make a shitload of variations on them, and try and find a formulation that works (dissolves right, is absorbed properly, isn't destroyed by various processes before it can do its thing, and can be delivered effectively without poisoning effects, etc, etc, etc). As I mentioned before, accurate measurements of the instrinsic properties of a molecule (intrinsic: permeability, solubility, dissolution, blah blah blah) are slow to gather right now, so they are mostly forced to go the other path. Efficient production would allow us to go the other way, or actually both ways: to find drugs that will at least get into the body, and then see which of these do what we want. This would allow big pharmas to basically stockpile usable molecules and test them against whatever targets they want. But... the technology isn't there, so things go the other way. Instrumentation companies are working on that all the time: better, faster, more meaningful measurements.

What this means is the there is no real way to "recoup" development costs, because if you try and figure out what you spent to get a drug you're lost. You're lost for two reasons. One is mostly what was mentioned above: the path a molecule goes through from beginning to end is really convoluted. The other is that, as mentioned as well, the development time is incredibly long: at least five times as long as any fiscal year. And the costs to develop it can't be known in advance in any meaningful predictive way.

So what is done instead is simply that research is budgeted, period. It is budgeted in two ways: by purpose (ie cancer research, etc), and by department (late stage research, target formation, yadda yadda yadda).

Research budgets vary not based on how much profits the company has, but rather on what they are looking for. Public and private research grants incite research directions. Perceived demand for better products can spur research. Company acquisitions can shift research entirely.

So to a pharma, research is more like an overhead than something they strictly invest in. When I invest in training my employees (hypothetically), I can expect certain things. If I invest in late-stage development, there is no way to tell what this will accomplish.

So I hope I'm clear: pharmas do not, and right now cannot, recoup research expenses because there is no meaningful way for the pharmas to quantify them. In the years I've been in the field I've seen pharmas grow from one-room labs to multinational corporations (Milennium Pharmaceuticals became unbelievably big in just six short years riding off a patent or three). I've also seen big uns downsize and send thousands and thousands of chemists fleeing for anywhere they can go.

What this all means. If there is no way to meaningfully recoup research costs, there is no way to assert that anyone subsidizes it. Pharma's research, like most public and private companies, is indeed driven by profits in an absolute sense, but not in any proportional way. So to look in terms of recouping costs is to actually approach this issue the wrong way. Instead the approach must be to look at profits as extending the life of a company with a very high operating cost (ie treat research more like overhead -- this isn't factual because research does have different tax implications, but conceptually is much more sound).

The important thing is to avoid the compulsion to look at pharmas as innovators. they are not. They are banking, ultimately, on luck. This is why small companies can grow hugely almost overnight, and huge companies start shrinking even though their "research costs" are many times larger than the ones who just exploded on the market.

I hope the above drives what I would like to say is my conclusion: until drug development becomes a science itself instead of divination with the trappings of science, there is no sense in which research is subsidized. Drug prices are not a part of research (because there is no ultimately meaningful way to quantify it -- not that that doesn't stop some, but this phenomena is well-known to people who report about the industry), and more research does not necessarily lead to more drugs. Innovation in research in fact takes place outside of pharmaceutical companies, in those places that work to manufacture tools the pharmas will utilize. Sales of said tools are not significantly lower to companies outside the US (eg in Europe), except in that, due to external economic reasons, there are less pharmas outside the US. This has nothing to do with drug pricing, however.

I want to clarify that I'm not saying companies don't quantify research. As I mentioned, they have to for tax reasons (well, they desire to for tax breaks :)). It is that the numbers they can utilize for tax purposes are not a function of what they spent to develop any particular drug.

Until there is a definite relationship between money spent on research and the number of drugs produced, the question of subsidy is unanswerable (it is not that the answer is: it doesn't happen).

[erislover]

I want to add...

A good way to look at it is that when a drug gets to late development (ie formulation work), any money spent researching it before is already spent, and was spent on a whole lot of other drugs too which may themselves become candidates. So for a company to make sound economic decisions, it instead has to say: the money, whatever it was (if we can ever quantify it at all) was already spent, and we're alive. We need to stay alive. And so pricing will follow with that in mind: what it costs to sell the pill, plus what it costs to (hopefully) keep the company alive.

Never is there a sadder sight then when a pharma has run out all its patents and is banking on brand name alone. Ok, there I exagerrated. ;)

[errata]

I see a lot of analogies here, but no real hard numbers.

I don't see how we can answer these questions without analyzing the actual budgets and pricing policies of these companies.

I will ask a corrolary question though.

IF european countries are currently being subsidized, and IF they suddenly were no longer subsidized, would the drug companies lower their prices in the US?

My guess is NO, they are simply selling at the highest price they can get. They would simply make more profit.

Now they might decide to invest this additional money in more R&D, but then again, they might not. They might simply decide to give their investors a better ROI. How can we really say how much profit is necessary for more R&D? Also, it seems likely to me, that after a certain point throwing more money at R&D will give diminishing returns, because they need good avenues for research to begin with.

Another theory, is that the drug market is very profitable and the monopolies granted manufacturers actually encourage waste- including poorly managed R&D. The US isn't subsidizing the Europeans, they're subsidizing poor management.

[revolutionarily]

Prices for medicines here in Australia aren't regulated by the government on the pharmaceutical company end. Drug companies can, and do, charge whatever they want for drugs. However, our government runs the "pharmaceutical benefits scheme", which subsidises the cost to the consumer by paying the drug company the difference. There are about 2,500 medications on the PBS list, those that arent on the list are not subsidised and the consumer pays full price. Those that are on the list incur a cost to the consumer of ~$AU25/script, or $AU3.70/script for low income earners.

It does cost the government a lot of money, but it helps most people get cheap medicines and the drug companies still get full profits.

[revolutionarily]

Well actually the drug companies get MORE profit because sick people who otherwise could not afford expensive medications can now get them (it's quite obvious that a lot of people who are sick can't work, and hence usually don't have large amounts of money lying around).

[The Ryan]

erislover, are you saying that there's no meaningful was to quantify research costs for a particular drug, or to quantify the research expenditures in general? I think that the total research expenditures shouldn't be too difficult to find. And of course this isn't a simple pay-$100-to-develop-drug-X, get-$150M-back-in-profits deal. Drug companies have various projects, each with a different expected cost and expected return, and if the latter is significantly higher than the former, the drug company will invest. The actual cost, and the actual return, can be quite different from what is expected. But there's still a connection there: if other countries paid more for drugs, both the expected and actual returns would go up, which would mean more investment, which would mean more drugs, which would mean more competition, which would mean lower costs.

"Until there is a definite relationship between money spent on research and the number of drugs produced, the question of subsidy is unanswerable " We don't need a definite relationship; we just need a definite correlation. If you're saying that higher drug prices have no effect on the number of drugs produced, why have patents?

[erislover]

Sorry, I was on a business trip.
erislover, are you saying that there's no meaningful was to quantify research costs for a particular drug, or to quantify the research expenditures in general?Particular drugs. This is why "recouping costs" is a chimera.
ut there's still a connection there: if other countries paid more for drugs, both the expected and actual returns would go up, which would mean more investment, which would mean more drugs, which would mean more competition, which would mean lower costs.I agree that this is a good way to think of researching in general, but researching pharmaceutical technology is not in this group. Other than acquisition work, large amounts of research do not yet seem to correlate to successful release of new drugs.
If you're saying that higher drug prices have no effect on the number of drugs produced, why have patents?I don't see what you're getting at. Patents are a way to ensure profit from intellectual property. The idea is that we can encourage new intellectual property if we grant creators of said property a temporary monopoly on its use. There is no question that there are hundreds of pharmas, very large and very small, busting humps to make new drugs. They want to do this for the profit that will come, yes. But as of yet there isn't any tried and true method of generating new drugs. It is a blind man looking for a needle in a haystack.

This is why there was so much work on reformulation patents, because pharmas needed to extend the life of existing patented drugs in order to hold off a large drop in revenue from not discovering new drugs.

Now, when a method becomes available for creating new drugs efficiently the large pharmas will have a huge headstart, and they know this. A lot of the research that pharmas do involves ways to quantify and qualify molecules with the hope that eventually they'll strike gold. The method will likely be patented, as will the drugs that come from them. Interesting future, if it happens.

[The Ryan]

Originally posted by erislover
Sorry, I was on a business trip.No problem.

Other than acquisition work, large amounts of research do not yet seem to correlate to successful release of new drugs.
I find that rather difficulat to believe. There are companies engaging in large amounts of research work, right? And the absence of a correlation isn't some special knowledge you have, right? Why would a company spend all that money, if they know it does not affect their chances of finding a new drug?

I don't see what you're getting at. Patents are a way to ensure profit from intellectual property. The idea is that we can encourage new intellectual property if we grant creators of said property a temporary monopoly on its use.
Yes, we can encourage research on new intellectual property. But if there is no correlation between research and results, then what benefit does society derive from more research? Wouldn't we be better off with cheaper generic drugs, and no more research?

I don't see how these arguments against the benefits of securing more revenure from other countries can't be used against the benefits of securing more revenue here in the US, and hence against pharma patents.

[erislover]

Why would a company spend all that money, if they know it does not affect their chances of finding a new drug?Companies cannot sit on money. If they do, it gets taxed. Why piss away 50% of your profits to the government and get "nothing" for it when you could dump it somewhere else that might have a pay-off? But they don't just dump it on research. They do things like give existing employees huge fringe benefits. Companies have huge lots with lakes and running or jogging tracks. They have libraries. They have complete cafeterias that serve breakfast, lunch, and sometimes dinner. They have day care centers on site. Hell, there are a few that have temporary housing on-site for relocating employees! That money goes all over the place, not just back into research. We're talking about some companies that are several city blocks in size, not including the land they own.
But if there is no correlation between research and results, then what benefit does society derive from more research? Wouldn't we be better off with cheaper generic drugs, and no more research?You can't win the lottery if you don't play, The Ryan. And there is a lot of research going on, and as drug discovery becomes more scientific those companies with the existing facilities will blow new drugs out like a shotgun blast.