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

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

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.

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

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.

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.

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.

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.

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?

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.

Yes.

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.

:confused:
Perhaps you, like me, thought one thing and wrote another?

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).

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. :wink:

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.

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.

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).

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?

Sorry, I was on a business trip.

Particular drugs. This is why “recouping costs” is a chimera.

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.

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.

No problem.

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?

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.

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.

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.