Does anyone know or have a reliable guide to the number of new drugs that enter the market and how many (percentwise) are made by American companies in America?
In our newspaper it states approx 1 successful drug is discovered (or made) after approx 2,000 failures. This inflates the cost of drugs in America. Other countries simply let American do the work and make and find drugs. Thus Americans pay more.
I don’t have the exact stats. It is true that the bulk of world drug research takes place within the U.S. Even many foreign companies have their research institutes in the U.S.
But it’s not half by any means.
[QUOTE=According to Pliny]
But it’s not half by any means.
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Looking at the Nobel laureates across all disciplines, I would be surprised if it’s not much more than one-half.
America certainly does get more than its share of scapegoating on the issue. 
[QUOTE=sdguy]
In our newspaper it states approx 1 successful drug is discovered (or made) after approx 2,000 failures. This inflates the cost of drugs in America. Other countries simply let American do the work and make and find drugs.** Thus Americans pay more.**
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I don’t follow this logic. Why do Americans pay more? The cost of development is passed on to all consumers, foreign and domestic. Why would drugs cost less in other countries just because they are developed here?
[QUOTE=Fear Itself]
I don’t follow this logic. Why do Americans pay more? The cost of development is passed on to all consumers, foreign and domestic. Why would drugs cost less in other countries just because they are developed here?
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Yea, I don’t see the connection either. People in other countries do tend to pay less for thier drugs, but only because they have huge state run health inurance plans that have enormous bargining power. But this doesn’t have anything to do with where the drugs are produced, a French drug is as likely to cost less in France due to this mechanism as one produced in the US.
[QUOTE=Fear Itself]
I don’t follow this logic. Why do Americans pay more? The cost of development is passed on to all consumers, foreign and domestic. Why would drugs cost less in other countries just because they are developed here?
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It is a complex issue. Drugs cost $$$$$$$$ to develop but only $$ to produce. Once they go into production, the drug companies can make a profit on just the production part by selling them relatively cheaply if that is what they have to do. The medical systems in many countries plays hardball with the companies on how much they can charge there. The companies take the deal because they are making a nice profit in a way for just producing the drugs.
The U.S. doesn’t have such a system so much of the development tab falls with us in more than one way. Consumers and insurance companies have to pay top dollar for the drugs and the federal government also spends billions in grants to help get the drugs developed in the first place. The other nations of the world do coast on our efforts to some degree.
The connection is simple. For example people in New Zealand don’t have any costs associated with developing a drug.
For instance let’s say 1 drug works and costs $1,000 (made up figure). But for the one drug that worked there were 2000 failures at $500 each a failure.
Thus 1 success is 1 X 1,000 = $1,000
2000 failures = 2000 X 500 = 1,000,000
Thus to get one successful drug it cost the company $1,100,000.00
Now New Zealand comes along and just licenses the drug to one of it’s companies. They pay much less because they are not paying for the failure, just the the license fee for the success. Some countries not party to the patent convention just take the drug and manufacture the equivilent in otherwords steal it.
[QUOTE=Shagnasty]
It is a complex issue. Drugs cost $$$$$$$$ to develop but only $$ to produce. Once they go into production, the drug companies can make a profit on just the production part by selling them relatively cheaply if that is what they have to do.
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Unless pharmacos are less astute than I give them credit for, why would they do that, when every other industry passes the cost of development along to consumers? It still makes no sense. You can’t sell a product at a price that is independent of the cost of development.
[QUOTE=Fear Itself]
Unless pharmacos are less astute than I give them credit for, why would they do that, when every other industry passes the cost of development along to consumers? It still makes no sense. You can’t sell a product at a price that is independent of the cost of development.
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The issue is that many countries have socialized health systems that have a monopsony on drug purchases within a country. These systems can tell the drug companies to accept less money, or they won’t buy any drugs from them at all. The situation is similar to the old West Virginia coal mining town, where workers had to accept the wages from the coal mining company, or not work at all.
[QUOTE=RandomLetterAssortment]
The issue is that many countries have socialized health systems that have a monopsony on drug purchases within a country. These systems can tell the drug companies to accept less money, or they won’t buy any drugs from them at all. The situation is similar to the old West Virginia coal mining town, where workers had to accept the wages from the coal mining company, or not work at all.
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That’s called “agreeing a price”. You know, just like every commercial transaction in the history of the world.
[QUOTE=RandomLetterAssortment]
The issue is that many countries have socialized health systems that have a monopsony on drug purchases within a country. These systems can tell the drug companies to accept less money, or they won’t buy any drugs from them at all.
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Meanwhile, Medicare is legally barred from doing the same bargaining with drug companies in the USA. Hard to blame anyone else when we’ve shot ourselves in the foot with short-sighted legislation.
[QUOTE=Fear Itself]
Unless pharmacos are less astute than I give them credit for, why would they do that, when every other industry passes the cost of development along to consumers? It still makes no sense. You can’t sell a product at a price that is independent of the cost of development.
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I don’t think socialized healthcare has anything to do with it.
Nobody is re-importing drugs legally to the best of my knowledge, so pharmaceuticals can set prices independantly for each country since elasticity is completely different everywhere. The production cost is minimal, and once the drug is developed, as long as they are selling above production cost they are not losing money further. They price it in each country at the supply/demand point, it’s just it’s different for every country. They can sell at X USD in US and sell A units. They can sell at Y USD in Zimbabwe and sell B units. Their revenue for these two countries is XA + YB. If they set the price in Zimbabwe at X USD, B would become zero, so their revenue would be X*A + 0, which is less than the revenue for any B greater than zero. It’s much more complicated than that with marketing, distribution, competition, patents, etc. but the price in Zimbabwe has no bearing on the price in the US because most likely you cannot legally buy it in Zimbabwe, import it to US and undersell the manufacturer.
[QUOTE=groman]
The production cost is minimal, and once the drug is developed, as long as they are selling above production cost they are not losing money further.
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This defies all the principles of economics I have ever heard. Cost of production is a small consideration in setting prices when development costs are so huge. If they could set the foreign price based only on the price of production, why can’t they do it here as well, and just eat the cost of development all together? You can’t call it a profit if you are unable to recoup the cost of development, and these companies are not in business to lose money. It still makes no sense.
[QUOTE=Fear Itself]
This defies all the principles of economics I have ever heard.
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It shouldn’t. It’s basic supply and demand. The cost of development is one time, let’s call that Cd. The cost of production is cumulative, let’s call that Cp(N) where N is the number of units produced. Let’s forget the costs of marketing and distribution for simplicity.
You’ve already spent Cd. So far your profit is -Cd and your revenue is 0. From now on, you have generate at least Cd+Cp(T) worth of revenue to break even, where T is the total number of units produced to achieve that.
Now, the demand curve is different for every country and they are isolated markets. Your profit goes up as long as the price per unit exceeds the cost of production for that one unit. Assuming the demand in the US for a given price is Dus(Price), and the demand in Zimbabwe for a given price is Dz(Price). If you price the same at P your revenue for the two countries is going to be
= (Dus(P) + Dz(P)) * P
To break even that has to exceed Cd + Cp(Dus(P) + Dz(P))
However, since the demand curves are different, and the markets are isolated you can maximize your revenue by setting two prices Pus and Pz that correspond to the maximum estimated revenue per country. Then your revenue becomes
= (Dus(Pus)*Pus + Dz(Pz)*Pz)
(with the case before simply Pz = Pus)
Now, there is no economic principle that I am aware of that even implies that for two isolated markets Pz = Pus would generate maximal revenue. It just doesn’t make sense.
Or in laymans terms: They price what they want in the US. If they set the same price in Zimbabwe nobody will buy. But they can set a lower price in Zimbabwe without changing the price in the US. It will not affect US sales at all, but *somebody * in Zimbabwe will now buy. Hence the revenue will be higher. If they priced the same price in the US more people might buy but their analysis shows that the revenue would be lower, so they don’t.
[QUOTE=groman]
They price what they want in the US. If they set the same price in Zimbabwe nobody will buy. But they can set a lower price in Zimbabwe without changing the price in the US. It will not affect US sales at all, but *somebody * in Zimbabwe will now buy. Hence the revenue will be higher. If they priced the same price in the US more people might buy but their analysis shows that the revenue would be lower, so they don’t.
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By this logic, they should sell below the cost of production in Zimbabwe, if that is all the market would bear. So long as the profit on sales in other countries subsidize the difference in Zimbabwe, it is all profit. Somehow, I don’t think the stockholders would agree.
[QUOTE=sdguy]
The connection is simple. For example people in New Zealand don’t have any costs associated with developing a drug.
For instance let’s say 1 drug works and costs $1,000 (made up figure). But for the one drug that worked there were 2000 failures at $500 each a failure.
Thus 1 success is 1 X 1,000 = $1,000
2000 failures = 2000 X 500 = 1,000,000
Thus to get one successful drug it cost the company $1,100,000.00
Now New Zealand comes along and just licenses the drug to one of it’s companies. They pay much less because they are not paying for the failure, just the the license fee for the success. Some countries not party to the patent convention just take the drug and manufacture the equivilent in otherwords steal it.
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I don’t understand this at all. Why is New Zealand coming along and “just licensing the drug”? Company X, the company that has spent $1,100,000.00, is going to sell the drug in both the US and the NZ market. I am sure it would plan to recoup the cost of development from the profits after production of the drug for both markets. Why does company X not make any money off the drug just because it is being sold in New Zealand?
[QUOTE=Fear Itself]
By this logic, they should sell below the cost of production in Zimbabwe, if that is all the market would bear. So long as the profit on sales in other countries subsidize the difference in Zimbabwe, it is all profit. Somehow, I don’t think the stockholders would agree.
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No. That’s wrong. If they are selling above the cost of production in Zimbabwe, each additional sale would increase TOTAL profit regardless of other countries. If they are selling BELOW the cost of production in Zimbabwe each additional sale DECREASES total profit regardless of other countries. This isn’t about using one country to subsidize another, this is about the fact that there’s one-time cost and there’s cumulative cost. Each sale has to at least cover the cost of that one sale. You may include the development cost in that, but that makes the calculation difficult because development cost per unit depends on total number of units sold.
Let’s take an extreme, fake, but simple example:
It costs $500 to develop a drug. It costs $1 to make one unit of the drug after it is developed. The manufacturer has access to two markets
USA: Where 20 people are willing to pay $2 per unit. Where 10 people are willing to pay $45 per unit. 5 people are willing to pay $80 per unit. 0 people are willing to pay $100 per unit.
Zimbabwe: Where 1,000 people are willing to pay $2 per unit. 5 people are willing to pay $5 per unit. 0 people are willing to pay $6 or above.
The optimal price strategy (using only the prices listed) is to sell at $2 in Zimbabwe and at $45 in the US, with total number of units sold being 1010, with total revenue being $2450 and total cost being $1510, yielding a profit of $940.
If the price is $2 in both countries, the revenue is going to be $1040, total cost $1520 and you didn’t even break even.
If the price is $45 in both countries, the revenue is going to be $450, total cost $950, and you didn’t even break even.
See the benefit?
[QUOTE=Driver8]
I don’t understand this at all. Why is New Zealand coming along and “just licensing the drug”? Company X, the company that has spent $1,100,000.00, is going to sell the drug in both the US and the NZ market. I am sure it would plan to recoup the cost of development from the profits after production of the drug for both markets. Why does company X not make any money off the drug just because it is being sold in New Zealand?
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Perhaps because New Zealand does not offer the same patent protection as does US and another pharmaceutical company is capable of cloning the drug generically without the need for any R&D spending since it’s already been done by the original manufacturer.
[QUOTE=Struan]
That’s called “agreeing a price”. You know, just like every commercial transaction in the history of the world.
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The problem is that the other countries are mostly not paying for the R & D. And they can theoretically just take away the patent (in their own country) by force if they so choose, and hand it over to a competitor within their own borders, who can sell it really cheaply, since they don’t have any R & D costs to recoup.
Edited to add:
There’s also a another issue involved with alterinbg the U. S. healthcare payments. If we did have group bargaining, we could inded get cheaper medicine. On the downside, this might well kill the drug companies’ ability to create new medicines. “Short-term” thinking is a relative concept.