But this assumes you can just set aside development costs and just look at the difference between the production cost and the selling price. That is an unrealistic way to determine profit.
Very few countries do this, however, in anything other than extraordinary circumstances. In particular, wealthy industrialized nations (even those with socialized medicine) respect each others patents. This isn’t to say they don’t act to keep the prices of patent drugs down - Canada uses out and out price controls for that purpose, and various other countries use price regulation and/or state-run pharmacare monopsonies to keep prices lower than in the US. But actual revocation of patents? I’ve heard that threatened for AIDS drugs, but can you actually point to any examples? It wouldn’t surprise me if, say, India were doing something like that, but New Zealand?
As for Americans subsidizing drug research, I disagree. Americans are subsidizing drug ads, is what they’re doing. My god pharma is spending ridiculous sums of money on ads in the States.
No it isn’t. Sunk costs aren’t relevant to future profits. Anyone who sets prices based on recouping sunk costs rather than on maximizing profits is a poor businessman. The point at which you need to consider development costs is when starting the research in the first place, at which point you ask yourself if spending X dollars for a Y% chance of coming up with a profitable drug is a good bet. Once you’ve spent the research dollars, how much you spent is entirely irrelevant. The only economically rational thing to do is to make as much money as possible off of the resulting drug, whether that turns out to cover the research costs or not.
Then would you agree the OP is wrong when he says Americans pay more for drugs because they are paying for development costs, when the rest of the world does not?
Americans are paying more. The % of each sale that goes to recoup the development costs is the same regardless of price. The implication OP is making is not an economic one per se, but rather that Americans wind up being the biggest chunk of revenue for any given pharmaceutical. I am inclined to believe that.
I don’t dispute that Americans pay more. We can afford to pay more, so the price varies due free market pressures. I only questioned his conclusion that we pay more because we are getting stuck with the development costs.
Well US is paying the development costs in two indirect ways.
-
The more is sold the cheaper it becomes to sell due to development costs being fixed. Initial consumers are most often in the US, as well as those paying the highest price. If a pharmaceutical company doesn’t expect to sell a sufficient # of units in the US at the highest price they might not bother developing that product at all.
-
A lot of countries do not have the same patent laws as the United States and once a drug is developed and tested a foreign chemical company can swoop in and start manufacturing it and marketing it in another country. In this regard, the American pharmaceutical company loses potential profit to a foreign company that did not pay for R&D and can thus undersell the pharmaceutical by having the manufacturing cost reduced through home field advantage. The company might then choose not to enter that foreign market at all, reducing revenue (even if slightly) and potentially affecting prices and behavior elsewhere.
For instance easy-to-manufacture drugs become a less appealing proposition. Manufacturing Epi-Pens, for example, is much more difficult than manufacturing just epinephrine itself.
That is correct. Americans are paying more for drugs because of the lack of price regulations and the specific supply/demand situation in the US.
However, the relatively high US profits pharma companies can expect to make will no doubt increase the amount they’re willing to pay on product development. In that sense Americans are footing more of the research bill. But they’re footing more of the research bill because they’re paying more for the drugs, not vice versa.
India actually changed their drug patent laws recently (right at the end 2004, to comply with WTO entry criteria) but prior to didn’t allow patents on chemical formulas, and has a large generic drug industry. You are correct that first world countries have patent agreements, and don’t invalidate drug patents - the bargaining power of national health programs is enough to get them lower prices.
As for drug ads, drug companies (like any other rational actor) wouldn’t be running so many ads if the extra revenue produced by the ads didn’t exceed the cost of the ads. For example, if a drug cost $50 million to produce, and with no ads brought in $100 million in revenue, the drug company would make $50 million, enough to cover the cost of developing another drug.
But if they spent $50 million advertising this wonder drug, and with increased exposure of the product, are able to make $200 million off of it, they have $100 million profit enough to research 2 new drugs, or one new drug + give the CEO a bonus & the stockholders a hefty dividend - well they would be crazy not to advertise.
Of course, it is entirely possible that all the pharmaceutical companies could be making a massive mistake, and are advertising way too much, but if that were the case, then eventually one company would figure it out, tone down the ads, and make $$$.
So the reality is that because the US consumer can and will pay more, the US consumer gets the benefits sooner.
Here in the UK, many all drugs are subject both to a clinical assessment, then a cost/benefit assessment, and this can take years.
The problem comes when the clinical assessment shows a benefit, but the costs are determined by our purchasers to be too great.
Instead of the wealthy getting the treatment, because of socialised medicine, noone gets it, even if someone could afford to pay for the treatment, the drug is not licensed for use here.
In some ways, it means everyone is treated equally.
Our problem is that if we do license a drug, everyone can have it, no matter what the cost, unlike the US, where only those whose medical insurance will pay up.
So a treatment that is so expensive that only a small percentage of the US could benefit, finds no chance of a licence here.
Worse still for us, even if the drug is licensed here, each region in the UK has its own Local Health Authority(LHA), whose task is to ensure best value for money and to attempt to balance their budgets.
Each is, in effect a purchaser and can cut their own deals, each one sets it own priorities, but the general rule is, once you have spent your money, thats it.
We end up with a patchwork of treatments, where, depending upon where you live, you may obtain some drugs, but not others.
It’s not surprising, because you can have very differant populations with differing medical requirements, if you go to some towns and cities, the population is relatively young compared to ,say, Eastbourne, where the population age is very much higher than the national average.
So if you are young in Eastbourne, your chances of certain juvenile leukeamia treatments is less optimistic, than if you live in Leicester.
If you live in Leicester, you are much more likely to obtain leading edge diabetic treatment, as there is a large Indian population there, and this condition is more prevalent among them.
[QUOTE=Gorsnak]
Very few countries do this, however, in anything other than extraordinary circumstances. In particular, wealthy industrialized nations (even those with socialized medicine) respect each others patents. This isn’t to say they don’t act to keep the prices of patent drugs down - Canada uses out and out price controls for that purpose, and various other countries use price regulation and/or state-run pharmacare monopsonies to keep prices lower than in the US. But actual revocation of patents? I’ve heard that threatened for AIDS drugs, but can you actually point to any examples? It wouldn’t surprise me if, say, India were doing something like that, but New Zealand?
[quote]
I recall Brazil did recently.
But more importantly, it’s always a factor in the drug co’s calculations. The knowledge that any country can simply yank their patents is a powerful force on the negotiation board, even if it isn’t spoken of. Moreover, you just mentioned other ways the countries can force the price down. What are the drug companies going to do about it? They can either make some profit, or none, in that market. So they make the “some,” and try to make up the rest in the only country that’s paying it’s full share (and then some).
Yes, it’s a business. But even advertising aside, the problem would remain.
I just wanted to add from my own experience, that these 2,000 falures are “successes” out of the millions that have already passed the initial screening as potential drug candidates. By the time you get the potential drug candidates down to 2,000, those candidates have already passed through several hoops concerning production, toxicity, stability, and effectiveness.
For example, there are many known natural products that test as great anti-cancer drugs but they can only be made in milligram quantities using benchtop methods that don’t translate to industrial production. Drug development is unbelievably complicated and expensive.