Drug companies are companies. They need to make money. There is a world economy. Companies have the capital of R&D and production & distribution sunk into their investment; they have to get more money than the initial investment to make a profit. Now, add in the length of the patent. In the US, it’s 17 years from the filing. If it takes them five years from patent to run all tests, get the doseage right, fully understand the effects of the drug, and then an additional 2 years to get past the respective FDA’s, that’s only 10 years to make a profit before generics can come in and change the price. And that’s assuming that no other drugs get on market for the same indication. (And 5 years is often ambitious.)
If a company needs to sell units at, say, 20$ to get in the black in 10 years over the global economy, and , say Canada, forces a drug to be sold at 15$, said company will need to raise prices elsewhere to make their money. Initial investments can be as high as 100’s of billions of dollars. Simple econ: if you calculate X as cost of a unit, and someone forces you to sell at (X-n), you will need to make up the difference elsewhere.
I admit this sounds odd, esp coming from someone who is against socialization. Here is my thinking, tho: What are you paying for? You’re paying to get back your life. As it is my life I’m getting back, I should be paying with a portion of my life. The closest comparison to your life (and quality thereof) is your income. Hence, this should be part of the income tax.
(But I also admit, this would be in an ideal world, one I don’t believe can exist in this country as it currently stands.)
The economics aren’t quite as straightforward as you make them out to be. Think of this thought experiment: If the drugs weren’t sold in Canada at all, or if the government forced the Pharm companies to raise the price of drugs selling to Canada, what do you think would happen to the price of drugs in the U.S.? They would go UP. Why? Because in a free market, the company will set its prices at a point which maximizes profit.
In other words, the drug companies are engaged in discriminatory pricing - a pricing system that lets them sell their product most efficiently. Screw with that, and their profits go down. As you point out, the current regulatory system puts hard boundaries on when a companies can profit from their drugs. Therefore, if you take away their foreign markets it is entirely possible that they will raise prices in the U.S. to take up the slack, if they can. It depends how elastic the demand for their drugs is.
I’d like to think we are neither. I am working for the same goals. I do want to see more people (in theory all) covered. All I disagree with is the means to do it. I simply have a different outlook on how the process will be best accomplished. (I don’t have horns, I swear!) What I see are people crying for help, but who don’t understand the full ramifications of the “simple” answer. From what I can tell, few people hear have a good grasp of the global healthcare market. They see other countries that have a strong socialized medicine program and say “why can’t we have that?” One of the answers is that, in some ways, we are paying for other countries to have their socialized medicine. The money has to come from somewhere, and right now, we are paying for other countries to have good healthcare.
So, your claim is that the pharma companies don’t already charge the most they can get?
That makes no sense. Prices can’t simply go up and profits go up. The companies should be setting prices at the point where it maximizes profit no matter what is happening elsewhere. The idea that they can simply raise prices in the US, and thereby raise their profits, is suggesting precisely the opposite than that they are trying to maximize profits now.
In other words, you’re saying they can get $5 a pill for Supermedilor, and will get $5 a pill for Supermedilor, but they are only charging $3 now? Altruism? Poor business sense? What?
Oh its much worse. Only those who can not afford it are even asked to pay full retail. PPO s and other pagers either have discounted free schedules or pay the lesser of an amount that they decide or your charge. His discount brings it to what he really charges then on average. Then saving the administration cost.
Are there not drug subsidies in various countries in which the drug would still be bought from the company at $20 and sold to the consumer at $15 with the government paying the remainder?
some yes, but some countries simply set the price, and that’s that. most companies don’t want the bad press of staying out of markets, so they take the hit.
Just because the price covers manufacture, it does not cover invested capital. “Profit” means that the price they get will cover all costs, not just manufacture and shipping. I’ve said it before, and I’ll say it again: We (The US and the UK) are paying for almost all of development costs. The revenues from other countries may cover M&S, but not R&D.
No, that’s not how it works. Sorry. Sunk costs are relevant to a company’s bottom line, but they’re irrelevant to whether it’s profitable to sell additional units at any given price.
Assuming drug companies are rational economic agents, the following will be true:
Once a drug is being sold, the price will be set at the equilibrium point resulting in the greatest profits, i.e., that point at which raising the price will result in decreased sales outweighing the increased profit per unit, and at which lowering the price will result in decreased profit per unit outweighing increased sales. If governmental price controls are in effect, the equilibrium price will be at the controlled level (assuming that the controls aren’t set so high that they’re already beyond equilibrium), for the simple reason that increasing the price past that point will result in zero sales, i.e., they’ll be forced out of the market by regulations.
Now, at the point at which decisions regarding research are being made, prospective profits from various international markets are absolutely relevant. The economically rational drug company will always spend its research dollars in such a way that it can expect to recover research spending. If some countries have price controls that force the retail price to be set below the equilibrium price, that absolutely must be taken into account. This means that if potential profits in international markets are artificially depressed by governmental price controls, drug companies will, other things being equal, spend less on research. The fact that prices in the US are higher than elsewhere means that, other things being equal, drug companies will spend more on research than they would if prices in the US were subject to price controls. (Of course, other things aren’t equal, but that’s another issue.)
But that’s irrelevant to the question of drug pricing after the research costs are already sunk. It’s economically irrational to factor sunk costs into your future decisions. Once the costs are sunk, the economically rational thing to do is maximize whatever profits you can make, regardless of whether those cover your research costs or not. And the way to do that is to set your price at the equilibrium point. The described behaviour of raising prices past the equilibrium point in one country because a second country forces your price there to be set below the equilibrium point is not economically rational. You’re failing to maximize your profits. That’s what RickJay meant when he said the idea doesn’t pass Econ 101 logic. Your suggestion of passing up on sales that turn a smaller profit is equally irrational. So long as a given market results in profit over and above manufacturing and distributing expenses, it’s irrational to pass up on it, even if those profits aren’t very significant in relation to your sunk research costs. That’s why drug companies sell in markets with price controls. Because they turn a per unit profit. As I said, bad press has nothing to do with it.
Recouping sunk costs are extremely relevent to the continuing ability of the company to delevope new products.
Wrong. Your business strategies are shortsighted. If you can’t take long term R&D in to consideration as a factor for pricing your products, you will not continue to have R&D. Today’s round of drugs needs to be able to foot the R&D departments until they can provide the next round of drugs. If you discount this relevance (as, unforetunately, many folks do), you are limiting the R&D you are able to conduct in the future.
Sorry, do they go away? When I say invested capital, you have to remeber, it’s an ongoing process. Just because you have a viable, profitable drug on the market does not mean you shut down your R&D. R&D is sunk in that once the compound’s out there, you don’t need to spend any more on developing it, but you need to continue funding the R&D department for the next generation of products.
Yes, companies can bring in more than manufacture and distribution in countries with price-fixing, but in those markets, you are not making enough money on the sale to justify the initial investment.
If we fix our prices, R&D will disappear. Do we have all of the drugs that you want?
Evidently you’re not following me. Obviously it’s important to the drug company that it gets (on average) a decent return on its research dollar. But that’s only a factor in deciding how much to spend on research, and where to focus that research. Once you’ve spent the money on research, the only economically rational thing to do is to make as much profit as possible from the end product. And the way to maximize that profit is to set your price at the equilibrium point. If that profit turns out to be insufficient to cover the research investment, well, that sucks, and choose your next research project more carefully. But how in the blue blazes does it make sense to price your drug higher than the equilibrium point? As RickJay said, this is Econ 101 stuff. It’s been a long time since I took it, but this is really basic stuff.
How is this relevant to the point? The research costs of the drugs you have on the market are sunk. You’ve already spent them. That money is gone. What you should do now is set your product prices based on what will result in the highest profit. And of course you should continue research on new products. And of course you want your bottom line to be in the black, which means balancing research costs with profits. That’s why I said “The economically rational drug company will always spend its research dollars in such a way that it can expect to recover research spending. If some countries have price controls that force the retail price to be set below the equilibrium price, that absolutely must be taken into account.” But that doesn’t mean passing up on profitable markets, or intentionally setting your drug prices at points which won’t maximize profits, as you and others seem to be saying.
This is just not understanding the issue. If you’re considering whether or not to sell in a given market, you have a product. You’ve spent the development money. Your decision should be based on whether you turn a per unit profit, not on whether your projected profits from this market will cover the development money that you’ve already spent.
It’s just bizarre that you’d even argue this point, frankly. Say I buy a truckload of widgets at $5/unit, expecting to be able to sell them at $7/unit and turn a nice profit. Unfortunately for me, the widget market crashes, and they’re now worth only $2/unit. Assume that there’s no reason to expect the price of widgets to go up in the forseeable future. Are you saying that I shouldn’t sell my widgets at $2/unit, because that would mean I’m losing $3/unit? The $5/unit I spent is a sunk cost. That money is gone. The only rational thing for me to do now is get as much for my widgets as possible, and that means selling them for $2/unit.
Of course, this isn’t how pharma works. In pharma, you spend 10000000 developing a drug, which you can then produce at .05/dose, distribute for $.25, and sell at $1.55/dose in the US or 1.15/dose in Canada for ~10 years, after which you'll only be able to sell for .34/dose. Now you’ve got to sell 8 million doses in the US or 12 million doses in Canada (or some combination thereof) before the 10 year limit is up or you’ll have made a bad research investment. But even if you can only realistically expect to sell 5 million doses in the US and .5 million in Canada, you should still do that. Anything else would be like sitting on the $2 widgets.
Well, no, price fixing won’t make research disappear. But yes, it will reduce it. Other things being equal. But as I said, other things aren’t equal. Advertising costs, for example. Marketing costs in the US market are nearly as high as research costs are. But in the Canadian market, marketising costs are much lower, since you can only advertise to physicians, and not to consumers. So the drug companies might not be able to sell for the same price, but their expenses are lower too. And don’t get the idea that the price controls limit drug companies to recouping manufacturing costs and a small profit. There’s still a lot of money to be raked in with patent drugs in Canada. Just for example, for a long time I took Asacol on a daily basis. It’s an NSAID, 5-aminosalicylic acid, to be precise, in an Enteric coating. I paid ~60 cents a pill. At the pharmacy, I’d see generic brand Enteric-coated ASA, which is damn near the same thing from a manufacturing perspective, for ~5 cents a pill. Canadian price controls are not draconian by any reasonable measure.
Moreover, drug companies focus research in particular areas, and neglect others. The ideal drug from a corporate perspective will effectively treat the symptoms of a common chronic disease, but won’t cure it. Then you can charge a whole bunch for it, and many people will use it for long periods of time. But a drug that quickly cures a relatively uncommon (but serious) illness? There’s no money in that, and so it won’t (as likely) be researched. That’s why companies spend fortunes researching the next Celebrex, but don’t spend fortunes researching the next penicillin. So relying on pharma to do all your drug research is misguided in the first place. Better to get at least some of your drug research in other ways, like through universities.
What you’re saying is simply wrong. It makes no sense at all. R&D is an indirect cost, and doesn’t affect per-unit price, and you cannot make more money simply by raising prices.
Let’s see if I can try to explain.
Look, R&D costs lots of money, fine. Consider the decisions the drug company makes after the drug is in production and ready to sell. We’ll come back to R&D.
Suppose Pfizer wants to sell Newdrugbutin in the United States. Pfizer’s marketing and market research people are going to use past experience, economic models, focus groups and what have you to determine to equilibrium price Newdrugbutin would expect to command. What they’re going to do, basically, is construct a model for how many Newdrugbutin units they’re going to sell at any given price:
$17 per pill = 100,000 sold per month = $1.7 million
$20 per pill = 90,000 sold = $1.8 million
$23 per pill = 80,000 sold = $1.84 million
$26 per pill = 65,000 sold = $1.69 million
So on and so forth. Eventually they will settle on what they think is the equilibrium price (they have to consider marginal cost at different levels of production, too, but for the numbers we’re talking about it’s not going to make a lot of difference.)
So let’s suppose Pfizer sets the price of Newdrugbutin at $23, since that maximizes monthly revenue at $1.84 million; suppose the marginal cost is pretty much the same, and that’s the ideal price.
Now they go to Canada. The Canadian government, being the monopsony buyer of pharamceuticals, argues and stalls, and Pfizer decides they won’t get a better price than $20 a pill, so they sign that deal.
Now explain to me, using some sort of logic, why Pfizer would then turn around and raise the price of the drug in the United States. Assuming they’re already setting it at the market clearing price, which of course they always are, THEY WILL LOSE MONEY IF THEY RAISE PRICES. Raising prices in the United States will not make more money, and will not help make up supposedly lost profit from Canada.
I don’t know how more simply it can be put. A product has an ideal price, an equilibrium price. In some cases marginal cost will affect that price and in some cases it won’t; in this case, it generally doesn’t, at least not very much. Drug companies set their prices in the US based on what they think the equilibrium price is - the price at which they will make the maximum possible amount of money. If they deviate from that price, up or down, they lose money.
If you could just make more money by raising prices beyond the equilibrium price, then everything would cost a million jillion dollars. Why do you think companies in financial trouble don’t just raise prices a hundred percent every time they run into trouble? Because you can’t make more money that way.
You also don’t seem to know the difference between a direct and an indirect cost.
Research and development is an indirect cost. If the equilibrium price of Newdrugbutin is $23, it is $23, and that is the end of the story. That price is determined solely by the demand for the drug and the supply of the drug, as well as, again, marginal (e.g. DIRECT) costs, which in the case of a drug means the physical process of mixing the chemicals and forming the pills and trucking them to a logistics company to be sent to drug stores.
It does not matter if Newdrugbutin cost $100 trillion skillion dollars to invent, or if it was accidentally discovered in a scientist’s egg salad sandwich (Viagra was discovered sort by accident, while they were working on a drug to do something else.) If the market-clearing price is $23, that’s what it is. You cannot, just because you spent a lot of money inventing the drug, pretend that reality is not what it is and that the ideal price is REALLY $250. If the market says it is $23, it is $23; any deviation from that price loses you money.
Gorsnak already tried to explain this to you using the term “sunk costs.” You replied to him by saying
Well, duh, but Gorsnak didn’t say they weren’t. His point was that sunk costs are, you know, SUNK COSTS. A “sunk cost” is a cost that is dead and gone and that no longer affects your decisions from the present on forward. You do know what a sunk cost is, right?
If you spend a billion dollars developing a drug and now you’re ready to go into production, that billion dollars is gone. It’s history, out the door, lost forever; from this point forward the only thing that matters to you is how many units you can sell at what price and how much MARGINAL PROFIT that gives you. If the market determines, after all your best efforts to market the drug, an equilibrium price that will net you only $800 million, then you will lose $200 million and there is absolutely nothing you can do about it. If you raise the price beyond the equilibrium price you will simply lose even more money, because you’ll be pushing demand away faster than you bring in additional per unit revenue.
The fact is that the money drug companies “lose” because Canada et al force the prices a bit lower cannot be made back. Ever. You can’t pretend the equilibrium price is anything other than what it is.
My thinking is that the price of the drug would go up slightly if you got rid of the lower priced alternative, simply because the new equilibrium price will be higher in the U.S. due to the loss of a low-cost over the border competitor for their own product. Part of what would have limited sales if Pfizer raised price would be an increasing number of customers who would then choose to cross-border shop their drugs. Take away that pressure, and Pfizer’s prices will go up slightly.
So the existence of low-cost Canadian drugs may result in a lower cost for the American drugs.