The Long Term Consequences of Coercion against Drug Companies

Bill Egan: Was very pleasantly surprised to see some sense in an editorial in the Boston Globe. Importing socialist price controls looks to be a great way to cripple the drug discovery business in the US (hint-how many new drugs were developed in Canada in the last ten years?) and thus introduce a shortage of novel drugs in the long term. This should work just as well as rent controls do at creating more nice apartments. Bill

 Op-Ed -- THE CHEAP DRUG TRAP

LAURENCE J. KOTLIKOFF , 21 June 2004, The Boston Globe

ANY DAY NOW, THE SENATE WILL PASS A BILL TO LEGALIZE THE REIMPORTATION OF DRUGS FROM CANADA AND, OVER TIME, 19 OTHER COUNTRIES, MAINLY EUROPEAN. THE BILL HAS WIDESPREAD BIPARTISAN SUPPORT. INDEED, ITS CO-SPONSORS INCLUDE SENATORS KENNEDY AND LOTT, WHO GENERALLY DISAGREE ON EVERYTHING. THE FACT THAT THEY AND THEIR COLLEAGUES, ALMOST ALL OF THEM LAWYERS, ARE CONVINCED THEY KNOW HOW TO FIX THE PRESCRIPTION DRUG MARKET IS ENOUGH TO RAISE AN ECONOMIST'S EYEBROWS. AND A GLANCE AT THE 73-PAGE BILL'S PROVISIONS IS ENOUGH TO MAKE AN ECONOMIST'S STOMACH SICK. The impetus for the bill is, of course, the fact that we Americans pay an arm and a leg for prescriptions. Meanwhile, just over the border in Canada, one can buy the same drugs for roughly 40 percent less. With an over- 80 mom whose prescriptions cost a grand a month, I feel this pain.  But when I take off my son's hat and put on my professor's cap, I realize that we need to ensure that legalizing drug imports does not end up

Yossi Ben-Dak replies:    The question is, how much profit is enough versus how much innovation will really be stifled? Data would be more useful than conjecture, along with an understanding that ability to pay is not equal throughout the world. Why are price differentials between countries justified? Let's say our next door neighbor was Tanzania, where the estimated average income is less than $30/month. Should Tanzanians be asked to pay the same price we do for medications, or should they be deprived of access to treatments for their illnesses? If drug companies accept reduced profits to Tanzanians so that medications are available to them, should we allow Tanzania then to re-export the medications back to the US?   Economic forces being what they are, the net result may be a reduction in the differential between countries rather than a reduction in research investment, which is a necessary basis for sustainable profit --ultimately resulting in a higher price to those who can least afford it. If novel drug discovery in the long run is not realized because big pharma research is profit wise handicapped -- an analysis of new, including generic drugs must include:  (1) The costs over time to the corporation R&D including trials as a percentage of profit up to the point the drug is reduced in price and is available from multiple sources as when a patent value dies or is about to;  This may be difficult to assess but if the data were available [are they? ] one could cumulatively, with many cases see if the holly cows grown so fat by the big pharma players are truly holly and were fattened only because the closed ranch grass was better for them. (2) The role of non American innovators. Canada is not the only reference point in OECD, even though this example is correct. Consider the rising innovations that penetrate the market, including trials of Takeida or Teva;  (3) The range of innovations because of patent law constraints' "effectiveness"--may be actually one of the key reasons for a nationality differentiation in the researchers of new drugs at the expense of erstwhile innovators who pay billion dollars per successful drugs.  (4) Many of the most important innovations ,(e.g. in stem research, its enhancement of curative growth and evaluating formatively the measurements and instruments involved) , especially in the unfolding second half of this decade seem to evolve outside the US e.g. Israel, UK, Cuba and seem to evolve in patterns of different intellectual property Than the traditional patents.  A great amount of "directed evolution" and patent fencing -- may go a long way as a contribution towards finding different modes to finance critical research by charging those who may seem able to pay as they consume... As frequently occurs, people may have their eye on the wrong ball.

 Bill Egan replies:

 Let me think out loud here for a bit.

80% of the cost of drug R&D is due to the clinical trials. This is unavoidable because the FDA, EMEA, the UK Medicines control agency, etc. set the requirements for the trials. It doesn't matter who does the innovation in which country (Teva in Israel, Takeda in Japan as you suggest), because to get the drugs on the market the pharmaceutical companies have to get past the regulators in each country, particularly the FDA.

Now, the historical success rate for success in clinical trials is 1-2 drugs succeed for every 10 drugs tested in man. Therefore, much of the cost is due to the failures. To reduce costs in the short term, a company may cut the number of clinical trials, and in the long term they can try to increase their success rate, and eventually make more profit via the sales of the extra drugs they market. They cannot reduce the costs of individual trials too much because of the regulators. However, the average duration of clinical trials and regulatory approval was 7 years for the crop of drugs approved in 2001-2002. If we import price controls, even given the fact that companies are currently changing their research and clinical practices to try to improve clinical trial success rates, the decrease in revenue will be immediate and enormous, while improved success rates *might* appear in 7 years. So I would expect the number of clinical trials to be cut drastically if socialist price controls are imported, unless the pharmas decide to take the losses on the profit side and have little to no earnings. No earnings = no incentive for investors to buy stock, especially in the start-ups. And the greatest risk inherently lies in the innovative projects, so if you can't make money backing those types of efforts (or make alot less) there is little incentive to invest in them. I am not approaching this in a very quantitative fashion, but the concept seems workable to me, and very scary. I don't think many people realize how slow moving drug R&D is, and how much of it cannot be sped up or cut the instant huge losses in profits hit when price controls are enacted. Due to the regulated nature of the business, you do it the regulators' way or not at all.

The implications for pharma/biotech stocks depend on the speed and severity of the price controls. Fast flows of large quantities of imported, cheap drugs would nuke revenues while expenses are forced to stay high. Slower importation of fewer drugs will obviously cause less of a problem.

With respect to your question on the "justification" of price differentials by country, even generic drugs are too expensive for many people in 3rd world countries. The cost of even not-for-profit manufacture would be too high for them to pay. They have no money, so they don't have series 7 BMWs or drugs or anything else. Being poor sucks.

As far as scientific innovation in Cuba - you're kidding, right? I work in the drug discovery business. I read *hundreds* of scientific papers every year on drug discovery and development in the course of my research, and have been doing so for 6 years now. I cannot recall one paper coming out of Cuba. Not just a good paper, but ANY paper. BTW, a large majority of the good papers come from the USA.