OPINION & EDITORIAL
Canadian drugs’ real cost
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by Mark A. Baumgardner
Wednesday, October 20, 2004
One of the more interesting moments in the United States Senate race in Wisconsin occurred several weeks ago when Sen. Russ Feingold demanded that challenger Tim Michels pull his ads in which he stated, “Unlike Senator Feingold, I’ll fight for your right to buy safe and affordable prescription drugs from Canada … ” Soon, a predictable back-and-forth exchange began.
Additionally, in his second debate against Sen. John Kerry, President George W. Bush indicated support of prescription drug re-importation from Canada, provided that safety is guaranteed. For many, re-importation seems attractive; some online pharmacies boast savings of 90 percent. Unfortunately, in both races, the important discussion of the reasons for the price differences has hardly occurred.
In many ways, prescription drugs become expensive like other familiar technology. Consider, for example, a cell phone. The bill of materials of the printed circuit board and other components comes to significantly less than list price. However, the costs do not end there. When considering the research, engineering, testing and salaries for all associates involved in those processes, the cost of the components is only a minor expense in producing a single phone.
Likewise, the ingredients of prescription drugs cost pennies compared to the average research and development cost of over $897 million to pharmaceutical companies for producing a single new drug.
In other words, this figure from the Tufts Center for the Study of Drug Development indicates that on average, drug manufacturers must sell over $897 million worth of a new drug before breaking even on their investment, explaining the reason for high costs. Without assurances of return on investment, pharmaceutical companies have no incentive to pursue new drugs.
Technology manufacturers will obtain competitors’ samples and pick them apart, hoping to match progress — a process often called “reverse engineering.” In much the same way, other companies will produce drugs identical to the newly invented drug at a tiny fraction of the cost, with the end result being lower-cost generic drugs.
While generic drugs clearly benefit consumers with that lower cost, they also stifle the inventors’ ability to recover research and development costs if introduced too quickly. If this happens too frequently, patients can say goodbye forever to any future significant pharmaceutical advancement in the U.S. Bearing this in mind, drug manufacturers will often obtain 20-year exclusive patents for prescription drugs that they develop, just as inventors of other products apply for their appropriate patents. To help reduce consumer costs, President Bush has supported regulation changes to speed up introduction of generic drugs once exclusive patents have expired.
These patents allow for pharmaceutical companies to sell their drugs at market price in the U.S. — but not in Canada and much of Europe. In these countries, with their socialist health care systems, the government imposes artificial price ceilings on prescription drugs, driving up costs here in the United States. These price ceilings in Europe and Canada is part of the problem, not the solution, to rising drug costs.
John Calfee, a resident scholar at the American Enterprise Institute, comments on the vanishing European pharmaceutical industry and summarizes the problem with re-importing U.S. prescription drugs from Europe and Canada, “Either way, price controls would end up suppressing innovation here, just as they have done abroad. It is one thing for the Canadians and Europeans to free-ride on American R&D, but we can’t free-ride on ourselves. The system that gave us the drugs the whole world wants would be hobbled just when researchers are finally glimpsing pathways to cures for cancer, Alzheimer’s and other killers.”
In an ideal world, Canada and Europe would let the market work, and free trade of safe prescription drugs would occur, driving down costs in the United States. Without an international free market, massive re-importation completely defeats the purpose of exclusive patents. In response, U.S. drug manufacturers would find other ways to recover development costs, likely either limiting Canadian exports or raising U.S. prices even more.
Few politicians have vocally opposed Canadian re-importation of prescription drugs, perhaps because of the political five-second rule: if the position cannot be explained in five seconds, do not take it. Kerry supports re-importation — it brings in cheaper drugs (for now). He tries to explain the opposition equally as simply pitting patients against drug manufacturers.
The flaw in that thinking, however, is that on this issue, consumers and the pharmaceutical companies are in the same boat. Consumers cannot benefit if drug manufacturers cannot research.
Mark A. Baumgardner (mbaumgardner@wisc.edu) is a senior majoring in electrical engineering.
Anonymous (October 20, 2004 @ 12:59am):
Since when did pharmaceutical research need to be a for-profit business? How much of those "research costs" are actually advertising costs and other fluff? The NIH gives grants for medical research. This doesn't have to be a lose-lose situation for the consumer.
Mark Baumgardner (October 20, 2004 @ 8:01am):
That's a good question- the number I quoted is strictly the costs for research and development. This does not even factor in costs of approval and marketing. Like any other business, pharmaceutical companies have to recover these costs or go out of business.
The fact that so many pharmaceutical companies have pulled out of Europe and conduct business in the U.S. shows that less, not more government involvement is needed.
Anonymous (October 20, 2004 @ 8:09am):
"Since when did pharmaceutical research need to be a for-profit business"
That is hysterical--- why would anyone have any reason to come up with new lifesaving drugs if there are no incentives? Common Sense..
Anonymous (October 20, 2004 @ 10:04am):
Isn't it fair that the citizens of the USA pay for most of the world's drug research?
I'm sure that other countries will praise us for our benevolence, although so far I haven't seen anything but whining that we don't give them drugs for free.
Anonymous (October 20, 2004 @ 11:22am):
The pharm. industry spends over $2billion/yr in mass media ads (tv, mag, etc). I find this disgusting. If they have developed a legit drug that can help people, it should be the doctors getting it out to patients, not patients going in and begging for it because they saw it on TV. Take that ad $$ and put it towards R&D and you'd be able to shave a few bucks off that boner pill.
Anonymous (October 20, 2004 @ 11:31am):
"That is hysterical--- why would anyone have any reason to come up with new lifesaving drugs if there are no incentives? Common Sense.."
Isn't saving lives an incentive??
The gov't subsidizes many money-losing programs. It doesn't mean that everyone in the program is a volunteer (researchers can make good money), and it doesn't mean that the program will go under.
This is such a typical republican argument...There needs to be incentives, and the only incentive is money. It's the same way you argue on the environment. If the whole world was republican we'd have no teachers and no trees.
Anonymous (October 20, 2004 @ 12:30pm):
The real question here is what does less government mean. Now, Baumgardner believes that government should stay out of the market process, and allow the free market to determine the price of medicine. This means that the government should not support its people directly, but rather should allow the people themselves to determine where their money is going and, therefore, how much their drugs will cost.
However, Baumgardner also believes that corporate interests need to be protected in the form of patent law. That means that government should support corporations by legally protecting their investments. This is every bit as detremental to the free market as socialized medicine. Despite this, he supports it. Like many Republicans, he believes that government needs to protect poor corporations from the ravages of the common people. Does this make sense? No.
If you want a free market, fine, let's go. Total lack of government involvement. Put your money where your mouth is. You want fair? Fine, let's socialize our medical system so that everyone has equal access. Of the two, I favour the latter. I believe that it is better to be fair than it is to be profitable. However, I can recognize some good qualities in the former. What I do not respect is someone who wants to protect corporations with the shield of the government while leaving the common people exposed to the harsh elements of the free market.
Anonymous (October 20, 2004 @ 12:42pm):
"Isn't saving lives an incentive?"
This is such a typical liberal argument. Simply ignore the free market as it exists and build your argument from there. It seemed to work well for Russia, Cuba, and the rest of Eastern Europe, right?
Love the point about Europe and Canada riding our coattails to keep their ceilings in place...bunch of wankers if you ask me.
Anonymous (October 20, 2004 @ 12:47pm):
To the lengthy anonymous poster: would you then propose lifting other patent and copyright protections as well? Let everyone, including pharm companies, to steal each other's innovative ideas. It's not about just protecting "poor corporations," it's about protecting everyone's right to their intellectual property.
Anonymous (October 20, 2004 @ 12:59pm):
So because I believe that there are incentives for doing things besides making money I'm now a communist? Way to go buddy. You really got me good.
Oh yeah, and read the previous post, I think he showed you where your "liberals ignore the free market" argument is wrong.
Anonymous (October 20, 2004 @ 2:04pm):
"Simply ignore the free market as it exists and build your argument from there."
That is such a typical conservative argument. Simply ignore the sanctity of human life in favor of inflated profits and build your argument from there. It seemed to work well for Saddam Hussein, Pol Pot, Adolph Hitler, and most French governments of the last century, right?
I love how conservatives blather on about how they believe in the sanctity of life, right up until it interferes with their precious free market...bunch of wankers if you ask me.
Anonymous (October 20, 2004 @ 7:33pm):
I can't believe how immoral liberals are. You want to TAKE from others to pay for your needs. There is no greater injustice than the giving to the undeserved.
There is no other way to argue this issue but on moral grounds. It is incredibly immoral for the United States to pay the R&D costs for the rest of the world and it's disgusting that you want to take from me to pAay for your medical needs
Take care of yourself. And if you don't have the means there is nothing left to do but rely on the charity of others. In no way is it just to force one person at the point of a gun to support another. I don't know about you, but I like freedom. Who wants to live a life of involuntary servitude?
Anonymous (October 20, 2004 @ 8:34pm):
In my own defence: No, I do not wish to lift the bans protecting one's intellectual property, I believe this is incredibly stupid. Nor do I support the hypocritical argument that a free, unregulated market is, in fact, regulated by governmental laws. I, personally, believe that a socialized system as seen in Europe is best, where companies and intellectual property are protect by governmental law, just as the consumer is protected by government law.
Now, you may argue: Where is the incentive? Since both property rights are vigorously protected (read: the newly developed drug will sell for a very long time before generic brands are produced) and the consumer is protected (read: price caps) both consumer and company reach a middle ground between efficiency (which favours the free market) and righteousness (which favours a truly communistic system).
Furthermore, in both Europe and in America, most real advances in pharmacology and other theraputic sciences are first made in the public sector from grants (The NIH being a primary example). The private sector then jumps on the advances made by the public sector, finalizes them and patents them. This is good, since the public sector should exist to fuel and streamline the private. The primary reason that drugs cost so much is because of agressive advertisement.
As to my favourable comment towards a truly free market, I have already stated why such a system is beneficial: efficiency. Free market fanatics always talk about its efficiency and they are quite right. I simply believe that there is more to life than raw number crunching. I believe in a balance between mean quality of life and GNP. Neither should have to sacrifice unduly for the other.
Matt (October 20, 2004 @ 9:57pm):
Thank you, Mr. Baumgardner, for the article.
Most people may agree that creating artificial demand for products through extensive marketing campaigns designed to generate interest in unnecessary pharmaceuticals raises the prices of those pharmaceuticals. I do believe, however, that a larger portion of the advertising costs are direct appeals to physicians rather than the public (such as through television ads). Pharmaceutical companies attempt to woo doctors to brand loyalty so that when they do write a prescription out to their patient, they recommend a certain brand when medications are substitutable. Remember, though, that the same marketing strategy of building an aura of assumed quality/image cause you to pay more for nearly all items in your life - even soda and frozen pizza. The best way to solve the advertising hemorrhage would probably be to educate the nation to a higher level of critical thinking, which would lead to less gullible purchasing habits.
For the person who wrote "Isn't saving lives an incentive??":
Only so long as the person doing the saving maintains a life of their own. Why should a capable person, someone with such a profound ability that they can use it to save others, sacrifice their own life and happiness for someone else without return? Don't they deserve an equal recompense for the service provided? If not received, they are being exploited for the benefit of a - growing - few that claim what belongs to others (e.g. intellectual property) based on need and not merit. What makes the receiving person deserving of the superior thinker's effort? Just because they never could have saved their own life doesn't mean they have the innate right to have someone else save it for them. If you can't paint your own house, you do not have the innate right to make your neighbor paint it. Money, ideally, serves as the indicator of value added to society. For how much value a person contributes, they are given a standard tradable good in return. So why shouldn't money help to determine if someone deserves a drug? If they haven't contributed to society, why should society dehydrate itself for them?
For the person who wrote "In no way is it just to force one person at the point of a gun to support another. I don't know about you, but I like freedom. Who wants to live a life of involuntary servitude?":
Thank you.
