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 ([email protected]) is a senior majoring in electrical engineering.