Commentary

A Pharmaceutical Free Lunch?

This article originally appeared on Townhall.com on May 2, 2005.

WASHINGTON - Politicians are always looking for a new goose to pluck. Today everyone from congressmen to city councilmen treat drugmakers like a flock of geese.

At least Congress has national jurisdiction. Not so the Washington, D.C. city council. But its members, too, want to regulate the pharmaceutical industry.

A council committee has approved legislation to create a new “illegal trade practice” - selling drugs for more than city politicians decide is fair. The bill would allow Washington, D.C. to transfer the companies’ patent rights to other firms through compulsory licensing.

It’s a truly nutty idea. Imagine the District setting “fair” prices for automobiles, heart pacemakers, and other products.

Yet cities and states across the country have been pushing to “re-import” pharmaceuticals from price-controlled foreign markets. Moreover, D.C. city councilman David Catania, chairman the health committee, originally proposed using eminent domain to seize pharmaceutical patents.

Since the Constitution requires payment of “just compensation” for government takings, Catania redrafted his legislation to target drug “overpricing” with compulsory licensing. City politicians would decide which prices were fair and which were not.

One standard would be charging prices above those in “Europe, Canada, Australia and other high-income countries.” If a medicine cost less in Portugal, Albania, or South Korea, that apparently would demonstrate an “illegal trade practice” and thus empower the District to hand off a company’s patent.

But this isn’t all. Prices would be considered to be inflated to “the extent to which past sales have more than adequately compensated the producer for all costs of research and development, including risk factors, cost of capital, and a reasonable profit margin.”

Fairly applied, this standard points to relying on market prices. For instance, “all costs of research and development” should include research and development costs for the many substances that never become marketable drugs.

“Risk factors” are many - dry holes, unexpected costs, regulatory barriers, health side effects, litigation, political threats to seize patents. As for a “reasonable profit margin,” the greater the risks of the process and the higher the value of the products the more obvious the justification for higher profits. Again, the market is the best measure of “reasonable.”

Alas, Catania apparently believes in the eternal “free lunch”: Slashing prices would have no impact on pharmaceutical availability. After all, he complains, the companies defend their profits through their “ability to threaten an end to drug innovation.”

Unfortunately, new medicines don’t magically appear on the ground every morning like manna from heaven. The U.S. pharmaceutical and biotech industry spends about $50 billion annually on R&D.

Failures far outnumber successes. Often several firms spend millions or billions of dollars seeking remedies to the same diseases but only one company succeeds. Sometimes none do.

Only one of every 5,000 to 10,000 substances makes it to market. Just 30 percent of those that do make it actually earn enough to cover their own development costs.

But only paying for themselves isn’t enough. The sales of these few drugs must cover everything - the dry holes, administration, new lab equipment, regulatory compliance, lobbying against bad legislative proposals.

Estimated drug development expenses have been rising sharply, going “from slightly over $100 million per successful drug in the 1980s to about $800 million in 2003,” notes a report by the Institute for Policy Innovation.

Costs aren’t likely to abate. Explain researchers John Vernon, Rexford Santerre, and Carmelo Giaccotto: “FDA drug development costs continue to increase in response to a growing demand for more clinical information and more clinical trial data.”

No arbitrary government-imposed price could reflect all of these considerations. Even businessmen can’t be certain of product value before actual sales. Some expected big sellers flop; some medicines produced with only modest hopes flourish.

If businessmen so often guess wrong with their own money, what kind of results should one expect from politicians who spend other people’s money? Politicians who are most concerned about winning votes in the next election a year or two hence rather than ensuring the availability of medicines a decade or two hence.

Yet price controls remain politically attractive because in the short-term they can cut medical expenses without reducing product availability. The inevitable impact on R&D won’t be evident for years.

Ensuring adequate access to life-saving medicines is an important goal. But there’s no political shortcut. Good medicine will never be cheap.

Government price-setting and theft of patents would sacrifice Americans’ future health. That is far too high a price to pay to help re-elect election-minded politicians, whether in Congress or city councils.

Doug Bandow is a senior fellow at the Cato Institute.