For good measure, they say that drug reimportation is a bad idea because of safety. This argument is mere scaremongering.

I agree so far.

The fact is that drug reimportation would not hinder drug companies' ability to invest in new drugs. Its effect would be to push drug companies to ensure they sell to rich countries at a price that happily covers R&D.

Perhaps there is a reason that they don't charge this price in Canada. Why, one wonders, would a rapacious drug company sell at a price less than the market would apparently bear? Perhaps because, in Canada, there is no real market at all, but instead a single, monopsonistic buyer, the government?

What profit do drug companies reap from their sales in Canada? How would profits at this level impact on R&D?

Imports from a market such as Canada, where prices are artificially low due to government intervention, do nothing to promote or extend free markets. What we are importing from Canada is not just drugs, it is socialized, anti-market medicine.

The Cato brief is apparently written with the impression that a true free market in drugs would lead to the rest of the world lifting their government-set price caps. I suppose that's possible.

It's also possible that the price caps will remain in place, and instead there will merely be a decline in the number of new drugs invented. Or, another possibility is that the price caps will remain in place, the problems with R&D will be noted, and as a result there will be massive government investing in R&D, and the drug industry will become either de facto or de jure nationalized.

The last is an option that the world may prefer for researching their drugs, but it is hardly free market nor avoids corporate welfare. It is also, I think, the most likely result. I suppose we shall see.

How about cigarette reimportation -- buy cigs in low-price countries, and resell them in higher-priced countries at a price lower than the current high price? :-)

Surely the big problem where the US state could actually help is that foreign countries such as Canada don't negotiate fairly. If they don't get the price they want, instead of doing without (which is what happens to any other transaction) they threaten to void the drug patent and make it cheaply locally. Other industries don't suffer from this problem.

--Its effect would be to push drug companies to ensure they sell to rich countries at a price that happily covers R&D.--

Ain't gonna happen, our "good friends" and "historic allies" won't give up their free ride, they can't afford to pay their fair share, their economies will go off the cliff even faster.

To prevent that, they'll break the patents and make knock-offs, and there will be fewer new drugs.

And we'll die sooner. End Overpopulation, Support Socialized Medicine.

--For good measure, they say that drug reimportation is a bad idea because of safety. This argument is mere scaremongering.--

Then there's than Chinese woman who tried to commit suicide by taking over 100 pills she bot off a vendor in the street, and lived.

R C Dean: The argument "but socialist meddling forces the price of drugs down in Canada" is based on bad premises.

To see why, scale it down. Say you were a vendor, and one customer is belligerent in demanding special low prices. He buys quite a lot, though, and nobody will buy from him, so you can still make a profit giving him a special price. Now suppose he starts reselling it, and undercuts you. Your reaction would be one of: raise his price and tell him to lump it - or, just refuse to do business with him.

So in practise, competition will force out socialism.

To throw a cat among the pigeons... I say that patents are corporate welfare. And, they are subject to the same economic law, via which markets force out special treatment, that I outlined above.

And when markets force out patents, the next thing to fall will be state-imposed testing expenses...

I read about price caps and controls but I don't actually see the legislation around the world. Its an industry myth pushed by Big Pharma corporations and their echo chambers on to gullible Americans. Thats part of the reason why U.S. citizens pay the highest prices for drugs.

Buyers set limits on what they are willing to pay - thats normal. Since most of the Western world has socialised medicine resulting in a monopsonistic buyer, the buyers have a lot of clout. Wal-Mart does the same to its suppliers. There are no price controls.

I don't buy the drug company line that Sandy has fallen for, that the rest of the world has a free ride off the U.S. - get real - more major drugs are discovered in Europe. So are U.S. citizens getting a "free ride" on European financed research?

[Incidentally, morbidity and mortality are lower in Western Europe than in the United States - despite what you may have been hoodwinked into believing.]

The pharmaceutical industry is highly subsidised by taxpayers - its no paragon of free enterprise capitalism. Big Pharma corporations operate in government regulated markets, with high barriers to entry secured by thickets of government regulations and government-granted patent monopolies. Their products are largely purchased and paid for by politically controlled healthcare and government run bureaucracies financed, at great cost, by taxpayers. The Pharmacuetical industry acts like a monopoly, prices like a monopoly and quacks like a monopoly - it sure ain't a duck.

See here and See the Pharmopoly Blog for more facts.

"government-granted patent monopolies. "

Here is an important and interesting question of principle:
Government defines, registers and protects all patents and copyrights. Is this legitimate protection of a natural right to intellectual property ? Or are these "new" rights, invented by Government ??

I think that the pharmas are entitled to patent protection just like any other person or industry.

I think that the pharmas are entitled to patent protection just like any other person or industry

Indeed, but the idea of a patent is to permit the inventor to gain the initial profit from his labours but at the same time to increase the sum of human knowledge by enabling everyone to exploit the new idea (after the initial effort is recouped by the inventor). In no sense were they intended to indefinitely prevent anyone else exploiting the research, but this is how they are often (ab)used.

The system of patents in general has been grossly abused over the years and has come to represent an ongoing source of income for the holder - patents are indeed a form of corporate welfare, and seem to be especially abused in the case of drug research.

The idea that Europeans are freeloading off expensive American research is just bilge. Given that Europe has a large pharmaceutical industry, develops more new drugs than the US and manages to make a profit on all of this without the excessive pricing and protection the American industry says is unavoidably necessary really should illustrate this pretty clearly.

EG

"but the idea of a patent is to permit the inventor to gain the initial profit ..."

The idea of a patent is that, if you invented something - that something belongs to you; that if another party wants to produce your gadget and make a profit it must get your permission and pay you royalties. The question is: if you invent something - is it your's or not ?
"but the idea of a patent is ..." it is to protect private property.

Limitting the time of protection to a certain number of years might be acceptable, I'm not very sure about it on a theoretical level.
It seems to me that the current levels of patent protection (the number of years) are reasonable (i.e. surely not excessive).

Aren't patents protected in Europe ? Do they expire faster ? Are American pharmas permitted to produce Europe invented drugs without lincenses ?

"excessive pricing and protection... "
What exactly constitues this excessive price protection ? In what is it different from European practices ?

" the interests of drug companies are directly opposite the interests of the sick."

Next time you pick up a serious infection, don't take any of those nasty antibiotics.

They were invented by evil drug companies whose interests are opposed to yours.

The idea of a patent is that, if you invented something - that something belongs to you

No, it isn't.

Patents were intended to facilitate the growth and spread of human knowledge, not to enrich inventors. This is not readily achieved by demanding licence payments in perpetuity for the use of your invention. For handy illustrations, consider the attempts to patent the aircraft and the car - it doesn't work. If it did, we could still be paying royalties to Gutenberg's offspring every time we bought a book. It's daft.

It is reasonable that an inventor gets the first crack at marketing his invention, but it is most unreasonable to say that he should ALWAYS be entitled to royalty payments if someone else wants to do it. It might be sensible, therefore, to significantly reduce the time for which a patent applies to a level such that the inventor might reasonably be expected to have had the opportunity to recoup his costs and make a profit. If he chooses not to do this it should not bar anyone else from trying, nor should that someone else pay for the privilege of doing something the inventor doesn't want to do for himself.

Patents should be strictly time limited, non-renewable and non-transferable. They should not be seen as a corporate weapon or an easy way of maintaining income, but should be seen for what they were intended to be - a means of furthering human knowledge. To this end, it should be impossible to patent business methods or software (based largely on algorithms, which cannot be patented).

It seems to me that the current levels of patent protection (the number of years) are reasonable (i.e. surely not excessive).

Given the high current pace of technological change and the much greater ease of securing finance in the modern market (both considerably greater than when patent law was created), the time limit almost certainly is excessive.

EG

"How about cigarette reimportation -- buy cigs in low-price countries, and resell them in higher-priced countries at a price lower than the current high price? :-)".

This is of course a (sadly, illegal) cottage industry in Southern England not only in respect of tobacco, but alcohol too, French "sin taxes" being much much lower than English ones.

Those interested to see just how far the government is prepared to disregard property rights in order to extort money from those who enjoy cheap tobacco & alcohol may wish to google "hoverspeed duty tribunal"

extort money from those who enjoy cheap tobacco & alcohol

The state's view appears to be that, whilst you may for your own consumption import any amount of fags & booze from the EU, you may not sell the stuff on without paying tax. On the face of it, this is not unreasonable - you're free to sell, provided you obey the law. Forcing people to obey the law is not extortion, although the mindset that considers taxation to be theft will be inclined to see it as such (unless it happens to be a law they agree with, of course).

Whether the law (which is to say in this case the excise duties levied) is fair or reasonable is, however, another matter.

EG

Unfortunately, not all industries change and advance at the same pace and the optimal duration of patents would vary from industry to industry.

From a free trade and market standpoint, I would love to see drug reimportation. I'm an American and my prices are the high ones.

On the other hand, market regulation of drug sales does not exist in a vacuum. As someone pointed out above, drugs are made, bought, and sold in a heavily regulated environment. Drug reimportation needs to be examined in the context of this environment. I don't know enough about the industry to know the answer.

In the US, the big problem is the half-assed regulation of medical insurance and the medical industry. I would like to see less regulation, but there are probably ways in which more regulation would be better than what we have now.

Other industries suffer from this half-assed regulation. The "de-regulated" airline industry is still heavily affected by government regulation and has problems because of it.

E G Even if I did not consider intra-EU excise duties pretty much morally equivalent to extortion, I would still consider that the Hoverspeed tribunals demonstrate the state's willingness to "extort money".

I find it hard to view the confiscation of a person's motor vehicle & its subsequent sale without recompense, purely on the grounds they had broken some extra-statutory guidelines as to what constituted reasonable amounts to import for personal use, as anything other than extortion.

EG
"Given the high current pace of technological change and .... the time limit almost certainly is excessive."

What are the time limits in Europe or Britain ?
Are they different from the US ?

(You can patent software. Wasn't the LZW algorithm of compression patented ? Should it have been ? )

What are the time limits in Europe or Britain ? Are they different from the US ?

Europe I don't know, but the UK and US are broadly similar.

In the UK, 20 years from date of filing, but you have to pay a renewal fee after the 5th year. If you don't pay the renewal fees, the patent lapses.

In the US, 20 years from date of filing, extensible only by Act of Congress. The sole exception to this limit on extensibility, interestingly, is (some) pharmaceutical patents. Renewal fees are also payable, on a slightly different timescale than in the UK.

You can patent software. Wasn't the LZW algorithm of compression patented ? Should it have been ?

I know you CAN (in some places), I'm saying this is wrong.

Business methods, mathematical methods (i.e. algorithms) and (generally) computer programs cannot currently be patented under British law, so the LZW patent would not necessarily be enforceable here.

Patents are of course a grant of time-limited monopoly guaranteed by the state, and apply only in that state. Nasty things, states.

EG

Euan: "Excessive" pricing? And who, pray tell, decides what prices are excessive?

Paul d: Odd, that. Derek Lowe doesn't seem to think it's all a giant conspiracy of lies, and he's on the inside. I imagine this just means he's one of Them, yes? On the other hand, I trust him a lot more than I trust a dedicated anti-Pharma blog, as he has less of an obvious agenda. And between him and Megan McArdle's analyses of "Big Pharma" budgets and risks, I don't think I can agree at all. Calling it a "company line" doesn't make it false, after all.

Sigivald

For what it's worth, I'm also on the inside, I think (more or less) it's a pack of lies. So now you have to contrary first hand sources to wave about as you wish :-)

Pharma companies engage in deeply unethical practices quite apart from their pricing strategies and their intense lobbying efforts.

I could of course spend considerable time and effort detailing these practices on the internet - but then I'd be a 'dedicated anti-pharma' blog and you wouldn't believe me anyway. So that would be pointless.

Luckily, the medical world has an active and largely sensible debate about the situation. I suggest reading peer reviewed journals on this topic for more info.

Way to go, Alex.

After a string of sensible essays, I was being to wonder what was wrong with Damizdata. Good to see a fruit cup back in the driver's seat.

It was said before, and bears repeating. An artificially low price enforced by the government of a tiny country such as Canada, is not an example of free market competition. It actually raised prices across the broad market.

Try to focus--the free market mechanism is simple. If you think the price is too high, don't buy the freaking drug. This will force the price to fall.

((I love how you guys don't get this. Thanks for the laugh.))

iDrug companies enjoy the highest profit margins of any industry in the US, nearly four times the Fortune 500 average

And yet, the sector trades at a low multiple because fear of government intervention weighs down valuations.

"Excessive" pricing? And who, pray tell, decides what prices are excessive?

If US drug companies make four times the F500 average profit, and invest a smaller proportion of that profit in R&D than does Microsoft, and if on top of that European drug companies invent more drugs (suggesting greater R&D effort) but sell cheaper (suggesting much lower profits), it really would seem fairly clear that the prices charged by many US drug companies are indeed higher than the market would otherwise support.

Naturally, they will object to reimportation because it threatens their highly profitable market domination. I think many people would have much more sympathy with them if they made small profits and invested a huge proportion of that profit in R&D - their argument would then make much more sense (not that I am suggesting their profits should be limited by law, of course). It looks rather more like they are squealing because the ease of global trading is threatening their cash cow.

It is of course true that the drug industry is highly regulated and controlled (for fairly obvious reasons). For example, one cannot patent a drug in the US until it has FDA approval. Nevertheless, the high profits and relatively small R&D effort does suggest that the regulatory framework doesn't really stifle the companies' ability to operate. They could sell their products much more cheaply and still make a handsome profit without spending a penny less on R&D. I don't believe that state regulation is needed to make them do this, but a more competitive market in drug supply would have the same effect.

EG

HelenW

Did you read - there is no artifical price cap - Canada's biggest customer just says it won't pay more than its prepared to pay. Just like WalMart says to coffee suppliers "we'll pay x and no more".

Sigvald

I have no idea who Derek Lowe is, and I don't care.

Facts are facts, Big Pharma, U.S. Pharma in particular, makes monopoly profits, supported by sponsored politicians, who have no compunction in transferring taxes to Pharma's bottom line.

Let's be clear - the Pharmaceutical industry sucks on the teat of the taxpayer. It ain't free enterprise - its like a nationalised industry - what economists call a "para-statal" - except its for private profit.

I believe in free market capitalism - but not in supporting a politically corrupting industry dependent on taxes being funneled to it by allies who's own campaigns for office are financed by the same industry.

Paul, your response is nothing more than a steaming crock of paternalistic crap.

In Canada, the Patented Medicine Prices Review Board regulates prescription drug prices to artificially low levels. Here's their freaking website.. Your inference that Canada's largest customer (who's name presently escapes you) can negotiate lower prices than American companies is pure fiction.

Since you're such an exemplar of Libertarian virtue, I have a question for you. In the UK, is lying the typical method of gaining advantage in debate? This is the 2nd outright fraud to confront me here. Not quite a pattern, just yet.

In Canada, the Patented Medicine Prices Review Board regulates prescription drug prices to artificially low levels

Actually, it only regulates the retail prices of patented medicines, whether prescription or not.

Perhaps you might care to read the "freaking website" yourself.

EG

You are absolutely incorrect, Euan.

Quoting their FAQ directly: "The PMPRB reviews the "factory-gate" price, i.e. the price at which the manufacturer sells the patented medicine to wholesalers, hospitals and pharmacies. The PMPRB does not have jurisdiction over prices charged by wholesalers or retailers nor over pharmacists' professional fees."

["Reviews" is Canadian for "regulates."]

Why do you bother to post lies? It is imbecilic.

My apologies for missing that part.

Nevertheless, it is the case that the board only controls these prices for PATENTED medicines, and not prescription medicines in general as you suggested.

It is the patented medicines which give rise to concern, because the monopoly granted permits the supplier to charge high prices. Competition in the generic drug market keeps prices lower, so there is little if any need to regulate.

Furthermore, it should be noted that the regulation does not seem to be framed with the intention of keeping the prices lower than a profitable level, and cognisance is taken of prices charged in other countries (including the US). One would expect, then, that the Canadian price would be lower than in some countries and higher than in others, but in any case at a level where the manufacturer makes a profit. I don't think you can really justify saying that this inevitably keeps prices artificially low - certainly, it will keep them lower than the monopoly patent holder might like to charge, but given that those prices are artificially high, I fail to see the problem.

If the manufacturer was compelled to sell at a loss, why would he sell at all? Better to simply withdraw from the Canadian market. Since they don't do this, it appears that adequate profit is still made. That this profit might be less than an unregulated monopoly supplier might otherwise like to charge is simply tough for the monopolist.

Why do you bother to post lies? It is imbecilic.

We are in a mood this morning, aren't we?

You are not exactly posting in a disinterested manner. What is your connection to or interest in the drug industry?

EG

That is a more sincere response. Pleased to return the favor.

I'm pissed because you and Paul both accused me of capriciously citing w/o reading. It just so happens that I don't read very well, so I'm very careful about it. My aptitude is for numbers, no doubt because there are few numerals than letters. I have a native interest in Pharma by way of training to be a chemist. My work is environmental and architectural, but I do invest from time to time in various drug manufacturers. ((Share prices are low now.)) My true sympathy for these companies comes from an appreciation of their fantastic performance and value to humanity. Of course they make a ton of money. Why shouldn't they? When I need medication, I don't give a damn what it costs. It would be a bargain at 10X the price.

Now that my full disclosure is concluded, we can resume the discussion of Paul's fraudulence. Your pedantics may have a few grains of truth, but there is nothing to build a pearl of wisdom on. Drug prices are lower in Canada for one single reason--government intervention in the market. Full stop.

The profit margins of the manufacturers are immaterial. The most elementary review of micro-economics reveals that companies are prudent to sell w/o profit, if those sales help to mitigate their overhead costs and promote efficiencies of scale. This is exactly why the drug companies do not abandon the small Canadian market. It is also why they can not afford to let the slimy Socialists determine worldwide pricing through international transfer schemes. High school students are generally unacquainted with these fine points. In this forum, I expect far more.

Obviously I need to repeat my initial point. Drugs are vital to society and dirt cheap. Governments have no business retarding development by regulating drug prices. That is the work of emasculated Populists. If you think a product is too expensive, DO NOT BUY IT. But pardon me for brooming your silly asses out of the way so the rest of us can make our own choices and enjoy ever better drugs in the future.

Helen,

I find it helpful, no matter how annoyed I get with comments, to keep a level head and avoid intemperate posts. Anyway.

I would agree with the thrust of your argument were it the case that Canada regulated all drug prices. This would, IMO, be unwarranted interference in the market. However, the problem only arises because of the patented nature of the drugs being regulated.

Essentially, the manufacturer has a monopoly for the life of the patent and can in the absence of regulation dictate the price. The argument "if it's too expensive, don't buy it" is fine where one has a choice, but in the case of patented drugs one might not have a choice. Or rather, the choice may be between (at extremes) healthy poverty and wealthy sickness. Furthermore, as is apparent, drug companies do make exceptionally high profits and invest a relatively small part of that profit in R&D.

At an emotional level, some people find it distasteful that companies should profit from the sickness of other people. Where that profit is unusually high and where only a relatively small part of it is invested in R&D, this emotional argument gathers substantial strength. Then again, one has to make the profit in order to have the money to invest in R&D in the first place, so it is hard to see how companies can be expected to sell drugs at a loss - many people, however, have only a shaky grasp of basic economics and often don't understand this.

On a purely economic level, it should be apparent that a monopoly provider of anything, whether state or private, will tend to raise prices to a level beyond that the market would otherwise sustain. This does not benefit anyone except the monopolist. Your basic economic argument about companies selling at no or little profit doesn't work in the context of a monopoly, unfortunately.

The profit a company makes is not immaterial. Where it makes high profits in a fiercely competitive market where the consumer has a wide and free choice, one can only applaud the good management of the company. Where the high profit arises solely because the company has a monopoly on the supply, one cannot be so sanguine - and where the product in question is bought by people who simply have no choice about whether or not to buy it at all (i.e. they might die if they don't buy it), high profits are even more dubious.

It is therefore reasonable to conclude that, where a firm has a monopoly on a product AND where that product is seen as essential to the health of many people, some degree of price control might be necessary to prevent the firm abusing its monopoly position. In practice, firms (and states) almost always abuse monopoly positions where they can get away with it, so the need for some form of control is pretty common. This is why most developed capitalist economies have some form of anti-trust regulation, although I concede this can itself be abused.

Since the Canadian regulation applies ONLY to patented drugs (i.e. only in the case of monopoly supply), and does not attempt to set the price so low that the supplier cannot profit, I simply don't see why there is a major problem with it. Indeed, if the companies sold the same product at the same price in every market, they would still profit and would still do so sufficiently to fund the necessary R&D. I do understand now why you object to it - your dividend receipts suffer.

It is not state regulation that is the problem (in THIS case), it is abuse of monopoly.

EG

Mr. Gray--

And that "large and profitable" European drug industry has been fleeing Europe to do all its R&D in the US, as you should know. See here, for example. Anyone familiar with the drug industry knows that the European drug market has been shrinking and it has been massively outsourcing in the US.

Of course, in the end Europe gets the drugs anyway, and can always threaten to break patent.

Euan Gray--

Furthermore, Canada and other countries set the price above the marginal price of producing another pill, but not so high as to cover the R&D. Companies are certainly willing to sell for that much, having already invented a pill, since it does add to their profit. But it changes the cost-benefit calculation that goes into deciding whether a new drug will be profitable and thus to engage in R&D.

There are often substitutes for patented drugs; just not quite as effective. There are difficult tradeoffs there; how much extra do we or society want to pay for a slightly better drug? (The US has the cheapest prices for non-patented drugs.)

Mr. Gray, I submit that you are the one who has a shaky grasp on basic economics, or perhaps on Schumpeters insights. You're very confused about how it works. Drug companies will choose to invest in producing or not producing a drug based on whether the expected profit exceeds the expected R&D. They will produce all drugs for which this is true. Some of the drugs for which this is true are drugs for which the expected profit massively exceeds the expected R&D cost. The very last drugs produced, the marginal ones, are those for which the expected profit equals the marginal cost.

Therefore, since the only drugs produced are those for which the expected profit meets or exceeds the expected R&D cost, it is completely obvious that profit will always exceed R&D, often by significant amounts due to the existence of some blockbusters. However, even given that R&D can be a small fraction of profit, it remains that reducing prices on all drugs will result in decreasing expected profits on all drugs, and hence the formerly last produced drugs will no longer be profitable, and thus will not be produced. Even so, R&D will make a small portion of profit, since the drugs which are no longer profitable will be dropped, and again only profitable dugs will be produced.

The end result is, of course, fewer drugs. Now, you may favor some sort of system which identifies which drugs are blockbusters and then selectively reduces their prices. This of course has the problem that companies will still fear that this could happen to any drug, and may avoid R&D as well. It's also quite socialist, and quite away from the free market-- it presumes that bureaucrats could organize the economy more effectively by picking winners.

John,

The article linked to doesn't quite support all your contentions, but there it is.

Canada and other countries set the price above the marginal price of producing another pill, but not so high as to cover the R&D

Supporting figures?

It seems Canada sets the price - when it does so - in recognition of the prices charged in various other countries, and only does this for patented drugs. It would appear that the assertion that this will not cover R&D costs is unwarranted, although it may be true.

Germany is mentioned in the article as provoking the ire of Pfizer by refusing to reimburse the full cost of patented drugs where there is a generic alternative. The presumption there is that where there is NO generic alternative, the full cost is reimbursed. From a public health point of view, this is not unreasonable.

There are difficult tradeoffs there; how much extra do we or society want to pay for a slightly better drug?

Slightly more for slightly better sounds more appealing than lots more for only a little better.

Therefore, since the only drugs produced are those for which the expected profit meets or exceeds the expected R&D cost

Obviously you are unaware of the concept of the "loss leader." Many business - probably most - run some operation or other at suboptimal profit or at a loss, even though the company overall runs at a profit. This is often necessary for a wide variety of reasons.

I think it is also unwise to assume that each drug is costed and priced on a standalone basis. Few businesses operate their books like this - you cost standalone, but you don't necessarily price the same way. If you have a very desirable drug that will for clinical reasons never sell in sufficient numbers to cover its own R&D costs, this does not mean the drug is unmarketable. Cross subsidy from other drugs manufactured by the same company can make selling the unprofitable one viable, more so if the unprofitable drug strengthens market or state sentiment toward the supplier.

From your mail address, I presume you don't work in industry. I do. I know how things are costed and priced in the real world, not least because costing and pricing is a big part of my job. Theory often takes a back seat in the real world. (This is one of my major objections to libertarianism - the theory is wonderful, but it just doesn't apply in reality)

you may favor some sort of system which identifies which drugs are blockbusters and then selectively reduces their prices

I don't. I do favour some sort of system which would reduce the odious effects of monopoly (this should be apparent from my earlier posts) whislt permitting the inventor the first opportunity of profiting from his labours. I do not approve of monopoly, whether state or private.

Finally, I would note that the main reason cited in the linked article for European drug companies setting up in America is that the larger American market is much more profitable not least because the consumer is used to paying more. It is, of course, easier to sell into the American market if you are established in America, so no suprise there. It not so much that one cannot profit in Europe, perhaps more that the profits are easier in America? This may well change soon enough, I suppose, so we'll see what happens as reimportation gathers pace.

EG

Hmm, I see that I am not keeping up. We'll take it as it come.

Euan, everyone needs to consider their limitations, but your level-headed approach to discussion doesn't work for me. I respond in kind. So when I receive false accusations, misstatements, misquotes, ad hominems, parochial imperatives, inappropriate interrogatories, or just plain nonsense; it doesn't bother me to respond frankly. Or not.

Having dispatched your last load, I can now address the fallacy du jour. Your new approach to defending the indefensible, centers around the principle of "monopoly must be regulated," but they fail as certainly as the earlier false claim that drug prices are not regulated at all in Canada. Before I deal with that, there is an interesting philosophical issue that has my attention. You folks seem to be vacillating between Socialist and Libertarians convictions. Two peas in a pod to me--they will always leave you on the short end of a debate. When your convictions drive your rationale, you always lose. So I invite you to consider the opposite approach. Now on to the chalkboard.

Your claim that drug makers derive excess profits from monopoly markets is false on it's face. I challenge you to name one. Meanwhile, I assert that there is not a single monopoly market for drugs. This Truth can not be expressed too strongly. There is NEVER a solitary possible cure for ANY particular malady, although only one may exist at the moment. Even in those instances, competent people have the option to refuse treatment. So for the 3rd time: If you think a product is too expense, DO NOT BUY IT. Perhaps you may be disabled or even die w/o treatment, but you will have made your point to those evil companies and saved a Euro for your heirs.

Now, expanding on the rare cases where there is a single product available for a particular ailment, there can still never be an industry based monopoly w/o illegal collusion. You see, drug companies don't make monopolies--government makes monopolies. Any other company is free to compete for that market with an alternative product or treatment. Choosing not to develop a position in any particular market when more lucrative opportunities exist, is not an evil business practice. In summary--the factual existence of free markets in the health care industry is the antithesis of your monopoly claims. This leaves your three-legged rhetorical stool with no legs at all.

Furthermore, punishing a sole supplier for taking what amounts to the huge risk of serving a limited market, is about the worst conceivable tactic for societies seeking better and broader health care alternatives. And to sharpen that point, legislatively limiting the profit made by ethical companies is nothing more than a moronic Socialist wet dream. No thank you. That's purely destructive and absolutely inappropriate for soothing your "emotional levels." Honestly, I don't understand how anyone can have so little pride as to suggest we substitute sentimentality for science in our pharmacopeia. How can these ephemeral discussions be that important to you?

This reflects socialist corparatism at its finest! -- Machine Ghost

WHAT U.S. PRESCRIPTION DRUGS REALLY COST

Brand Name,Dosage,Consumer Price,Cost of Generic,Percent Mark-up

Celebrex® 100 mg $130.27 $0.60 21612%
Claritin® 10 mg $215.17 $0.71 30206%
Keflex® 250 mg $157.39 $1.88 8272%
Lipitor® 20 mg $272.37 $5.80 4596%
Norvasc® 10 mg $188.29 $0.14 134393%
Paxil® 20 mg $220.27 $7.60 2798%
Prevacid® 30 mg $344.77 $1.01 34036%
Prilosec® 20 mg $419.00 $0.52 80477%
Prozac® 20 mg $247.47 $0.11 224873%
Tenormin® 50 mg $104.47 $0.13 80262%
Vasotec® 10 mg $102.37 $0.20 51085%
Xanax® 1 mg $136.79 $0.02 569858%
Zestril® 20 mg $89.89 $3.20 2709%
Zithromax® 600 mg $1,482.19 $18.78 7792%
Zocor® 40 mg $350.27 $8.63 3959%
Zoloft® 50 mg $206.87 $1.75 11721%

U.S. PRESCRIPTION DRUG PRICE INCREASES, 1994-2004

Drug Brand Name,Company,Dosage (mg),Count,1994 Consumer Cost,2004 Consumer Cost,Cost Per Count,Cost Increase

Premarin® Wyeth-Ayerst 0.625 100 37.08 $106.99 N/A 189%
Synthroid® Boots-Knoll-Abbott 0.1 100 20.46 $49.99 N/A 144%
Synthroid® Boots-Knoll-Abbott 0.075 100 19.98 $49.99 N/A 150%
Synthroid® Boots-Knoll-Abbott 0.05 100 18 $45.99 N/A 156%
*Lanoxin® Glaxo Well 0.125 100 10.82 $24.99 N/A 131%
*Lanoxin® Glaxo Well 0.25 100 $28.29 N/A 131%
Lasix® Aventis/Mylan 40 100 4.73 $31.99 N/A 576%
Pepcid® Merck 20 30 43.08 $54.47 N/A 26%
Zocor® Merck 10 60 $108.03 $78.99/30 157.98 46%
Zocor® Merck 20 60 $195.76 $125.09/30 250.18 28%
Zoloft® Roerig 50 100 $186.64 $232.99/90 tabs 258.88 39%
Zestril® AstraZeneca 10 100 78.01 $71.99/60 119.98 54%
Zestril® AstraZeneca 20 100 $83.48 $77.99/60 119.98 56%
Prilosec® Astra/Merck 20 30 $11.23 $419.00/100 125.7 1019%
Norvasc® Pfizer 5 90 $102 $135.19 N/A 33%
Norvasc® Pfizer 10 90 $176 $183.19 N/A 4%
Paxil® SmithKline Beecham 20 100 $174 $270.19/90 tabs 300.21 73%
Claritin® Schering-Plough 10 30 53.17 $98.99 N/A 86%
Humulin N® Lilly 100 iu 10 16.83 $83.70/5 vials 167.4 895%
K-Dur 20® Schering-Plough 20 mEq 100 34.57 $57.15/90 tabs 63.5 84%
Klor-Con 10® Upsher-Smith 10mEq 100 9.88 $14.99 N/A 52%
Lopressor® Mylan 50 100 43.04 $144.99/25 mg 289.98 574%
Pravachol® Bristol-Myers Squibb 20 90 $155 **$134.99/40 tabs 303.73 96%
Toprol-XL® AstraZeneca 50 100 $42.59 **$85.99/90 tabs 95.54 124%

*The above prices are somewhat more expensive than some Internet pharmacies.

fail as certainly as the earlier false claim that drug prices are not regulated at all in Canada

OK, so where did I say drug prices were not regulated at all in Canada? You asserted that prescription drug prices are regulated there - this is incorrect, it is PATENTED drug prices (prescription or not) that are regulated. This means prescription generic drug prices are not regulated, nor are OTC generics. Patented drugs, whether on prescription or not, do have their prices regulated.

As for regulation of monopoly, you fail to provide any argument countering my own (based on personal experience and a knowledge of history) that monopoly suppliers do tend to abuse their position by jacking up prices. This is just how people, companies and states (the last two made up of people) actually operate in the real world, not in academic theory. It matters not if the supply is coal, telephone calls or medicine.

I assert that there is not a single monopoly market for drugs

Of course there isn't. But where a specific drug is patented, the patent holder has a monopoly on the supply of that drug and can (and does) tend to increase the price of it. How much the increase is depends on many factors, but the general principle applies.

I think you may be confusing the total market for drugs and the monopoly supply of a specific patented drug.

If you think a product is too expense, DO NOT BUY IT. Perhaps you may be disabled or even die w/o treatment, but you will have made your point to those evil companies and saved a Euro for your heirs

Are you serious?

Essentially you are saying that it does not matter that a drug supplier charges a horrendously inflated price for a vital product, and that if the patient objects he can just die to make his point.

As I said before, the idea of not buying if you don't like the price is fine WHERE YOU HAVE A CHOICE. If the choice is between life and death, I think it is unreasonable to allow the sole supplier of an essential life-saving drug to put a cash price on the continued existence of the sufferer. Basically you seem to be saying that it is quite acceptable for a company to tell an individual "if you want to live, you will pay me whatsoever I choose." I disagree. I do not believe one should - or even can - put a money price on life.

It often strikes me as pathetically absurd that many commenters on this blog will rail and moan incessantly at any attempt by the state to compel people to do its bidding, but some will quite happily assent to a private corporation doing exactly the same thing. What is the difference? Bullying is bullying, whoever does it.

drug companies don't make monopolies--government makes monopolies

Through the grant of patents in this case. I know, and I have commented on this before.

legislatively limiting the profit made by ethical companies is nothing more than a moronic Socialist wet dream

In general yes, but I don't agree that "pay me what I want or die" is a particularly ethical business model. I see nothing wrong with regulating the profit made on the supply of an essential product where there is no alternative. Where there is an alternative, regulation is unnecessary since market competition will tend to reduce prices anyway.

There are many ways to do this, and overt price control is just one. Another might be significantly reducing the life of patents, another still could be allowing anyone to produce patented drugs but relieving the patent holder from paying tax - this would be essentially the same as limiting the royalty fees payable to the patent holder.

Free market regulating mechanisms only work where there is competition. Where there is monopoly, they simply don't work, and it makes no difference if the monopolist is a state or a corporation.

I would stress that I do not in any way object to drug companies making a profit from the sale of patented drugs. What I do object to is the same companies making very high profits not because they have a great product but because they are the only supplier of a product for a given market. To clarify, by this I mean the market for treatment of a specific ailment, NOT the overall market for drugs.

EG

Mr. Gray--

Well, in many cases in the US brand name drug costs do go up after they get off patent-- because the only people who continue to get the brand name are those who absolutely refuse to buy generics. With all the price-elastic people buying generic, the price for the brand name naturally increases.

It is actually very rare for there to be only one live-saving drug that someone can take. Usually what happens is that there is some hot new drug that is slightly better than previous drugs. And everybody wants the hot new drug and seems willing to pay any price to get it, because people put a very high price on a slightly higher chance. But generics and now off-patent drugs are out there. The vast majority of the drugs people complain about are NOT the only thing in a market; they're simply the latest and greatest thing which is somewhat better than previous drugs, whether due to fewer side effects or slightly better efficacy. If you want anything which existed 14 years ago, you can get it cheaply. (Though, as mentioned, not necessarily the brand name version but perhaps the generic.)

And the US has very low generic prices, lower than Europe.

And you still refused to respond to this link discussing how the European drug business is doing so poorly, which contradicted your earlier claim.

"Supporting figures?

It seems Canada sets the price - when it does so - in recognition of the prices charged in various other countries, and only does this for patented drugs. It would appear that the assertion that this will not cover R&D costs is unwarranted, although it may be true."

Basic economics, my friend. A monopsony negotiatior, especially one that can break the patent, should be able to negotiate down to close to the marginal cost. The drug company should be willing to sell at slightly higher than the marginal cost rather than sell nothing at all due to the drug being banned or the patent being broken. So a powerful government should be able to force things down close to the marginal cost, what a generic would cost.

"Various other countries" include others with price controls. Only for patented drugs is another giveaway; of course non-patented drugs wouldn't need price controls, as they already sell at the marginal production cost. Since I always assume that companies will act greedily and selfishly, I assume the same about countries as well. Why would a country not bargain down to the lowest price which they could force the drug company to give, and shift the burden onto someone else? It only makes sense, from a selfish point of view.

In any case, as mentioned before, it's axiomatic that the marginal cost price would not cover the cost of R&D. It's equally obvious that any forced price lowering is going to result in less R&D. It would discourage drug companies from researching any drug whose expected profits become less than the expected revenue. Since they still produce all drugs whose expected profits are greater, they're still going to make a profit, even perhaps an enormous profit if there are a few very succesful drugs.

But restricting companies to only making drugs with tremendous profit potential, or, in other words, strongly restricting drug prices, will REALLY hurt people with rare conditions, since the market isn't large enough to justify it without the ability to charge really high prices.

That's why you're really backwards, Mr. Gray. You say that especially in cases where there aren't available alternatives, that prices should be heavily controlled. Well, why would any company want to bring out the first treatment for a disease, especially a rare one with a small market? Their potential profit is restricted. It's the promise of temporary large monopoly profits that causes research, which leads to competition and things eventually coming off patent. But you would short-circuit that process alltogether.

Which is better, a system where a rare condition has a drug produced which is expensive for up to 14 years and then becomes cheap, or one where no drug is produced at all? Because you're arguing for the latter, and have still shown that you have a poor understanding of economics.

John,

Where is it said that the controlled price will be set such that R&D is explicitly not covered? Nowhere.

It's equally obvious that any forced price lowering is going to result in less R&D.

Why is this obvious? You assume that the drug company, left to its own choice, would price a patented drug at cost plus R&D plus minimal profit, and that any lowering of price would necessarily impact R&D because it would otherwise render the drug unprofitable. Given that drug companies seem to make four times the average F500 profit yet expend only 10% of that profit on R&D, this is manifestly not the case.

Your argument may be theoretically sound, but it is not applicable to the real world.

EG

You assume that the drug company, left to its own choice, would price a patented drug at cost plus R&D plus minimal profit, and that any lowering of price would necessarily impact R&D because it would otherwise render the drug unprofitable.

No, I don't assume that; I explicitly argued against that. I'm sorry that you fail to understand my argument, and economics. I will attempt to explain it again.

I argue that the drug company, left to its own choice, charges as much as the market will possibly bear for a drug in order to make the largest profit possible. It is, of course, greedy.

However, I merely assert that there are many different types of drugs. Some are fantastically successful and profitable, and the company makes enormous, obscene profits of them. Others have a much smaller market, or smaller success, and do not make enormous profit. I assert that the drug company will attempt to produce any drug that makes a profit, from a tiny profit all the way up to obsencely large profits. Now, since all the drugs made are profitable, the average profit for the company may be quite large, since it will include some of the obscenely profitable drugs. So you see you've twisted my argument around. I don't argue that they choose to price at cost + R&D; rather, I argue that they will choose to produce any drug which they can price at at least cost + R&D.

Now suppose that we impose price controls. These lower prices reduce the profitability of all drugs. The obscenely profitable drugs are still quite profitable, but the barely profitable drugs are now no longer profitable. If the company continued to produce the same basket of drugs, it would still make quite a profit. But will it do so? Of course not. The drug company, being greedy, will not be satisfied will merely making a profit, but will attempt to make the largest possible profit. Therefore, it will cut the now no longer profitable marginal drugs, cutting R&D. All the drugs it still produces will still be profitable, all the way up to the formerly obscenely still quite profitable drugs, with the result that the pharmaceutical company will still make quite a profit, albeit a smaller one.

Now, you may argue that, "Aha! There's a middle ground, though! All the regulator has to do is impose price controls in a clever manner that only hits the obscenely successful ones, while avoiding the marginal ones! Problem Solved." Fair argument. However, I strongly doubt that this will happen. The marginally successful ones are those which serve a fairly small market. I do not think that the argument would long survive to keep pharmaceutical prices for rare diseases very high while pushing down the prices of common diseases-- especially since rare diseases have fewer treatments, and you yourself have pushed for price controls most on drugs for rare diseases with few options. Secondly, I doubt that price controls would stop short of lowest possible negotiated price for most if not all drugs. Thirdly, the very threat of price controls discourages R&D, because the policy could always change.

The second line of argument against even "targeted price controls" is that obscenely large profits draw in competitors new and old to research similar drugs. Artificially keep those profits down, and there's no reason for new entries. (Market entry deserves a much larger explanation, though.)

In other words, Mr. Gray, my line of argument starts from the assuption that the drug companies and the governments are both greedy, and attempt to extract as much profit as they can. Your line of argument seems to believe that the drug companies will act altruistically, producing money-losing drugs, and similiarly for the government negotiators, who will refuse to get the lowest possible price for drugs and shift the burden to others. I doubt it.

"In the minds of the public, prices apparently go up when businesses suddenly start to feel greedier. Economists, in contrast, expect businesses to be greedy year-in, year-out; but depending on market conditions, greed may call for prices to go up, go down, or stay the same."-- Bryan Caplan

In addition, for proper "smart price controls," the commission would have to accurately estimate the probability of successfully researching a specific drug, in order to deterimine the proper level. Of course, not even the pharmaceutical companies do a really great job of this, but the market does a better job of discovering this information (and punishing the companies and investors who choose poorly) than a bureaucracy can, as any libertarian should know.

One would expect a great deal of effort by the companies to game the system, and inevitable regulatory capture leading to corporate welfare. In any case, one doubts that the government bureaucracy could really achieve proper efficiency.

Now suppose that we impose price controls. These lower prices reduce the profitability of all drugs

If the profit percentages of all drugs are reduced, or if all drug prices are reduced proportionately. However, you will note that it is only PATENTED drugs that are in question here, and furthermore only patented drugs where there is no alternative. Your entire assumption is, therefore, not necessarily valid.

EG