Free Market Failure?
March 27, 2001 12:33 PM   Subscribe

Free Market Failure?
The pharmaceutical companies profits have been rising faster than the S&P Industrials as a whole, mainly due to huge profits from drug patents. Not only are the drug companies milking American consumers, but their stranglehold on IP rights to new drugs prevents much-needed medicines from being affordable in many third-world countries. But, we can't take away patent rights or investors would flee the drug scene and new drugs wouldn't be developed at all. How do we solve this problem? The only institutions with the financial resources to do the same research as drug companies are national governments. And they have the obligation to protect the social welfare. Should we turn over pharmaceutical research and development to government?
posted by daveadams (17 comments total)
I'd have to say no. In 25 years, I'd say the health of the public will be better with money as an incentive to develop new drugs than if the Government had control. Capitalism needs controls, but in the long term, it clearly works better.
posted by quirked at 12:40 PM on March 27, 2001

This is a very important question. Would government-sponsored research develop new drugs as quickly as the private sector? Whatever institution (such as the NIH) developed new drugs, it would run the risk of being taken over for short-term political gain. According to the article, it costs an average of $500 million dollars to develop a new drug. This is ripe target for politicians to try to steer into their home states.

On the other hand, government inefficiency may be preferable to corporate exclusion of the benefits of new drugs.
posted by Loudmax at 12:43 PM on March 27, 2001

The $500 million amount came from the pharmaceutical industry's association. I wouldn't take it as gospel. It probably includes marketing and production costs.

In fact, if you look at the financial statements of well-known pharma companies, you'll see that they spend more than twice as much on marketing as on R&D. In some cases, they spend more on marketing than on production expenses. R&D is a relatively small expense item, as a percentage.

Pharma companies have always argued that because of their high R&D burdens and high risk, they deserve high profits. Maybe, but how is it high risk if you never show a loss?

Government takeover of drug development is not the answer here; they'd just farm it out to someone else anyway. I think the answer is in shorter periods for patent protection, so that competition kicks in a lot sooner.

Pharma companies are not going to stop developing new drugs if they face more competition. Their profits may decrease somewhat, and their market capitalization may decline significantly, but they'll still make plenty of money.
posted by anapestic at 1:13 PM on March 27, 2001

Government takeover of drug development is not the answer here; they'd just farm it out to someone else anyway.

They already do. The NIH gives grant money to universities. Those universities pay researchers. Those researchers sometimes make discoveries, which then get licensed to pharmaceutical companies. Witness a few meaningful paragraphs from this newspaper story about AIDS drugs and sub-Saharan Africa:
In South Africa, the only sub-Saharan country where New York-based Bristol-Myers has patented Zerit, the company had earlier argued that it could not bypass patents because of an agreement with Yale University, which developed the drug and then licensed the company to manufacture and distribute it.

Yale came under pressure from Doctors Without Borders and group of its own law students to make the drug available. Last week the university reached agreement with Bristol-Myers to "remove any obstacles" on patent and price issues, Yale said in a statement yesterday. "As far as Yale is concerned, anybody who wants to give it away, all the time, it's fine with us," said spokesman Tom Conway.
posted by snarkout at 1:19 PM on March 27, 2001

Interesting article about drug companies' profits:

Goddamn the Pusher Man: Why does everybody seem to hate the pharmaceutical industry?
posted by StewV at 1:20 PM on March 27, 2001

government inefficiency may be preferable...

No it isn't. Maximum R&D of new drugs and maximum distribution of the resulting medications is preferable. (No, not socialist distribution, maximum distribution. Sorry, but saving millions of lives in the industrialized world only is preferable to being "fair" and letting everyone die everywhere.) The only way to get these drugs created in the first place is through private enterprise.

A couple weeks ago, two drug companies agreed to offer their AIDS medications to African countries for $1/day. That's far less than the average American pays for his allergy medicines, and is a mind-bogglingly low price for medications as expensive to create as these AIDS drugs. It was a massive capitulation on the drug companies' part. Result? The activists cried foul. Not good enough. A publicity ploy. Not only do they want the drugs for free, they want the drug companies to pay for the honor of providing it, including all costs related to distribution. That's the point where I officially gave up caring. You can't win with these people.

And it's pointless to discuss this matter at all without paying close attention to that distribution problem. Africa isn't like the US, where if the medications were paid for they'd be at every clinic in the country tomorrow morning. The corrupt regimes there use medications like this to make money, to buy weapons, and to play favorites (you support me, you get the drugs; you oppose me, you get nothing and like it).

Those researchers sometimes make discoveries.

posted by aaron at 1:28 PM on March 27, 2001

Should we turn over pharmaceutical research and development to government?

As snarkout said, we already do. Plenty of my friends doing doctoral and post-doctoral research are working in affiliation with pharmacorps, are personally sponsored by pharmacorps, or become part of startup pharmacorps when their group leader decides there's money to be made from the big boys.

quirked: capitalism in pharmaceutical research wouldn't work better if it were deprived of its publically funded training schemes in the world's universities. After all, Merck and Glaxo don't recruit researchers off the streets: those "occasional" discoveries in the university lab are the basis of every single bloody PhD.

It's a question of balance, I think: do the corporations make more money from "lifestyle" treatments (anti-obesity, anti-smoking, certain anti-depressants) than AIDS drugs? Because I'd be happy to see people pay through the nose to treat their own self-imposed illnesses, if the money could be redirected towards "charitable" treatments. What worries me is that time and money is spent coming up with yet another tweak of an established drug, often just in order to satisfy the patent lawyers, when they could be working on something more innovative. (Think of all the variations on the Prozac theme.) At least academia doesn't place the profit motive at the top of the priority list, which gives it greater scope to do that innovating.
posted by holgate at 1:37 PM on March 27, 2001

do the corporations make more money from "lifestyle" treatments (anti-obesity, anti-smoking, certain anti-depressants) than AIDS drugs? Because I'd be happy to see people pay through the nose to treat their own self-imposed illnesses.

Since WHEN is depression a "self-imposed illness"? Since WHEN is obesity always a "self-imposed illness"?

At least academia doesn't place the profit motive at the top of the priority list...

You're dreaming.
posted by aaron at 1:43 PM on March 27, 2001

Aaron, can you find citations for your claim that the drug companies offered AIDS drugs to African nations for $1/day? Were there restrictions involved? Would it have been in supplies sufficient for more than a token percent or two of HIV-positive Africans? 'cuz frankly, I'm dubious.

For numerous diseases -- malaria is the one that springs to mind -- government- and university-funded research is the only way anything will ever be developed, because the paying market is too small. And huge amounts of private-sector research boil down to work based on public-sector grants; this Federation of American Societies for Experimental Biology paper reports that "of the 21 drugs with the greatest therapeutic effect introduced between 1965 and 1992...only five (24%) were not based on a key enabling discovery made in the public sector."

Mind you, I don't see anything wrong with turning those drugs over to the private sector; neither Yale University nor the NIH should be in the business of marketing pharmaceuticals (and as a shareholder in a giant health products corporation, I have a vested interest in seeing that system work; I think it does, at least for most people in the industrialized world). But the idea that "[t]he only way to get these drugs created in the first place is through private enterprise" isn't wholly accurate.

(And I've never seen a breakdown of the $500 million per drug figure -- how much of that is improved delivery methods and the like designed to increase the life of pharmaceutical patents?)
posted by snarkout at 1:46 PM on March 27, 2001

Citation. (Not to be confused with a Citation.)
posted by aaron at 2:13 PM on March 27, 2001

Crap -- my deepest apologies, Aaron; I misread your post as "a couple of years ago", which is something I thought I would have heard of. I heartily approve of the most recent wave of price reductions, although it's more based on a desire to stave off Indian generic drug manufacturers. Regardless, it's a good thing.
posted by snarkout at 2:17 PM on March 27, 2001

aaron: if you can say with a straight face that the ads in the glossies pushing things like Paxil aren't designed to tap into everyone's everyday worries, then I'll pack up and leave. The commercial advertising for prescription drugs in the US, manufacturing demand out of nothing, continues to strike me as the height of cynicism.

And I'll refine my last comment, just to make it pefectly clear: academic management may be looking for that next big corporate hookup (Oxford's getting none of my money now that they're pushing a MBNA credit card) but the people doing the research in the labs on a day-by-day basis aren't doing it for the money, particularly when they get cold-called every other week by corporations offering them jobs in the industry for ten times their academic salary.

Of course, give it a few years, and it'll be Glaxo College and Pfizer University.
posted by holgate at 3:32 PM on March 27, 2001

Holgate, hopefully your wrong, i am hoping that especially the drug industry, spurred on by the masses, will go in the direction of software, open source. There is evidence as mentioned that generic drugs are being made which means that the big drug companies must cut their price, the first step in the right direction.
posted by Zool at 4:34 PM on March 27, 2001

Holgate: You're right. It is a matter of balance. Government and academia have the luxury of being able to go after new technologies that may be less profitable but have a greater impact. On the other hand, profit is a powerful incentive, and sometimes corporations are more efficient than universities in the discovery process. Consider the human genome project, for example. The NIH's sequencing effort was crawling along for years because they didn't want to risk sinking money into developing Venter's "gunshot" sequencing technology. So he founded Celera, developed the technology, beat the government to the sequence, and raised a buttload of cash in the process.

I also want to point out that universities need corporate funding. There's no way academic labs could stay funded without grants from industry, especially since funding for basic science research has become less of a priority for national governments. For the most part, though, this grant money comes without strings attached. Pharmaceutical companies will award grants to investigators doing interesting, cutting-edge research and figure that the resulting scientific advances will benefit them indirectly, even if nothing immediately marketable comes from the research.
posted by shylock at 6:11 PM on March 27, 2001

The biggest segment of the prescription drug market is in cardiovascular drugs.

Here are the US numbers for 2000 (from MedAdNews):

Cardiovascular drugs Ð $23.66 billion
Anti-infective agents Ð $20.70 billion
Psychotherapeutic agents Ð $15.29 billion
Gastrointestinal products Ð $15.28 billion
Respiratory therapies Ð $13.94 billion
Cholesterol reducers Ð $12.69 billion
Cancer and cancer-related therapies Ð $9.49 billion
Blood modifiers Ð $7.15 billion
Antiarthritic agents Ð $5.55 billion
AIDS and AIDS-related drugs Ð $5.21 billion
Diabetes and diabetes-related therapies Ð $5.16 billion
Anticonvulsants Ð $3.55 billion
Urinary tract agents Ð $2.98 billion
Biological response modifiers Ð $2.92 billion
Biologicals Ð $2.68 billion
Hormones Ð $2.50 billion
Immunosuppressive agents Ð $2.36 billion
Ophthalmic products Ð $2.16 billion
Analgesics Ð $2.08 billion

That's a lot of money, but patent protection issues aren't the only reason for that. The payer system is also responsible, to a great extent. There are many many drugs that are much more expensive in the US than anywhere else because the Insurance-company heavy system will bear the prices. An example is Allegra, which is a major (in terms of sales - it's top 5) prescription drug in the US but a relatively insignificant OTC product here in Canada. Because, at least partly, the market (insurance system) will bear high-priced drugs.

Also, don't be fooled by marketing costs. A very significant portion of the marketing costs are consumed by serious medical education to physicians. It's marketing, yes, but drug companies know (for the most part) they can't lie to (for instance) early-adopter regional knowledge leaders working in teaching hospitals (most of whom are involved in the trials in the first place).

It can take 3 to 5 years (or more) for even breakthrough drugs (that save lives) to make it from the major centers to smaller hospitals and clinics. The way to get them there - the only way - is through marketing (= continuing medical education, among other things). This delay happens to eat into the on-patent time a company has to market a drug, so it's in their interest to decrease this time - it can be worth billions. But it also has a clear positive effect on patients' lives as well.

If you think that just making something good is enough - that physicians will adopt it quickly and save lives with it - well, the world doesn't work that way, unfortunately. There is far too much material published for most doctors even to keep up with, let alone to consider and figure out how it might or should change their practices.
posted by mikel at 10:57 PM on March 27, 2001

Oh - one more thing - in most of the world, DTC (= direct to consumer) advertising or prescription drugs is strictly illegal. It's a US phenomenon that (so far) has been resisted elsewhere as far as I know. In Canada you can't even mention the name of a drug alongside the condition that it treats.

But even at that, DTC isn't, on the whole, a huge proportion of the total marketing costs of any drugs, though obviously it's increasing big time in the US.

Again, though, that has to do with the payment system and political factors (litigiousness being one of them) as much as anything else. DTC works because then patients go to their doctors and demand a product, without knowing often whether it's the best thing for their condition. Physicians often prescribe because a) they'll be sued if they don't and something goes wrong (even something not associated with the non-prescription) and b) because the patient is covered and the price isn't an issue.

This is one of the reasons why the US healthcare is, on a per capita basis, by far the most expensive in the world. Also as a proportion of GDP (really just another take on the same reality), more gets spent in the US than anywhere.
posted by mikel at 11:08 PM on March 27, 2001

There are many many drugs that are much more expensive in the US than anywhere else because the Insurance-company heavy system will bear the prices.

Well do I know this. Just last week I went to a pharmacy here in Paris and asked, on a whim, for allergy drugs. Not only did the pharmacist let me have them without a prescription--which is normally required; pharmacists are more authorized here--but they cost about one-fourth of what my insurance company at home pays.

Zyrtec, 15 10-milligram pills, costing 7.52 euros, equalling 49.30 francs, about 7 American dollars. It's probably true, however, that a good deal of that cost differential is due to state subsidy.
posted by Mo Nickels at 12:00 AM on March 28, 2001

« Older Voters voting their concience rather than their...   |   Wizards of the Coast Newer »

This thread has been archived and is closed to new comments