Reimporting Cheap Drugs Will Destroy Big Pharma’s Incentive to Innovate

There was a time, not to long ago, when Europe was home base to the world’s pharmaceutical industry. Today, the United States is the center.

According to a 2003 report by John E. Calfee, “In 1990, European pharmaceutical firms outspent American firms on R&D by approximately $7 billion to $4.3 billion.” Ten years later, the United States was outspending European firms “$20.9 billion to $14.8 billion.”

Of the important global drugs approved in the U.S., Europe and Japan from 1975 to 1995, almost half were developed in the United States. The next closest was Great Britain at 14%.

GlaxoSmithKlind and Novartis, firms Clafee describes as “traditional European firms” have “moved their most essential operations to the United States.” Between 1990 and 2002, investment in research and development in Great Britain increased by 250%. America increased R&D fivefold.

Here are some other staggering statistics surrounding the decline in healthcare R&D in Europe (h/t Andrew Sullivan):

The latest data on new molecular entities (period 2001-2005) shoe the predominance of the US which has now become the leading inventor of new molecules in the world (61 against 51 for Europe.)
The top 20 companies worldwide shows the leadership of US companies. In 2005, nine of the top twenty pharmaceutical companies in the world are of American origin (against 8 for Europe.)
US companies significantly increased their share in the world’s top selling medicines. On the top 30 worldwide products for 2005, 21 originate from the US (against 8 from Europe.)
US companies are more successful in disseminating their new medicines at international level: 70% of the sales of new medicines launched on the world markets during the period 1998-2002 were made in the US, compared to only 18% in Europe.
Whereas the European pharmaceutical market was still the world’s largest market in 1990 (representing 37.8% of the world market), it now only represents 30% of the world market (compared to 47% for the North American market.)

This dramatic shift is due to the European economy shifting from a more free market to one dominated by government controls. And it has been a benefit to America.

According to Phyllis Gardner, now a Professor of Medicine at Stanford Medical School, “Thanks to America’s free market for prescription medicines, its citizens have access to more new treatments than do any other people in the world. Almost every pharmaceutical and biotech company from around the world seeks to launch its products here first, making the country the epicenter of global innovation.”

All of this could easily change, and will, if the moral busybodies on Capitol Hill are successful in allowing the “reimportation” of drugs from countries where price controls dictate the cost. While it sounds moral, allowing cheaper drugs from foreign countries to be imported to America, it would have a lasting impact on pharmaceutical innovation. To understand why, you have to understand why drugs are cheaper in foreign countries.

Why Do Foreign Countries Have Cheaper Drugs?

From Bloomberg.com:

Pfizer’s cholesterol drug Lipitor, the world’s best-selling medicine with $12.4 billion in sales last year, costs twice as much in the U.S. as in Canada, according to Internet pharmacies drugstore.com and canadadrugs.com. A 30-pill prescription of 20- milligram doses costs $124.99 at the U.S. site, compared with $60.78 from Canada.

Many people see this as the pharmaceutical company ripping off the American public. The fact is that Canada, and other foreign countries are freeloaders.

Lipitor is cheaper in Canada because the government controls the price of Lipitor in Canada, limiting the amount of profit Pfizer can make on their product. If Pfizer doesn’t agree to the price Canada sets, they risk having their patent revoked or nullified. Therefore, to save their intellectual property, drug companies agree to sell their product at an extremely low price. That puts the burden of profit on the United States.

The United States does not control the price of drugs, so pharmaceutical companies can charge a price that will allow them to turn a profit. It’s higher here to compensate for it being lower there. It’s akin to going dutch on a dinner with someone who never pays their fair share.

If the United States allows the “reimporation” of drugs, we are also importing that country’s price controls. It will flood the American market with artificially low prices and limit the profit pharmaceutical companies make on their products. And we want pharmaceutical companies to make a profit.

If they don’t it will hurt on a global level in the future.

Destroying Profits Destroys Innovation

Research and development of a new drug is an extremely costly endeavor, both in time and money. Annually, close to $58 billion is spent on research and development by U.S. research based pharmaceutical companies. It takes an average of 12 to 15 years and $802 million to $1.3 billion to bring a drug from idea to reality. Of the new drugs created, “only 1 of every 5,000 products screened is ultimately approved as a new medicine” and “only 1 in 5 drugs approved and marketed ultimately produce revenues (aka profits) that recoup their R&D costs.”

Those profits are then used to perform more research and development. In fact, the pharmaceutical industry reinvests more of its profits in R&D (17.7%) than electronics, telecommunications and aerospace. The “average ratio of R&D to sales for all US industries is less than 4%.”

Without the profit on drugs, there is no research and development. There is no innovation. There are no new drugs.

It’s happened before, exactly as described above, in America:

After anthrax-laced letters killed five Americans in the wake of the 2001 World Trade Center attacks, Secretary of Health Tommy Thompson threatened to suspend Bayer’s patent on its antibiotic Cipro unless the company agreed to his “preferred” price. Bayer, faced with the prospect of generic companies getting the right to break its U.S. patent, caved and slashed its price from $1.83 to less than $1 per pill.

In 2004, Congress passed legislation, called Project BioShield, designed to spur private sector development of treatments for potential bioterrorist attacks. But nearly three years after the bill was signed, pharma companies have expressed little interest in the program. Not a single new product has been approved by the FDA.

Why? One major reason is the suspicion that, in the event of an attack, the government will offer pennies on the dollar for bio- terror drugs and will break patents to ramp up generic production. Instead of joining the biodefense effort, big companies are thus focusing their efforts on diseases like cancer or heart disease — where financial rewards are left to market forces. (Emphasis mine.)

Because of profits, we have a California biotech company that created a new AIDS drug. Because of profits, Pfizer has created the drug Sutent, which slowed the progression of pancreatic cancer. And because of profits we have new drugs being created and tested every day, including “36 for high blood pressure, 33 for heart failure, 16 for heart attacks, and 22 for stroke.”

The “reimportation” of cheap drugs will destroy the profit making capabilities of pharmaceutical companies, therefore destroying their capability to create new medicines. While the do-gooders on Capitol Hill may think they are doing what is best for America, they are not, as economist Thomas Sowell would say, thinking past stage one.

Their efforts to solve the high cost of medicine will provide lower prices now at the cost of future innovations. The solution doesn’t lie in the demonization of pharmaceutical companies or in socialist price control schemes, but in the free market and solid profits.

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Duane Lester is an ex-Navy journalist turned blogger and podcaster. He is the lead writer and editor for All American Blogger. You can also find him on StumbleUpon, Facebook, Twitter, LinkedIn, Blog Talk Radio and Newsvine.

Originally published at All American Bogger
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