No Free Lunch, No Cheap Drugs

Xconomy News: Weston, MA-based Biogen Idec, the largest maker of injectable treatments for multiple sclerosis, met its goals in a second clinical trial for an oral pill to treat the disease. The pill reduced flare-ups by 44 percent when taken twice per day, and by 51 percent if taken three times a day.

A friend of mine, George Martin, has challenged me to defend the high drug prices in the US.  He asks why doesn’t the US government buy drugs from Canada and cut costs of US healthcare?

I agree with George’s argument that drugs cost less in Canada or Europe because their governments each provides single purchasers that forces prices down. I am sure the US could also cut prices.

Unfortunately, I think we need to be honest about the effect of cutting those prices. Drug companies create new drugs because new drugs generate profits.

The importance of the US market to drug comapny innovation  is reflected by the fact that the overwhelming majority of R&D for new drugs comes from the USA.  Even research outside the US, is driven by the chance to sell in our market.

The US consumer subsidizes the EU consumer.

Does this mean that opening the US borders to drugs from the EU or Canadian markets would stifle innovation?   . Let me avoid answering that question by offering  four questions:

1. Would you buy shares in AMGEN if you read that their profits were going to fall?

2. If AMGEN could not get higher prices for Erythropoetin in the US, would they raise prices esewhere?

3. Do we need twenty of thirty new marketable drugs every year? Would we be better off without Gieevec and Avastin? An outcomes researcher might say “yes.” He might say we would get better health if the dollars were spent on prenatal care or an increased supply of nurse practitioners.

4. Generic manufacturers in India and China are encroaching on the US market.  Will their lower costs and absence of research drive investments our of pharma and into more profiteable industries?


3 Comments Add Yours ↓

  1. George Martin #

    Thanks for this follow up on our all too brief conversation, Steve. My question was more generic and is related to wider international comparisons of costs for drugs. An example is found in Figure 8 of a 2005 Australian study (

    Yes, we should recognize the important research contributions of our US Pharmaceutical industry, but it is well known that their major costs are in marketing, including direct to consumer marketing, something that is outlawed in all other developed countries with the strange exception of New Zealand. For one of several scholarly studies of this subject, see a 2008 PLOS Med paper entitled “The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States”, by Marc-André Gagnon and Joel Lexchin.

    A reasonable hypothesis for why we spend so much more for drugs in our country is that, in contrast to other developed countries, we do not have a single payer system for health care and, therefore, do not have a single bargaining agent. An exception is the VA system, which does enjoy the benefits of a single payer system. It also delivers superb care to our veterans (see the 2011 book by Phillip0 Longman entitled “Best Care Anywhere: Why VA Health Care is Better Than Yours” Berrett-Koehler, San Francisco).

    We should also keep in mind that the vast bulk of research that is germane to the development of new pharmaceuticals comes from public funds that support the National Institutes of Health, an institution that is currently struggling to support research applications from the many young investigators we have helped train to contribute to our understanding of mechanisms of disease.

    Best regards,

  2. admin #

    Thanks George.

    The simple issue is that American medical care costs about twice what its should. Part of that is due to higher drug costs.

    I actually do not see how the combination of a single payer and private for profit suppliers can change the drug cost issue. If a single payer, or some other of form of price control is used, what effect do you imagine the lost income will have on the drug makers?

    It seems to me that the real issue is that foreign consumers are gaming our system. One thought I have had is that we use free trade mechanisms. It seems to me that Pfizer selling Lipitor at a lower price in Ottawa than Chicago is a good example of “dumping.” Of course the issue here is that no one thinks of monopoly pricing as working this way. I am not sure that is true. If Lipitor were not being subsidized for sale in Canada, then THEIR market would force the sales of generics.

  3. admin #

    I also think we .. the scientific community ,,, could do more to lower costs and foster competition.

    For example, why couldn’t the NIH spend money to reduce the costs of drug development? A sizable part of the cost of discovery is inefficient duplication of efforts in high throughput screening and the informatics needed to store and make use of that data. If the NIH got into the business not only would costs go down, opportunities for small companies would increase. (The challenge would be making these resources pay of for American companies rather than just subsdizing companies in India and China!).

    Another example is the idiocy of our current patent structure. Corporate profits are heavily leveraged on the value of patent portfolios. I suspect this means that corporations are driven to optimize return on their patents by stifling each others innovation. What would Merck do if the NIA came to them with a fully developed set of IP on a drug for Alzheimer’s?

    Finally, why couldn’t the NIH underwrite FOR PROFIT startups whose business model did not depend on such high risk? DARPA has done that for years with great success.

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