Drivel from the Drug Industry/U.S. Government Axis

“The pharmaceutical industry has provided invaluable medicines to cure and relieve millions of patients throughout the world. As an industry, it drives economic growth and employs thousands of skilled people. But it also uses false economics and makes up stories to justify higher prices. Higher prices strain budgets, causing millions of U.S. patients not to take the drugs their doctors think necessary. The pharmaceutical industry and the U.S. government want to blame other developed countries for these higher [U.S.] prices rather than make drugs more affordable.”

So conclude researchers from the University of Medicine and Dentistry of New Jersey (Donald Light, Ph.D.) and from Toronto’s York University (Joel Lexchin, M.D.), giving credit where credit is due and blame where it is appropriate. They have published a review in the British Medical Journal (October 22, 2005, pages 958-960) enticingly entitled “Foreign free riders and the high price of U.S. medicines”.

They state that “The United States government is engaged in a campaign to characterise other industrialised countries as free riding on high U.S. pharmaceutical prices and innovation in new drugs. This campaign is based on the argument that lower prices imposed by price controls in other affluent countries do not pay for research and development costs, so that Americans have to pay the research costs through higher prices in order to keep supplying the world with new drugs. Supporters of the campaign have characterised the situation as a foreign rip-off. We can find no evidence to support these and related claims, and we present evidence to the contrary. Furthermore, we explain why the claims themselves contradict the economic nature of the pharmaceutical industry.”

Among their findings are:

• “Contrary to claims of American dominance, pharmaceutical research and development in the U.S. has not produced more than its proportionate share of new molecular entities. The U.S. accounts for just under 48% of world sales and spent 49% of the global total on research and development to discover 45% of the new molecular entities that were launched on the world market in 2003, less than its proportionate share. European countries account for 28% of world sales, 36% of total research and development spending, and 32% of new molecular entities, more than its proportionate share.”
• “A report from the U.K. Pharmaceutical Price Regulation Scheme documented that drug companies in the United Kingdom invest proportionately more of their revenues from domestic sales in research and development than do companies in the U.S. Prices in the U.K. are much lower than those in the U.S. yet profits remain robust.”
• “In Canada the 35 companies that are members of the brand name industry association report that income from domestic sales is, on average, about 10 times greater than research and development costs. They have profits higher than makers of computer equipment and telecommunications carriers despite prices being about 40% lower than in the U.S..”
• “Mark McClellan, the former commissioner of the Food and Drug Administration [now — unfortunately — head of Medicare and Medicaid], maintained that low prices are “slowing the process of drug development worldwide.” This assertion is contradicted by the industry’s data. The European Federation of Pharmaceutical Industries and Associations reported that, between 1990 and 2003, its members increased their research and development investments in Europe by 2.6-fold and in the U.S. by fourfold.”
• “‘Free rider’ is both a vivid public image of someone jumping on for a free ride and a highly misleading economic term. Technically it refers to a method for allocating fixed costs in proportion to the prices that different groups pay. For example, if Group A (call it Europe) pays $1 per pill and Group B (call it the U.S.) pays $2 a pill and each buys a million pills, then this accounting method would assign half as much of the fixed cost to Group A as to Group B. If, however, the fixed costs are only $300 000 (a tenth of the total revenue) for the two million pills, the fixed costs could be allocated by volume rather than by price ($150 000 for each group) and conclude that Group A more than pays the fixed costs and Group B pays much more than it has to. In short, the free riding argument economically is the artifact of an accounting convention and can be eliminated by Group B (the U.S.) cutting its prices in half, rather than forcing Group A (Europe) to double its prices.”

It is our view that these researchers have put their fingers on an important new way of looking at the issue of price discrepancies between the U.S. and the rest of the world. If anything, the entity getting a “free ride” is the pharmaceutical industry, which has bludgeoned the U.S. Congress out of imposing price controls or negotiated prices on drugs for the 40 million Medicare recipients in this country. Thus, although the industry is already extremely profitable in Europe and elsewhere, in the U.S. its price-gouging — masquerading as necessary for the preservation of research, most of which is for developing me-too drugs — is unconscionable and must be stopped.

When our elected representatives start paying more attention to the health needs of Medicare recipients and, for that matter, of all people in this country, instead of being led around by the more than 600 drug industry lobbyists in Washington and by the industry’s close to 100  million dollars a year of  campaign contributions, the drug industry’s “free ride” will end and prescription drugs will finally become affordable for a large proportion of people in this country.