Drug Wars
Wall Street Journal, April 26, 2004; Page A14
...
The role that the French government played in both discouraging a
Swiss bid and riling up French unions against Novartis wasn't exactly
subtle. These factors doubtless helped convince Aventis's board that
going French was the path of least resistance. The French Health
Minister promptly issued a press release last night "rejoicing" that
France would be home to "one of the world's biggest" drug companies.
Maybe so, but it won't fix what's wrong with the European
pharmaceutical industry. In the course of the past decade, U.S. firms
have overtaken their European counterparts in both R&D spending and
new-drug approvals. Novartis itself has moved the center of its
research operations to the U.S. from Europe, quite simply because
these days, that's where the money is.
The French government's desperation to hang on to the last vestiges of
a once-mighty industry is just the latest sign of the true costs to
Europe of decades of stringent price controls on the research-based
drug industry. European drug companies that have not fled or merged
have stagnated or shrunk.
If the French government is genuinely concerned about the viability of
what's left of its homegrown pharmaceutical industry, it should take
the plank out of its own eye. Price controls, rigid labor-market rules
and high taxes have all helped make European pharma uncompetitive in
the global market. A couple of years back, Pfizer CEO Henry McKinnell
even warned the French government that without more liberal pricing
policies, Pfizer might not bother to sell certain drugs in France at
all.
The French government appears to have won its battle to keep Aventis
in (sort of) French hands, but the merger won't change the long-term
outcome, in which France and its European neighbors price themselves
out of an industry they once led.
The politicians and lobbyists in the U.S. who have been clamoring for
drug-reimportation laws to lower the costs of prescription medicines
would do well to look at the devastation price controls have brought
to Europe's drug industry. By some estimates, the American market now
accounts for 62% of the global profit pool in the pharmaceutical
business. As attractive as lower drug prices may seem politically,
supporters of reimportation might consider whether they want the U.S.
to become France, desperately clinging to the surviving remnants of an
industry in decline.
BUSINESS WORLD
By HOLMAN W. JENKINS, JR.
Why Not Import Drugs From Fantasyland?
Wall St. Journal, April 28, 2004; Page A17
Mark McClellan, the FDA chief, paid a call on the Journal a year ago
and we asked him who had the job in the Bush administration of
worrying about how other countries regulate pharmaceutical prices. He
looked puzzled, shrugged and said maybe the U.S. Trade
Representative's office.
That was that, and the discussion moved on.
A year later, when Dr. McClellan was invited to leave his job and take
over Medicare, the estimable Robert Goldberg, drug industry expert at
the Manhattan Institute, could pen a tribute to the FDA chief as the
guy who "made Canadian and European free riding on American drug
development through their price controls a global trading issue."
The point is, some people in Washington do look reality in the eye and
pursue rational solutions. Then we have Ted Kennedy, John McCain,
Trent Lott and Byron Dorgan, who last week announced bipartisan
legislation to allow "re-importation" of drugs sold to Canada.
We're not in business to give Congress even worse ideas than it can
come up with on its own, but if the Canadian system is so great, why
not just enact our own Canadian-style price controls here? Or why not
just mandate that all U.S. drugs be shipped to Canada and then shipped
back so they'll be eligible for Canadian prices and all Americans can
have cheaper drugs? What's the point of simply sanctifying ad hoc
hoops and hurdles that permit a few Canadian Internet pharmacists to
get rich by arbitraging between our system and theirs?
OK, Ted Kennedy probably doesn't understand any of this (or care). His
answer for the difference between U.S. and Canadian retail drug prices
contains only one syllable: greed. So let's visit the greed argument,
since it also possesses the minds of many journalists.
What can it possibly mean to call an industry "greedy"? Drug companies
are said to be an unconscionable exception because their profits are
comparatively high, 15.4%, when measured as a percentage of sales. But
here's a question: Grocery stores have a measly return on sales of
1.4%, and liquor stores an even measlier 1%. So why does anybody
invest in these businesses rather than the drug business? Last time we
looked, the grocery industry and liquor stores still existed.
Such indictments of the drug industry overlook the fact that profits
are a cost -- the cost of a company's capital. Nobody pays back their
investors more than they are obligated to. By the same token, if your
capital costs are 15.4% of your total costs, profits had better be
15.4% of your revenues or you won't be in business long. Measures of
profitability, in short, tell you a lot more about an industry's need
for capital than about its "greed."
But, critics moan, don't drug companies spend more on advertising than
they do on research and development, and therefore . . . what exactly?
The critics never say, but apparently they suspect that the
availability of money to throw away on advertising is evidence of
excess profitability.
Wrong. Companies spend money on advertising because it generates
profits, not because it consumes them. You've spent 10 years and $500
million to develop a new product and haven't rung up your first sale
yet. What could be a smarter investment than spending a few dollars
more to let the world know the product exists? Advertising actually
makes companies more willing to invest in R&D. Capital can be earned
back faster; fixed costs can be spread over a larger number of
customers, allowing each to be charged a lower price.
All this is magisterially beside the point, of course. No matter what
adjective is applied to drug industry profits, everyone should be able
to agree that you can't reduce industry profits without, ipso facto,
reducing the incentive to develop new products.
America's real problem is that drugs have been roped into the same
perverse incentives that govern most health care spending. Consumers
don't weigh cost vs. benefit; drug companies focus their development
efforts on drugs aimed at large populations of price-insensitive,
insured patients. At the same time, consumers who don't have drug
insurance and pay out of their own pockets scream bloody murder
because drugs seem like a violation of a natural order in which
medical care is increasingly perceived as a costless entitlement.
Think we exaggerate? Everybody noticed when HCA, the big hospital
chain, earlier this month put aside $700 million to cover the bad
debts of uninsured patients, who are typically good for only seven
cents on the dollar. Little noticed was the fact the company also has
to cover the bad debts of insured patients, who routinely skip out on
their co-payments and deductibles. Nowadays these people are good for
only 45 cents on the dollar on average.
Medical bills seem to have become optional to Americans when deciding
which envelopes to toss in the trash unopened at the end of the month.
"Hospitals are ninth" on the payment list, HCA's Chief Jack Bovender
told Reuters in February, well behind mortgages, car payments and
cable-TV bills. "The only thing people pay worse is the student loan
program."
Yet the single biggest factor behind rising drug spending is the
simple fact that drugs are being invented that can do more things for
more people. A study by Columbia's Frank R. Lichtenberg finds that
spending on cancer drugs buys an average extra year of life for every
$5,000 the country spends on them. What patient doesn't consider that
a bargain?
Well, insurers may want to hitch up their safety belts now. Eleven
million Americans already take cholesterol drugs daily and new studies
suggest that perhaps five times as many could benefit from taking
them. But no problem: We'll just get the meds from Canada.
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