Thursday, June 08, 2006

The price of pharmaceutical research

Prices for prescription medications are very high, generally rising far faster than inflation, and far higher in the United States than in Canada or other nations. This is a serious problem, and it needs to be addressed, but it's not the problem that the average person thinks it is; it's an entirely different and much more difficult problem. Explaining how and why may smack of being an apologist for the pharmaceutical industry, because most people are pointing fingers in too simplistic a fashion. But don't mistake a more realistic look at the problem as dismissing the problem.

The fact people don't realize or handwave away is that pharmaceutical research is both highly expensive and highly risky. Medicinal technology is so advanced that much of it is based on highly complicated molecular modeling requiring huge amounts of supercomputer time along with the talents of very talented and highly trained scientists, and lots more. The testing makes that look like chump change; for very good reasons we require exhaustive multi-layered tests that take years and cost millions. For every product that comes out of this process approved and ready to earn money, scores more never see the light of day or are relegated to a very limited applicability (and concomitant return on investment potential).

There is only one way to make it financially feasible to invest capital into such an enterprise: by allowing it to make huge profits when it happens. Otherwise, the investment capital will go to other opportunities with less risk or more payoff possibility. That's simple arithmetic, combined with an inescapable consequence of a capitalist market.

Note that this analysis still holds even for a company which has been established already. A pharmaceutical company that has a successful product still has to choose how to invest its revenue to achieve best results for its shareholders; it's not a foregone conclusion that it's always best to invest them into its own continued research. That's generally how it happens in a stable market, but if the laws changed, or the market shifts abruptly, a company might well cease development in a particular sector, or even liquidate itself, according to the very same risk-benefit analysis as was performed by the initial venture capitalist.

The United States has an intriguing "solution" to this problem, one which is of course not without flaws, but isn't nearly as bad as people might think. The developers of a new drug get seven years of patent-supported monopoly, and the opportunity to charge very high prices without competition on a product that people are likely to buy regardless of price, both because of need, and because of the insurance industry. After seven years of "first mover privilege", the drug becomes available to generic manufacturers, who can price it only based on manufacturing costs, ignoring research and development costs, and thus bringing the drug within the reach of a hugely wider base of customers.

In a way, this mirrors the situation for a lot of "luxuries". Consider home theater hardware. The first CD players, DVD players, HDTVs, etc. cost huge amounts of money, thus effectively excluding most people from getting them. Those who could pony up the big bucks for the privilege of getting first dibs, got the privilege, and everyone else waited.

No one sees it as a crime against humanity that not everyone can have a DVD player at the same time, but many of us see it as a much more serious thing that everyone should have equal rights to life-saving, or quality-of-life-improving, medical care, because these things are considered necessities. The trouble, of course, is that while we may believe that, we seem to lack the political will to act on it -- since that principle inexorably leads to socialized medicine in one form or another, or at very least, universal healthcare.

And thus we stand trapped between a sensible enough principle and our inability to act on it. The inequities of drug prices are merely a reflection of that chasm, not really a problem of their own.

But why doesn't Canada have that problem, why are drug prices lower there? In essence, the United States is subsidizing the rest of the world. US drug-buyers are paying a far disproportionate part of the research costs. And that's not fair. But it's nowhere near as unfair as a lot of people make it out. On average (and what a cruel word "average" can be to those who fall below it) the US consumer can better afford to pay those research costs than anyone else (considering both standard of living and size of population base). And for that extra lucre, they're getting first crack at almost every medical advance made, since the vast majority of cutting edge medical research happens in the United States (though that edge is gradually eroding too).

The superficial analysis so common today, and even starting to infect the legislatures, is the foolish idea that we can just pass laws forcing drug companies to keep prices equitable with Canada, and that'll make everything better. Of course, it won't. There are two possible outcomes of that approach.

First, everyone else's prices will rise while ours fall until we find an even level: in other words, we'll have improved our lot at the cost of the rest of the world. You decide how fair that is, taking into account our financial advantages over the rest of the world. Keep in mind that this will hasten the spread of medical research into the rest of the world, costing US jobs and tax revenue as well as access to some cutting edge medical techniques... but so will any other solution to the drug price disparity.

Second, price restrictions will make pharmaceutical research less and less fruitful, and the "invisible hand" Adam Smith talked about will cause it to diminish. It will still spread worldwide, but it will also peter out, or at least slow the fantastic pace of medical advances that the last generation or three have become accustomed to.

Neither of these are really palatable outcomes, and that's what you get when your solution is aimed at a symptom and not the problem. The simple fact is, you can't mandate prices. The costs that went into those prices -- including profit that justifies risk -- are still there. They either go somewhere else (to other countries, perhaps) or the whole thing shrivels up.

I don't pretend to have a real solution at hand. The only thing that comes to mind is government-sponsored medical research -- a step towards communism, perhaps, forcing the question of whether the driving force of capitalists looking for profit can ever be matched by anything that isn't driven by profit incentives. Any such thought is at best hypothetical: if we can't even provide basic medical care for ourselves, how are we going to talk about providing cutting-edge expensive medical research to ourselves?

All I'm trying to say here is, the problem is not as simple as pointing a finger at "greedy venture capitalists and greedy pharmaceutical companies". (Well, you can say it is those things as long as you reject capitalism itself; but you can't have your capitalism cake and eat it too.) Those costs fund something we need (or at least want), and you can't make them go away with a wave of a magic wand or by passing a congressional resolution. If you're really trying to change how costs are distributed, say so, acknowledge the consequences of reallocation, and don't pretend you're talking about lowering them instead.

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