Wednesday, 12 January 2005

Drug companies

Richard Epstein has a detailed book review in Legal Affairs that addresses attacks on current drug industry practices. I haven’t read the whole thing—one of the nice things about having a blog (or partnering with someone who does) is that you can capture links and such for later reading—but here’s an excerpt of what appears to be a couple of compelling paragraphs:

Kassirer argues that drug marketing corrupts the companies that do the pushing and the doctors who yield to their blandishments. A doctor with undivided loyalty to his patients cannot resist temptation when a zealous sales force pushes overpriced and often dangerous products onto the market. Angell echoes these concerns and offers a more extended indictment. Pharmaceutical firms have been the beneficiaries of government largesse. They grievously overstate the costs of bringing new drugs to market in hopes of wringing extortionate payments from desperate patients. They adopt foolish strategies for research and development, producing “me-too” or copycat products with little medical benefit while falsely taking credit for scientific innovations underwritten by the National Science Foundation and the Institute of Medicine. The pharmaceutical companies benefit from a patent system that they can game and from a lax FDA process for drug approval. And they use devilish advertising campaigns to promote their wares.

In response to these perceived failings, Angell favors a stiff dose of price controls, tougher FDA approval procedures, restrictions on advertisements, and sharp limitations on drug patent protections. She would undo both the Hatch-Waxman Act of 1984, which extends the patent life of all drugs in order to partially offset the lost sales from those that have been patented but await FDA approval, and the reforms that allow drug companies to help finance the costs of the FDA‘s new drug applications. Drugs are a complex business, and each of Angell’s proposed reforms would produce a myriad of unintended and often destructive side effects. Remove industry payments to expedite FDA review, for example, and desired new drugs will take longer to reach the market. That in turn will truncate the life of a patent and reduce innovation. Experts in the field ponder the trade-offs. Angell and Kassirer write as if the trade-offs do not exist.


Any views expressed in these comments are solely those of their authors; they do not reflect the views of the authors of Signifying Nothing, unless attributed to one of us.

Agree with most things but I am not sure that drug companies overstate the cost of drug development (independent data supports their estimates). What they overstate, though, is the degree of risk. In general, drugs are profitable business.

They also overstate benefits of drugs. Only now we know that drugs like Vioxx and Celebrex presented no more benefit than an OTC painkiller and did a lot of harm to the heart.

And while I am no fan of price controls of any kind, a recent Commerce Department study shows that if 11 OECD countries eliminated their price controls the benefit to Americans will be merely $5–7 billions, which is a drop in the bucket. Or in other words, price controls is not the problem. In fact it may be the solution to high drug prices in America.


Mr. Consultant,

It appears that you are indeed a fan of price controls, specifically for drugs. You’re at least open to it. I think you should reconsider; I’ll tell you why.

As with all other products, producers keep making the drugs until marginal revenue is equal to marginal cost. With price controls in place, the riskiest drugs, with the payoffs farthest into the future, won’t get made. Sure, for existing drugs the cost of making an additional pill is minimal (it’s in the pennies, IIRC). Price controls wouldn’t have much of an effect on their decision to produce or not. However, all costs are variable in the long run and the real cost will be in the form of drugs that don’t get made because the prospect of recovering their R&D costs is diminished. Of course, that cost is not visible.

While price controls may have some short run appeal, over the long run fewer drugs will be made. Price controls are short-sighted.

Comments are now closed on this post.