Friday, October 21, 2005

Drugs

I always thought it was a bit strange when we were told that the reason why we pay much higher prices for prescription drugs than other countries do is because of the cost involved in production - I remember a commercial saying it takes 20 years and $700 million, or $900 million, to develop a new drug - but we were daily bombarded with ads hawking the newest pharmaceutical wares. These ads are puzzling themselves - essentially, they encourage you to self diagnose: Do you feel X, Y, Z? You may have this - see your doctor. And then, when your doctor asks about symptoms, you'll say, Well, I have X, Y, and Z...and you might even ask about their product.

Drug companies spent, last year, 4.1 billion on advertising; equivalent of developing between 4 and 5 wholly new drugs, give or take. That was over a 25% increase from the year before. This year, up to July, they'd spent just 2.34 billion - down 1.5 % from the previous period.

It's all a little strange - we pay more for drugs than other countries, developing and non-developing, and we're told we pay more because they're expensive to develop, or because (the Bush argument) we can't trust those dad-gummed Canadian drugs - I mean, there are French people there! - but they sure as shit can spend money on ads.

According to one report I found, in 2002, Fortune 500 drug companies spent 30.8% of their money on advertising and administration, and 14.1% on R&D. Pfizer and Johnson and Johnson spent more on ads than Coca Cola, McDonald's, or Toyota.

Why is so much money spent on advertising to consumers? Why not rely on advertising in medical and trade journals that physicians read, and will then use to formulate their treatments?

If you measure directly by profits, according to the report, each dollar spent on advertising to consumers raked in $4.20 in sales. Pretty good bang for your buck, I suppose.

In effect, though, what it means is that we aren't paying higher prices on drugs simply because of R&D costs, but because the companies are spending lots of money getting us to buy their drugs.

As to why they're so much cheaper in other countries...well, I guess they're just not safe there.

Actually, not quite - prices vary according to what goods can be sold for in markets - that is, the more sensitive consumers are to price, the less that price tends to be for a good, and if there are two markets, one with high and one with low price sensitivity, the low sensitivity will get high prices, high sensitivity will get low - so long as they're separate:

"There is no doubt that one of the major explanation of drug price differentials between our two countries is market separation to reflect the fact that Canadians cannot pay as much as Americans for their drugs. From an economic point of view, this makes perfect sense. Every separate market will have a profit maximizing price that represents that market’s maximum sustainable contribution to the R&D effort of the pharmaceutical industry, as well as covering the hard costs of producing the actual medicines consumed.

Note something very important: If a company is selling at a high price in a well-off market and a lower price in a less well-off market, and separation of the markets ends so they find themselves having to charge the same price in both markets, both the company and at least one set of consumers will be made worse off as a result.

If it raises the price in the lower-priced market, because the demand is more elastic in that market (which is why the original price was lower there), even though the price will now be higher in that market it will lose enough sales to cause its profits to fall (since the original price in that market was the profit maximizing one in that market, any other price, higher or lower, must yield a lower profit than did that original price). If it cuts its price in the higher priced market, because demand was relatively inelastic there (which is why the price was higher there in the first place) it will lose revenue as a result of lowering its price, and not pick up enough in the way of sales to compensate, so its profits in that market will fall. If it adjusts both prices, settling on a common price somewhere in between the original prices, it will lose profits in both markets."

First point: if large portions of revenues/profits are being put into advertising, we shouldn't feel too bad about pharmaceutical companies making less money by charging less for drugs in the US. After all, they're paying, it seems, about as much on advertising as they do R & D, so it's tough to see that loss in revenue, compensated for by diminished advertising, will crush R & D.

Second point: markets don't just stay "separate" for goods that can be moved easily. If you can buy a car in Canada cheaper than in the US, you'll buy it there if you live near the border; automakers in the US stopped honoring Canadian warranties as a result. Meaning, markets don't just stay separate unless the state steps in to keep them separate, or firms do so. And that's precisely what we've seen happening with opposition to importing Canadian or Mexican drugs, which are cheaper. (See this report on drugs in Vermont.)

Now, click over to Open Secrets: in 2004, the pharmaceutical industry gave $17,803,205 to candidates at the federal level, $11,821,283 to Republicans, or 66%. That put them at a rank of 21 in terms of 80 different industries. For the 2006 cycle, they've thus far given $4,436,015 - that puts them at 13. This time around, 71% of the money goes to Republicans.

If memory serves me right, it's more often Republicans that oppose allowing the importation of Canadian or Mexican drugs.

Anyway, just some random thoughts before I hit the sack.
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