The argument? Drug pricing.
Hal Pawluk at Tude put together this explanation on BlogCritics of why prescription pharmaceutical prices are so high. If it makes anyone feel better,in the version posted on his own site, he suggests getting back to more of a free-market in drugs.
MYTH: Drug prices need to be as high as they are to pay for research and development.
REALITY: Drug prices are as high as they are to support unconscionable profits, with much of the research paid for by taxpayers.
The big claim by Big Pharma is that it costs $802 million to bring a new drug to market.
It's not true.
The drug industry figure comes from a Tufts University study released in late 2001. There are some major problems with the study (it affects your bank balance so it's worth paying attention):
1. The $802 million included $400 million that had nothing to do with bringing drugs to market. It was an estimate of how much the drug companies could have made by investing in some other way. This is an imaginary number that the drug companies do not pay.
After deduction: $402 million.
2. The remaining $402 million included about $230 million for clinical trials, but many drugs are simply revamps of existing drugs so clinical trials are done on only about 29% of drugs. That cuts the figure to $67 million, and we can deduct another $163 million.
After deduction: $239 million.
3. The US taxpayer pays for 34% of the remainder through a tax deduction drug companies take on R & D. I think encouraging R & D this way is good policy, but it does reduce the cost of bringing the drug to market by $81 million that's paid for by you and other taxpayers, not the drug companies.
After deduction: $158 million - $644 million less than Big Pharma claims.
Multiplying the real cost by a factor of 5 is a lot of "shading," but even the last figure is still higher than the average cost to bring out a new drug: the study was limited to a number of drugs that were developed exclusively within the drug companies.
What's wrong with that?
This: the reality is that the majority of drugs are developed with government support, paid for by American taxpayers:
A National Institutes of Health (NIH) internal document, dated February 2000 and obtained by Public Citizen earlier this year, showed that all the top five selling drugs in 1995 received significant taxpayer backing in the discovery and development phases. Investigations by the Massachusetts Institute of Technology and The Boston Globe also have examined samples of medically important and top-selling drugs and found that a vast majority of drugs in each group received government support. [True Figure of R&D Costs Likely Is 75 Percent Lower]
The explanation for this situation may be grounded in the fact that the Tufts Center for the Study of Drug Development gets 65% of their research funding from drug companies.
So when you hear spokesmen like Dr. Mark B. McClellan, commissioner of the Food & Drug Administration [yeah, I know - he's supposed to be working for us], claim that "the US is is paying the lion's share of the cost of developing drugs" you can believe him.
But remember that we're paying twice: once in government-funded research, and again in drug prices that are much, much higher than in other developed nations.
That's where those "unconscionable profits" come from.
Posted by P6 at February 14, 2004 03:12 PM
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Comments
> The $802 million included $400 million that had nothing to do with bringing drugs to market. It was an estimate of how much the drug companies could have made by investing in some other way. This is an imaginary number that the drug companies do not pay.
There goes "Economics 101".
If you can work an hour for 20$ or stay at home and watch TV, the opportunity cost of watching TV is 20$, i.e. you will be 20$ the poorer if you stay and watch TV. Never mind that you don't have to physically insert the money into the Idiot Box.
If you can invest your money in the most profitable industry in the world, your opportunity cost is a negative number.
But for the sake of argument, let's add that $400 million back in there. That means Big Pharma still overstates its case by $244 million…and the estimate doesn't apply to the majority of drugs because Big Pharma doesn't develop them.
Posted by P6 at February 15, 2004 10:13 AM> If you can invest your money in the most profitable industry in the world, your opportunity cost is a negative number.
Example:
I have a place I can rent for 500$ a week.
I also am able to invest 5000$ to clean it up (taking 4 weeks time during which the place can't be rented), after which I can rent it for 600$ a week.
Question: how long will it take for me to recuperate my investment should I decide to renovate?
answer: 70 weeks (5000+4*500)/(600-500)
and not 50 weeks 5000/(600-500)
Should I be ableto make , for whatever reasons, lots and lots of money after renovating my property, that still does not alter the fact that during the renovation I was not able to rent out the place, and that means I lost 2000$.
Whatever money I make after the renovation, I still have to deduct both the renovation costs AND the opportunity cost to count out my profit.
Opportunity costs are real costs, it's just money you're not getting instead of money you have to pay. The 2K I don't get when the place is being renovated is "as real" a cost as the 5K I actually have to fork up.
Duh.
Now, out of the land of fantasy.
Where could they have invested their money and gotten a greater rate of return?
Oh, I know! Marketing their products!
Why aren't they claiming opportunity costs on money they spend on marketing? After all, they spend more on marketing than research.
It's the same level of unreality built into market valuations of companies.
Posted by P6 at February 16, 2004 07:54 AMYou're mixing two things up here:
How profitable is a given drug company
vs
How profitable is a given drug from a given drug company.
an analogy would be for you to both own and exploit a restaurant: you will receive income both from exploiting the restaurant, and renting the place.
Just because you are paying rent to yourself doesn't make your restaurant miraculously more profitable compared to other restaurants.
The equivalent rhetoric to demand price setting for drugs based on general profitability of the company rather than profitability of the individual drug would be to demand that people who exploit restaurants should lower their prices if they have other means of income.
I'm not mixing up anything.
The initial argument was on the cost of developing A drug, which was absurdly hyped.
You then raised the issue of opportunity costs, which (a) are not an expense and (b) are calculated on the absurd principle that there's a more profitable place to invest than pharmaceuticals.
I am totally clear that we're discussing two different issues.
Posted by P6 at February 20, 2004 09:54 AM