Response #1

I disagree with your analysis on the re-importation of drugs issue, but for a different reason than you usually hear. However, I am not sure that I oppose your solution.  

Drug companies like any business are profit maximizes. That is generally a good thing. Their drive for profits gives new life-saving, life improving and life extending drug after drug. Given the very high risk business in which they engage, the possibility of high profits is a must or this marvelous machine shuts down.  

The thing to remember in all this is marginal pricing. What is marginal pricing? Why can a drug company still make a profit selling to a country at less than average cost, but higher than marginal cost? What happens if all countries fix prices below average cost or even at average cost?

Response #2

Marginal pricing is what you see with airline seats. You are happy to lower the price below that average cost of flying each passenger to the destination, because the added cost of filling that extra seat is minimal. However, if you priced every seat on the plane as that same price, you would lose money on the flight.  

The big cost in drugs is all the research and development, including all the R&D involved all the drugs that never worked out. Developing drugs is a high risk business. Nobody would do it if the potential for high profits was not there for the few successes.  

However, if Spain or France comes to your company and they say, we will only pay 50 cents per pill (that is our law). You look at it and say, we can't change more, even if that market would sustain a higher price, but the actual manufacturing, packaging, transportation, etc. is 25 cents per pill. That is the marginal cost, i.e., the cost of producing one more pill. You would be foolish not to sell, because you would be leaving money on the table.  

However, imagine that when you include all the cost, including the entire R&D on that particular drug, and all the dry holes you hit getting there that the average cost is $2 per pill. While you can make some money selling at prices based on marginal cost, your company is going down if everyone pays a price based only on marginal cost. Using the airplane analogy, the plane is not going to fly for long if somebody is not paying business class.  

This means that if the UK fixes prices and pays based on marginal pricing and Mexico does not fix prices and pays prices that reflect that total costs and risks involved then Mexican consumers are subsidizing UK consumers. Again, because if someone is not paying business class, neither the airline nor the drug company can stay is business long term.  

What I would like to see is all developed countries pay market rates, so that you do not have some consumers in wealthy countries subsidizing other consumers in wealth countries.  

I think that it is important that we think about how people in poor countries are going to be able to access drugs. The WTO is doing work in this area. Obviously, we do not want poor people in Africa dieing of malaria because they cannot afford drugs or even mosquito netting. At the same time, you could undermine the entire system by creating a gray market through developing countries. This is a serious issue, which from what I have seen the WTO is taking very seriously.  

I also realize that even in well to do countries there are people who are ill and need expensive drugs beyond their means to pay. However, I think that it is within the reach of the governments of those countries to subsidize the purchases of those people without insisting that all of their citizens, the wealthiest included pay rock bottom prices (or that they pay nothing and the government pays rock bottom prices for them).  

I hope I answered your question.

Response #3

Great question. I actually thought about this last night as I was trying to fall a sleep, and wondered if you would ask this question, because it is the next logical question. It shows that you are giving this some serious thought.  

In essence, what we do with patent law is we tell people that if you bring something new, unique and significant into the world for a limited amount of time we will let you make monopoly profits. However, one thing that most people do not understand is that monopoly profits are not maximized at an astronomical price. It is definitely at a higher price than in a market with significant competition. However, even for a monopoly, profits are maximized at the point where marginal cost equals marginal revenue. In other words, even a monopoly will not leave money on the table. They will produce as long as they can sell one more pill for more than it cost to produce.  

Even with drugs there are often substitutes. Particularly if the price of one drug is high, people usually figure out other alternatives. I think too often we have the mistaken assumption that most health situations involve one ultimate treatment, with no other substitutes.  

But, let us imagine that there really is that great wonderful pill for which there is currently no substitute. And let us suppose that it is for a serious illness and many people will pay almost anything for the drug. Also, let us suppose that the drug company is making obscene profits. They are just raking in money hand over fist. What will be the market response to such a situation? If markets are left to function, those obscene profits will be like a beacon on the hill telling the world "put money here, you can become insanely rich." As we have seen over and over again throughout history, resources will pour in as other try to find alternatives to take part of those profits, or maybe find something even better. Soon there are likely to be several good alternatives. At worst, the 20 years runs on the patent and then the generic companies come into the market. But, look how the lure of high profits have caused several new wonderful drugs into existence that once invented will always be there for future generations. If the lure of profits is killed by price controls, we are stuck with what we have and not much more for those who will follow us.  

Take Viagra as an example. Even though its patents are still in effect in most countries, it has two significant competitors, Cialis and Levitra. Viagra was first marketed in the US in 1998. http://en.wikipedia.org/wiki/Viagra There were all kinds of stories about Pfizer's high profits from Viagra. But, that big spot light of high profits sent a strong signal to the world. Cialis hit the market in 2003 http://en.wikipedia.org/wiki/Tadalafil and Levitra I believe around the same time. So, despite the patents, Pfizer had only about 5 years before it was faced with significant competition, which drives down prices and gives consumers more options.  

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