About this Author
DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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June 17, 2004

You'd Think It Was An Election Year or Something

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Posted by Derek

There are several Canadian drug reimportation bills floating around in the House and Senate, and it's anyone's guess whether one of them will come up for a vote this session. The AARP has just weighed in in favor of S. 2328, sponsored by Bill Dorgan and Olympia Snowe - and if you're an elected official, the AARP is not to be taken lightly. Of course, neither is the drug industry, so we're set up for a fine Godzilla-versus-Rodan spectacle if the bill ever gets to the floor.

You can see the maneuvering going on. In addition to the AARP's statement, the General Accounting Office has released a study where they tried out dozens of online pharmacies. This one can be spun both ways, depending on where you stand: "US, Canadian Web Pharmacies Generally Safe" or "Many Online Drugs Fake, Study Says." Both headlines are accurate, as far as I can see. The GAO was ordering from as far afield as Turkey, which requires (no offense to the Turkish pharmacy distributors in the audience) a bit of a leap of faith.

I continue to think that the drug-safety argument is a long-term loser for the industry, because it's a problem that can be addressed. The Dorgan-Snowe bill has plenty of provisions to do just that, along with some to prevent drug companies from cutting down supplies to non-US pharmacies. The bill can be summarized as: We have ways of making you sell at the prices we like.

But do they have ways of making us discover and market drugs more cheaply? Or is that going to be our department? I realize that we in the drug business need faster, cheaper methods of finding new therapies - but you know, it's not like we lack incentives - green folding ones - to do that already. And we've been throwing substantial sums at those problems, without all that much to show for it. Would price controls have helped us, do you think?

No, the real arguments against reimportation are economic, and if you don't believe me on that one, believe an economist, Alex Tabarrok over at Marginal Revolution:

Price controls or other such plans such as reimportation may bring cheaper pharmaceuticals for a short period but we will then have a much smaller supply of new drugs forever. Only the shortsighted would buy that prescription.

Comments (9) + TrackBacks (0) | Category: Drug Prices


1. Anonymous Coward on June 18, 2004 1:57 AM writes...

But you don't see pharmaceutical companies declining to sell their products in countries with price controls.

If big pharma truly believes that Canadian prices do not provide enough return to develop the next generations of medications, they should quit supplying Canada.

Instead we have a situation where Paul (the drug company) is happily selling John a product for $20 and at the same time is selling George the same product for $100.

Paul can talk all day about how valuable the product is, but George is a fool to pay anything more than $20.

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2. Fool on June 18, 2004 2:50 AM writes...

Yes but the nominal fixed cost involved in developing your fantasy drug has already been amortised in the $100 that George has paid. Paul can happily pay $20 because the nominal marginal cost is lesser than $20. The opportunity cost for the drug company is $20 for not selling to Paul. The benefits of not selling is $0 at this point.

However, when drug importation becomes a reality then the picture changes. Paul and George now both pay $20. Suddenly the drug company can no longer cover the fixed costs. Suddenly the opportunity cost is lower than the benefit.

Either, (1) they can find a lot more customers to amortise the fixed costs over or (2) Candians stop getting meds or (3) investors (yes thats the folks who actually hope to make a profit....pesky capitalism) take their money elsewhere to get better returns....

You decide on the scenario but I don't see any happy fun scenarios which is a win-win for everyone

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3. Derek Lowe on June 18, 2004 7:26 AM writes...

Fool's argument against Coward is valid (I couldn't resist writing that sentence.)

Believe me, we are not "happily selling the product for $20." The Canadian government forces a choice: sell your product here for $20, or don't sell it at all. So we in the drug industry decide that $20 > $0, grit our teeth, and use the US market to make the real profit.

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4. Industry Guy on June 18, 2004 8:47 AM writes...

Let Coward not forget that the Canadian government has a huge leverage point, recognition of US patents. It was only in the 70's I believe that this began. If US companies do not sell at discount, invalidation of patent protection in Canada opens the door for generic manufacturers, and with the relatively open border and willingness of state governments to already ignore the law, whats to stop them from importing these?

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5. Brad Hutchings on June 18, 2004 9:12 AM writes...

Arnold Kling discusses this issue from time to time on EconLog. Free-market types can, in good faith, end up on either side of the reimportation issue depending on the specific bill.

Philosphically, I don't like to see preferential pricing supported by law. I don't have a problem with preferential pricing as a tactic, but market ethics need to uphold it. In the case of pharmaceuticals, the law in question is restrictions on (re)importing. Obviously, it's a complicated situation, with the implied threat of breaking patents and all that. But nobody in the US, right or left, thinks that Canadians should get a price break because they have a backwards Socialist medical system, hockey, and mullets.

Realistically, (re)importation will probably make only a small dent in domestic prices and make our neighbors to the north hate us more. But who cares? As the earth cools, we're all gonna be headed for Mexico. <grin>

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6. Katherine on June 18, 2004 10:47 AM writes...

How do countries that "negotiate" lower prices get away with the implicit threat of breaking U.S. patents? Are the intellectual property treaties really that weak?

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7. Daniel Newby on June 19, 2004 7:41 PM writes...

They get away with the threat because a trade war would be hideously expensive. The pharmaceutical industry would win (well, probably), but at an immediate price of billions of dollars.

I have a better question: Why file for regulatory approval in hostile markets? If a lucrative drug is illegal to distribute in Canada, it obviously can't cut into US sales. Better yet, how about filing for approval, but with such screwball applications and trials that the process stretches out for years and years. Nobody could prove anything, and it would be hard to fix with legislation.

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8. Derek on June 27, 2004 2:11 AM writes...

I think part of the issue, is that we're tired of paying the whole bill for drug discovery, and letting the Canadians get a free ride. So really this is about sticking it to the Canadians. We'll still be paying $100, its just the Canadians won't be getting it any more (or will be paying $100 like us.)

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9. David Rogers on June 28, 2004 3:49 PM writes...

Or more likely, both we and the Canadians (and the Europeans...) will be paying $75, as the fixed costs will be amortized over a larger group of customers with no free-loaders. A win for US consumers, a loss for Canadians, and a wash for the pharmaceutical companies.

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