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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: derekb.lowe@gmail.com Twitter: Dereklowe

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July 30, 2004

John Kerry on Drug Prices

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Posted by Derek

I didn't watch John Kerry's speech tonight. I'll watch a political speech made to a potentially hostile or sceptical audience (like the State of the Union) but not one made to an adoring throng, either throng. Life is too short.

But I've had some e-mail pointing out that Kerry whipped out a line about drug prices, which I presume was an applause-getter:

"Under our plan, Medicare will negotiate lower drug prices for seniors. And all Americans will be able to buy less expensive prescription drugs from countries like Canada."

Of course, the law as it stands forbids any drug company from offering anyone a lower price than they offer Medicare. Ask Schering-Plough how that one works. But what Kerry is talking about is modifying the latest Medicare drug benefit, to allow the federal government to directly negotiate drug prices. My industry put up a serious battle to keep that from happening, and it's no secret why. This is a direct route to Federally mandated drug price controls. If you think that those are a good thing, then you like that idea - if not, you don't.

And as for importing drugs from Canada, well, I'll resist the temptation to start turning purple again. But I took Kerry's suggestion to go to his campaign website for more details:

"The Kerry-Edwards plan will reduce prescription drug prices by allowing the re-importation of safe prescription drugs from Canada, overhauling the Medicare drug plan, ensuring low-cost drugs, and ending artificial barriers to generic drug competition."

Now that word "safe" is an interesting one to drop in there. As many readers know, Congress has already passed a law making it legal to reimport drugs from Canada - but only if the FDA certifies their safety. And that the agency has refused to do, saying they don't have the resources to make such a guarantee. Is Kerry planning to give the FDA whatever it might need to go ahead and make the call? Or is this an escape clause to allow the status quo to prevail?

Well, if that Medicare idea comes true, it could be a moot point. There won't be much need to import drugs from Canada if we become Canada, will there?

Comments (10) + TrackBacks (0) | Category: Drug Prices


COMMENTS

1. Boonton on July 30, 2004 12:57 PM writes...

If a pharma company has to buy a lot of something, don't they usually try to negotiate a bulk discount? If the Fed. Gov't is going to buy a lot of drugs thru Medicaid/Medicare, then why shouldn't they use their buying power to get the best deal possible?

If the Pentagon does this to Boeing, no one frets that Boeing is going to cut back on R&D. If the deal is profitable for Boeing, they will accept it. If not, they will refuse. Why should the taxpayer be asked to overpay for drugs simply because pharma says they use that extra money to put into R&D?

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2. Chris on July 30, 2004 1:59 PM writes...

While the whole reimportation idea sounds great in its effects, its really wasteful when you think about it. Here we're going to spend money sending drugs out of the country, only to spend more money bringing them back in the country.

Additionally, you have to think of the supply and demand ratios. If company A knows they have 5000 patients taking their drug in Canada, and they don't make as much money selling their drugs in Canada, what makes you think they're going to sell 3 times as many prescriptions to Canada? Simply put, there might be a great demand to reimport drugs from Canada, but is there logically going to be an adequate supply from Canada?

I think you will find the answer turns out to be yes, which should be even more worrisome. If Pfizer sells 5000 prescriptions of Viagra to Canada, and 18,000 prescriptions manage to be reimported, where did the additional 13,000 prescriptions come from? Obviously these aren't the same drugs that Pfizer manufactured. That is what the FDA is trying to make people realize.

I'm bringing in another facet to this gem, but this is why litigation immunity is so important to drug companies now. If someone dies from taking a counterfeit drug, who's the first person they sue? They don't know its a counterfeit drug, so they go after the drug company. So now the drug companies can be held responsible for dangerous counterfeit drugs that have been imported.

But hey, if all this marginally drives down the cost of perscription drugs by about 10%, its worth it right?

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3. langdon on July 30, 2004 9:16 PM writes...

It seems like the flaw in the Kerry plan is that the drug companies are currently willing to negotiate with the Canadian health care system for lower drug prices precisely and only because they know that it isn't legal to reimport the drugs to the US. They agree because they know that Canada doesn't have the same per-capita purchasing power as the US (and maybe has less strict regulations, allowing the drugs to be manufactured cheaper?), and they would make less money in the Canadian market by charging higher prices. However, if US reimportation becomes legal, then sales North America-wide at the Canadian price will cut deeply into their profit, and they will simply stop selling at a discount to Canada. This change in the law would help zero Americans, but it would hurt numerous Canadians.

Is that right? This seems like a very obvious consequence, though of course I am not in the drug industry.

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4. qetzal on July 30, 2004 10:03 PM writes...

Your bottom line is correct, langdon, but the reason for cheap drug prices in Canada is b/c the Canadian gov't sets the price.

The healthcare system there is all gov't run. So the drug companies have two choices: sell some drugs at a price set by the Canadian gov't & make some extra money, or sell no drugs there and make no extra money.

The reason they can sell the drugs cheaply in Canada & still make some profit is basically b/c we in the US are subsidizing their drug costs. The cost just to manufacture a drug is usually a fairly small part of the total price. A big part of the real cost is the need to recoup all the hundreds of millions of dollars invested in getting the drug approved in the first place. Not to mention needing to recoup the hundreds of millions spent on other drugs that failed.

US drug prices are basically set to cover all of that development cost. So, as long as we foot that bill, the price for Canadians can be much closer to just the cost of manufacturing, packaging, & distributing.

But in the end, the logical response to reimportation is just what you predict. Drug companies would basically be forced to raise prices in Canada (or not sell there at all) to counteract any lost sales at US prices.

Of course, this assumes that you don't think overall drug industry profits are exorbitant. Many people do think drug companies make unfairly high profits, and they argue that the US gov't could easily impose price caps without making the drug companies unprofitable. I think those people have been sniffing ether, but I could be wrong.

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5. John Johnson on July 30, 2004 10:19 PM writes...

I believe that the current estimate to bring a drug to market (i.e. discover, develop, fail, repeat x times, discover, develop, finally succeed) is about $800 million now. Current estimates on time for a development program for a successful drug is 8 to 12 years. These are nothing to sneeze at.

I wonder how profitable prescription drugs are vs. soda pop, movies, music, etc. I'm sure the margins aren't nearly as much as illegal drugs, but then again black markets carry a huge inflation.

In short, I think some people smell blood. We'll have a few lawsuits and some huge awards and some battles over stupid bills. However, I'm afraid that this issue won't go away until people wake up and realize that golly gee there haven't been many breakthroughs in the recent years and where in the hell did all the innovation go.

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6. langdon on July 30, 2004 10:58 PM writes...

Qetzal - interesting, I guess I didn't know that the Canadian government set the prices themselves, without negotiating individually with the drug companies. Still, I think that's more of a polite fiction than anything, since practically speaking, the Canadians only set the price until the day that the major manufacturers say, "Ok, well, never mind, good luck," because the Canadians would have essentially no recourse. Certainly a very large percentage (the majority?) of drugs are developed by American companies - there is no Canadian drug industry to take up the slack, and developing something like that from scratch must take 10 years, maybe?. I guess they could leave the international conventions on intellectual property and manufacture their own versions of drugs still under patent protection, but that's more of a silly suggestion than a practical solution, because it would of course destroy their economy. I guess we agree here that this plan isn't practical, and will most likely just hurt the Canadians, which seems like a shame.

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7. weirdo on July 31, 2004 11:46 AM writes...

But of course that is exactly what Canada is doing:

"Sell us your product at our prices or we'll just invalidate the patent."

It's just that no one has called their bluff(?) yet.

Permalink to Comment

8. Boonton on August 2, 2004 11:59 AM writes...

Nevertheless, from the US's point of view it makes sense to permit reimportation. Remember, by not permitting reimportation the US is tacitly helping the Canadian gov't control drug prices. If reimportation was allowed the Canadian gov't would have to pay closer to a market price for their drugs...otherwise Canadian pharmacies will just turn around and sell them back to the US.

By not paying the market price, Canada is basically scoring a subsidy from US consumers. I could understand a poor thirdworld country receiving such a subsidy but Canada is a developed nation!

Permalink to Comment

9. Doug Ridgway on August 3, 2004 8:29 PM writes...

I believe Canadian drug prices are negotiated by the provinces, not the feds, so compulsory licensing is not one of the available negotiation options. It's either make a deal, or deny the treatment. Most of the world works this way, BTW. Provincial populations range from ~100K to 10M, i.e. HMO size, so there is still some bargaining power available to the deal makers. Expensive drugs for common diseases get rationed: check out the paperwork for MS drugs in Saskatchewan, eg.

The drug gray market is getting press up here, too. Most of the concern is about the pharmacists and physicians colluding in the process (yes, you need a prescription from a Canadian doctor, etc.). The risk to our price bargaining position does not seem to be appreciated.

Permalink to Comment

10. Sebastian Holsclaw on August 5, 2004 4:46 PM writes...

"Still, I think that's more of a polite fiction than anything, since practically speaking, the Canadians only set the price until the day that the major manufacturers say, "Ok, well, never mind, good luck," because the Canadians would have essentially no recourse. Certainly a very large percentage (the majority?) of drugs are developed by American companies - there is no Canadian drug industry to take up the slack, and developing something like that from scratch must take 10 years, maybe?. I guess they could leave the international conventions on intellectual property and manufacture their own versions of drugs still under patent protection, but that's more of a silly suggestion than a practical solution, because it would of course destroy their economy."

This is completely wrong. Canada has explicitely threatened to invalidate patents if drug companies refuse to agree to their prices. This would allow generic production of the drug immediately. No need to rediscover the drug. And the international patent protection treaties aren't nearly as strong as you seem to think.

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