Friday, June 12, 2009

Obama's Pharmaceutical Delusion [Mister R.]

Health care insider Mister R. offers his examination of the pharmaceutical industry and the impact that socialized medicine would have on it.

I think many writers are hitting the healthcare issue on the head with their comments, so I want to deviate from that a little to another issue not getting much focus.

The United States develops 93% of all new and breakthrough drugs worldwide. The reason for this is pharmaceutical companies are willing to spend the resources and take risks in order to develop new drugs that people will use to improve their wellbeing.

The cost for each drug to get from concept to market is $1,000,000,000 to $3,000,000,000 ($1 billion to $3 billion) each. And that does not include the money spent on drugs that do not make it to market (that's over and above the $1 to $3 billion).

The United States then issues a patent for the drug, which usually lasts seven years. Now, the company could appeal and it would then last longer, but for the most part, the pharmaceutical company has seven years to get their money back. After seven years, it comes off patent, and any company can make the drug generically. And since "other companies" didn't spend any research and development funds on the drug, the cost to make the drug is very low, and that is why generics are so much cheaper.

Most times, the company that actually developed the drug will also manufacture the drug in generic form to squeeze more revenue from the market.

A person reading this might say, "oh, so that's why new drugs are so expensive." And the answer is, "yes", that's one reason. However, the other major reason will make everyone cringe.

Pharmaceutical companies then bring their drugs to other countries for their approval. Once approved by a country, they can sell their new drug there, but there's a catch: the drug is either hit with high tariffs or there are price controls on the drug.

In other words, the foreign country is dictating the price a drug company can sell their drugs. The pharmaceuticals still make money, but not nearly what it should be making if it were sold at fair market value.

People in the United States are furious that we're paying much more for the exact same drug. But the anger is misplaced. It is not the pharmaceutical companies' fault they cannot make nearly enough money by selling in other countries than in the United States. The companies need to make their money back, and they need additional resources to continue to research and develop other drugs to improve our lives. They can only do that by selling the drugs they've already developed.

The bottom line is other countries do not have the resources to develop breakthrough drugs, and they rely heavily on the U.S.

The U.S. has the resources because they have a free market system that encourages the development of new drugs. A government takeover of health care in the U.S. will result in huge cutbacks in research and development and a screeching halt to the development of new drugs.

President Obama can fix this problem very easily and reduce the prices of new drugs in this country: he should demand other countries drop their tariffs and price controls and pay the same fair market value as citizens of the United States. That alone would drop the price of new drugs in this country by 20-30%.

But you won't see that happen. Because other countries must impose price controls because they have closed, government-run health care systems and do not have the resources to pay for the drugs at fair market price. If they did pay fair market price, they would have to ration care even more.

Put simply, the U.S. is the last bastion of medical innovation. Our free market system drives the invention of new drugs. If, heaven forbid, government takes over health care, then our pharmaceutical innovation process will simply drop dead.

• Mister R. Chapter 1: The '47 Million Uninsured' Lie
• Mister R. Chapter 2: Health Care Insurance: Puzzling Questions No One Will Answer

Update: Commenter Fred notes, "The last major drug from Canada was insulin, discovered at the University of Toronto in 1926."

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