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December 12, 2004

Pharmaceutical Patents

Pharmaceutical Patents-Becker
The pharmaceutical industry is under attack once again for its high prices, because of a belief that it pays insufficient attention to safety, and allegedly that sometimes it hides damaging information about their drugs. The industry is no paragon of virtue, but during the past 50 years it has become a major contributor to the dramatic declines in mortality and increases in the quality of life. Reforms that undervalue these contributions are likely to do far more harm than good.

Some of the industry’s important products include aspirins, antibiotics, blood pressure lowering medications, cholesterol lowering drugs, Aids cocktails, drugs that slow the progress of breast and prostate cancer and Parkinson’s disease, effective sleeping pills, and anti-depressants that enable many mentally troubled persons to live reasonably normal lives. Although the cost of producing these and other drugs is typically quite low, enormous amounts are usually spent trying to discover and develop them.

In 2003, American drug companies spend over $30 billion on research and development, which includes the very expensive clinical trials required by the FDA and government regulatory bodies in other countries. This is not very far behind the Federal government’s spending on basic and other medical research. The average number of new molecular entities approved during the past five years averaged about 50. So American drug companies are spending some $600 million (=$30 billion/ 50) per new molecular entity. This heavy R&D burden explains why stock prices of drug companies have not performed especially well during the past 5-10 years, despite very high prices for a few blockbuster drugs. Bio-tech companies as a whole probably even lost money over this period.

The low cost of producing drugs once discovered creates the impression that drug companies are gouging seriously ill cancer, Aids, and other patients. But these companies cannot recoup their huge R&D spending without charging for a number of years much more than the cost of producing their drugs. The patent system provides protection against generic competition for about 20 years from the date of first filling for a patent. However, competition from chemically similar entities usually appears years before patents expire, and the extensive testing required by the FDA considerably shortens effective patent lengths. Still, without patents or similar protection, other companies can reverse engineer most drugs to discover how they are made, and then sell them at much lower prices since they do not have the burden of heavy R&D costs.

To be sure, a patent system creates a tension between the effect that prices well above costs of production have in reducing the use of drugs by sick persons, and the effect of high prices in helping companies recoup their large R&D spending. This tension is the cause of the increasing attacks on drug companies as more blockbuster drugs have been introduced during the past couple of decades. So an important public policy question is whether we can do better than the present patent system? I believe we can improve how the system operates in many ways, but some suggestions are likely to make matters worse rather than better.

One tempting idea is to have the government buy out patent rights, and place them in the public domain available to all producers. Competition would then insure they would be sold to consumers at the cost of production. Recently, the Harvard economist, Michael Kremer (http://papers.nber.org/papers/w6304) revived this old idea in sophisticated form. Kremer suggests that the government uses auctions to decide how much patents on new drugs are worth. The value of a winning price would be paid not to the winner, but to the discoverer and patent holder-who can refuse the government’s offer and hold on to the patent. The winner of an auction only provides a measure of the drugs’ worth, and would not receive exclusive rights, even if the discoverer accepts the government’s offer, except in “a small proportion of patents”. But if this proportion is really small, the incentive to provide serious bids is greatly weakened. I also believe such a system might create a bureaucratic nightmare, but his proposal is worth more attention.

State governments and other groups are exerting great pressure to allow imports from Canada and online pharmacies, where drugs are much cheaper. But Canadian drug prices are cheap in good part because they impose price controls. In essence, Canada (and most other countries) free ride on the profits collected from the higher prices in the American market. The U.S. could also impose price controls if it wanted to do so, but these would be counterproductive because they would discourage discovery of new drugs. Moreover, if many drugs begin to be reshipped from Canada, drug companies would cut the amounts supplied to Canada, and prices there would rise. That is why Canada is beginning to crack down on online pharmacies that resell to the American market.

Perhaps patent lives should be shorter, but they were lengthened in the 1990’s because clinical trial procedures take so long due to the requirement of three clinical stages: the first to determine safety, the second to determine efficacy, and the third randomized trials to check safety and efficacy. It has been estimated that perhaps 40% of all R&D costs are spent on these trials. I have proposed elsewhere (http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/09_16_2002.pdf )) that the FDA trust patients more, and allow them more freedom to use new drugs by granting approval without the efficacy and randomized stages - this was the situation prior to 1962. At the same time, the FDA can tighten up safety standards, especially by putting resources into following more closely possible side effects over long time periods. Were my suggestion implemented, R&D costs would go down considerably, patent length could be considerably reduced, and yet companies would have more incentive to invest in finding new drugs.

I do not like the hype and some other salesmanship of big pharma and bio-tech companies, but this industry has made enormous contributions to raising world health. It is likely to become even more important in the future as drugs are developed to match individual genetic differences. One does not want to kill this goose that is laying golden eggs by ill-thought out and counterproductive “reforms”.

Posted by becker at 8:42 PM | Comments (39) | TrackBack (14)

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Comments

The idea of governments buying out patents sounds like a reasonable solution to this type of problem. Yes, we need patent protection to promote drug company innovation, leading to increases in the availability of treatments. This is fine if you can afford the treatment. However, given the huge number who cannot, government support for generic drug makers not only allows treatment accessibility but provides the economic reward for innovation. Sounds like a much better idea than simply allowing lower income people to be priced out of the healthcare market.

Posted by Jeremy at December 12, 2004 9:16 PM | direct link

So American drug companies are spending some $600 million (=$30 billion/ 50) per new molecular entity.

Part of the huge cost is that many drugs never make it to the approval level even though they might get to Phase II or III and incur those large costs (recent example being Vaxgen's AIDSVAX). But there are many new tools coming out that will sort possibilities much more efficiently and so fewer will reach these expensive trials and fail, most likely. Meanwhile, the idea of eliminating the last stage of trials scares me based on the way the FDA and industry have handled the post-approval observations since the '93 rules change (ie, Vioxx).

Posted by BillSaysThis at December 12, 2004 9:37 PM | direct link

Excellent summation.

I have heard the idea of importing so-called "Canadian" drugs the "outsourcing of socialism." That's an apt description If we are to import drugs from countries with price controls on medicine isn't the logical conclusion that we, too, should have price controls?

Moreover, I don't see any importation scheme working. As you have pointed out, Candians and others are free-riding on American profits. The drugs are being sold below ATC but above MC--something which is only sustainable in a peripheral market. Applying Canadian rules to the USA would negatively impact innovation and supply.

I do not think it's possible to have an accurate auction system where the winner of the auction does not retain any meaningful ownership in most cases. Why not just allow the government to negotiate buy-out prices with drug companies on a stricly volunteer basis? I suppose one could argue that such an arrangement, especially among such drugs which the public greatly desires, would lead to exorbitant prices.

While the discussion of Pharm patents gathers much attention because of the life and death consequences, how about other intellectual property generally? I don't see any economic justification for the ridiculously long copyright terms now in place. Wouldn't a 15 or 20 year term, more like those on patents, be more economically justified? Judge Posner went into some depth guest-bloggin on Lessig's blog about intellectual property and fair use. It'd be great if you would expand your economic discussion to include IP more broadly.

Posted by Palooka at December 12, 2004 9:49 PM | direct link

Advertising should not be so roundly denounced. Let us examine what it does. It reaches the intended audience, and informs there is a drug which could improve or even save their life. Is that a bad thing?

If marketing is effective and more individuals buy the drug, then the enormous R&D costs can be recouped over a larger population. The result? Lowering the price of the drug.

I am sure some will say Pharm companies often too vigorously promote their drugs, extending the use of the drug to patients who do not greatly benefit. Ritalin is one drug which comes to mind, but I think advertising played little, if any, role in the over-prescription of that drug. Marketing is also directed at physicians, however, so maybe there is some problem there as well.

Posted by Palooka at December 12, 2004 9:53 PM | direct link

Two points.


First, I think you're right about the dangers of price control here; for an example of what happens there, see the recent flu shot panic. The reason there were only two suppliers was precisely that the US gov't had price controlled the shots.


Second, I don't think the auction idea can work. Its mechanics seem brilliant enough, but who decides which patents the government will buy? Surely some advisory board somewhere; and who will staff and inform that board? Who will buy its members expensive lunches? I'd bet that we'd wind up spending a LOT of tax money on a LOT of worthless or superceded patents. Even with a worthwhile patent, this would be a GREAT way for a company to protect itself from an upcoming rival with a similar medicine of its own!


-Billy

Posted by William Tanksley at December 12, 2004 9:56 PM | direct link

I think it's wrong to view the drug market as a free market, and assume that rational choices by patients will lead to some intelligent end. Consider, for instance, acid reflux drugs -- recent new batches of drugs have provided only the smallest advantages over older drugs, and for most people changes in diet could have a greater and safer effect.

These new drugs have still been popular and highly profitable because:


  • For many people the out-of-pocket prices are identical.
  • People do not rationally weigh the effectiveness of a drug (e.g., considering a cheaper options that may be entirely effective); there is a sense that any less effective drug is inferior and unacceptable.
  • Doctors are in an ethically compromised position which they choose not to address. Drug marketing targets doctors in ways that is not purely informative (and provides many direct and concrete benefits to doctors), and reflects potential profitability of a drug more than a drug's true effectiveness.

There is no body to make rational decisions in our medical system. HMOs or other organizations have a difficulty making rational decisions, because their actions are often viewed as profit vs. patient. There is no market, because people seldom have a choice in their healthcare plan, and it is quite impossible to change the nature of a plan once medical attention is needed.

Market-based alternatives don't mean much as long as consumers are acting rationally -- especially in this case where the "consumer" includes patient, doctor, health provider, and insurer.

Posted by Ian Bicking at December 12, 2004 10:39 PM | direct link

As someone who has followed the Pharm industry for years and who, incidentally, is alive because of their innovation, I believe that any solution that removes the "rights" to company innovation from the developers is likely to reduce innovation and ultimately lead to a smaller number of players in this industry. Innovation is encouraged by the attendant rewards. I believe that a balance between the public good and the rights of the Pharm inventors can be struck in the following scheme:

1. Patent protection should run for a specified period from the date that the molecule is approved as a medicine that can be sold to the public. This will give certainty to the duration of exclusive ownership rights and will remove any incentive to rush the testing period leading to unsafe or inadequately understood drugs.

2. There should be a process that kicks in at the end of the patent protection period that will allow the inventor to continue exclusive rights on the basis of a reduction in pricing to what would have been expected from a generic, again for a specified period. Perhaps a requirement for licensing to another generic manufacturer will keep everyone honest. This will remove the sudden death aspects of patent protection. The economics of this will have to be thought out.

3. Reimportation should be allowed only when the sources are dependable, that is not counterfeit or expired. Relabeling should be prohibited. I believe that the economics of reimportation will correct themselves, for ultimately, the manufacturers will not oversell to Canada or other source countries and reimportation will cease to have the economic incentives present now.

4. Pertinent domestic governmental entities should have a right, at discounted prices, to purchase drugs for redistribution to patients lacking insurance coverage or otherwise unable to pay market prices. This will have to be carefully structured so as not to create a black market.

5. HMOs that provide drug benefits, being large users, are able to negotiate discounts on their drug purchases. Most HMOs have lists of drugs that are approved for their members and these lists reflect the ability of the HMO to negotiate more favorable pricing. This process should be encouraged and expanded. One way to accomplish this is for there to be more transparency in wholesale drug pricing.

6. Currently, advertising and marketing expenses are treated as ordinary and necessary business expenses and are fully deductable from income. I don't like the idea of limiting advertising per se, but I think that putting a cap on advertising expense, perhaps as a percentage of revenue might be constructive. Some portion of the pharma advertising translates into patient-doctor tension over medical necessity, with the doctors giving in all too often.

7. A web based clearinghouse for drug information for the public would, in my opinion, ultimately be helpful. Attempting to read through all the warning materials as presently written is bewildering. A simplified source that would ultimately rely upon the necessity for a prescription as a barrier to abuse, would respect the public intelligence and still offer more protection to the public than the current confusion literature.

8. Tort reform. As a society we must recognize that the miracles that drugs provide often come with risks. If a person is genuinely hurt as a consequence of the proper usage of an approved drug, there should be some sort of compensation scheme perhaps like workers' comp. It pains me to see Merck dangling in the wind over the Vioxx issue. This is a very old company which has contributed a great deal to the quality of human health and well being. If having to defend thousands of jury trials and being at the whim of judges that have little scientific knowledge and jurors who have next to none destroys this company, the public good will not be served. I say this from the perspective of a retired, Ivy educated attorney who tried many jury trials over more than thirty years. We need a more rational and less costly scheme to deal with Vioxx like problems.

9. Finally, we need an information repository where physicians can easily and quickly forward information as to adverse reactions or untoward results from approved medicines. Requiring them to fill out endless pages of information discourages the gathering of the very data that is necessary to monitor safety. The computerization of medical information is an absolute necessity here.

Michael

Posted by Michael Pecherer at December 12, 2004 10:39 PM | direct link

I don't see why reimportation would be bad. Wouldn't price control countries be forced to pay their fair share of R&D or go without the drug? A drug company wouldn't sell its product to a country for such a low price if it could be reimported and prevent the company from recouping costs. Or is there some international patent law that would prevent drug companies from refusing to sell to price control countries.

Also, would it make sense to extend patents more so as to allow drug companies to recoup costs over a longer period?

Posted by Reg at December 12, 2004 10:43 PM | direct link

I can't believe I just read a commentary by Gary Becker endorsing import restrictions.

But as I understand it, Canadians do not impose overt price caps, but simply have a single major buyer who negotiates a good price. Are there laws that pharma co.s must provide drugs at the Candadian govt's prices? How are they punished if they opt out of the market because they don't like the prices?

Anyway, it seems that a good neoclassicist would be enthusiastically in favor of dropping artificial import restrictions, and you don't make a particularly strong argument that the initial-investment market imperfection justifies imposing an import-based market imperfection. Don't we usually solve startup cost problems with new risk-sharing or investment mechanisms instead of border controls?
Further, you don't really prove that Canada's prices are somehow more wrong than U.S. prices---especially since the U.S. medical system has a horrific agency problem wherein individuals consume drugs but insurers pay. You and I and everybody else knows that an agency setup like this will lead to too-high prices.

I was hoping you'd comment on Brazil's recent decision to violate patents on AIDS drugs, especially since you cite Kremer's book which is primarily about designing mechanisms to convince parmaceutical companies to provide drugs to the third world.
Under a regime with strong import restrictions (i.e., the real world), your commentary seems to indicate that it would be OK for Brazil to provide the drugs that parma co.s aren't willing to provide them at the price they can pay, since their decisions won't affect the recouping of investments here in the U.S.A. Would you agree?

Posted by Mr BK of Baltimore, MD at December 12, 2004 11:16 PM | direct link

The above reply that pharmaceutical firms spend a large portion, if not a majority of their revenues on marketing is an important point to consider. If these firms are spending more sending marketing reps to parcel out samples to weary doctors at a convention center in Las Vegas then the “we need patents to recoup R&D losses” argument loses much of its potency. This is no small problem. If market share, and therefore profits, can be increased by spending more on purple-pill ads on TV then these firms face a troubling prisoner’s dilemma – spend more on marketing to sell more, but each dollar spent is less spent on R&D for the next generation of drugs. If they don’t spend on ads their competitors will, but if they do and everybody else does money is wasted in a fruitless rent-seeking competition.

The solution is obvious – simply regulate the way in which pharmaceutical firms can market their drugs to the public. This is been attempted successfully in, I believe, Washington or Oregon (or was it Maine?). For the state to reimburse drug purchases, all drugs had to be considered by a state panel in charge of producing a “consumer reports” for pharmaceuticals that rated each drug by cost and efficacy. With unbiased information of this sort being distributed freely to doctors, costs were contained. The pharmaceutical firms fought this in the state legislature and would, no doubt, use a small army of pill-dispensing, patient-scaring, and contribution-doling lobbyists to kill such a proposal in D.C.

Also, the argument that restricting drug imports from, say, Canada, will reduce US pharmaceutical firm profits and therefore the incentives they face when deciding to invest in new drugs is also quite suspect. Logic dictates that allowing imports would force these firms to charge higher prices in Canada and other countries exporting drugs to the United States. Free trade in drugs would arbitrage away the price differentials and shift some of the burden of researching new drugs off of the backs of the US consumers and onto other countries.

Drug reform needs to happen quickly – otherwise a larger and larger black market in pharmaceuticals will be created.

Posted by Lowly Grad Student at December 12, 2004 11:29 PM | direct link

I am very far from claiming expertise of any kind in this area, but I do wonder that the lengths of patents for pharmaceuticals are the same whether a drug is directed at cancer or at male pattern baldness.

Perhaps there is no other way to manage patents. However, there is no getting away from the fact that lengthy patent terms "encourage innovation" in some areas where innovation is hardly necessary. They may actually draw industry resources away from research on drugs to treat serious diseases; research on lifestyle drugs that promise to bolster a corporation's stock price and its executives' compensation is bound to take priority for many pharmaceutical companies.

Would it not make some sense to make distinctions betwen classes of drugs, based on the conditions they are designed to address? Is the public interest most efficiently advanced by giving the same patent protection to Lipitor and Levitra?

Posted by Zathras at December 12, 2004 11:39 PM | direct link

why not offer prize money for research achievements? the obvious downside is that the gov't is poorly positioned to make a determination as to what medical research is best funded by such a system. but it seems like the fight against certain conditions (AIDS, for example) is going along a predictable path. so why not offer a gov't prize of X dollars to the first team to come up with a drug that does Y (where Y is determined by the appropriate experts) in exchange for waiving all patent rights? perhaps this is, in essence, the same idea as having the gov't buy out the patent. but it seems sensible.

Posted by Anonymous at December 13, 2004 12:30 AM | direct link

Would you be in favor of a universal health care system in the United States, where people would not have to pay for medication outside of a government tax?

Could it be said that the idea of the government's buying of patents to help reduce the cost of medication on average would be a step towards universal health care?

Posted by Rob at December 13, 2004 12:40 AM | direct link

Doesn't anyone think it's wrong to extend patents to make the problem of a faulty approval system less costly to drug companies? It seems to me that the approval system should be fixed (or more likely eliminated). An SUV is more dangerous than Vioxx, yet Vioxx is what is pulled from the market. We need more and better information, not a big (mentally disabled) brother making decisions for us. My girlfriend has a rare disease which can be treated with Vioxx. It's so rare that no drug company will EVER develop a medicine for the purpose of treating it. By chance something came out that helped, but now she can't use it. An AIDS or cancer patient may have 6 months to live, and there may be a medicine that has a 50% chance of curing them, and a 50% chance of cutting that life span to 5 months, but the patient will never have the option of taking that medicine.

Not only does our big (mentally disabled) brother do a bad job of getting drugs out there, it does an even worse job of keeping track of drugs that are already out there.

Private entities could do a much better job of protecting the public. It could even be the UL who does the testing - just as nobody would buy Christmas lights without UL approval, nobody would buy a drug without UL approval (unless it was a last ditch effort to stay alive). Consumer watchgroups are also more reliable than the government because they have competition. Profit motive can corrupt government researchers as easily as private researches (with offers of future jobs, per diems, and so on), but when a private group gets corrupted, consumers will turn elsewhere for information. When the government system goes bad, there's nobody else to turn to for information on safety (and it can still keep you from getting competing drugs that might even be safer).

Posted by Andrew Boysen at December 13, 2004 1:23 AM | direct link

I just posted this comment to Judge Posner piece. I think this is relevent here too:

****

So right yu are that companies may race to the finish line to claim the prize.

Unfortunately we consumers/patient lack the knowledge to be informed consumers. Everyone has some knowledge of what a car is.

In the field of medicine the consumer has to put their trust in the doctor, the drug companies, and the regulatory system.

However when ethics lapse there can be significant consequences.

See this breaking story on our site:

ANTHRAX VACCINE - Had additive agent that may be injurious to the health of those service people inoculated.

Several days ago I posted and linked to a book review on our site, "Vaccine-A." We've since transferred this piece from the HSPIG Forum Site,
"Book Reviews" to the new HSPIG blog site:

http://www.hspig.org/MT/weblogs-hspig/archives/2004/11/anthrax_vaccine_1.html

HSPIG has a keen interest in things related to bioterrorism and bio-chemweapons both in their use and our response and counter-measures.

The book, Vaccine-A, has far reaching ramifications from the manufacture of such weapons to mounting creditable defenses against their use.

This is something to watch. This story is continuing to evolve.

This is still under the radar of the MSM. The MSM is probably wary of Uncle Sam I suppose. The MSM has been burned badly lately on not objectively reporting the news. One can argue almost that they have markedly been rooting for the enemy.

Mr. Matsumato doesn't appear to be an alarmist and has considerable credentials with a strong research/investigative background. Mr. Matsumoto
is a well respected and experienced investigative journalist both in print and the TV media. Mr. Matsumoto was the Chief Investigative Correspondent for the FOX News Channel and a foreign and national correspondent for the NBC Nightly News. For his other distinctions and awards see his bio at:

http://www.hspig.org/hspig-board-bios-gmatsumoto.htm

This story has the potential to dwarf the Rathergate scandal and could even rival Watergate. This Country is at war and those who would allow this to happen to our brave men and women need to be held accountable for their actions.

Since the original post Tom Barnes, Co-Founder of HSPIG and Persian Gulf War vet - military intel, has talked many times with the author, Mr. Matsumoto.

Mr. Matsumto has agreed to come on the Board of HSPIG. Mr. Matsumoto is staking his professional reputation on his book. As he says,"I took a page
from my old employer's play book at Fox News Channel - 'We Report. You Decide.' I reported; now you decide." Mr. Matsumoto backs up his book with
exhaustive research he has done over the last several years.

Mr. Matsumoto has answered several comments from concerned vets in posts subsequent to the initial article.

In a response on the HSPIG blog, Mr. Matsumoto says:

Dear GulfVet2: I obviously didn't think it was purely coincidental either. The trail of evidence is too complicated for TV, and almost too complicated for newspapers; hence the book. The DOD/FDA stonewalling on this issue - which has been documented by the GAO, Congressman Jack Metcalf, and the House Government Reform Committee - has been so formidable that I felt it necessary to write a book to lay it all out. Even pressure from Congress couldn't pry loose the facts that you've read in VACCINE A.

I took a page from my old employer's play book at Fox News Channel - "We Report. You Decide." I reported; now you decide.

What I reported in VACCINE A, you won't hear from the Department of Defense or the FDA. I think officials from DOD/FDA/NIH - the three federal agencies working in concert to "fast track" the second generation anthrax vaccine with squalene - will continue to stonewall, obfuscate and lie about squalene and its injurious effects until they are forced to testify about it under
oath. With the help of veterans like yourself - the people who arguably needthe most protection from unethical human experimentation - that could
happen.

Mr. Matsumoto


Ron Wright, Moderator
HSPIG Forums Site
www.hspig.org


Posted by Ron Wright at December 13, 2004 2:08 AM | direct link

Regarding patents: patents do not only provide an incentive for inventing a drug and getting it approved. They also provide an incentive for further development -- additional testing for new uses, promotional expenditures, etc. Any limiting of patents will also limit future possibilities for the drug.


Some points regarding promotional expenditures:
1. Critics of the industry distinguish between promotion and research. But they are not so different; both are information. Research obtains information about the properties of some chemical. Promotion spreads that information to potential users -- physicians and patients. If users cannot learn about the properties of a drug, then research is useless.

2. No one will advertise generics, because there is no way to recoup the investment. If there is valuable information about some class of drugs, this information must be spread by patent holders. Therefore, claims that advertising leads to substitution of more expensive patented drugs for less expensive generics are misguided. Consumers will not be in a position to learn about the less expensive generics, and so will not buy them. If the drug is useful, then it is hard to criticize promotional expenses that inform users of its benefits.

Posted by Paul Rubin at December 13, 2004 9:46 AM | direct link

---- Some points regarding promotional expenditures:
1. Critics of the industry distinguish between promotion and research. But they are not so different; both are information. Research obtains information about the properties of some chemical. Promotion spreads that information to potential users -- physicians and patients. ----
You are trying to compare the information and knowledge gained by scientific research that has the aim of producing new drugs to the flim-flam campaigns of Madison Avenue. Are you arguing that the information consumers gain from purple-pill ads is the same as the information gained in, say, a clinical trial? The two are simply not even remotely comparable.
--- If users cannot learn about the properties of a drug, then research is useless. ---
That is true, but to argue, again, that Madison Avenue flim-flammery and disingenuous marketing campaigns aimed at rewarding doctors for using particular brands of drugs is a “good” way to go about providing information to consumers avoids the real problems asymmetric information raises in these markets. A far better system would be to set up a consumer reports for drugs that allows these firms to disengage from the marketing war they all have to engage in.
---- 2. No one will advertise generics, because there is no way to recoup the investment. ---
I disagree. No one advertises generics because the market for competitive drugs approaches being perfectly competitive. The products, aspirin for instance, are undifferentiated and it is difficult to create a stand-alone brand name for such items.
--- If there is valuable information about some class of drugs, this information must be spread by patent holders. Therefore, claims that advertising leads to substitution of more expensive patented drugs for less expensive generics are misguided. Consumers will not be in a position to learn about the less expensive generics, and so will not buy them. If the drug is useful, then it is hard to criticize promotional expenses that inform users of its benefits. ---
That is not the argument against advertising. The argument is that advertising directs firm revenues away from value-adding R&D to rent-seeking battles over market share. This would be unnecessary if information on drugs could be collected and distributed to doctors and patients in a manner that is relatively unbiased – which is why I would trust neither an industry consortium nor a government agency to do this. Perhaps a private entity could make money by providing drug cost/efficacy research to interested consumers?

Posted by Lowly Grad Student at December 13, 2004 11:33 AM | direct link

http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/09_16_2002.pdf
is the url that was cut of in your next to last paragraph.

i've posted comments here:
http://www.enochchoi.com/thoughts/archives/001323.html

Posted by enoch choi at December 13, 2004 1:23 PM | direct link

Becker's idea of having the FDA regulate only safet y - not efficacy - is unlikely to work. It is an invitation to vastly spread the use of homeopathy, acupuncture and other ineffective treatments. Consider the example of "Berkeley Premium Nutraceuticals", in Cincinnati:

http://www.indystar.com/articles/0/196151-9260-223.htm

$200 million a year for selling sugar pills, merely with effective ads!

The current arrangement is not perfect, but beware of alternatives!

Vish


Posted by Vish Subramanian at December 14, 2004 12:06 PM | direct link

Andrew Boysen,

Good points, and I'm sure the difficulty of that problem has hit you particularly hard.

I don't agree that we should abolish medical regulatory structures, but I do agree that many medicines deemed "unsafe" for public use should be available to the public. What is important is that the patient know the potential side-effects, and understand how those side-effects could negatively effect their life.

It doesn't make sense to outright ban any drug. Perhaps Vioxx is not a justified treatment for Arthritis, but would make sense for your gf's rare disease.

At the risk of complicating and worsening the problem, perhaps the FDA could provide limited approval of risky drugs, such as Vioxx.

Posted by Palooka at December 15, 2004 1:10 AM | direct link

One effect of the high cost of getting drugs through the regulatory process (and more fundamentally, the high cost of getting strong evidence about the quality of new drugs) is that anything that can't be patented will almost never get through the process, because nobody can ever recover the cost of doing so. What would be a sensible solution to this problem? On one hand, I can't really see letting someone patent, say, fish oil, just because they spent a lot of money establishing it as an effective treatment for high cholesterol. On the other, it would be nice if *someone* had the incentive to spend money on this sort of thing.

--John

Posted by John Kelsey at December 15, 2004 4:07 PM | direct link

I recall reading that a large percentage of marketing costs were in the form of "trial" samples. For anyone who has not been reading the new doctor column in the Wall Street Journal, these samples are frequently used by doctors either as a way to get the patient on a much-needed drug quickly, or as a way to provide medicine to patients who otherwise might not be able to afford it. In other words, a good deal of "marketing" consists of charitable donation, which is exactly what we would expect a gov't-run plan to provide, the difference being that the gov't plan would be involuntary and bureaucrats would replace salesmen.

Regarding people's skeptical views of marketing and market determination of efficacy, why is it that you want to both prohibit the companies from telling us what they have, and for us to determine for ourselves what works best? You are essentially saying that the FDA should hold a monopoly on information. In the absence of such a monopoly, it is reasonable to expect other 3rd party certifiers to take up that role. Think Underwriter's Laboratory or Consumer Reports. At present, no such organization exists because you can't make claims without FDA approval, making independent testing either illegal or redundant depending on whether the 3rd party results agreed with FDA results.

It is also worth considering whether regulatory control of drug marketing is supported by industry. You could expect sugar pills to come under whithering attack by their competitors if such behavior was allowed.

Posted by Eric H at December 16, 2004 9:24 AM | direct link

I was very much struck with the idea of the government buying out patents for important drugs and then releasing them to the public domain. It seems to me that this is similar in some respects to the re-selling of loans, which allows lenders to generate capital for making additional loans.


I have problems with some of the other ideas here:


"I have proposed elsewhere (http://home.uchicago.edu/~gbecker/Businessweek/BW/2002/09_16_2002.pdf )) that the FDA trust patients more, and allow them more freedom to use new drugs by granting approval without the efficacy and randomized stages..."

-- Becker

The phrase, "...trust patients more...", is a good sound bite, but is meaningless. This is not a matter of trust. The overwhelming majority of patients (even the majority of doctors) have neither the access to information nor the expertise to judge whether new drugs are safe and effective. Patients exercising their own judgment has led to the current multi-billion dollar resurgence of the snake oil industry (AKA, "alternative medicine").

"Advertising should not be so roundly denounced. Let us examine what it does. It reaches the intended audience, and informs there is a drug which could improve or even save their life. Is that a bad thing?"

-- Palooka

It is a bad thing when the intended audience is not presented with the information necessary to make that decision. Drugs ads never present such information. (If you disagree with me, please explain how Patrick Stewart reciting poetry provides you with the information necessary to know that Crestor will help your condition.) However, a large proportion (as others have said, perhaps the majority) of what we pay for drugs actually pays for information-free marketing.


Health care is not a market; it is a right. If you are dying of a terminal disease, or even have a chronic disease that "merely" reduces your quality of life, then you will pay any amount of money for relief. This demand is completely inelastic to price (neglecting people who don't have the money to buy the drug and die as a result). As the current situation shows, this leads to no constraint on pricing, just as would be the case in a monopoly. The only solution to this is governmental intervention.

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