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“It” being a really expensive price for a pill that is quite literally a life-saving pill. And once again, we get the usual standard fare from the Voxers:

  • In Europe, things are like, so, way, cooler and more just. They pay, like, so much less for their life-saving pills.
  • Big pharma profits are like, waaaaaayyyyy, over the top, like five times larger than other medical companies.
  • It’s the “system” that has to rise up to stop it, or the “system” that is broken.

So once again I threaten myself with stopping this blogging thing here at TUW because I am not mature enough to treat pieces like this with dignity. It takes until the very end of the piece before the author begrudgingly reminds folks “there’s another take” on high drug prices … which is that investing in pharamceutical research is a high-risk procedure with much uncertainty, especially given the regulatory environment. The article says NOTHING at all about serious economic “solutions” to question like this, ones that were offered by Michael Kremer over a decade ago (read about patent buyouts) if you insist that “the system” ought to do something about it. The article says NOTHING about how the situation with pill pricing in Europe does not at all inform the issue of high prices here – the drugs are not developed in Europe and a simple discussion of how price discrimination works would have been helpful . Here’s an analogy, “the sticker price at the U of R is an outrageous $60,000 and there is nothing the system can do about it.” And then we’d proceed to show how some students pay almost nothing to go to the U of R while others are charged the outrageous price of $60,000. Or finally, and perhaps this ought to go without saying …

… if I offered you a pill that would be virtually guaranteed to save your life, or extend your life by, say, another 10 years, how much would you pay for it, now? Would you prepay into “pill fund” while you are young and healthy so that you would be able to buy such a lifesaving pill when you are older? Why is it imperative that the price of the pill be lower? I’d clean out my entire bank account to extend my life by 10 years … and this pill’s treatment clocks in at a mere $84,000. How come I do not see an article bemoaning that open-heart surgery costs $125,000 here which extends life by 10 years and which maybe even costs the same in Europe? And finally, what “can be done” about the price of the pill? Lots. Innovate. Work on the patient side to prevent the spread of the disease. Encourage drug companies to innovate even more. Are you more likely to find a low-cost alternative way of treating Hep C when firms have a chance of swiping some of the billions from the existing producers or when they have no incentive but the public interest?

What would a fair price be for a drug that instantly cures all cancers today? If we think that it should not be really high, then I suggest we stop all of this nonsense about cancer research and Movembers and such …

UPDATE: this just hit my inbox

he crisis of R&D is highlighted in a new report by the Tufts Center for the Study of Drug Development. Back in 2003, the Tufts team estimated that the cost to research and develop a new drug was $802 million (in 2000 dollars). In 2013 dollars, that would be $1,044 million.

This month, the team updated its estimate, using drugs first tested on humans from 1995 through 2007: It now costs $2,558 million to develop a new medicine, almost two and a half times more than the (inflation-adjusted) 2003 estimate. It appears that the Tufts group’s estimate is much larger than the one from Deloitte and Thomson Reuters because the Tufts group looks at costs from the first step of research, before discovery.

This means that the cost of abandoned projects is allocated to successful ones. And an astonishing 8 in 10 were abandoned. Because some of the drugs in the Tufts study are still under development, even more will be abandoned. My Forbes colleague Bruce Booth confirms that an 8 percent success rate is the consensus of other estimates.

Why such little success? The authors note that “[c]linical approval success rates have declined significantly” since their earlier study.

For those who advocate that the research-based pharmaceutical industry should be subject to government audit and regulation of its R&D budgets for each new compound, the Tufts report confirms my own conclusion that this would be an impossible task: “The drug discovery and development process typically involves high fixed costs, meaning that substantial expenditures incurred prior to clinical testing cannot be directly linked to work on specific compounds.”

The Tufts report also estimates an average real cost of capital of 10.5 percent over the period. In 2010, it was 9.4 percent. I estimate that the real interest rate at that time (as measured by U.S. Treasury Inflation-Protected Securities) was about 2.8 percent. This implies a real risk premium of about 6.6 percent. If the nominal IRR (as estimated by Deloitte and Thomson Reuters) is only 4.8 percent, the pharmaceutical industry as a whole is clearly not achieving its hurdle rate.

4 Responses to “There’s Nothing the “U.S. Health Care System” Can Do to Stop It!”

  1. Harry says:

    Another way to lower prescription drugs would be to provide a safe harbor for drugs approved for safety by the FDA — for example, by denying treble punitive damage suits for drugs like Vioxx. Merck decided to pull that drug completely, and then spent the next several years in litigation with contingency lawyers.

    The dream of the Single Payers is to force the Only Developed Nation without free health care to cease to compete with the Enlightened Fair Nations and get on with how much to pay for drugs, medical devices, doctors, nurses, sterile bandages, janitors, etc.

  2. Trapper_John says:

    I worked for years in a major pharma company in their research portfolio management group (we helped inform decisions about which drugs in the pipeline to pursue). The four main dimensions we evaluated drugs along: 1) probability of technical success, 2) time to market, 3) market opportunity, and 4) resource intensity (pre-launch costs). Through regulation and price fixing, governments around the world have moved the needle in a negative way on all four dimensions–chances of approval are lower, clinical trials take longer, revenues are lower, and costs of development are higher.

    We are left with “that which is seen” (people need a drug, it exists, why does it cost so much?) vs. “that which is unseen” (people need a drug, it does not exist, where are the incentives to try and solve this problem?). The latter is always sacrificed to the former, especially when coupled with the narrative of “you didn’t build that”. Atrocious. There is unseen blood on the hands of the FDA, EMEA, and associated government price-fixing rings. I have no idea how they sleep at night.

    • wintercow20 says:

      And I am sure you realize that it gets worse when the FDA rules for efficacy rule OUT the possibility of developing safe drugs that may be marginally less effective at treatments but that are MUCH less costly for people to purchase … and so it depressingly goes.

  3. Harry says:

    Regarding drug companies, the evil of hydrocarbons, the success or failure of Obamacare and the British, Swiss, Canadian and the French national health services, consider polyethylene glycol, the major ingredient in the prep for a colonoscopy.

    Inventing this compound was not as complicated as inventing as Loctite, but getting it approved by the FDA for ingestion by humans probably was. Just in case people do not abuse the free health care system,one cannot get this substance more often than every five years, and there are permitted exemptions for people who want it more often.

    Now, you might kill yourself if you drank this stuff every day, without federal supervision! And we have to mind the habitual users of Gastroenterologists, who are paid too much relative to Gastrosocioeconomists.

    A daily drink of polyethylene glycol would solve the obesity problem in our schools.

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