tim they make huge profits in sales in europe
Since they can make up the cost of their R&D and testing largely in the American market, any additional sales that are beyond the incremental cost of producing the pills are profitable (and these sales are typically for much more than cost of producing the pills)
.they are only forced to make discounts as any company might make to very large buyers.
Government monopsony or near monopsony buyers aren't exactly like normal discounts, its closer to price controls.
Of course "Europe" is a bit general, its not like there is the same exact policy in all European countries.
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The High Price of Cheap Drugs
By John E. Calfee
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Foreign Price Controls
Essentially, the coalition wants our drug prices to be set by the PMPRB or one of its sister agencies. The PMPRB, whose full name is the Patented Medicine Prices Review Board, is a creature of the Canadian government. It dictates the maximum price that can be charged for a new drug when it is introduced into Canada. The individual provinces then keep prices from rising with inflation (or with changes in exchange rates), so that prices steadily fall behind free-market levels.
The PMPRB does not work alone. It links Canadian price ceilings to European controls. Each European nation has its own price control system, and there are lots of links among those systems. The Netherlands, for example, sets prices at the average price in Belgium, France, Germany, and the United Kingdom. Portugal demands the lowest price in France, Italy, or Spain. Greece wants the lowest price in Europe, period.
Those price controls prevent innovative pharmaceutical firms from reaping free-market rewards anywhere but in the United States. That is one reason why the world pharmaceutical industry, which twenty years ago was mostly based in Europe, has largely relocated to the United States. American manufacturers now account for seven of the top ten worldwide best-selling medicines, and fifteen of the top twenty. This reflects a large and growing disparity in research and development expenditures. In 1990, European pharmaceutical firms outspent American firms on R&D by approximately 8 billion euros to 5 billion euros ($7 billion to $4.3 billion). In 2000, U.S. firms outspent European firms by 24 billion euros to 17 billion euros ($20.9 billion to $14.8 billion). Even traditional European firms, notably GlaxoSmithKline and Novartis, have moved many of their most essential operations to the United States.
After years of looking the other way, the European Commission is sufficiently alarmed by these trends to propose relaxing price controls in order to rejuvenate its pharmaceutical industry, especially the biotechnology sector.
But in the meantime, a lot of drugs are substantially cheaper in Canada and Europe than in the United States. That is why Republican congressmen Gil Gutknecht and Dan Burton want Congress to pass a law so that drugs shipped to Canada or Europe or South Africa can be imported into the United States for sale at foreign prices.
The law would leave the Food and Drug Administration with almost no authority to check the safety of these imports. Wholesalers would have to do their own testing, but pharmacies and "qualifying individuals" (who could resell to others) would face no such requirement. This bothers the FDA, because it thinks mass importation will drastically increase the traffic in counterfeit drugs. Counterfeits are already a problem even though imports are now only a tiny fraction of what they will be if the House bill does what its proponents want it to do.
Importation advocates do not worry about safety because they think the mere threat of importation will push down prices in the United States by at least 30 percent, according to a recent op-ed by Rep. Burton. They think this is competition and free trade at work. The fact that a group of Canadian or European bureaucrats would be setting drug prices for the entire U.S. economy seems to elude them.
Likely Consequences
What would this law actually do? For one thing, Burton, Gutknecht, and their allies might not get the low prices they want even if Congress passes their law. Foreign price controls are anything but a free-market institution, and the Canadian price structure, for example, cannot be imported like a piece of equipment. Prices will not drop in the United States unless foreign drugs really will be imported in large volumes. Importation from Canada alone will not do the trick because the Canadian market is tiny, about 5 percent of the U.S. market in terms of revenues. When Canadian pharmaceutical wholesalers ask Pfizer, Merck, and their competitors to ship them ten times the usual volumes of Lipitor and Zocor and other blockbuster drugs, with the obvious intention of shipping them right back to the United States, any manufacturer with a decent regard for its shareholders will refuse. Why sacrifice billions of dollars in U.S. sales to maintain sales in a market one-twentieth the size?
If that were the end of the story, events would follow a simple course. Canadian authorities, who understand the importation logic as well as anyone, would have to reassess their price ceilings or leave their citizens short of the best pharmaceuticals. At some point, it would become clear that Canadian drug importation would not bring the low U.S. prices its advocates want, although it might put a good number of patients at risk if importation--including importation of counterfeits--were to ramp up before prices adjusted. Prices in Canada, meanwhile, would rise.
But the House bill is not limited to Canada. There is also France, Italy, the Netherlands, Portugal, and Greece, not to mention Israel and South Africa and soon, Hungary and the Czech Republic, and on and on. That makes for a lot of places from which to ship drugs that can be purchased for a lot less than they cost here.
Two scenarios could play out, one bad and the other worse. In the first scenario, drug manufacturers would again simply refuse to ship huge volumes of drugs to small foreign countries in order for the drugs to be shipped back and cripple profits at home, where the drugs were invented. If that happened (and I think it would), our European friends would probably have a political fit. They would face the prospect of either going without American drugs or raising their own price ceilings--and with them the costs of their fiscally strapped socialist health care systems. From their point of view, the importation plan would be a clever way to force U.S. drug prices on Europeans. They would want very much to prevent that. An international demand for drug price controls in the United States (not just in Europe) would become a centerpiece of international diplomacy. And we might cave in, pushed by the same politicians who want importation. Our record of standing alone in the face of unanimous international pressure is not exactly unmarked by failure.
In scenario two, Burton and Gutknecht would win in the short run. Importation would rapidly escalate to massive volumes from Canada and Europe, maybe from South Africa and elsewhere. The process would resemble the "parallel trade" now engulfing European drug markets as products with Greek or Spanish labels flow to patients in Germany and Britain. Drug prices would drop here, limited only by fears of counterfeiting, dilution, or inadequate storage. Wholesalers, pharmacies, managed care organizations, and other large-volume dealers would feel intense price pressure from the imports, and the U.S. pricing structure would gradually collapse, just as congressmen Gutknecht and Burton now pray and predict.
Either way, price controls would end up suppressing innovation here, just as they have done abroad. It is one thing for the Canadians and Europeans to free-ride on American R&D, but we cannot free-ride on ourselves. The system that gave us the drugs the whole world wants would be hobbled just when researchers are finally glimpsing pathways to cures for Alzheimer's, cancer, and other killers. The hundreds of biotechnology firms searching for these cures would know that if and when one of them discovers the elusive solution that no one else could find, it will face the prospect of price ceilings set by a government agency intent upon cutting costs. Given that the expensive part--all the laboratory work and the years of clinical trials--had already been paid for, the manufacturer of a breakthrough drug would have no choice but to take whatever deal it could get as long as the price covered manufacturing and distribution, without consideration for the expensive failures littering the path to success. The market would understand with perfect clarity that the days of free-market rewards for high-risk-high-payoff research were over. The implications for future drug research are both obvious and depressing.
Congress should dismiss all possibility of these scenarios by rejecting the drug importation legislation. It should not fall into the trap of thinking that as long as controls over U.S. prices were introduced by the government of a foreign country, we would still have a free market. We would not have a free market, and we would not get the benefits of one.
John E. Calfee is a resident scholar at the American Enterprise Institute and the author of Prices, Markets, and the Pharmaceutical Revolution (AEI Press, 2000).
aei.org
Price controls seen as key to Europe's drug innovation lag
Peter Mitchell1
Top of page
Abstract
Pharmaceutical innovation is not only occurring faster in the United States than in Europe, but the gap is getting wider.
For those hoping that Europe might be redressing the imbalance in R&D innovation compared with the United States, two recent reports make gloomy reading. According to a competitiveness report published in November 2006 by the European Commission's high-level Pharmaceutical Forum, the US has established itself firmly as the key innovator in pharmaceuticals since 2000. "That dominant position continues to expand... a disproportionate share of pharmaceutical R&D is performed in the US," it laments.
The discouraging conclusion for European R&D is backed up by Kenneth Kaitin, Director of the Boston-based Tufts Center for the Study of Drug Development, which released a study on drug approval times and new drug availability in Europe and the US earlier this year. He says pharmaceutical companies are increasingly submitting their new drug applications in the US long before they apply in Europe — and as a direct result, they are focusing their R&D efforts in the US too.
Of the 71 drugs receiving marketing clearance both in the European Union and the US between 2000 and 2005, 73% (that is, 52 drugs) received approval first from the US FDA (Fig. 1). On average, the FDA approval came 1 year ahead of clearance by the European Medicines Agency (EMEA).
nature.com
Commentary: Europe Pays a High Price for Cheap Drugs
Americans are up in arms over the soaring cost of prescription drugs. The U.S. already spends more per capita than any other country on medicines (chart). And that spending has been rising at double-digit rates annually, faster than anywhere else in the world. U.S. politicians and consumer-advocacy groups looking to put the brakes on that trend often cite Europe as a model. No surprise there: Germans, Italians, and the French pay far less for prescription drugs than Americans do. Take Pfizer's (PFE ) cholesterol-lowering medicine Lipitor: It retails for 60 cents a pill in Paris and $3.98 in Philadelphia.
But the U.S. shouldn't be too quick to reach for the European prescription. While there is ample room to argue that European-style universal health care is more equitable than the U.S. system, there is no question that patients on the Continent are often shortchanged. Europe's cash-strapped national health-care systems rely on cheaper, older, and often less effective drugs. Access to new and potentially lifesaving medicines is delayed, and frequently restricted. Last but not least, studies have shown that measures to restrict drug prices could deprive drug companies of incentives to develop cutting-edge therapies. "As a result of price controls, European consumers are heading toward second-class citizenship when it comes to access to medicine," says Daniel L. Vasella, chairman and CEO of Swiss drugmaker Novartis.
Blame it partly on the wads of red tape choking most of Europe's health-care systems. Once a drug is approved by the European Agency for the Evaluation of Medicinal Products, national governments must debate whether to make the drug available through their health systems and at what price. The process, which usually involves negotiations with manufacturers, who are under pressure to extend deep discounts, can drag on for several years. Bristol-Myers Squibb's Taxol, an effective but costly treatment for breast cancer, is a prime example. The drug was approved for use in Europe in 1995 but was not available to British cancer patients until 4 1/2 years later. It is worth noting that Britain has the worst cancer survival rates in the developed world, according to a study by London-based research consultancy Datamonitor. The study cited insufficient screening, along with lack of access to drugs like Taxol, as factors.
In some European countries, patients aren't able to get their hands on lifesaving medicines at all. Take beta interferons, widely regarded as one of the few effective treatments for multiple sclerosis (MS). Although the first beta interferon was approved in Europe nearly eight years ago, the high cost of this therapy--upwards of $17,000 per patient annually--means very few are receiving the drug. As many as 60,000 people in France have MS, and an estimated 2,000 new cases are reported each year. Yet less than half of the French patients diagnosed with MS are treated with beta interferon.
These budgetary pressures aren't confined to France: European health authorities in general are often reluctant to prescribe expensive drugs. The paradox is that prescription medicines can yield big savings in overall health-care costs down the line, as they often reduce the need for expensive specialist care or hospital treatment. Oliver Schöffski, a professor at the University of Erlangen-Nuremberg in Germany, found that in the U.S., statins--a costly class of lipid-lowering drugs--are prescribed for 56% of the 6.2 million patients diagnosed with heart disease. But in Italy, only 17% of the 3.3 million people eligible for the drugs get them. Schöffski figures that if the drugs were being prescribed more often, the Italian health system could reap savings of $890 million over five years.
Price controls have other side effects. Because prescription drug prices are so low in Europe, there is little incentive for generic manufacturers to enter the market. The upshot is that governments end up paying higher prices than needed for older, branded medicines. In the U.S., generic versions of branded medicines become available as soon as a drug goes off patent, often for as little as 10% of the price, says European pharmaceuticals analyst Kevin Scotcher at SG Cowen Securities Corp. in London. European governments could save more money and improve access to new medicines by promoting the use of generics. Any savings could then be reinvested into more innovative drugs, argues Marc Booty, European pharmaceuticals analyst at Commerzbank Securities in London.
Another knock against price controls for drugs: They reduce the incentives for drugmakers to undertake huge investments for the discovery of breakthrough medicines. It takes an average of 10 years and $802 million to develop a new drug. No company would spend that if the payoff weren't attractive. "In order to be successful, we are completely dependent on our capability to innovate. And the money goes where the money flows," says Novartis' (NVS ) Vasella.
There's research to back him up. John Calfee of the American Enterprise Institute, a conservative think tank in Washington, D.C., notes that the global drug industry scaled back annual increases in research and development spending to less than 4% in the mid-1990s, when the Clinton Administration floated the idea of price caps on prescription drugs. That's well below the 11% average annual increase in R&D spending for the industry from 1981-93. After reform was shelved, the rate went back to double digits.
Americans who spend hundreds of dollars a year out of pocket for pills have every reason to envy the Europeans. But it's worth asking whether the short-term savings from price controls are worth the long-term costs.
businessweek.com
Pfizer Public Policy: Price Controls
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Price controls have dampened overall global pharmaceutical R&D efforts. A study by the U.S. Dept of Commerce, which was published in December 2004, found that price controls imposed by OECD countries in the study reduce global R&D expenditures by $5 billion to $8 billion annually (the equivalent of 11 to 16 percent of annual private worldwide pharmaceutical R&D).1
The study concludes that eliminating price controls, and thus the R&D reduction they cause, could result in the introduction of three or four additional new drugs per year (above and beyond the current average of 30 drugs per year).
The study noted that if such price controls were eliminated, U.S. consumers would benefit from an increased flow of new drugs, valued at about $5 to $7 billion per year...
pfizer.com |
