Reimportation of Drugs Promises to Destroy Innovation

Innovation in health care, particularly in the area of developing new drugs, is one of the crowning achievements of US health care. According to Forbes Magazine, 80 percent of all new drugs are developed in the United States and one of the primary reasons for this is because companies still have an incentive to do such in this country. The profit motive creates the desire and provides the incentive to over come the fear of risk that comes with bringing new medicines to market.

"The fully capitalized cost to develop a new drug, including studies conducted after receiving regulatory approval, averages $897 million," according to a study by the Tufts Center for the Study of Drug Development. The expenditure of almost $1 billion to bring a product to market can only be done with some hope of reward. Thr hope businesses are looking for is a period of time of being able to sale that medicine without competition. Seven years is the standard period of time for such intellectual property to be protected. During that time, medicines can vigorously pursue recouping the cost of bringing a drug to market before other players can legally come along. This may be expensive, but that is a small price to be paid for innovation.

Policy makers who do not understand the economic dynamics of drug innovation want to fight the problem through reimportation, which is the US purchasing medicines from countries that receive them at a lower cost because they have less personal incomes and the drug companies change the cost accordingly. With reimportatin the drug companies would have to compete against themselves. Although the practice is currently illegal, many states have pursued the policy and now it has become front and center of the current health care debate.

Jack Calfee of American.com observes "This week, the Senate is expected to vote on an amendment to the healthcare overhaul bill that would incorporate the chief features of Senator Byron Dorgan’s drug importation bill. The Dorgan amendment would essentially require U.S. pharmaceutical manufacturers to supply importers from foreign nations with unlimited quantities of low-priced drugs, which could then be resold in the U.S. market." It is interesting because I am sure the foreign companies that resale it to the US will do so for a profit, so our policy makers are sending these jobs to foreign countries. The question is, for how long? With these companies being forced to compete against themselves, the development of new drugs will be hindered. Simply put, there may not be new drugs to export in the future.

The economics of this are bizarre, Calfee notes 'The central feature is 'forced sales,' not in the sense that any sales are literally required, but because a manufacturer that sells to any particular nation has to sell as much as buyers want at whatever price those buyers pay in that nation. The implications are bizarre. If Lipitor is 40 percent cheaper in Germany, a German importer could order enough to supply not only Germany but also the entire U.S. market. The manufacturer (Pfizer) could try to meet domestic German demand and no more, but the Dorgan bill includes provisions to make that difficult. But why worry about Germany? Prices are certainly cheaper in, say, Greece, Portugal, or one of the Eastern European nations (the Dorgan bill includes a list of acceptable nations). A lot of drugs could flow through Portuguese seaports, assuming that anyone bothered to ship them back and forth instead of directly to the United States.

"US health care certainly has problems. Most of them are created by excessive legal rewards, government mandates, and bureaucracy. Innovation is one of the crowning achievement of our system. If this amendment passes, innovation will certainly suffer.


Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

The American Magazine: Excellent Reading

One of the great things about the Internet is the huge volume of information that is available in virtually every area under the sun. It is also one of the biggest problems with the Internet, creating a massive recycling of content and quite difficult to find anything remotely original.

With that, I was thrilled to stumble on the new American Magazine. The writing is sharp and concise and (more importantly) the thought is very original. It doesn't bore you by acting smart (long and laborious), but by being smart in the way it approaches problems and polices.

One of my favorite sections of the magazine is "The American Scene," which provides windows of what is going on in the economy. Recent articles included:

* The Venti Effect. This article examines the positive impact that Starbucks Coffee has had on smaller competitors. Who would have guessed that a big chain like Starbucks would do the necessary market research to tell smaller competitors where to place stores? Because of Starbucks pricing model, this smaller stores can typically compete quite well when it comes to pricing. This is a very contrarian view of large businesses.

* The Myth of Offshoring Pollution. Extreme environmentalists are continually arguing that the sky is falling, and if there has been any reduction in pollution in the US it is because the manufacturing jobs have been exported. A telling article from the American points out that in areas where there have been higher manufacturing production in this country, there has been a decrease in polution. What is the real cause of reduction? New technology.

* In Ease of Paying Taxes, We're #76. We hear many platitudes about the great free enterprise system in the United States. There is no doubt about it, the US is wildly successful by world standards, but a recent report from PriceWaterhouse and reviewed by the American shows that we are ranked 76 in terms of ease of payment of taxes. We are successful in spite of our system and not because of it.

There are other great articles through out the magazine and it will certainly become "must reading" in preparing for my radio show and writing in this blog. On its excellent website you will also find great audio programs with some of the finest minds in business, politics, and culture today, like this interview with author Tyler Cowen (author of Markets and Cultural Voices).

I suggest spending time with American today.

For a copy of the free report, "Why Your Marketing Isn't Working," email Info@HoustonBusinessShow.com and put "marketing" in the subject line.

Kevin Price is Host of the Houston Business Show (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.