Why those for cheap Canadian drug imports are short sighted and ignorant

[DougMD]

Drug Re-importation: A Doomed Disaster
Sunday, January 09, 2005
John R. Lott, Jr.
For years, Americans have enviously eyed low drug prices just over the border in Canada, where strict price controls prevail as part of a socialized national healthcare system (search). Canadian drugs are cheaper by about two-fifths.

Yet, as Canada's Internet drug sales (search) to the United States have topped $700 million, the Canadian Minister of Health Ujjal Dosanjh says the shipping drugs south should stop.

Some blame the Bush administration for putting pressure on the Canadian government, though both governments deny this. Others claim that it is a matter of public safety.

But the explanation is much more straightforward: Canadian drug sales to the United States threaten the free ride that Canadians and other countries have received.

The reason Canadians and Europeans, who have similar national healthcare systems, pay so little for drugs is they enforce price controls. U.S.-based drug companies spend vast sums to develop new drugs, and Americans pay market prices for them. Once developed, drugs are reasonably inexpensive to produce and reproduce, and companies are willing to sell the medicines at a price that merely covers the marginal cost of manufacturing and distribution.

Americans pay the fixed cost of research and development, and that is all-important. In the long haul, companies will not keep developing new drugs unless they can recoup the massive costs of research and regulatory approval.


Incredibly, Americans, who comprise just 5 percent of the world's population, account for 50 percent of the world's spending on drugs. In effect, the United States is underwriting the cost of a critical chunk of the world's health care. If U.S. spending on drugs dropped sharply "” as a result of re-importation (search) "” drug companies would simply stop making new drugs.

Re-importation, which, at first glance, seems like a decent idea, would be a disaster for all concerned. Canadians and Europeans, who currently benefit from both low prices and continued research, would be killing the goose that's laying the golden eggs.

But American consumers too would be hurt. While they would get the short-term windfall of lower prices, they would end up suffering and not living as long as they could have "” since promising new therapies would never be developed.

In other words, the current system, as unfair as it appears, actually works relatively well. It would work better, of course, if the world paid market prices for drugs. But the system will collapse if re-importation becomes legal.

U.S. politicians who advocate such a change "” many of them Republican "” are acting irresponsibly. Still, their response to the clamor of constituents is understandable. In the end, the most effective opposition to re-importation may have to come from Canada and Europe, which have little to gain and everything, including lives, to lose.

At the heart of the issue lies the cost of developing a new drug and overcoming the regulatory hurdles to bring it to market: $802 million on average, according to a study by Tufts University. Even then, only three in 10 market drugs produce enough revenues to match or exceed the average costs of research and development.

R&D now totals $30 billion a year. Despite such high risks, drug companies in the past 25 years have developed powerful new therapies for conditions "” including high cholesterol, sepsis, depression, Alzheimer's, HIV/AIDS and asthma "” that had been difficult or impossible to treat in the past.

But imagine if the legislation passes and the Food and Drug Administration gives its assent to the safety of re-imported drugs. It will then be profitable for middlemen to buy drugs outside the United States and keep shipping them back until U.S. prices are driven down to the level of Canadian and European prices "” which are low not just because of price controls but also because of government restrictions on their use and because Canadians and Europeans have lower incomes than Americans (Canada's per-capita GDP in 2001 was $22,000, and the EU's $20,900, compared with $35,000 for the United States).

In response, drug companies might stop selling drugs to countries that allow re-exportation. The companies may be able to control sales from Canada since it is such a small market "” with the sales of many popular drugs in Canada amounting to only 5 to 7 percent of U.S. sales. The companies may respond by limiting sales to Canada and making Canadians choose between sales to their citizens or resale to Americans. But if re-importation comes from the large European market, firms would face revenue losses that could be tolerated only by drastically reducing R&D.

In effect, re-importation of drugs would import something else to the U.S.: price controls, where the lack of such practices is the oxygen that allows pharmaceutical research to thrive.

Drug-price controls are pernicious. While controls on oil and other products tend to be short-lived, as voters eventually object to the resulting shortages, the effects of drug regulations are more difficult to observe since they mainly affect medicines that haven't been invented yet.

Even if people realized that controls were preventing new drugs from being developed, the lags would make the controls difficult to remove. Customers would have to pay higher prices for years before they saw any benefits. Firms would have to be convinced that new controls would not be imposed as soon as the new drugs are released.

This lost innovation would have real health costs. A recent study by Frank Lichtenberg of Columbia University found that life expectancy in 52 countries increased by an average of almost two years between 1986 and 2000 and that launches of "new chemical entities" accounted for 40 percent of that gain.

If Canada and Europe paid market prices for drugs, even more pharmaceuticals would be available to fight disease and save lives around the world. But that's a fantasy; they won't. The best the world can hope for is a continuation of the current process "” which is another example of how Americans, often maligned by others for their selfishness, are, in fact, carrying heavy burdens for the rest of the world.

U.S. consumers, however, are unhappy with the status quo. They ask plaintively why they have to pay $270 for the same dosage of Lipitor that's sold in Canada for $180. But if Americans paid less, the system that has helped the entire world live longer and healthier would come crashing down. The irony is that Canada and Europe "” by opposing the folly of re-importation "” will ultimately improve their health and ours at the same time.

John Lott a resident scholar at the American Enterprise Institute.

[Adrian J Hare]

One very important thing that was left out of this writeup about Canadians and that is We pay 50% more Taxes to the Goverment to pay for Heath Care and Drugs. It don't take alot to find that info out...BT

[mr-pirk]

Doug I can't tell if the artical you posted was meant to be a joke or to be taken serous.

In effect, the United States is underwriting the cost of a critical chunk of the world's health care. If U.S. spending on drugs dropped sharply as a result of re-importation drug companies would simply stop making new drugs.
But American consumers too would be hurt. While they would get the short-term windfall of lower prices, they would end up suffering and not living as long as they could have "” since promising new therapies would never be developed.
If Canada and Europe paid market prices for drugs, even more pharmaceuticals would be available to fight disease and save lives around the world. But that's a fantasy; they won't.
But if Americans paid less, the system that has helped the entire world live longer and healthier would come crashing down.

It is an amazing thing that the pharmacology industry won't be able to operate unless the USA continues to account for 50 percent of the world's spending on drugs. In effect, the United States is underwriting the cost of a critical chunk of the world's health care.

Just amazing.
I am trying to remember where the "morning after" pill was developed...according to the logic of the above artical the only drugs developed are done in the USA.

The first rule of commerce...if there is a need there WILL be someone there to fill it and they will find a way to make a profit at it.
I read this somewhere
At least the option of buying things from overseas keeps domestic suppliers competitive. Such competition increases our standard of living by allowing us to buy more for less money. I can understand preferring to buy American, but not when the lack of competition leads to overpricing and high paid workers who work less and less hard because there is no incentive to do so.

To think that new drugs and treatments won't be developed unless the USA maintains a status quo is absurd.

Thanks
Mr-Pirk

[vc1111]

In other words, the current system, as unfair as it appears, actually works relatively well. It would work better, of course, if the world paid market prices for drugs. But the system will collapse if re-importation becomes legal.

I'm not sure I understand the man that wrote this. The current system actually works relatively well? Compared to what? Reimportation will increase demand for drugs from other areas and drive their prices up, thus they will share in the R&D burden on drug companies.

[Cougar Mag]

Doug, give me some time to find and post other views I recently read.........because some of the things you post are skewed. The facts are that the amount of drug companies' research and development money spent is a drop in the bucket compared to the profits they make. Canada has recently claimed that Americans importing drugs in from Canada could jeopardize their drug supply.

Its very strange that ever since Bush was in talks with Canadian officials, they now have been thinking of banning selling drugs back to Americans.

[Briman]

Isn't funny that no matter how governments supress them, the free market still prevails?


Canada is able to get price breaks because of the nature of drug manufacturing. In modern manufacturing of just about every other type of commodity, you input A in a steady stream and get B out in a relatively steady stream. Most manufacturing is a modernized assembly line type system.
Not so with drugs- they are made in batches and batches are scaled accordingly to the amount that would be sold. If you make more drug than is saleable, the drug will go to waste and will be destroyed when it expires. The workforce needed to do these batches are not your typical manufacturing type workers, more like tradespeople who spend years learning every aspect of the job, there is very little specialization. Canada can get lower prices because the government can order large lots of drugs to distribute over the course of several years, allowing for manufacturers to run larger batches or extended campaigns of batches to meet the order, instead of having to guess at the sales forcasts and tool up for several different drugs over the course of a year.

[CalHunter]

Maybe drug companies should start charging market prices to other countries. Then everybody would be on a level playing field.

[kevin1]

Here's a thought:

MAYBE THE GD DRUG COMPANIES SHOULD STOP GOUGING US AND SPREAD THE GREED OVER THE LARGER AREA OF THE WORLD MARKET FOR A CHANGE !

At most(according to an investigation done by 60 Minutes) it costs them about $2 per bottle to market a new drug , this includes all production , development , advertising , and other associated costs that they incur spread over the SEVENTEEN YEARS DURING WHICH THEY WILL HAVE ABSOLUTELY NO COMPETITION . This does not include the costs of the "other uses" that they will eventually find for the same drug so that they can extend their patent protection indefinitely , or veterinary sales of the same drug(under still more new patents) in watered down form .

Should we legalize the importation of drugs from Canada ? I believe the operative question should be "Why ? Why not just make the pharmaceutical giants stop gouging us and charge the same prices they do up North ? [:@] [:@] [:@]

[tardfarmer]

Americans pay the fixed cost of research and development, and that is all-important.

I posted that info YEARS ago on this site. In essence, united states citizens have been taking it in the shorts for years for the sake of simply getting these drugs into Canada and Mexico solely for the purpose of sale.

If Canada etc. would be forced to shoulder their share of the cost of R&D and insurance for the pharma companies, our prices would drastically reduce.

This won't happen though, the new mantra to prevent this from happening is "we won't be able to develope new drugs".... No other country on earth (barring brutal dictatorships) ravages their own population economically more then the U.S.

[DougMD]

I agree 100% that other countries should pay the same price as Americans, and that alone would lower US prices because those countries would also pay for R&D . What I have a problem with is those that think that we can all get lower prices and still expect companies to spend heavily on R&D into the future. Without the profit motive, it simply won't be done, especially so in our environment of increasing regulation and litigation.