THE PHARMACEUTICAL INDUSTRY AND DEVELOPMENT

I have been thinking about the pricing of drugs and the way the pharmaceutical industry works. Clearly the industry is the key player in the development of knowledge embodied in vaccines, medicinal drugs, and related products. The issue has always been how to get for-profit companies to develop needed pharmaceuticals for poor people in developing nations, since the market is much better for the products serving people in rich countries. In the case of HIV/AIDS, as in other previous cases, there has been a great deal of pressure brought on the industry from civil society organizations and governments to sell products at prices close to the manufacturing and distribution costs.

A key point in understanding the pharmaceutical industry is that it investigates thousands of chemical compounds for every successful product it finds and markets. The costs are huge of bringing a product to market, including those of safety, efficacy and effectiveness testing, of the development of production processes, and of the marketing and education of the doctors and pharmacists – on the orders of hundreds of millions of dollars. Indeed, only a small portion of the products marketed by the industry are financially successful. It is the profits from the sales of these drugs (over the costs of their production) that pays for all the research and development, training and investment that makes the knowledge based industry possible.

The industry, as I understand it, feels that a fair price for a pharmaceutical product should be based on the medical costs or medical problems it averts or replaces. Thus, if one would have to have a $10,000 surgical procedure that could be averted by a course of medicines, that course of medicines might be fairly priced at perhaps $9,000. The really successful drugs for the industry are those that are widely used, and that bring the average patient large benefits. When such a drug can be manufactured and distributed cheaply, it pays for a lot of research.

I doubt that there are exorbitant profits to investors in the industry. My basic economics suggests that were that to be the case, the industry would attract more and more investors until the profits came into line with other industries.

Of course pharmaceutical industries will bargain on prices. Indeed, the people I have known in the industry are no less and perhaps more motivated by humanitarian impulses than the rest of us. If one looks at orphan drug programs, they illustrate that companies are willing to run product lines at a loss to meet a real humanitarian need.

And I find it quite reasonable for governments and NGOs to bargain hard for lower drug prices. The industry has greatly reduced HIV/AIDS drug prices in recent years, no doubt for many reasons, but no doubt in part in response to the demand for lower prices.

I also think it reasonable that other policy instruments be used to get drugs to the needy poor. Donor subsidies are appropriate, and I think the Bush Administration’s $15 billion HIV/AIDS initiative is a real advance. Other donors also act to mobilize resources for the purchases of new and effective pharmaceuticals, Government also funds generic research and development related to such products as a public good, it provides tax financing for research and development in the form of tax exemptions, and it reduces regulatory deterrents to the development of such drugs, such as the simplifications of FDA approval for orphan drugs or freedom from anti-trust legislation. The wealthy are given tax deductions for funding research and dissemination programs, and the work is acceptable for charitable foundations, Appropriate balance of these instruments is a key policy issue.

One real problem is if the profitability of HIV/AIDS and other diseases of poverty product development is too low to maintain industry interest and investments. If the benefits to industry of working in poor nations are commensurate with the costs, as viewed in comparison with other product lines, they will continue to invest. If not, they won’t. It is as simple as that. So it is important that if public policy demands the development of vaccines for malaria, diagnostics that are fast and accurate against SARS, vaccines and drugs for HIV/AIDS, and many other products, we find ways to pay for them, and those ways do not depend too heavily on squeezing the industry. If industry leaders see only losses and marginal profits in making drugs for the poor, then they will make other, more profitable products.

If all people have rights to basic health, then the pharmaceuticals needed to treat those too poor to afford drugs become public goods. We finance such public goods by government and charitable institutions, not by taxing a specific industry.