No one should underestimate the difficulty of fixing what’s still wrong with America’s healthcare system, so the following post shouldn’t be interpreted as saying that critics of drug companies’ pricing practices are emphatically wrong to be upset about hyper-expensive medicines – especially when they can be life savers.
But they should be more mindful of some of the long-term dangers of proposals they’ve been championing with unusual vigor these days (along with Democratic presidential candidate Hillary Clinton and other political leaders) for government curbs on drug prices. And they should be especially wary of tackling drug prices without addressing the problem’s global origins.
This international angle could have an especially important impact on how price controls might affect drug discovery and the overall pace of medical progress. Specifically, I’ve never heard an adequate answer to the question of how, in a world where most countries impose price controls, drug companies can finance adequate research and development unless they can count on a big profit center someplace – the role that even their critics admit is played by the American market.
In a recent Washington Post article, Marcia Angell – a former editor in chief of the prestigious New England Journal of Medicine – responds that the pharmaceutical industry is plenty profitable. In fact, she claims, “Pharmaceutical manufacturers are consistently among the most profitable companies.” Trouble is, her evidence yields a mixed picture at best of the industry’s financial fortunes.
Angell’s case rests on Fortune magazine’s well known rankings of America’s 500 largest companies. Interestingly, when measured by revenues (the magazine’s headline ranking) only 11 of these giants are in pharmaceuticals, with Johnson & Johnson being the largest (at number 37), followed by Pfizer (56) and Merck (71). No other drug companies crack the Fortune 100.
Looking at profitability in standstill terms, pharmaceutical firms do considerably better. Thirteen of them make the top 500 by this gauge, and not only are five of them in the top 100, but these are all in the top 50 (in order, Johnson & Johnson, Gilead, Merck, Pfizer, and Amgen). Unfortunately, in our free market system, even profitability doesn’t translate into guaranteed future success, and when it comes to profit growth, the drug sector lags notably.
Of the 500 leaders in this Fortune category, only three pharmaceutical companies ranked in the top 100 profit growers over the last year (Gilead, Merck, and Alexion), and only Gilead stood in the top 50. Gigantic Johnson & Johnson, revealingly, was only number 305 on the profit growth list. And among the ten biggest pharma firms in absolute terms, Pfizer, Amgen, AbbVie, Lilly, and Bristol-Myers Squibb all were left off the list of 500 fastest corporate profit growers altogether.
Moreover, these figures all reflect the fact that American pharmaceutical companies are able to exploit this nation’s lack of drug price controls. Imagine how they’d perform if they lacked any significant U.S.-style national profit center?
That’s not to say that the drug companies’ behavior is beyond reproach and, like others, Angell makes an excellent point by noting that they’re the beneficiaries of major public subsidies in the form of government-sponsored basic research, as well as the larger boost their products enjoy from government support for health care in general. These payments ensure that drug companies’ markets are much larger than they would be if Americans paid the full costs out of their own pockets. So there’s clearly a basis for some claw-back here. Moreover, Clinton makes a promising suggestion when she proposes rescinding the federal tax credit for pharmaceutical company advertising and replacing it with a tax credit for R&D.
But that’s a long way from saying, as Clinton and Angell also propose, that Washington should tell pharmaceutical companies how much they should spend on research (versus other priorities), or how much they should charge for their products once the above subsidies are taken into account. And in my view, weakening drug industry patents even further would backfire much worse.
For the fundamental global issue faced by the pharmaceutical industry would remain: The rest of the world receives many of the benefits of America’s pharmaceutical innovation, but lets the American taxpayer and the American consumer pay most of the costs. (And let’s not forget future generations of Americans, who will have to repay the debts racked up by government borrowing to finance current health care spending.) Unless this international free-riding is ended, expect Washington to continue struggling with the challenge of restraining drug costs without crimping the drug discovery pipeline.