This article was first published in <a href="A7_2009-03-06.pdf“>The Epoch Times on March 6, 2009.
Demonizing large drug companies is easy because they seem often highly profitable, and tend to sell products to people who are sick or dying. But is it wise to punish these companies by choking off their profits? More important, is there a point at which important and beneficial drug research slows down? Europeans have discovered the answer to these questions the hard way.
“It is simply not right that the skyrocketing profits of the drug and insurance industries are paid for by the skyrocketing premiums that come from the pockets of the American people,” says Barack Obama. Now that Obama has assumed the presidency, we can expect a major crackdown on drug company profits.
From a political perspective, this is clearly an effective strategy. Demonizing large drug companies is easy because they seem often highly profitable, and tend to sell products to people who are sick or dying.
But is it wise to punish these companies by choking off their profits? More important, is there a point at which important and beneficial drug research slows down? Europeans have discovered the answer to these questions the hard way.
European drug firms take a real hit when marketing and distributing a new drug. Restrictions on price, availability and even usage are much stricter in Europe than in America. There, with public healthcare costs threatening budgets, for decades European countries’ health authorities have been trying to limit healthcare spending by arbitrarily imposing low prices on drugs, controlling profits and even restricting prescriptions by doctors.
Private drug companies are forced to subsidize the public healthcare system. In Germany in 2007, for example, drug price “discounts” imposed by the government amounted to more than 1.2 billion euros, nearly 27% of drug companies’ total R&D programs. Is it a surprise this has an impact on R&D? There’s simply no incentive to invest if firms cannot recoup the cost of developing new products.
Moreover, taxation targeted solely at pharmaceutical companies is already in place in France, another major pharmaceutical market in Europe. According to a recent report from the French Senate, in 2006 these special pharma-taxes brought the government 831 million euros, a sum which exceeded drug firms’ total 818 million euro industrial investment in that country.
These special taxes are calculated not on firms’ revenues or profits, but are tied to current deficits of the health insurance system. The higher the deficit, the greater the levy. So, for instance, even though one firm experienced a 2% decline in revenues, its taxes rose by 42%; another saw its tax burden shoot up by 235% in 2006 and 300% in 2007. Is it possible to imagine that arbitrary tax measures of this sort will not end up penalizing the pharmaceutical industry and reducing firms’ ability to innovate?
Indeed, the cumulative effect of such policies has radically curtailed European drug development. It is happening while the costs of innovation are rising, and the investment required to develop and market a new molecule has gone up sharply in the last decades.
Larger sample sizes, longer time periods and more numerous administrative formalities are inevitably adding to the costs of the drug firms’ innovation projects. The cycle to put a new drug on the market may now run 12 or more years and cost roughly an equivalent of a billion euros.
During the last 20 years, the number of molecules launched by European drug firms has been reduced by half, going from an average of 97 molecules between 1988 and 1992 to 48 between 2003 and 2007.
As a result, the center of drug innovation has shifted to the United States, where the drug market is generally less restricted than in Europe. But American drug development may itself slow if U.S. political leaders import the structural obstacles that have decimated European innovation.
Americans take a great deal for granted about the U.S. economy and its dynamic industries. The pipeline of new drugs and cures has changed lives and benefited millions. But it is not guaranteed that the flow will continue without careful and wise cultivation. The pharmaceutical industry is on the verge of creating a whole new revolution in biological technology, which could bring untold benefits to all of us.
But if drug companies find themselves scapegoated and penalized by short-sighted government policies, they may slowly shift their focus and output – just as we’ve already witnessed in Europe.
Valentin Petkantchin is Director of Research of the Institut économique Molinari.