Sigh

Take the pharmaceutical industry. Companies like GlaxoSmithKline and Pfizer regularly unveil new drugs, yet most real medical breakthroughs are made quietly at government-subsidised labs. Private companies mostly manufacture medications that resemble what we’ve already got. They get it patented and, with a hefty dose of marketing, a legion of lawyers, and a strong lobby, can live off the profits for years. In other words, the vast revenues of the pharmaceutical industry are the result of a tiny pinch of innovation and fistfuls of rent.

And we deliberately engineer it this way too you idiot.

Depending upon who you believe it costs $800 million to $2 billion to get a new drug approved by the FDA. If there were no method of extracting a rent from having done so no one would do so. Thus we create patents in order to produce that rent.

There are other solutions of course – blowing up the FDA is one of them. But to complain about the rent when it’s deliberately engineered into the system because of the public goods problem is, well, it’s stupid, isn’t it?

33 comments on “Sigh

  1. In any case the size of profit relative to size for these companies is not unreasonable.

  2. “In other words, the vast revenues of the pharmaceutical industry are the result of a tiny pinch of innovation and fistfuls of rent.”

    Of you go then, do a tiny bit of innovation as it’s so easy and set up as a non-profit.

  3. It would be good if Rutger could give a few examples. The fact is that the pipeline of new drugs is almost non-existent. The government labs have not come through with new antibiotics. And it takes a long time and a lot of costly effort to get from the lab to a publically available drug otherwise universities would be doing it all the time. Wouldn’t it be good if the Guardian got factual just for once?

  4. Actually, at 2.24%, the yields on pharma sector shares are rather low. So not particularly profitable.

  5. The small number of headline breakthrough drugs have to subsidise all the dead-end research, which is the majority, during the short timeframe between drug approval and patent expiry.

    Having seen a bit of the economics of pharma development, the most amazing bit is that they manage to make money at all…

    A while back Novartis I think it was had a drug fail at phase 3 tests, so had had billions pumped into it already. Ouch.

  6. Airbnb is a rentier because they use the internet? What HMG should get a slice because Tim Berners Lee was a publicly funded physicist? That’s ridiculous.

    reminds me of Richard Feynman’s patents story (yes posted this before)
    https://youtu.be/rc9gwPB78lk?t=2m3s

  7. @Noel Scoper

    +1

    Lefties are always banging on about how easy it is to be a fat cat capitalist. They never set up their own utopia compliant businesses to compete.

  8. Not long ago, I read of a girl with a rare cancer denied a certain medicine that cost a high 6-figure sum per year GBP (NHS), while it was available for other cancers in her hospital. Apart from the question of whether it would do her any good, the question was why should it cost so much?
    The drug company position was that it had to make its development costs back before the drug came off patent, whereafter it would be ‘as cheap as Paracetamol.’
    The point is that the NHS is just about a monopoly consumer, just as the company is a monopoly supplier, and frankly, if the stuff is as cheap to produce as paracetamol, why the two couldn’t get together to agree a price for an unlimited supply that would, in fact, pay off the development costs and generate an acceptable profit, I can’t see.
    For example, if a year’s treatment costs £600k, and NHS buys 100, then that’s £60M, or £600M over 10 years. If it’s as cheap as paracetamol to produce, then we could have 200 supplies for £60M + £100. It is, after all, the treatment for a very rare cancer, and the numbers involved are by definition small.
    No doubt the NHS negotiators were trained in the same place as Cameron, and couldn’t negotiate their way out of carpet slippers.

  9. “most real medical breakthroughs are made quietly at government-subsidised labs.”

    Examples? References?

    I cry bullshit.

  10. @Witchie

    “a rare cancer”
    “NHS buys 100…over 10 years”

    And so long as the rare cancer obliging occurs 100 times each year over the 10 years in question, your plan seems fine….

  11. The NHS, or rather NICE, are good negotiators, which is why NHS drug prices are widely used by other countries. In order to be an effective negotiator, you have to be willing to walk away sometimes.

    Of course, Witchie is right that it’s madness that a patient cannot get a drug which has negligible marginal cost. The whole system of paying for drug development by granting monopolies is a mistake. Stiglitz has a better idea.

    Meanwhile, when Tim writes of exploding the FDA (and presumably the EMA) what has he got in mind? A free-for-all for quackery?

  12. @AndrewC, @Witchie

    What if the NHS says we’ll contract to buy 100 of them, to be supplied as and when needed at £400k (or whatever) per treatment – even if the patent has expired.

    Sure, we will be paying over the odds after the patent expires, but it will reduce the risk for the companies and give them a steadier income, which they will like so we can get a discount and would reduce costs.

  13. ‘Bankers have found a hundred and one ways to accomplish this. The basic mechanism, however, is always the same: offer loans like it’s going out of style, which in turn inflates the price of things like houses and shares, then earn a tidy percentage off those overblown prices (in the form of interest, commissions, brokerage fees, or what have you), and if the shit hits the fan, let Uncle Sam mop it up.’

    Bregman is delusional.

    The housing bubble/banking/financial crisis in the U.S. was created by Uncle Sam FORCING banks to make bad loans.

    Typical Leftist crap. Business is guilty for doing what government made them do.

  14. @Chernyy_Drakon. I work in pharma. There are deals like that that are made in other countries but nearly always for the period up to patent expiry.

    I’ve worked 2 years on setting up the commercial side of things for a large pharma company to launch a new drug with millions invested to get the salesforce and marketing teams ready, do all the medical education required etc. only for a drug to fail its phase 3 and everything get canned. This aside from the huge development cost.

    A lot of the very initial identification of potential avenues to explore does indeed get done in public orgs (or Cancer Research UK) but the most expensive part is the phase 3 trials (think in the $10s-100s of millions) which are all pharma funded. And then realise that doctors do not have automatic awareness of new breakthroughs and will often resort to prescribing 20 year old shit as its ingrained as a habit. A hell of a lot of marketing is required to make physicians aware that they have better options for their patients and they should be using them (genuinely, not just marketing hype: I’m talking drugs that have hugely improved survival rates without any of the side effects previously seen in existing treatment)

  15. Diogenes – “The fact is that the pipeline of new drugs is almost non-existent.”

    I think future historians will say that Fen-fen killed the pharma industry. An obesity drug that actually worked was linked to slightly higher rates of heart valve damage. As if the morbidly obese don’t already have higher rates of heart problems.

    Cost the company well over $20 billion for a drug that had passed every possible regulatory hurdle.

    No one in their right mind would bring a new drug to market unless it is for someone so sick they are unlikely to stick around long enough to sue. Cancer drugs for instance. But anything else? Someone is linking a baldness drug to long-term impotence. They may have made a fortune out of vain middle age men but they are about to be hit with so many legal cases that they may well be driven out of business.

  16. My earlier contribution wasn’t intended to knock pharma, or to deal with a case where the drug in question wasn’t ‘as cheap as paracetamol’. Say it cost £599k to make a year’s supply for one person, in which case there is (almost) no market for a cheap competitor when it goes off patent – and, incidentally, no return on investment. The point was simply if the initial investment was recouped with the given price, the extra cost of even doubling the supply was simply negligible,

    And Andrew_C, let’s suppose that the cases increase dramatically in number, then the extra costs of making the stuff are tiny, and the NHS budget is hardly likely to notice the odd £100k extra, is it? If you mean that the number of cases dips under 100 (and I have no idea how many there are, it was just a for instance), then you cope with that by making an appropriate minimum deal price per annum. It isn’t that such cancers don’t occur in other countries, is it? And what is rare? 10, 100, 1000 per annum? If the number dips and you only sell half the previous year’s number of treatments you won’t recoup your costs in the same way.

    My whole preference is a deal that benefits everyone.

    And I don’t believe that the NHS does do the best deals. It certainly pays more for paracetamol than I do, or so my Doctor tells me!

  17. A hell of a lot of marketing is required to make physicians aware that they have better options for their patients and they should be using them (genuinely, not just marketing hype: I’m talking drugs that have hugely improved survival rates without any of the side effects previously seen in existing treatment)

    This is exactly wrong. Little or no marketing is required to make physicians aware of the benefits of clearly superior drugs. The results of phase III trials are published, and specialists read them; that’s all you need.

    The point of the billions spent on marketing is to get physicians to prescribe drugs which aren’t (much) better.

    No one in their right mind would bring a new drug to market unless it is for someone so sick they are unlikely to stick around long enough to sue

    This is exactly wrong too. The big money-spinners are drugs which relatively healthy people take for years, statins for example.

  18. @Noel Scoper

    +1

    Nail on head. This is my reply so often when friends complain about the price of anything being a con – “If you think a deal looks unbalanced, then the way to make money is to get on the other side of the deal”.

    On a smaller scale: You think cookies are easy to bake and why should shops charge pounds for them? Well get baking then. You thought people were daft to buy pet rocks? Well start collecting in your garden and set up a stall outside your house.

    If making a profit from pharmaceuticals is so easy, get out there and do it. Or, at least, buy shares in the company you think is making rip-off profits.

  19. @Pro Bono. That’s pretty naïve. Explain to me why Roche spent billions marketing Mabthera if what you say has any relation whatsoever to reality? It was an absolute ground breaking drug. Still needed billions to get physicians to consistently prescribe the damn thing.

    Likewise tell me why some physicians still prescribe TZDs in diabetes despite there being 3 whole new classes of drugs being launched that are far superior at managing diabetes, let alone all the insulin developments. In Pro Bono world they would have checked the data and immediately switched to any of the superior drugs. They didn’t. Pro Bono world is not reality.

  20. You want me to tell you why marketing departments say they need to spend lots of money on marketing? Who’s naive?

    Rituximab (aka Mabthera) is a ground-breaking drug for the treatment of lymphoma and leukaemia. The huge marketing spend is to get physicians to prescribe it for rheumatoid arthritis.

  21. “most real medical breakthroughs are made quietly at government-subsidised labs.”

    Odd choice of phrase. Is a “government-subsidised lab” a State-run lab or a private one which receives a proportion of its income from the State?

  22. I suggest those who complain about the cost of drugs should take a guided tour round a pharmaceutical plant then they might understand the regulations regarding the actual drugs comes trotting after the regulations covering manufacture, storage and distribution.

    Every ingredient and every supplier of these are subject to strict regulations.

  23. The big money-spinners are drugs which relatively healthy people take for years, statins for example.

    And if you start when you are old enough, by the time the patient has worked out just what side effects the statins are causing, they haven’t got much longer to live, anyway.

  24. John B
    “…the regulations regarding the actual drugs comes trotting after the regulations covering “manufacture, storage and distribution”.

    Yes that’s the exploding the FDA option Tim alluded to (A good way to become a millionaire is to be a whistleblower to the FDA. You get a not insignificant share of the fine.)

    But what also undermines the authors point somewhat also is that the patents in force are often not about the invented drug but the manufacturing process which produces the drug in regulatory approved and efficient way.

  25. Pro Bono,

    Meanwhile, when Tim writes of exploding the FDA (and presumably the EMA) what has he got in mind? A free-for-all for quackery?

    That is the problem. We ended up with the FDA for good reasons. If we just blow it up the snake oil salesmen return and we repeat history. We have to do something, the problem is finding the something that is better than what we already do.

    Rob,

    Odd choice of phrase. Is a “government-subsidised lab” a State-run lab or a private one which receives a proportion of its income from the State?

    Both. My girlfriend’s sister works at Mylan and one of her biggest headaches is the extra paperwork government funding requires. This is a private lab that gets some of it’s income from the state. We also have government run labs.

  26. “We ended up with the FDA for good reasons. If we just blow it up the snake oil salesmen return and we repeat history.”

    Hi, Liberal Yank!

    Gotsta be government, you say.

    Nope. Consider private standards, like NEC and SAE. Government screws up most of what it touches. People die because of the FDA.

    Snake oil salesman now have to deal in the Information Age.

    “It’s immoral to let a sucker keep his money”

  27. It doesn’t have to be government. We can always use trade guilds. Those have their own problems. Feel free to name any other option you are willing to consider.

    It is also immoral to sell poison to a sick person yet claim it is a cure.

  28. “It doesn’t have to be government.”

    Doesn’t square with “We ended up with the FDA for good reasons.”

    We are close. I’m just saying it SHOULDN’T be government.

  29. Another reason why I hate New Labour, and Alastair Campbell in particular, for making policy on the basis of “the best sound-bite”.
    Before 1997, the PPRS and its successor, the VPRS, rewarded pharmaceutical companies that made useful drugs invented in the UK by allowing them profits on sales of the NHS of these drugs that gave them a return on investment in research of x% pa. The first time I went to an analysts’ meeting on Glaxo Sir Austin Bide said (I think it was in answr to a question but I can’t now remember) that Glaxo manufactured some low-volume drugs at a loss *because it was the right thing to do* – and no-one complained! (we were British).
    Meanwhile his Finance Director was adjusting the NHS drug prices to maximise the profits on drugs that were 90% exported and reduce the profits on those where exports were 50% or less.
    Then we get Alastair Campbell saying NHS should buy generic drugs – which is a good sound-bite but means the NHS cost is INCREASED by the difference between Glaxo’s (or whoever’s) production cost and the generic manufactrurer’s sale price. We saw thirty years ago when Beecham killed off generic competition to Pebritin that the OEM cost is lower than the copyist’s.
    THe PPRS and VPRS was *a very good deal for the NHS* – until New Labour wanted a sound-bite. So now we have NICE refusing to pay for life-saving drugs.

  30. Then I will reword the statement. We end up with the FDA as a lessor evil choice because patent medicines were much worse.

  31. john77: no, you hate Labour because that’s what you do.

    Generic prescribing just means that doctors write prescriptions using scientific names rather than brand names. If the drug is out of patent, pharmacists can then choose which version to dispense. Whatever they dispense they get reimbursed according to a weighted average market price, as listed on the NHS Drug Tariff. So if (unlikely) the branded version is cheapest, that’s what they dispense.

    The Kings Fund estimates that generic prescribing has saved the NHS about £7.1bn since 1976.

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