Reimportation of drugs and the demise of innovation

By Kevin Price

Innovation in health care, particularly in the area of developing new drugs, is one of the crowning achievements of US health care. According to Forbes Magazine, 80 percent of all new drugs are developed in the United States and one of the primary reasons for this is because companies still have an incentive to do such in this country. The profit motive creates the desire and provides the incentive to over come the fear of risk that comes with bringing new medicines to market.

"The fully capitalized cost to develop a new drug, including studies conducted after receiving regulatory approval, averages $897 million," according to a study by the Tufts Center for the Study of Drug Development. The expenditure of almost $1 billion to bring a product to market can only be done with some hope of reward. Thr hope businesses are looking for is a period of time of being able to sale that medicine without competition. Seven years is the standard period of time for such intellectual property to be protected. During that time, medicines can vigorously pursue recouping the cost of bringing a drug to market before other players can legally come along. This may be expensive, but that is a small price to be paid for innovation.

Policy makers who do not understand the economic dynamics of drug innovation want to fight the problem through reimportation, which is the US purchasing medicines from countries that receive them at a lower cost because they have less personal incomes and the drug companies change the cost accordingly. With reimportatin the drug companies would have to compete against themselves. Although the practice is currently illegal, many states have pursued the policy and now it has become front and center of the current health care debate.

Jack Calfee of American.com observes "This week, the Senate is expected to vote on an amendment to the healthcare overhaul bill that would incorporate the chief features of Senator Byron Dorgan's drug importation bill. The Dorgan amendment would essentially require U.S. pharmaceutical manufacturers to supply importers from foreign nations with unlimited quantities of low-priced drugs, which could then be resold in the U.S. market." It is interesting because I am sure the foreign companies that resale it to the US will do so for a profit, so our policy makers are sending these jobs to foreign countries. The question is, for how long? With these companies being forced to compete against themselves, the development of new drugs will be hindered. Simply put, there may not be new drugs to export in the future.

The economics of this are bizarre, Calfee notes 'The central feature is 'forced sales,' not in the sense that any sales are literally required, but because a manufacturer that sells to any particular nation has to sell as much as buyers want at whatever price those buyers pay in that nation. The implications are bizarre. If Lipitor is 40 percent cheaper in Germany, a German importer could order enough to supply not only Germany but also the entire U.S. market. The manufacturer (Pfizer) could try to meet domestic German demand and no more, but the Dorgan bill includes provisions to make that difficult. But why worry about Germany? Prices are certainly cheaper in, say, Greece, Portugal, or one of the Eastern European nations (the Dorgan bill includes a list of acceptable nations). A lot of drugs could flow through Portuguese seaports, assuming that anyone bothered to ship them back and forth instead of directly to the United States.

"US health care certainly has problems. Most of them are created by excessive legal rewards, government mandates, and bureaucracy. Innovation is one of the crowning achievement of our system. If this amendment passes, innovation will certainly suffer.

© Kevin Price