The Drug War talks about the war on prescription drugs:
As a myopic consumer, I’m all for beating up on the drug companies and forcing them to lower their prices — in the short term. But as an economist trained to appreciate scarcity and the need to finance research and development, the public pillaring of the drug companies gives me lots of pause.Yes, drugs are expensive. But so are lots of goods and services. Where I live, three bedroom homes cost an outrageous amount. Gasoline has gone through the roof. College tuition is stratospheric. And consuming double espresso latte frappe mocha grande supremos or whatever they call a cup of coffee at Starbucks can bust your budget in no time flat.
Funny, isn’t it, that no one is accusing Starbucks of price gouging even though millions of Americans are addicted to the place and can’t afford it. But who knows, Starbucks may be next on the hit list, particularly if Senator Lott’s mom is a Frappucino junkie.
The drug companies get our gall because their products are so tiny, yet still cost so much. Take the new purple pill, Nexium. Each pill costs roughly 6 bucks. At one level, this just seems amazing. But spend a day suffering with acid reflux, and you’ll view it as a bargain. Also think of the millions upon millions of dollars that went into researching, developing, testing, and marketing those little purple pills and all the other little pills that didn’t pan out or, like the arthritis drug Vioxx, were introduced to the market only to be recalled.
Of course no one is forced to buy coffee, let alone coffee from Starbucks, whereas we all need to fill our prescriptions. And for those drugs that we buy that are still protected by patents, there aren’t a lot of substitutes. Consequently, drug companies are free to charge what the market will bear, which is typically a high price. Is this immoral? No, it’s exactly what we established our patent system to produce. We want drug companies to charge high prices and reap high profits from new drugs that they discover and/or help bring to market so they’ll have the incentive to keep developing new medications. We also want the business to be profitable so that the industry will experience lots of new entry.
This argument won’t make any sense to people who don’t “get” capitalism:
Dr. Angell would have us believe this virtue is a vice. In a nutshell, she claims the drug companies are super profitable, don’t spend enough on R&D, waste money on marketing and advertising, don’t generate enough new discoveries, and free-ride on government research support. Rather than debate these dubious propositions, let’s assume, for argument’s sake, that they are all true. In this case, Dr. Angell should set up a new drug company or engineer the buyout of an existing company. With her new company, she can choose to spend more on R&D, make more discoveries, bring more drugs to market, cut back, if not eliminate, marketing and advertising, benefit from government research support, and end up with higher profits than current drug companies. That’s the nice thing about an open market. You’re free to invest your time and money where your mouth is.As far as I know, Dr. Angell is not setting up her own drug company. Nor are new entrants to the drug industry popping up every day. Nor is there a plethora of pending takeovers of existing drug companies. These facts suggest that the market is properly pricing these companies, that the risk-adjusted expected return available to pharmaceuticals on marginal investments is not supernormal, and that the industry isn’t acting stupidly when it comes to deciding how much to spend on R&D, marketing, advertising, etc.