Free Trade in Drugs

Last night the House voted 243-186 to let Americans buy drugs from abroad, a free-trade victory that was, oddly, opposed by the free-traders at the Cato Institute. Their chief argument seems to be that, because Canadian price controls artificially lower the cost of American pharmaceuticals, allowing us to buy those drugs at Canadian prices will lead to drug shortages in America. There's three problems with this position:

1. It's not like we pay market prices here either. The cost of drugs is inflated by prescription laws, by the FDA approval bottleneck, and -- most significantly -- by patent monopolies.

Let's not open the Pandora's box of debating whether patent laws themselves are a good idea. Even if such laws are worthwhile, there's no reason to assume that American policymakers have devised the perfect patent system: From the length of time drugs are monopolized to the question of what can be patented in the first place, our setup is defined by essentially political decisions. Why should they be sacrosanct?

2. No one's forcing the drug companies to sell their products in Canada. If the market price for pharmaceuticals really is closer to what Americans pay than to what Canadians pay, freer trade is as likely to undermine Canadian policy as it is to, in the words of Cato's Doug Bandow, "import foreign regulatory regimes."

3. When foreign governments distort a market with subsidies (cf. Europe), trade barriers (cf. Japan), or even forced labor (cf. China), the free-marketeer's usual response is still to call for opening trade and letting the chips fall where they may; the solution to one distortion, they caution, is not to add yet another. What's different about medicine?

Comments

erf | July 25, 2003, 1:20am | #

Can I import my favorite newly legal (up there, or soon enough), organically grown, apetite enhancer from Canada?

Sebastian | July 25, 2003, 1:20am | #

That would assume pharmas are just throwing money away advertising their products. Why is it okay for Ford or GM or spend billions on advertising, but when a Pharma does it, it's somehow evil? Any company needs to market it's product, and if it didn't help improve sales, they wouldn't bother.

Mac Daddy Hoon | July 25, 2003, 1:28am | #

I agree with Sebastian. It cracks me up when people complain about pharma advertising, saying it creates markets or encourages people to ask for drugs they don't need.

Please. It's not like seeing an add for Lipitor or Zocor on TV suddenly raises my cholesterol 10 points.

Advertising is a means of informing consumers about potential drug options. Advertising does not create a health problem that doesn't already exist.

mbe | July 25, 2003, 1:32am | #

Sebastian: I think the point is that pharmas claim drugs are expensive because of R&D costs, (control our prices and we will have to stop doing R&D) when a bigger part of the cost is advertizing. I want them to keep doing R&D, I could care less if they choose to advertize.

thoreau | July 25, 2003, 1:46am | #

Americans will start importing drugs from Canada. America has many more people than Canada, so if the Canadian gov't does nothing in response there will quickly be a drug shortage in Canada.

A few things could happen:

1) Canada could regulate drug exports, so that the supply of cheap drugs in the US is limited. This will limit the losses to pharmaceutical companies due to people in the US buying at Canadian prices.

2) Canada could allow drug prices to go up, to reduce the number of Americans who import drugs. Fewer drugs will head south of the border, and the higher price of drugs in Canada will limit the losses suffered by pharmaceutical companies.

The market will prevail. Americans will probably enjoy slightly lower prices in the end, Canadians will face substantially higher prices, the drug companies will experience little if any drop in profits, and this well-publicized setback for socialized medicine will encourage many (but not all, alas) Americans to rethink socialized medicine.

See, free trade benefits consumers in the long run.

Brian | July 25, 2003, 1:58am | #

The ads you see on TV or in print are only part of the industry's marketing budget.

If you've ever been around a hospital and seen the countless freebies, dinners, cocktail parties, etc., etc., that pharmaceutical reps throw for doctors in the name of "educating them" about their products, you know that this consititutes a substantial portion of their budget.

It think that advertising to consumers is one thing, but attempting to influence the medical decisions of physicians with free food is at least suspect.

Personally, I'm ecstatic about this bill. I've been buying allergy meds in Mexico for a couple of years now (at less than 1/4 of the American price) but not everyone lives as close to the border as I do.

Phill | July 25, 2003, 2:14am | #

I dont really agree that Intellectual property for a regulated item can cross international boundaries. Americans can only buy these items because of risk/benefit ratio as approved by an fda bureaucrat.

Evan McElravy | July 25, 2003, 2:18am | #

Poppycock, Thoreau. The Canadian medical system is the most rigidly socialized in the entire world -- more so than any country in Europe. Drug prices are centrally administered, and whether or not Americans are allowed to reimport or not isn't going to make the slightest bit of difference in local prices. There is virtually no market mechanism in Canadian healthcare, which exists -- for the moment -- pretty much by fiat. I can't begin to imagine why the various commenters here think that U.S. policy is going to have the slightest bit of impact on that at all. Bottom line, reimportation is going to shaft the pharmaceutical companies financially. Whether or not that is something we should worry about is a totally different question, of course, but here are two points that definitely disturb me about this decision:

1) Canada has had a huge problem with counterfeit medications, fake generics, and the like -- due, of course, to the total squashing of any market mechanisms in their health system. Now we're going to get involved with that.

2) The potential precedent here is alarming. Basically what we are doing is out-sourcing a regulatory issue to a foreign jurisdiction. Americans demand cheaper pharmaceuticals, but it is politically impossible to institute full price controls, so the pols just attach the country to the price controls of a neighbouring country where it IS politically possible. There's something cynical and vaguely undemocratic about the whole thing. Free trade it might well be, but it wasn't conceived as such and probably won't particularly function very well that way, either.

mbe | July 25, 2003, 2:22am | #

Evan: You say, "1) Canada has had a huge problem with counterfeit medications, fake generics, and the like -- due, of course, to the total squashing of any market mechanisms in their health system. Now we're going to get involved with that."
Your source, besides pharma reps testifying before congress? How is it that the most rigidly socialized system in the world is awash with fake drugs?

Conor | July 25, 2003, 2:26am | #

Isn't there a contract issue here too? U.S. drug companies have the right to see to the Canadian government (or anyone else) under the condition that those drugs only be sold in the Canadian market. They in fact do this. Canada has not been at all active in enforcing the terms of these contracts, however, relying instead on the U.S. re-importation prohibition. Rather than raising the price of drugs in Canada and lowering them in the United States, as many commentors have suggested, isn't it more likely that Canada will start policing exports more aggressively?

JDM | July 25, 2003, 2:29am | #

Raymund,

Drug companies spent about $15 billion on promotion, only $2.5 billion on direct to consumer advertising in 2000, (the last year for which I can find numbers.) The largest portion of their promotional budget was free samples, valued at $7.2 billion dollars. Also, the direct to consumer advertising includes magazine and radio ads, free pens, etc.

Total US spending on all advertisments of any kind is around $120 billion.

With Google, there is no need to make up numbers.

B. Baltic | July 25, 2003, 2:35am | #

The question of "should one buy drugs ftom Canada" becomes rather moot when you consider that a prescription user can typically save 1/3 on cost simply by substituting the largest dosage of that drug for the smaller now taken.

For instance, Zocor, the largest selling cholesterol drug comes in 10, 20, 40, and 80 milligrams. The 20, 40 and 80 cost the same per tablet (about $3.60). Thus, if you are taking 20, mg., the most common prescribed, you simply, upon next refill, ask your doctor to prescribe 80 mg. tab, @ 1/4 tablet per day. Your savings is 75% or $2.70 per day or $1,000 per year.
Taking Viagara @ 50 mg.? It costs $8.00 per use. Switch to the 100 mg which also costs $8.00 per tab and save $4.00 per USE.
Other typical savings: Zoloft=50%, Paxil=45%, Lipitor=75%, Primpro=50%

If this info, where you can typically save over $2,000/year if you are now spending $6,000/yr, were generally known, the statist politicians would lose their major domestic issue! That's why they refuse to tell this knowledge to the folks who voted for them.

To my knowledge, only Congressman Ron Paul has consistantly told his constituents about pill cutting when they contact him about drugs.
BTW, a pill cutter costs $4 in the drug store and you will likely pay for it in one day. Also, the savings can be acquired by opening and dividing capsule content. The only drugs which can't be split are time-release tablets where cutting the tablet will diminish its efficacy.

Why haven't any free market think tanks JUMPED on this issue? Axe your favorite one!

mbe | July 25, 2003, 2:44am | #

Evan, don't get me wrong, I disapprove of the distortions created by Canada's health care system. But as someone who spends part of every day watching developments in the pharma world and also deals personally with drug regulators from the US-FDA, Europe-EMEA, Canada-HC and Australia-TGA, this claim I have heard in the last few days that Canada has a huge counterfeit drug problem is news to me. All the wealthy countries see counterfeit drugs, the US as much as the rest, especially considering the higher profits to be made by the scumbags who counterfeit drugs.
Compare for yourself:
http://www.fda.gov/cber/safety/safety.htm
http://www.hc-sc.gc.ca/english/protection/warnings/2003.htm
http://www.orlandosentinel.com/news/orl-asecbadpills24072403jul24,0,4817430.story?coll=orl-news-headlines

Phill | July 25, 2003, 2:58am | #

I would like to know if there has been any public choice research into the effects of international intellectual property and bureaucratic regulation.

Russ D | July 25, 2003, 3:06am | #

The idea that regulation helps promote research cuts both ways. As it stands now, if a company invents a new medicine, they can sit on their R&D for twenty years instead of trying to improve on it tomorrow. Only another company developing a competing product may get that company of their lazy arses. As Jesse says, there's no proof that our present patent system is the best.

Also, if Canada or another country sees a surge in American drug purchases, would they likely keep their prices at the same level? Supply and demand is one thing, leaving so much money on the table is quite another. This could actually benefit other nations, if you're part of "their program", you get the discounted price, if not, you get the market price.

There could also be a benefit in terms of patient care. Pharmas today advertise so much because they know they can recoup all that marketing money. Spend a small fortune convincing lazy doctors to push your drug, you get all your money back and then some. Doctors tkae advantage of this by listening to the pharma marketers rather than actually trying to decide for themselves what drugs would be more beneficial for their patients. If the marketing dollars go down, the doctors may start learning more about the medications themselves rather than take a hot babe's sales pitch at face value. And if it has the opposite effect in that marketing expenditures by pharmas increase, then obviously there's even money to be made in drugs.

The free market provides no guarantees that things will remain the same as today. That's why people are scared of it. But I don't much care for the phony guarantees our regulated market provides currently.

T. Hartin | July 25, 2003, 3:08am | #

The problem with reimportation as a "free market" activity is that it is based on theft and monopoly power.

The reason that Canada and other countries have cheap drugs is because they tell the drug companies that they will only pay a little over the production cost, and if the drug company doesn't do business with them on that basis, they will break the patent and produce the drug themselves. Breaking a patent is theft, but nation-states can do it because of what they are. These nation-states also exert monopoly power over their national drug markets, which gives the drug company no other way to sell into that market.

Thus, these cheaper prices are not the result of a free market in action, but are the result of naked coercion by the state through both its monopoly power and its sovereign ability to break patents (steal stuff) and get away with it.

The drug companies have a choice between getting nothing at all (the nation-state breaks the patent) or getting a little over the production cost. Of course they agree, but this is not a consensual relationship in any meaningful sense of the word.

Reimportation amounts to no more than allowing American consumers to take advantage of the coercion employed by other nations against drug companies. I fail to see how importing the anti-free market practices of other countries has anything to do with a free market in drugs.

Joe | July 25, 2003, 3:26am | #

So, it is immoral for Pharma to advertise on TV, newspapers and periodical. It is immoral for Pharma to hold parties for docs and nurses to inform them of new products. Pray tell, when is it ok for a pharmacutical company to announce that they have something that is helpful to mankind?

This premise that 50% of revenue is directed to marketing is wrong. This number comes from press releases that look at what are essentially administration costs of pharma companies from SEC filings and considers it all to be marketing. So all of the 'back office' functions of accounting, payroll, mail room, legal and all the other essentials of running a company are considered to be evil marketing. Once you understand this, you should realize that the vast majority of what else is spent is R&D, since the production cost of a pill is next to nothing. To attempt to breakout what is marketing expenditures from a quarterly SEC filing is impossible. Without performing an internal audit of a company, you won't. Snopes.com would do well to look at this number.

I don't know where you got the drug shortages argument from, but I always have usually heard it with the caveat that it would slow down research and cause the rate of advances to slow. This is the 'shortage' that I am used to hearing about. If someone is talking about drugs already in existence being in short supply under a price control regime, they are high. The production price of a pill is so miniscule it almost doesn't count when compared to R&D costs. Since R&D is a sunk cost, there is no way that any sane business person would make a production decision based on not being able to make it back. But putting good money after bad ain't going to happen. The rate of inovation will dry up, and people suffering from diseases that have rapidly mutating properties such as Hepatitis or AIDS will soon find the drugs they rely on to help live as close to a normal life as possible aren't worth a thing.

Finally, the notion that a pharma company can just refuse to sell into a country is a pipe-dream. Pfizer doesn't want to accept Canadian price controls, so they just say screw Canada and the Canadian government accepts it. Right? No, Canada then starts producing all of Pfizers drugs and dares Pfizer to do something about it. Where are they going to go for judicial relief? Saying pharma companies 'accept' price controls is like saying a rape victim 'agreed' to sex when she stopped struggling because of the gun to her head.

Sebastian | July 25, 2003, 3:29am | #

"prescription user can typically save 1/3 on cost simply by substituting the largest dosage of that drug for the smaller now taken."

You have to be careful with doing that. Drugs which come in time release capsules should never be cut, as it can affect the rate at which you recieve the dose. Always check with a doctor to make sure this is okay.

Sebastian | July 25, 2003, 3:34am | #

"Saying pharma companies 'accept' price controls is like saying a rape victim 'agreed' to sex when she stopped struggling because of the gun to her head."

Well said Joe

take two and call me in the morning | July 25, 2003, 3:54am | #

The US does not have a free market in drugs. It has the world's largest regulatory body, restricting the choice of consumers and protecting the monopolies of a handful of corrupt big pharma money machines. Innovation and competition have very little to do with it. All you "free marketers" who are so passionately defending Bayer, Baxter, Pfizer, GSK et al. against rape are just a bunch of suckers.

Sebastian | July 25, 2003, 4:09am | #

"The US does not have a free market in drugs. It has the world's largest regulatory body, restricting the choice of consumers and protecting the monopolies of a handful of corrupt big pharma money machines."

Your assertion that the drug market in the US is far from free is certainly correct. Drug development is a highly regulated activity, which is reflected in the cost of the drugs. Proving a drug is safe and effective is a long, expensive, and time consuming process.

The reason there are so few pharma companies is because there's an 800 million dollar cost associated with bringing a new drug to market. On top of that, you then have to market the drug, and even then you're not certain to recoup your development costs. This makes the barriers to entry extraordinarily high for the pharmaceutical market, and is a big reason why there are so few players. It's just a fact that complying with the regulations is very costly. Reducing the regulatory barriers would certainly make it easier for new companies to enter the market.

Joe | July 25, 2003, 4:09am | #

Take Two, I assume that you are pissed about the patent issue. Am I correct or are you also raging against the FDA?

take two etc. | July 25, 2003, 4:17am | #

Sebastian: so we agree. I think.

Joe: Pharma companies play the patent game so well that it hurts innovation. And yes, the FDA certainly isn't here to protect consumer choice or keep prices down. (Not to say that regulators should set prices, rather that they regulate with no regard for costs, which hurts consumers.)

Sebastian | July 25, 2003, 4:27am | #

"Sebastian: so we agree. I think."

Perhaps. I'm arguing that blaming the companies for a market condition created by the FDA isn't really fair. I will hardly argue that pharmas are being raped, it's still a very profitable business to be in. Creating a huge regulatory burden to overcome, then dictating prices, is just going to reduce the number of drugs coming onto the market, and continue to reduce the number of players in that market.

I'm not calling for an elimination of all regulation. I'm not a purist libertarian. There should be some requirement for companies to prove their drugs don't kill people, and do what they say it does, but I think we should probably accept a little more risk, and a bit less regulation, in order to allow more players to enter the market, and to get more potential drugs for illnesses which aren't widespread enough create a viable market under the current regulatory regime.

It's a difficult balance to strike, and probably something worth arguing about.

take two etc. | July 25, 2003, 4:37am | #

Sebastian: I agree with you that a little more risk would be good but that we do need regulators. However, I feel that today, the companies piss and moan about some regulation at the same time they manipulate (or ask for) other regulations to keep out competitors. Big pharma is not the bastion of free trade some of the posters on this thread believe. The companies did not create the current situation by themselves but they are not innocents - they are happily making profits today. (More than I can say for many other less-regulated industries.)

Joe | July 25, 2003, 4:44am | #

Take Two, I was just checking that you understood the role the FDA played in this mess. Far too many people are under the delusion that government=good.

I will grant that because of the concentration, it is far too easy for this market to have aspects of a cartel. The solution isn't price controls, it is easing barriers to entry. The only time in America's past that cartels and monopolies have flourished is in industries that had high barriers. See Standard Oil and the steel industry. There are few physical stock requirements for pharma, just impossible FDA hurdles to get over that eat up endless amounts of cash and knowledgable researchers. Allowing a Canadian 'loophole' to bring in pricing controls ain't the answer.

joe | July 25, 2003, 4:51am | #

National Review Online ran a piece yesterday comparing the import of prescribed drugs from Canada to immigrants' getting tainted injections in the back room of a "clinic" from a Mexican "doctor."

Fucking scum. THEY don't even believe that. I may disagree with you libertoids, but at least you play it straight.

| July 25, 2003, 4:52am | #

^is this the liberal democrat joe? because if so, you'ce CHANGED.

thoreau | July 25, 2003, 4:52am | #

OK, so maybe Canada's highly centralized medical system will not allow drug prices to rise in response to US reimportation. Still, a lot of people will be reimporting drugs from Canada. To avoid more shortages in Canada, the Canadian gov't will have to restrict reimportation.

Even if we don't stop people from bringing medicine into the US, the Canadians can still stop people from bringing medicine out of Canada. The end result will be:

1) Restrictions on reimportation limit the number of Americans who buy reimported drugs. Drug companies are still able to sell at their regular prices (I won't say "market prices" since medicine is so regulated even in the US) to a substantial number of Americans, limiting the damage suffered by drug companies.

2) If Canada becomes really stringent about banning or limiting reimportation, a black market will come into being. The people who smuggle drugs out of Canada will demand a higher price to compensate them for their risk. The price of reimported drugs will rise, and Americans will be even less likely to buy reimported drugs.


So, basically, if the Canadian gov't responds with more regulation, drug companies will lose very little of the US market to reimportation. On the other hand, if the Canadian gov't lets the market work (unlikely, I know) then the price will drop in the US and rise in Canada, and the drug companies will probably reap a net benefit, or at the very worst a small loss.

So I don't see the reimportation bill harming drug companies to any great extent in the long run.

Joe | July 25, 2003, 4:54am | #

I'm was not trying to saying that pharma are free-traders. They are the same as any other rent-seeker. The way to challenge rent-seeking isn't thru price-controls, but more competition. I'm suprised I need to make that point on a libertarian web site.

take two etc. | July 25, 2003, 4:56am | #

Joe: I think we agree that the FDA shares a significant amount of the blame for the high costs. And the pharma industry does verge on cartel-like behavior. So what is the solution from the point of view of the senior citizen who is caught between these two market distoring monsters? What is the fastest way to deal with the fact that my uncle in Detroit pays twice as much as my uncle in Windsor for the same drug? (Obviously, for my uncle, it's to visit his brother more often ;-))

T. Hartin | July 25, 2003, 5:02am | #

The Canadian government won't do jack about people reimporting drugs from Canada. There will be no shortages created - why would there be? As demand goes up, so will supply.

Further, the Canadians have every financial incentive to capture as much of the US drug market as they can, so they have no reason to stop reimportation that is making them money just to help out a bunch of US companies.

Wide-open reimportation is functionally the euqivalent of breaking the drug companies patents, because the reimported prices are the prices that would be charged if the patents were broken.

I don't think there is any doubt that denying patent protection to drug companies will dramatically reduce the amount of research that they do. You may think that this is a good road to go down, but I do not.

Steve Skutnik | July 25, 2003, 5:03am | #

You know, I find it rather odd that some libertarians are hopping on board for this bill. I consider it a lot like the following:
I sell TVs that were acquired through rather shady means off the back of my truck. The prevailing argument of Reason here seems to be, "Well, back-of-the-truck sales are just another legitimate market - why should we prohibit access?" Yet unlike a new electronics store opening up that actually acquired its products through non-coercive means (i.e., in the case of the pharm companies, "Sell to us cheap or we void your patents"), the sale from the back of the truck is basically the sale of stolen goods. How many libertarians would really condone that as a proper application of markets?
Ergo, the idea that this is a "free trade" issue here seems honestly misleading - rather, I think the arguments made by Cato are stronger than they've been given credit for. How is this not importing Canadian price controls?
Again, it's like the government saying they're not going to simply steal every TV and distribute them for free, but hey, if you want to buy from the back of the truck, that's fine with us.
If we're sanctioning American consumers to exploit blackmail for lower drug prices, how does that make us any better than the Canadians doing the blackmailing to begin with?

Joe | July 25, 2003, 5:04am | #

thoreau, you assume that supply is fixed. While in the short term that is true, when you are dealing with an entity with sovereign immunity you tend to provide them with what they want.

Nope, not a liberal democrat. Filthy Joes. I either need to get a new name or kill all other Joes on the planet.

Joe | July 25, 2003, 5:15am | #

Take Two, since this is a libertarian site, I would have hoped the reflexive answer would have been less regulation on the development side to ease barriers to entry, creating more competition and bringing us closer to a 'perfect'(economic term) market. Instead, I think I read a post from a hacker based at the DNC asking to unbollicks a regulatory problem with more regulation. When dealing with a market distortion that has been assisted by the government, there is no 'fast' cure. Unless you want to get the US government to go to the WTO and get the rest of the world to stop free-riding off us. Politically, I don't see that one working.

T. Hartin | July 25, 2003, 5:58am | #

The people who think reimportation will help create a free-er market in drugs have a handful of assumptions that bear examining.

First, that the current bans on imports are a barrier to entry into the market.

Well, I suppose they are, just as bans on selling stolen TVs out of the back of your truck are a barrier to entry into the TV market. The barriers on reimportation are there, at least in part, because the actions of foreign governments in exercising monopoly power and threatening to break patents profoundly distort their markets and add up to a violation of the property and contract rights of US drug companies.

There is no barrier to reimporting cars that meet US standards because foreign countries aren't in the habit of breaking car patents and forcing car makers to sell into monopoly markets.

Second, that the FDA constitutes a barrier to entry to the market, meaning that the current market isn't really a free market anyway.

This may be true, but it has nothing to do with reimportation. You can take the FDA out of the picture altogether, and the dynamics of reimportation don't really change.

Third, that the patents given to drug companies constitute a barrier to entry, and no one should care if they are (effectively) broken by reimportation.

Patents are a barrier to entry just like any property rights are a barrier to entry. Your refusal to let me load up my truck with your TVs unless I pay for them is certainly a barrier to my opening up a TV store of my own, but that doesn't mean that patent or other property rights are the kind of barrier to entry that we should do away with.

| July 25, 2003, 6:24am | #

When someone treats intellectual property rights as though they're identical to ordinary property rights, it's a sign that he doesn't know what he's talking about.

Steve Skutnik | July 25, 2003, 6:44am | #

Anon, would you care to qualify? I don't think anyone acts as if IP rights should be treated as limitless, but clearly some protection of the right of inventors and artists to profit from and exercise control over their works is in order, lest we completely destroy any incentive for these creators to do what they do. Such a situation would seem very little different than the concept of private property - when property rights aren't secure, people fail to improve value on what they "own," as it can easily be taken away - the value added isn't secure.
It's readily acknowledged that IP is different than conventional property, though - ideas aren't controlled by scarcity. But the fact that ideas have value means that they are like property in that sense, meaning without some protections similar to private property (although of limited term - clearly IP protection shouldn't exist indefinitely), you run into the same problems as you do with conventional, scarcity-controlled property.

Brian | July 25, 2003, 6:48am | #

"The reason that Canada and other countries have cheap drugs is because they tell the drug companies that they will only pay a little over the production cost, and if the drug company doesn't do business with them on that basis, they will break the patent and produce the drug themselves."

T. Hartin--

Do you have documentation of this practice? It certainly seems possible, but given the considerable leverage that the US has over Canada on trade, and the considerable contributions pharma makes to US politicians, it seems kind of unlikely...the US is more than capable of retaliating against Canada economically in a dozen ways.

I'm no expert on this, mind you, so if you have more information, I'd really appreciate it.

| July 25, 2003, 6:58am | #

"Anon, would you care to qualify?"

I was responding to this:

"Patents are a barrier to entry just like any property rights are a barrier to entry. Your refusal to let me load up my truck with your TVs unless I pay for them is certainly a barrier to my opening up a TV store of my own, but that doesn't mean that patent or other property rights are the kind of barrier to entry that we should do away with."

Support patents if you want. But don't pretend that intellectual property is like ordinary property. They're very different, legally as well as philosophically.

Evan McElravy | July 25, 2003, 7:26am | #

>>How is it that the most rigidly socialized system in the world is awash with fake drugs?

Kevin Carson | July 25, 2003, 8:10am | #

twistedmerkin:

I think something like half of drug company R&D is funded by the government. Indeed, some of the most lucrative drugs (AZT among them, I believe) were developed ENTIRELY at taxpayer expense, and then the patent rights given away to the drug company free of charge. One of the main reasons drugs are so expensive to develop are all the FDA's testing requirements. So here's a deal: abolish the FDA, let drug companies sell whatever they want to whoever wants to buy it, eliminate government funding of research, and eliminate patents. I believe that's what they call a free market.

mudflap:

So, you ADMIT the tech-industry, in its present form, is a virtual creation of the state?

Phill | July 25, 2003, 8:53am | #

What I wanted to know is whether consumers must buy drugs from just Canada or may they purchase them from any country? Also, how will prescriptions be verified?

Sebastian | July 25, 2003, 8:54am | #

The pharmaceutical business wouldn't exist in a truely free market because there would be no patent system to allow R&D costs to be recouped. When a new drugs hits the market, everyone would copy it and the incentive to create it in the first place would be lost.

Pharmas actually do most of their own research. Some is fed from academia, which can receive government funding, but most of the legwork involved in bringing a drug to market is beyond the ability of most academic or government funded institutions.

While the libertarian idealist in me would agree with getting rid of the FDA, the pragmatist in me thinks that would result in a lot of companies selling drugs that are dangerous and/or ineffective. As much as I think there is a good deal of room for improvement over the current regulatory regime, you need some mechanism to give consumers confidence that the drugs on the market are safe and effective.

Sebastian | July 25, 2003, 9:00am | #

"What I wanted to know is whether consumers must buy drugs from just Canada or may they purchase them from any country? Also, how will prescriptions be verified?"

No, they can buy them from the US if they want. From a consumer point of view, this is a positive. But the fact that most foreign markets are price controlled creates a problem in my view.

As far as verifying prescriptions, I don't really care about that. With few exceptions, I think most drugs should be available to anyone willing to buy. If someone is dumb enough to take a drug without the advise of a doctor, that's their problem. The government shouldn't be in the business of stopping people from doing dumb things. Prescriptions also help to keep drug prices artificially high, since you create barriers to procuring the drugs people might desire.

mudflap | July 25, 2003, 9:14am | #

Kevin-

Without the protection that patents provide there would be little incentive to innovate. Anyone who invented any widgets of merit would only see their work reverse engineered and replicated. Why invest in development when you are going to be competing in a commodity market? Government (USPTO) protects against that to ensure that innovation can exist. How that translates to a “virtual creation of the state” isn’t clear to me. However I’ll log on once I get home and have a few bowls, and maybe your reasoning will become clear.

Would you rather live in a world without heart valves, chainsaws, cars, dental floss, blenders etc?

cheers
Mudflap

Kevin Carson | July 25, 2003, 9:54am | #

Mudflap:

According to a study presented to the FTC, over 80% of all inventions would have been developed without patents. The main motivation for developing both new products and new production processes, in a competitive market, is to keep up with with other firms. This motivation would exist regardless of patents.

The one exception, to be fair, was pharmaceuticals, in which it was only something like half that would have been developed. But the study didn't take into account the effect of stuff like abolishing the FDA approval process.


Here's the source: FTC. Hearings on Global and Innovation-Based Competition. November 29, 1995 http://www.ftc.gov/opp/gc112195.pdf

Phill | July 25, 2003, 10:00am | #

My question was whether someone can import drugs from canada or any other country as well sebastian. as far as self-medication goes, I see it as a basic human right that existed prior to the 1938 act(sans various narcotics). If someone can import any drug other than a controlled substance without a script from any country, this would vastly change the landscape of american medicine.

mudflap | July 25, 2003, 10:21am | #

Kevin-

Thanks for the link. I don't have time to read it now. I need to invent an oil change for my jeep before tomorrow. I will read it. I work in medical devices. 4 startups in the last 12 years. Stents, stent grafts, cateheters surgical devices etc. Always as part of the due dillagence a full review is done on IP. Is it tight, is there coverage etc. This has enormus implications on valuations of companies in this industry. Without it none of the companies I have participated in starting would have been funded. Therefore the innovations (some of which I am extremely proud of) would not exist. I would agree that this may haves little or no bearing on flip phones or toatters that sing. But where Development is a significant cost it most certinly does.

Have a good weekend
Mudflap

Lefty | July 25, 2003, 11:39am | #

Could be that the Cato Institute is a corporate tool.

Mike | July 25, 2003, 11:46am | #

Their vocal opposition to corporate subsidies would seem to indicate otherwise.

Hovig John Heghinian | July 25, 2003, 11:48am | #

I'm pleased with this legislation. I bet the net effect will be that American drug prices will decrease slightly, but Canadian drug prices will double. I look forward to hearing the Canadians complain about paying American prices for Canadian care.

The WSJ Editorial yesterday reported Canadians are also coming to America for drugs, since the Canadian regulatory agency does not approve as many drugs as the FDA, nor approve them as quickly. We'll see if the last 10 or 20 years of Americans yearning for a Canada-like health care system will be justified or not.

Free markets (almost) always work. Congress will learn a lesson in economics, even if it kills Canada. :-)

Sebastian | July 25, 2003, 11:51am | #

While on principle, I have to agree that it should be perfectly legal to buy drugs from overseas. As someone who works for a small biotech which is in the drug business, I think it does present problems for the pharmaceutical industry.

The US is one of the few markets left where the price of drugs isn't regulated by the government, and the market where you're going to make up most of the R&D, clinical, and regulatory costs associated with bringing a new drug to consumers. Pharmaceuticals are an enormously risky business. Only a fraction of proposed drugs will ever make it on the market, and only a fraction of those will ever recoup R&D costs. Without the potential for massive payouts when you manage to get a blockbuster drug on the market, there will be less incentive to develop new drugs, especially ones for treating less common ailments, which don't have potential for massive payouts.

The manufacturing costs of a drug are typically a small fraction of the total cost. When deciding to sell into a price controlled market, if the set cost is above your manufacturing cost, it makes sense to sell into that market. That's why drug companies aren't going to stop selling drugs in Canada. It's important to consider though, without a healthy non-controlled market to recoup your R&D costs in, having to compete against this price controlled market will just reduce the incentive to produce new drugs.

The ideal solution would be to have no price controlled drug markets, and convince governments that the healthiest way to keep drug companies from reaping obscene profits is to adjust the lengths of their patents, and to reduce the industries use of other types of patents that help them hold on to their government-granted monopolies longer than they really should. In order to help make drugs cheaper, governments can also help by reducing a lot of red tape associated with the highly regulated activity of drug development.

Drugs are expensive, because R&D is costly, and proving they are safe and effective is very costly. The positive effect of this reimportation law is that people will get drugs cheaper. The unfortunate effect of this, I'm afraid, is going to be fewer new drugs improving people's lives.

B | July 25, 2003, 12:00pm | #

I think we should carry out "regime change" in Canada for stealing from our local drug pushers, er makers.

twistedmerkin | July 25, 2003, 12:04pm | #

Well Jesse, it's not very honest to name patents as the most significant reason for inflated costs and then state "Let's not open Pandora's box..." I've noticed that several of Reason's contributors believe that patents are a wrong that need to be abolished. But as an engineer, I find it appalling that people would suggest that a design that I create should belong to the public. If a machinist creates some part, it is his to sell, modify, ignore as he sees fit. Just because "idea smiths" do not create solid, physical matter, doesn't mean we shouldn't be able to enjoy the same freedom. Do you have this view of your own work, Jesse? Would you advocate that I can make copies of Reason and sell them for 10 cents an issue?

Jesse Walker | July 25, 2003, 12:16pm | #

It wouldn't really bother me if you did. Other Reasoners might disagree.

But I was serious (or "very honest") about not wanting to debate the justice of patent laws here. As I said in my post, you can support pharmaceutical patents in principle without necessarily believing that the United States extends patent protections for the optimal length of time or otherwise has an ideal patent system.

Rex Stetson | July 25, 2003, 12:18pm | #

How is buying cheaper drugs from Canada any different that comparison shopping on the Web for a DVD? The customer gets the lowest price, the merchants are forced to be competitive, and the most competitive gets the sale. If The drug companies lose money in the US, they'll make it up from these big Canadian government subsidies they supposedly get. If not, they pull the drugs. I personally don't mind Canada picking up the tab for my cheap drugs. What I don't want is for MY govt. to give the US suppliers a monopoly so my money is used to offset the loss from Canadian sales.

mudflap | July 25, 2003, 12:18pm | #

Twistedmerkin is right Jesse. Creation and ownership of Intelectual property is large part of the valuation of small (and large)high tech companies. Without these protections they would not exist. Would you mind sending me an electronic copy of "pirates on the air" so that I can E-publish it? Or would that piss you off?

Jesse Walker | July 25, 2003, 12:22pm | #

Would you mind sending me an electronic copy of "pirates [sic] on the air" so that I can E-publish it?

Scan it yourself, Mudflap; I'm not gonna do your work for you.

SteveInClearwater | July 25, 2003, 12:22pm | #

Sebastian: Drugs are expensive, because R&D is costly, and proving they are safe and effective is very costly.

SIC: Drugs are expensive because advertising them to the general public is expensive.

Some estimates place pharm companies advertising budgets at 50% or more of total revenue. I kept an informal survey the other nite during a 4-5 hour television session (I was working online and made a note at each drug ad spot) and I counted 27 spots for drugs.

The drug companies used to distribute their products and information thru doctors and hospitals. Now they actively recruit new users and route them to the doctor instead.

In essence, they create the drug in some cases before having a fully legitimate market base. Then they create that base and the associated costs of any 'new, start-up' venture are enormous.

Hey man, tell me how to keep my sinuses clear, how to regulate my heart rate, pressure and blood sugar, and how to keep the mail moving smoothly thru my bowels. Oh, wait, I already know how to do that with the drugs already created.

I don't know of anyone holding shares in pharm companies that are racing to sell on the dire warnings of those who predict a more free market could 'destroy' the pharm industry.

Drugs are good, mmmmkay....

JDM | July 25, 2003, 12:36pm | #

Steve,

The estimates I find say about 15%...

Raymund | July 25, 2003, 12:50pm | #

SIC, my first thought was your statement that pharma advertising costs about 50% of total pharma revenues had to be erroneous, so I did a back-of-the-envelope-calculation. Specifically, assuming 5 pharma ads/hr/channel, 200 channels, and $10,000 per ad, pharma's overall advertising budget would be around $88 billion/yr. A quick glance at Merck's website gives 2002 revenues at $50 billion; for Pfizer, about $30 billion. So my second thought is that you're in the ballpark.

| July 26, 2003, 1:14am | #

Actually, many small firms tend to eschew patenting their IP, and rely on protecting their IP as a trade secret (hand in hand with that comes non-disclosure agreements and the like). They do this because the patent prosecution process is so convoluted and expensive. In other words, a trade secret is a poor man's patent.

Xmas | July 26, 2003, 9:13am | #

Of course, we are assuming that drugs sold in foreign countries are actually cheaper than those sold in the US.

Most of the studies that compare drug prices between countries chose a limited number of new brand name drugs, which are generally more expensive in the US. However, generics and alternative brand name drugs may actually be more expensive or even completely unavailable in foreign markets.

http://www.techcentralstation.com/1051/techwrapper.jsp?PID=1051-250&CID=1051-072403B

T. Hartin | July 26, 2003, 9:36am | #

"But don't pretend that intellectual property is like ordinary property. They're very different, legally as well as philosophically."

Well, yes and no. Property rights in anything, whether physical or "intellectual," are legal constructs. We have an intuitive understanding of property rights in physical items that doesn't carry over to intellectual property, but this doesn't change the fact that property rights in either are essentially artificial legal constructs. While you can hold your physical property in your hand, you can't hold your property rights in your hand.

There are certainly different issues raised by intellectual property, but I don't think differences of opinion about the nature of property rights in physical or non-physical property really matters for this discussion..

Saying that intellectual property is different doesn't answer the observation that all property rights, regardless of whether they are in physical or intellectual property, stand as barriers to entry to a market because both act to keep people who don't hold those rights out of the market as sellers. Someone who claims that enforcing intellectual property rights somehow distorts the market first needs to spell out exactly why enforcing intellectual property rights is distortive, but enforcing physical property rights is not.

As for the breaking of patents - it is rarely threatened openly, but it happens, and it is what underlies all the deals cut by socialized medicine nations with drug companies - otherwise, why would the drug company agree to a deal that is the equivalent of a deal for a generic (non-patented) drug?

For a story on one recent overt threat to break a patent, go here:
http://www.cnn.com/2001/WORLD/americas/08/22/aids.drug/

raj | July 27, 2003, 3:51am | #

"For a story on one recent overt threat to break a patent..."

Actually, I am reminded of a threat by the US government to break a patent on the drug Cipro. That was the drug that was used to treat people who had been exposed to Anthrax. The threat was by the Bush II administration after 9/11. And the patent holder was a German company.

Go figure. A threat against a foreign owner of US property. By a Republican administration.

| July 27, 2003, 12:19pm | #

Can anyone say market failure? I thought so.

twistedmerkin | July 28, 2003, 10:53am | #

Kevin,
I'm surprised you believe what the FTC says! Yes, corporations have an incentive to come up with new products, simply to stay competitive. But corporations do not create designs, people do. As an example, over the years I've come up with three concepts, designs that I would like to patent. Unfortunately, when I took my current job, I signed a contract that any patentable idea that I come up with while working at the company belongs to the company. (Patent creation is not my job function) Two of the ideas are outside the field of my employer and I'm sure they would not be interested in bringing either to market. But I'm hesitant to patent them because I might not own the patents. So the innovations (I'm not trying to imply that these are world-changing creations and I do plan on "giving" the company the third idea) do not see the light of day. I think it's also important to realize that not everyone has the backing of a large corporation and that a great deal of new inventions are hard or impossible for a lone person to bring to market. Being able to patent your idea is a way to safely put it in the idea marketplace while you try to secure funding- a process that is also much easier to do if you have a patent number.

Evan McElravy | July 28, 2003, 12:43pm | #

Anon, I said it before, but I'll repeat it for your benefit: regardless of other aspects of its socio-economic structure, Canada has the most rigidly socialized state health care system of any western nation, including Europe. Private provision of health care to anybody is absolutely forbidden, whereas in most Euro countries there is a thriving private medical sector for those who can pay, completely separate from the state administered sector. This does not exist in Canada, and will not without major reform -- although the prov. gov. in Alberta is attempting to push the limits of the Canada Health Act in this direction.

J Canuck | July 29, 2003, 5:39am | #

Evan, you are describing what the lefties in Canada refer to as a two-tiered health care service. What they fail to admit is that it is already here, albeit in a limited sense. How do you think pro athletes end up with their MRI's done right away, as opposed to the lengthy wait that is usually required? They don't all go to Buffalo.

Wilson Dean | September 10, 2004, 12:26am | #

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