the myth of vanishing drug R&D budgets

Live from the WTC comments on the issue of reimportation of drugs to the US from Canada. It's an impassioned and meticulous argument, but in my opinion is based on an fundamental piece of misinformation by the drug companies themselves. That is, that if the drug companies' profits are lessened, then drug research and development will cease.

That's patent nonsense (pun intended :). The R&D budgets are huge, but so is the marketing department, in fact much more so. I know a large number of doctors and pharmacists (including my wife and my mother) and let me tell you, the amount that drug companies spend on these groups of professionals is obscene.

Case in point. A pediatrician will typically receive tickets to paid gourmet dinners at fancy hotels, $100 certificates to Amazon.com, gift cards from American Express i the range of $50 to $150, and of course enormous amounts of "free samples" - so many, that whenever we travel to India or Pakistan, we take along an entire suitcase and dispense them in free clinics for the poor.

All of this is to get the doctor to simply look "favorably" upon drugs - and it works. Doctors can prescribe from an entire range of drugs for any given ailment, and brand-name recognition really works. Doctors keep an enormous amount of information in their heads and they are not pharmacists. So they tend to make easy decisions about what to prescribe.

It woudl be different if doctors only specified what they were trying to do (ie, need an antibiotic targeted for ear infection, also want to reduce systemic inflammation) and let the pharmacists decide what specific drugs to administer. As things currently stand, pharmacists have an enormous amount of education that is for the most part, completely wasted. This is why Pharmacy is a hot field, ironically - so many Pharm D's are leaving, that there is a shortage. The minimum requirement to do most of the work at Eckerd's or Walgreens is really just a Bachelor's degree in Pharmacy, not a Pharm D.

Anyway, drug companies are notoriously tight-fisted about their expense sheets. It's because they want to hide how much money is thrown away on lavish marketing and the scale of that budget compared to R&D. But take claims by drug companies that high prices are essential to their development costs and their dire predictions of No More Drugs! to scare us at night. These are self-serving and suspect.

If drug companies want us to believe that R&D costs are on the knife-edge of profits, then they should open up their books and let us see publicly. The fact they won't is suggestive that they have something to hide.

and yes, the drug companies can give us cheaper drugs (and can afford to sell drugs below cost in places like Brazil or Africa).

UPDATE 072302

Megan McArdle comments. It's a complex post, and she summarized it in email to me:

My point was threefold. First of all, if you lower the price, you have to increase volume to make up the revenue. How do you increase the volume? Marketing.

Second of all, if you lower the price, you lower the projected return on any investment in the product. Since the projected return on R&D has to be very large to compensate for the capital tied up, R&D is more vulnerable than marketing. It is especially vulnerable because if you cut the price you send a political signal to the pharmaceutical companies that you are willing to, essentially, seize their property for political purposes. Doing so increases the risk of making any investment -- if it's successful, the government may just take it. Increasing the risk increases the discount rate you have to apply to the investment.

And third of all, the numbers don't even work arithmetically. A 40% decline in price cannot be offset by any conceivable combination of cuts in the marketing budget.

As for the biotechs, biotechs suffer from the same problem as R&D research, only more so. Biotech firms, almost to a one, are currently unprofitable. They are surviving on equity capital. But 90% of them will fail. In order to compensate for this risk, their projected profits must be very large, or investors will not give them any more capital. If you cut the price of their product by 40%, these biotechs will go out of business for the same reasons I enumerated two paragraphs above. The risks inherent in investing in one of these firms will increase, and the potential return will decrease.

I'm still not convinced though, as there are a number of assumptions in there that still don't seem tohave any source other than "it's this way, trust me". A far more detailed essay on teh subject was written two years ago by Gardiner Harris in the WSJ, titled "Drug Firms, Stymied in the Lab, Become Marketing Machines"

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