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Buying in Canada Won't Cut Drug Costs

August 31, 2004|Joel W. Hay

The California Legislature has sent a package of bills to the governor that is the latest in a long line of moves throughout the country to make it easier for Americans to take advantage of the controlled drug prices offered in Canada. The bills would evaluate Canadian Internet pharmacy sites and allow the purchase of Canadian drugs for state programs. Despite the appeal of getting drugs for less, the governor should veto the legislation.

If California or any other state succeeds in busting the border loose for imported drugs, Canadian drug prices would quickly rise to U.S. levels rather than Americans getting great deals on imported drugs. Canadian consumers would lose, and U.S. consumers wouldn't gain.

If brand-name manufacturers set global prices for drugs, billions of people in Africa, Asia and Latin America would simply be locked out of the new drug market. The average new drug has a 1-in-5,000 chance of clinical success, takes more than a decade to test and costs close to $1 billion to develop and get approved. Drug production costs are small in comparison.

If U.S. drug prices fall because of government price controls or because the U.S. imports Canadian price-controlled medicines, pharmaceutical and biotechnology innovation -- one of California's strongest economic sectors -- will be curtailed.

The U.S. vaccine market is a good illustration of what happens when the government tries to control drug prices. The Centers for Disease Control and Prevention has purchased half of all U.S. childhood vaccines at heavily discounted prices for nearly two decades. As a result, vaccine research and development lag behind other pharmaceutical R&D, the number of U.S. vaccine manufacturers has dropped from dozens to five, vaccine shortages occur regularly and many childhood vaccines have only a single supplier.

The culprit is the patent system, which rewards innovators for risky R&D efforts by granting them a limited-time monopoly over new-product prices. For centuries, patents have done an excellent job, using markets to reward innovation through monopoly prices. But drug patents create politically unsustainable pressures when patients suffer or die because they don't have access to treatments that would be affordable were it not for the monopoly prices.

A better solution would have the federal government buy out new drug patents after Food and Drug Administration approval and allow all manufacturers to compete on selling approved generics at product launch. Because generics cost a fraction of brand-name drugs, this would preserve innovation with much lower drug prices. The government would set patent buyout prices based on economic assessments of the drug's societal value.

Rather than buying every new drug patent, the government could purchase a set of strategic patents that would ensure broad access to critical medicines. To ensure fair prices, no manufacturer would be forced to sell its patent, but if it hesitated, it could lose the sale to a similar competitive product.

Fair-price patent buyouts for medical breakthroughs -- for example, a successful cancer treatment or AIDS vaccine -- could cost taxpayers billions of dollars. But it shouldn't be forgotten that the patent system already creates an enormous monopoly "tax" while pricing drugs out of reach for many patients.

Suppose the government focused only on the most promising and innovative drugs, classified by the FDA as "fast-track" submissions. If the federal government were to buy out the patents for the eight to 15 "fast-track" medications approved by the FDA each year at an average price of $3 billion each, this would represent more than a 300% return on investment for the average successful drug development effort. It would be a bargain compared with the projected costs of newly patented medicines under the Medicare drug benefit.

For less than the cost of Medicare's new multitrillion-dollar drug program, the government could buy out all pharmaceutical patents, provide the brand-name pharmaceutical industry with greater annual profits than it currently receives and ensure that Americans have access to innovative and inexpensive generics. It would be an unnecessary tragedy if drug price controls or foreign imports curtailed U.S. and California leadership in the search for new medicines for future generations.

Joel W. Hay is an associate professor in USC's School of Pharmacy.

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