Importation Not the Answer

A version of this article was published by National Review Online.

The House is expected to vote soon on legislation to allow the importation of prescription drugs from Canada and 25 other countries, possibly with a new catch: The government would not have to validate the safety of the imported drugs.

In approving Medicare prescription drug legislation recently, both the House and Senate bills included additional provisions that would meddle in pharmaceutical prices and alter intellectual property rights. The issues will be in the forefront in the weeks ahead when the conference committee meets to iron out the differences between the two bills.

The following is a Q and A answering some of the charges that have and will be made as the debate proceeds on these issues.

Charge: It is perfectly safe to reimport drugs from Canada..

Reimportation would allow American consumers to purchase prescription drugs that have been manufactured in the U.S. and shipped to Canada where they are sold under Canada’s system of price controls.

Reimportation has been opposed by 10 of the last 11 Commissioners of the FDA dating back to 1969, the current Secretary of the Department of Health and Human Services Tommy Thompson, and former HHS Secretary Donna Shalala. All cited public safety concerns, including risks of mishandling, mislabeling, improper storage, ineffective product recalls, and expiration date violations. Some also expressed concern about the potential for opportunists to manufacture and sell counterfeit drugs.

According to Anthony Daniels, a former FBI agent, these officials have good reason to worry. “I am aware of operations in which counterfeit prescription drugs were seized. Some of the drugs confiscated were formulated to come close to the genuine prescription of the American-made ones they copied, but few were exact copies. It’s likely they were not manufactured under squeaky-clean sterile conditions,” said Daniels. “Legislation allowing re-importation could open the floodgates to adulterated and often dangerous counterfeit drugs from unscrupulous profiteers, deranged individuals, and even terrorists,” said Daniels.

The problem of counterfeit drugs has already begun to have dire consequences in Florida where a grand jury has found an alarming percentage of wholesale prescription drugs to be stolen, counterfeited, purchased on the black market, or otherwise illegally acquired. “We have found that the wholesale drug pharmaceutical industry in Florida has been corrupted by the infiltration of a criminal element which is making a fortune while tainting our drug supply,” the grand jury said. These diverted drugs comprise a large portion of the state’s Medicaid fraud, and the problem would become worse if the reimportation of prescription drugs were to be legalized.

Charge: Free-trade supporters should be happy for people to buy their drugs from Canada.

Reimportation would interfere with the free market by setting artificial prices on prescription drugs and disrupting the economic principles of the free marketplace.

Supporters of free trade believe that companies should be given a fair price for their goods, in part to continue the development of new products and the manufacturing of existing ones. Free traders also support the implementation of safety measures to ensure that imported goods are safe for distribution.

Several experts have commented that the likely result of permitting the reimportation of prescription drugs from Canada would be an attempt by pharmaceutical companies to increase the prices of the pharmaceuticals they sell in Canada. John Graham of the Fraser Institute, located in Canada, warns that the “Canadian market is just not big enough to fight over?However, with reimportation, [pharmaceutical companies] would then try to raise their prices in Canada, and if the Patented Medicines Price Review Board opposed these moves, the firms would just quietly restrict the supply.” The restricted supply of pharmaceuticals to Canada cannot be good for Canadian patients or for the free-trade supporters in the United States.

Charge: Europe still has a thriving R&D industry despite price controls so why shouldn’t United States consumers have the same low prices that all other industrialized countries have?

Once known as the “world’s medicine chest,” the European pharmaceutical industry is falling behind the United States in research expenditures. Between 1990 and 2001, R&D investment in the United States rose fivefold, while in Europe it only grew 2.4 times.

Furthermore, European firms are relocating their research operations and headquarters to the United States. The Swiss pharmaceutical company Novartis announced in May 2002 that it was moving its research headquarters to the United States. This followed a similar move by French-German Aventis in 1999. Glaxo Smith-Kline (UK) decided to move its operational headquarters to the United States in 2000 and Pharmacia (Sweden) moved its headquarters from London to the U.S. in 1995.

The harmful consequences of price controls were clearly recognized by the U.S. International Trade Commission in a 1991 report to the Senate Finance Committee: “The enactment of cost-containment programs, price controls, or both, on a national level often results in decreased levels of R&D spending in that these programs reduce revenues that can be reinvested in R&D programs. Several countries that have implemented such programs have seen their pharmaceutical industries weaken or shift outside their borders.”

Charge: Companies will keep doing research even if we cut their profits, and therefore innovation is not at risk.

The opportunity to earn a profit commensurate with the risk involved in developing new pharmaceuticals is what motivates pharmaceutical companies to innovate. True pharmaceutical innovation would not exist without this opportunity. Sidney Taurel, chairman and CEO of Eli Lilly & Co., made this point in a recent speech. “Under a regime of weaker intellectual property protection or harsher market controls, our R&D would no longer be able to deliver true innovation,” said Taurel. Instead, Taurel predicted that a price-controlled market would result in increased marketing of existing products, incremental improvements to existing drugs, and diversification by pharmaceutical companies beyond pharmaceuticals.

Charge: Forty-five percent of R&D spending comes from government funds.

The pharmaceutical companies together spend more on pharmaceutical R&D than is provided in the entire operating budget of the National Institutes of Health (NIH). In 2001, PhRMA member companies (the industry’s trade group) spent $30.3 billion on R&D. Biotechnology companies spent an additional $15.6 billion on R&D. Taken together, pharmaceutical and biotechnology companies spent $45.9 billion on R&D, compared to NIH’s budget of $20.3 billion. Of course the NIH spends its budget on many more projects than just pharmaceutical research.

A report by the NIH itself in 2001 thoroughly dismissed the notion that the government pays for most of the research for top-selling prescription drugs. The report found that only four of 47 drugs with U.S. sales of $500 million a year had been developed in part with technologies created with NIH funding.

Charge: Pharmaceutical companies spend many times more on marketing than they do on research and development.

False. A recently issued report by the General Accounting Office on direct-to-consumer (DTC) advertising confirmed that pharmaceutical companies spend more on R&D than on DTC advertising and other types of promotion. “Pharmaceutical companies spend more on research and development initiatives than on all drug promotion activities, including DTC advertising. According to industry estimates, pharmaceutical companies spent $30.3 billion on research and development and $19.1 billion on all promotional activities, which includes $2.7 billion on DTC advertising, in 2001,” said the report. It is also important to point out that the $19.1 billion spent on promotional activities includes free samples that physicians dispense to their patients.

Charge: Pharmaceutical companies are four times more profitable than other industries and have profits margins of 20%, many times higher than the average profits of companies in other industries.

An analysis of Fortune Magazine data on the average profit margins of different industries shows that the profitability of the pharmaceutical industry is in line with other major industries. The average profit margin of the pharmaceutical companies in the 2002 Fortune 1000 list is 16% (profits as a percent of revenue). This is in line with the profit margins of the banking (13%), diversified financial (11%), tobacco (11%), and real estate (10%) industries. None of these industries has the need to pour money back into research that the pharmaceutical industry does.

Charge: Pharmaceutical companies should become a regulated utility like all other monopolies.

The Food and Drug Administration (FDA), which approves and regulates all prescription drugs sold in the U.S., is already the strictest regulating body for prescription drugs in the world. All prescription drugs approved in the U.S. must go through a lengthy review process with three phases to prove safety and efficacy, which cuts into the patent life of the drugs. The FDA review process for the 24 new drugs approved in 2001 averaged 16.4 months. Industries that are highly regulated become devoid of innovation. More regulation in the pharmaceutical industry would essentially cripple pharmaceutical innovation and research.

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About the author

A version of this article was published by National Review Online.

The House is expected to vote soon on legislation to allow the importation of prescription drugs from Canada and 25 other countries, possibly with a new catch: The government would not have to validate the safety of the imported drugs.

In approving Medicare prescription drug legislation recently, both the House and Senate bills included additional provisions that would meddle in pharmaceutical prices and alter intellectual property rights. The issues will be in the forefront in the weeks ahead when the conference committee meets to iron out the differences between the two bills.

The following is a Q and A answering some of the charges that have and will be made as the debate proceeds on these issues.

Charge: It is perfectly safe to reimport drugs from Canada..

Reimportation would allow American consumers to purchase prescription drugs that have been manufactured in the U.S. and shipped to Canada where they are sold under Canada’s system of price controls.

Reimportation has been opposed by 10 of the last 11 Commissioners of the FDA dating back to 1969, the current Secretary of the Department of Health and Human Services Tommy Thompson, and former HHS Secretary Donna Shalala. All cited public safety concerns, including risks of mishandling, mislabeling, improper storage, ineffective product recalls, and expiration date violations. Some also expressed concern about the potential for opportunists to manufacture and sell counterfeit drugs.

According to Anthony Daniels, a former FBI agent, these officials have good reason to worry. “I am aware of operations in which counterfeit prescription drugs were seized. Some of the drugs confiscated were formulated to come close to the genuine prescription of the American-made ones they copied, but few were exact copies. It’s likely they were not manufactured under squeaky-clean sterile conditions,” said Daniels. “Legislation allowing re-importation could open the floodgates to adulterated and often dangerous counterfeit drugs from unscrupulous profiteers, deranged individuals, and even terrorists,” said Daniels.

The problem of counterfeit drugs has already begun to have dire consequences in Florida where a grand jury has found an alarming percentage of wholesale prescription drugs to be stolen, counterfeited, purchased on the black market, or otherwise illegally acquired. “We have found that the wholesale drug pharmaceutical industry in Florida has been corrupted by the infiltration of a criminal element which is making a fortune while tainting our drug supply,” the grand jury said. These diverted drugs comprise a large portion of the state’s Medicaid fraud, and the problem would become worse if the reimportation of prescription drugs were to be legalized.

Charge: Free-trade supporters should be happy for people to buy their drugs from Canada.

Reimportation would interfere with the free market by setting artificial prices on prescription drugs and disrupting the economic principles of the free marketplace.

Supporters of free trade believe that companies should be given a fair price for their goods, in part to continue the development of new products and the manufacturing of existing ones. Free traders also support the implementation of safety measures to ensure that imported goods are safe for distribution.

Several experts have commented that the likely result of permitting the reimportation of prescription drugs from Canada would be an attempt by pharmaceutical companies to increase the prices of the pharmaceuticals they sell in Canada. John Graham of the Fraser Institute, located in Canada, warns that the “Canadian market is just not big enough to fight over?However, with reimportation, [pharmaceutical companies] would then try to raise their prices in Canada, and if the Patented Medicines Price Review Board opposed these moves, the firms would just quietly restrict the supply.” The restricted supply of pharmaceuticals to Canada cannot be good for Canadian patients or for the free-trade supporters in the United States.

Charge: Europe still has a thriving R&D industry despite price controls so why shouldn’t United States consumers have the same low prices that all other industrialized countries have?

Once known as the “world’s medicine chest,” the European pharmaceutical industry is falling behind the United States in research expenditures. Between 1990 and 2001, R&D investment in the United States rose fivefold, while in Europe it only grew 2.4 times.

Furthermore, European firms are relocating their research operations and headquarters to the United States. The Swiss pharmaceutical company Novartis announced in May 2002 that it was moving its research headquarters to the United States. This followed a similar move by French-German Aventis in 1999. Glaxo Smith-Kline (UK) decided to move its operational headquarters to the United States in 2000 and Pharmacia (Sweden) moved its headquarters from London to the U.S. in 1995.

The harmful consequences of price controls were clearly recognized by the U.S. International Trade Commission in a 1991 report to the Senate Finance Committee: “The enactment of cost-containment programs, price controls, or both, on a national level often results in decreased levels of R&D spending in that these programs reduce revenues that can be reinvested in R&D programs. Several countries that have implemented such programs have seen their pharmaceutical industries weaken or shift outside their borders.”

Charge: Companies will keep doing research even if we cut their profits, and therefore innovation is not at risk.

The opportunity to earn a profit commensurate with the risk involved in developing new pharmaceuticals is what motivates pharmaceutical companies to innovate. True pharmaceutical innovation would not exist without this opportunity. Sidney Taurel, chairman and CEO of Eli Lilly & Co., made this point in a recent speech. “Under a regime of weaker intellectual property protection or harsher market controls, our R&D would no longer be able to deliver true innovation,” said Taurel. Instead, Taurel predicted that a price-controlled market would result in increased marketing of existing products, incremental improvements to existing drugs, and diversification by pharmaceutical companies beyond pharmaceuticals.

Charge: Forty-five percent of R&D spending comes from government funds.

The pharmaceutical companies together spend more on pharmaceutical R&D than is provided in the entire operating budget of the National Institutes of Health (NIH). In 2001, PhRMA member companies (the industry’s trade group) spent $30.3 billion on R&D. Biotechnology companies spent an additional $15.6 billion on R&D. Taken together, pharmaceutical and biotechnology companies spent $45.9 billion on R&D, compared to NIH’s budget of $20.3 billion. Of course the NIH spends its budget on many more projects than just pharmaceutical research.

A report by the NIH itself in 2001 thoroughly dismissed the notion that the government pays for most of the research for top-selling prescription drugs. The report found that only four of 47 drugs with U.S. sales of $500 million a year had been developed in part with technologies created with NIH funding.

Charge: Pharmaceutical companies spend many times more on marketing than they do on research and development.

False. A recently issued report by the General Accounting Office on direct-to-consumer (DTC) advertising confirmed that pharmaceutical companies spend more on R&D than on DTC advertising and other types of promotion. “Pharmaceutical companies spend more on research and development initiatives than on all drug promotion activities, including DTC advertising. According to industry estimates, pharmaceutical companies spent $30.3 billion on research and development and $19.1 billion on all promotional activities, which includes $2.7 billion on DTC advertising, in 2001,” said the report. It is also important to point out that the $19.1 billion spent on promotional activities includes free samples that physicians dispense to their patients.

Charge: Pharmaceutical companies are four times more profitable than other industries and have profits margins of 20%, many times higher than the average profits of companies in other industries.

An analysis of Fortune Magazine data on the average profit margins of different industries shows that the profitability of the pharmaceutical industry is in line with other major industries. The average profit margin of the pharmaceutical companies in the 2002 Fortune 1000 list is 16% (profits as a percent of revenue). This is in line with the profit margins of the banking (13%), diversified financial (11%), tobacco (11%), and real estate (10%) industries. None of these industries has the need to pour money back into research that the pharmaceutical industry does.

Charge: Pharmaceutical companies should become a regulated utility like all other monopolies.

The Food and Drug Administration (FDA), which approves and regulates all prescription drugs sold in the U.S., is already the strictest regulating body for prescription drugs in the world. All prescription drugs approved in the U.S. must go through a lengthy review process with three phases to prove safety and efficacy, which cuts into the patent life of the drugs. The FDA review process for the 24 new drugs approved in 2001 averaged 16.4 months. Industries that are highly regulated become devoid of innovation. More regulation in the pharmaceutical industry would essentially cripple pharmaceutical innovation and research.

SHARE THIS ARTICLE

About the author