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A Prescription for Prescription Drugs

by Conservativity Staff,
Originally Posted: 11/19/2004 1:47:16 PM
Last Updated: 11/19/2004 1:49:06 PM

Walter Williams is filling in for Rush Limbaugh today.  He started talking about prescription drugs and their cost, and the concomitant adverse results to the economy.  He then made a radical suggestion:  Eliminate FDA certification of new prescription drugs.  Whoa!  This is not something that seems like a good idea at first blush.  We’re still stinging over the Vioxx withdrawal.  Other anti-arthritic drugs are now under investigation for dangerous side effects similar to Vioxx.  However, Mr. Williams’ position, which is that the Underwriters’ Labratories (UL) or some similar organization could easily and cheaply certify drugs for use, has some real merit.  Let’s examine some facts and see if we can come to a logical conclusion.

The Cost of Bringing a Drug to Market

"With the present hyper-regulated FDA process, the average prescription drug takes 15 years to be approved, at a cost of $400 million.  This is a pure regulatory cost, and does not even begin to address the billions of research and development dollars that the drug companies invest in finding new cures for a variety of illnesses, maladies and inconveniences."

With the present hyper-regulated FDA process, the average prescription drug takes 15 years to be approved, at a cost of $400 million.  This is a pure regulatory cost, and does not even begin to address the billions of research and development dollars that the drug companies invest in finding new cures for a variety of illnesses, maladies and inconveniences.  The R&D Cost for the average new drug is $800 million (source: Congressional Budget Office).  That means that the regulatory surcharge is a staggering 50% of the cost of the new compound!  Also, the life of a drug patent is seventeen to nineteen years, and that includes the 15 years where the drug is in testing.  That means that the drug companies have between two and four years to take advantage of their invention and recoup their average R&D and regulatory cost. of a whopping $1,200,000,000.00.  I purposefully wrote out the $1.2 billion in digits to make the impact plainer to see.

Let’s say that you have one million people who benefit from the new compound.  For many drugs this is impossible; one million users is a breakout success drug.  In order to break even on R&D, not even counting the actual materials or manufacturing cost, on one million people on $1.2 billion, you need to obtain revenes of $1200 per person.  Over two years, this is $50 per month just to cover the drug company’s initial cost to create the compound.  Newer drugs may cost as much as $1 per pill to manufacture.  Let’s assume $0.25 per pill, and the dose is only one pill per day.  This adds $8 per month in manufacturing costs.  So now this new compound has a materials cost of $58 per month.  The drug companies have a right to cover their overhead, which we’ll estimate on the low side at 20%.  That is $12 per month, so $70 per month per patient breaks the company even -- no profit at all.  This also assumes that every single drug the company ever develops is approved within 15 years, no unapproved drugs are contemplated.

If you have a drug with only 500,000 users, now you have a bigger problem.  It takes $140.00 per patient month to break even.  The smaller your potential market, the higher the price has to be in order to recoup costs, an interesting but unintentional warping  of the law of supply and demand. 

Some drugs, an example being the lifesaving clotbuster called "TPA," have gigantic manufacturing expenses.  One dose has a materials cost of over $3,700!  But people think that TPA is a ripoff when they see a $4,000 charge on the hospital bill.  They, of course, don’t realize that the tiny IV bag saved their lives and that they would most likely be in a casket were it not for that $4,000 bag of fluid that cost over $3,700 to make.  The drug companies are not trying to rip us off; they are merely trying to recoup actual expenses they have spent.  On average, one third of the R&D cost is regulatory surcharge.

Importing from other countries -- Consummate Foolishness

"The elite leftists portray pharmaceutical companies as robber barons, and seek to import the drugs from leftist countries that impose price controls, effectively cheating the drug companies out of their costs.  Do these people have no idea of the after-effects of these plans?"

The elite leftists portray pharmaceutical companies as robber barons, and seek to import the drugs from leftist countries that impose price controls, effectively cheating the drug companies out of their costs.  Do these people have no idea of the after-effects of these plans?  You cannot use the government to place choking costs upon the drug companies and then use the socialist laws of other countries to screw them out of any chance to make money.  If the profit motive of these companies is removed, there will be no R&D.  Almost all of the new drugs developed on Earth are developed here in the United States.  What will happen is there will be no progress in the development of new life-saving compounds.

"The ’progressives’ who saddled the drug companies with the massive, stifling costs of regulatory approval now want to ensure that these companies cannot recover any of their research costs."

The "progressives" who saddled the drug companies with the massive, stifling costs of regulatory approval now want to ensure that these companies cannot recover any of their research costs.  Originally, I thought this to be mere stupidity and short-sightedness.  I now realize that the motives of the far left are nefarious.  The left wants the government to supervise and control every aspect of our lives.  If the "evil" drug companies cannot live with perennial losses so that the elites can look good, then the government must take over the pharmaceutical industry so that "progressive" research can continue to take place.  This, of course, means that the government has nationalized an area that is known for private innovation.  Kiss that innovation goodbye.  So is the drive to buy American drugs from Canada and elsewhere an example of short-sighted stupidity or an evil plot to subsume American enterprise to realize a goal of control?  Time will tell.

Privatizing Drug Certification

As the armies of trial lawyers clogging court dockets nationwide with Vioxx liability lawsuits shows, FDA certification does nothing to mitigate downside liability, either by preventing all "bad" drugs from entering the market, or by granting the pharmaceutical companies some or even complete immunity from non-intentional tort liability by certifying the substance(s).  If the latter were a benefit of drug certification, then drug prices would fall as the drug makers’ liability insurance obligations would be nullified.  That could be a justification for FDA certification and regulation.  Of course, the liberal trial lawyers would be apopleptic at the cutoff of suckers -- oops, plaintiffs -- who would foreclosed of the right to sue.  However, if the end result was cheaper health care, the people would agree.

"Faster certification means that drug companies can enjoy their patents for longer, and can thus amortize their expenses over many more patient-months.  That reduces the per-dose price."

The alternative leaves the trial lawyers a wide berth to try to use the court system to get a payday, but it has the salutary effect of permitting rapid testing by a commercially run (read: efficient) process of drug testing.  Instead of 15 years of testing, it’s two.  Instead of $400 million in compliance costs, $50 million.  Faster certification means that drug companies can enjoy their patents for longer, and can thus amortize their expenses over many more patient-months.  That reduces the per-dose price.  The reduced cost to certify the drug would mean that there would also be fewer dollars to amortize over that longer period.  Again, a lower cost per dose.

Finally, there is the priceless element:  The government gets its nose out of private business.  By introducing an efficient process to certify prescription drugs, administered by a body such as UL, there will undoubtedly be many more innovative substances, especially in the area of "orphan drugs," where the drug companies simply cannot afford to certify a substance that may cure a rare disease that only affects thousands of people.  It is certainly cheaper to treat a malady with a pill than hospitalization and/or surgery.  This one reform, in my opinion, has the potential, more than any other, to drastically improve the health care system.

Therefore, in my book, Walter Williams’ proposal to eliminate FDA drug certification is brilliant.