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Education And Debate

Foreign free riders and the high price of US medicines

BMJ 2005; 331 doi: (Published 20 October 2005) Cite this as: BMJ 2005;331:958

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Basic question unanswered

Very little can be said about the actual costs involved in
researching and developing costs for a particular drug. As the article
admits, pharmaceutical companies are not willing to open their books to
show these costs as this is proprietary information. I do not think that
the question posed by the article can be answered without this

However, I agree that in a patent monopoly situation, there should be
some form of regulatory oversight to ensure that the public benefits from
this non-market intervention.

The article, in accusing others of misusing economic theory, also
commits some economic fallacies. It is incorrect to assume that drug
prices should be determined in a free and open market, similar to stock
prices. Patent protection exists to correct an assumed market failure.
The assumption is that firms need an expectation of a certain level of
profit if they are to stay in business. Without patent protection, would
pharmaceutical companies invest in research, development, and getting a
new drug approved if there is no expectation of recovering those costs?

Without patent protection, you would have a different sort of free
rider problem. Other companies skilled at reverse engineering would
simply "free ride" on the expensive research, development, and costs
associated with getting regulatory approval of a new drug.

The article's attempt to show "free riding" as a flawed accounting
convention is an obfuscation. The concept of a "free ride" in economics
goes far beyond accounting conventions. If a pharmaceutical company needs
to raise prices in a less regulated country to remain a profitable
business, it is doing so at the expense of that country.

This is not to say that a company with patent protection can raise
its prices to infinity. The monopolistic company, in the absense of other
restrictions, will charge only as much as the market can bear.

But the question of what happens when you take the profits out of the
pharmaceutical business is a pertinent one today, considering the
financial difficulties now apparent in the industry. As profits become
scarcer, you will see more and more consolidation and an even higher focus
on profits to stay in business and avoid takeovers. This will be only at
the expense of research for "neglected" diseases and vaccines.

Competing interests:
None declared

Competing interests: No competing interests

02 December 2005
David C Veazey, M.A.
Senior Adviser, NGO, writing in a personal capacity
Chayanova, 15/5, 125047 Moscow, Russia