Commentary: Drug R&D: Must Americans Always Pay?

It's time for other countries to share the burden

If Americans want a reason to be mad at Europe and Canada, they need only look at drug prices. U.S. consumers shell out $82 retail for a month's supply of the antidepressant Zoloft, for instance, while Canadians can get it for $42 and French patients pay just $29. That's too great a disparity, says Dr. Mark B. McClellan, commissioner of the Food & Drug Administration. With retail prices that typically average twice those of other developed nations, "the U.S. is paying the lion's share of the cost of developing drugs," McClellan told BusinessWeek. "That is not a sustainable or fair situation."

He's right. And it's not just that the higher prices Americans pay for drugs fund half of the industry's research efforts. U.S. taxpayers also support most of the world's government-funded basic biomedical research -- as much as 80%, by some estimates. So if it weren't for U.S. dollars, many breakthrough drugs simply would not exist. "Currently, the innovation in the pharmaceutical industry is paid for by the U.S., and, to a lesser extent, by the U.K., Switzerland, and Germany," says industry economist Eugene M. Kolassa. Although there's no clear strategy yet for sharing the burden more equally, the world would clearly benefit from broader support of research and development. In a Sept. 25 speech to a drug industry conference, McClellan urged other rich nations to raise drug prices. "If we do not find better ways to share the burden of developing new drugs," he said, "all of us will suffer."

Why the big price differences? In much of the world, governments either set prices or have so much bargaining power that they can force big discounts. The U.S. market is more chaotic. Big buyers such as the government and HMOs can often negotiate low prices that rival those found in Canada. To make up for the discounts, though, the industry charges high retail prices. So those who are least able to pay -- the uninsured -- are often stuck with the biggest bills.

The resulting hit on Americans' pocketbooks has led to a major revolt. If Congress manages to pass a Medicare bill, it's likely to allow Americans to import cheaper drugs from Canada. Meanwhile, several governors have vowed to cut their states' expenditures by buying drugs from our northern neighbor. And storefronts and Web sites offering cheaper drugs from elsewhere are multiplying. "The Internet pharmacy business has mushroomed to a level where there is almost no going back," says independent drug industry analyst Hemant K. Shah.

A big influx of cheaper drugs may seem like good news to American seniors struggling to afford their medicines. But the future it augurs is grim. There's a serious safety issue, for one thing. Already, FDA inspectors are finding that drugs being imported aren't what they claim to be. On Sept. 29, the agency announced that 88% of 1,153 drugs inspected at ports were formulations that lack U.S. approval.

TRADE-OFFS. More important, if prices are lower today, then inevitably research budgets will suffer. That means there will be fewer breakthrough drugs tomorrow. Of course, many would argue that the drug industry's profits are too high, that companies spend too much on marketing and "me-too drugs," or that they should make their existing drug development operations more productive. Big Pharma also has done a lousy job making the case that many expensive new drugs do offer good value -- and cut overall health-care costs.

But that doesn't change the underlying fact that higher profits means more research and development -- and that paying more now offers the hope of big savings later. Imagine, for instance, the billions of dollars that the health-care system could avoid spending in coming decades if drugmakers found ways to treat or prevent Alzheimer's disease. "People don't believe it, but if all prices were the same as Canada's, there would be fewer products," says Ian Spatz, vice-president for public policy at Merck (MRK ) & Co. "There is a trade-off of today against tomorrow." Economists also argue that the prospect of lower prices and lower profits would cause the industry to put more of their R&D dollars into safer "me-too drugs" instead of targeting riskier breakthroughs.

Already, Europeans are fretting that their relatively low prices are killing their pharmaceutical industry. In 1990, European and U.S. companies each held about a one-third share of the world drug market. Now, Europe's share is down to 21%, while the U.S.'s has jumped to 50%. European companies have increasingly moved their R&D operations to the U.S., and they make 60% of their profits in the American market, analysts estimate. "Europe remains less attractive for R&D investments, primarily because its economic environment is less favorable than in the U.S.," explains Sir Tom McKillop, CEO of AstraZeneca (AZN ) PLC. In an attempt to turn things around, the European Commission has recommended that Europe replace regulated prices with a market system -- and the recommendation is expected to pass.

NO EASY SOLUTIONS. It's a promising development, but just a beginning. In addition, the U.S. desperately needs a Medicare drug benefit and other subsidies so that seniors and poor Americans can get the drugs they need. That would reduce the urge to import drugs from countries with lower prices. Beyond that, the industrialized world needs to acknowledge that breakthrough medicines won't be developed unless the industry can reap sufficient profits -- and to figure out a way to share the burden more fairly.

There aren't any easy solutions. Before broaching the topic in his speech, FDA Commissioner McClellan had spent several months exploring possible approaches -- including going to the World Trade Organization -- to boost drug prices in other nations. So far, no strategy has emerged -- and neither Canada nor the European Union is exactly volunteering to go first."It's a challenge," admits McClellan. "I didn't say we have all the answers yet." The Bush Administration's Council of Economic Advisers and other White House economists are receptive to devising a plan, but trade negotiators are more doubtful. "There's no obvious way for the U.S. to take action against other nations that have price controls," explains Claude Barfield, director of trade and science and technology studies at the American Enterprise Institute. Still, McClellan's arguments have struck a resonant chord in some countries, such as Germany, which also feel that other European nations are paying unfairly low prices.

Easy answer or not, this is too important an issue to ignore. McClellan and the Administration plan to set up a multi-agency task force to explore potential strategies for making drug prices more equitable around the world. With medicines for dread diseases such as AIDS, trade negotiators have already hammered out agreements to lower prices in countries that can't afford the expensive drugs the West produces. Now, the world's rich countries need to extend the idea of matching prices with ability to pay to their own markets. If the world wants to enjoy the future health benefits of drug R&D, it must share the cost.

By John Carey

With Laura Cohn in London, Jack Ewing in Frankfurt, and Joseph Weber in Chicago

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