Mind to Market

Thursday, May 10, 2007

Price Pressure on Drugs

With patents giving drug companies a virtual monopoly on a drug treatment and peoples' lives on the line, what, if anything could put pressure on the companies to cap their drugs' prices? Shareholders are pressuring pharmas for higher profits while the cost of developing drugs continues to soar as does pressures from the government for safety. Isn't it only reasonable that a pharmas charge as much as possible for the few drugs that eventually do make it through to the market?

In a story featured in the WSJ last March, Dr. Steven Harr, an analyst at Morgan Stanley, says "no." Although drug companies may not be responsive to the complaints of a single patients, those patients have political representatives, representatives that can make life very difficult for drug companies if they choose to regulate drug prices.

Although the government has yet to step in to set price controls, there is some thought that the Democrat controlled Congress may do just that if prices grow too high. Prices for cancer drugs are increasing rapidly with five costing over $40,000 for a course of treatment. Cancer drugs accounted for 13% of the country's drug spending in 2002, in 2007 it will be 22%.

The reality of the situation, as Dr. Harr puts it is: the "market structure effectively provides no mechanism for price control in oncology other than the companies' goodwill and tolerance for adverse publicity." But this is the kind of incentive that companies need to undertake the risk of developing new drugs, right?

Although financial incentives of this magnitude certainly provide motivation for undertaking such risky ventures, they also lead to fairly inefficient and unproductive drug development processes, processes that won't change unless there are financial reasons. This is precisely what has been done in so many other industries; even though the complexity of the product has increased, costs have been kept under control and so too have prices to the consumer. If the computer and telecommunications industries can do, so can the pharmas.

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