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moto1's final paper

The Ill Effects of Regulation in the Pharmaceutical Industry

Recently there has been rising concern in the public over the safety of new drugs, and pharmaceutical companies have been the object numerous lawsuits and attacks from the media, politicians, and activist groups. Many complaints have been made about the high and ever-rising price of prescription drugs and the large profit made by pharmaceutical companies. Many believe that the government should increase regulations, especially over prices and safety, on new drugs entering the market. But these attacks and concerns, for the most part, are unwarranted for many reasons. The United States already has strenuous regulations on new pharmaceuticals; this, combined with the low cost of prescription drugs in foreign countries, leads to poor returns for pharmaceutical companies.
Because of high standards placed on drugs by the U.S. Food and Drug Association (FDA), it takes many years and extensive funding to develop a new drug and to put it on the market. For a drug to be approved, the company developing the drug must first apply for a use patent. The use patent allows the company exclusive rights to the drug while it is being tested and developed; like other patents, a use patent takes time and a lot of money to procure. Once a use patent has been obtained, the company is allowed only to test on animals; animal testing proceeds until proper human dosage levels are estimated and reported. Then, to begin human testing in the U.S., the company must get an investigational new drug application with the FDA; finally, testing may proceed under strict guidelines. The pharmaceutical firm first tests on a group of 20 to 80 healthy volunteers, then on 100 to 300 patients, and finally on a large group of 1,000 to 3,000 people. The firm reports on how well the drug performs and on the side effects that were discovered. All of this research and testing is costly and time consuming, but helps to ensure that new drugs will not be harmful.
Once a drug reaches the market, it is constantly reviewed and studied by government agencies and academic foundations (such as the National Institutes of Health and public universities). This is where most of the development money is spent on new drugs, which causes controversy since publicly funded institutions perform much of this research. Because of this, people believe they should not have to pay such high prices on drugs; they also feel that pharmaceutical companies should not be allowed to earn such high profits because of publicly funded research.
To give validity to the above claims, a few more factors must be considered. First, the actual profits made by pharmaceutical companies must be investigated. It has been estimated that it costs a drug company approximately 802 million dollars over the course of 10 to 15 years to market a new drug; this translates to 32 billion dollars per year spent on drug development by the U.S. pharmaceutical industry as a whole. The FDA commonly uses the time it takes a drug to get to the market as an estimate of the cost of the drug; and, over the last few decades, the time has steadily increased which translates into greater costs for pharmaceutical companies. The increase in time is due, in large part, to greater regulations on pharmaceutical drugs.
The effect that the increase of development time has on the profits earned by pharmaceutical companies is two-fold. The longer development time means that more time and money is put into research and development. It also causes companies to lose time that their drug is patent protected. Since drug companies are required to attain a patent for a new drug before they are allowed to test it, and the testing time has risen from three to between six and seven years, there is less time that the company which developed the product has exclusive rights to sell and earn profits from it.
Another aspect to be considered when looking at the profits of drug firms is the price of prescription drug in the U.S. compared to the price of the same drugs sold in foreign countries. Some people believe that it is unfair that Americans have to pay much more for prescriptions than most other countries, and, as a result, more and more people have been using the internet to buy prescription drugs from other countries. Some people even cross the border to buy prescriptions in Canada or Mexico where prices are significantly less. On average, Canadians pay 59.2% of what Americans pay for prescription medicine, but this number is not quite what it seems. The difference in price is justified by a difference in average income and cost of living. Just as the cost of a home in Southern Georgia is not nearly as high as the cost of a home in Upstate New York, the cost of pharmaceuticals should not be the same in America as in Canada where there is a much lower gross domestic product (GDP) per-capita than in the U.S.
The Organization for Economic Cooperation and Development (OCED) produces an index known as “purchasing power parity” (PPP). The PPP index compares how many currency units are needed to buy the same amount of goods in one country as compared to another. This index, while not perfect, is the best way to compare the price of products in different countries. In 2001, Canada had a PPP of about 82.5% compared to the U.S. (meaning they only paid approximately 82.5% of what Americans paid for the same products). This number, when compared to total percentage that Canadians pay as compared to Americans for medicines, shows that Canadians pay about 23.3% less than Americans pay for the same meidcines. These results hold true for most industrialized foreign nations; the following is a list of foreign nations’ PPP and the percent they pay for patented drugs (based on a U.S. PPP and patented drugs percentage of 100% and 100% respectively): Italy – 74.7% and 49.6%, France – 74.7% and 50.8%, Germany – 75.1% and 59.7%, Canada 82.5% and 59.2%, U.K, - 74.8% and 63.4%, Switzerland 85.4% and 64.3%, and Sweden – 74.1% and 58.0%. When these percentages are added up and averaged, it shows that foreign countries pay almost 20 percent less than what they should for prescription drugs as compared to Americans. In addition to the already low prices, foreign governments continue to try and lower prices. The lower prices paid for pharmaceuticals in foreign countries causes companies to make lower returns; this problem is exacerbated by an increasing number of Americans buying their prescriptions from foreign countries.
As a result of the aforementioned problems, it has been harder and harder for pharmaceutical companies to earn good profits from their products. A study conducted by Dr. Merrill Matthews for the Institute of Policy Innovation showed that in 2001 Microsoft had higher returns than the most profitable pharmaceutical companies, and many drug-makers had only single-digit returns or even losses. This shows how many complaints about extremely high profits from pharmaceuticals are ungrounded. Despite their high profits, many drug companies are only able to make small returns due mostly to the rigorous regulations placed on pharmaceutical products.
If regulations continue to increase, fewer companies will have interest in the market, and the number of lifesaving drugs will probably decrease. This has already happened in European countries where regulations on pharmaceuticals are excessively strict and have caused foreign drug companies to immigrate to America where the regulations are not quite so numerous. A study done in 1992 by E. M. Kolassa at the University of Mississippi School of Pharmacy reported that the countries with the lowest prices due to price controls had the least productive drug research. When it is harder for a company to make profits, less people seek out that type of business.
Although there is greater control over the price and use of drugs in foreign countries, they have a shorter approval time without an increase in the number of ineffective drugs. This causes, yet another detriment to U.S. pharmaceutical profits because foreign countries are able to produce drugs and market drugs sooner, taking away from potential profits for American companies.
The Prescription Drug User Fee Act of 1992 and the FDA Modernization Act of 1997 have actually improved the process required to market new drugs. These acts provided money and resources to the FDA, changing it from one of the world’s slowest regulatory agencies to one of the speediest, shortening the development time for new drugs, which in turn, has decreased the time between when foreign countries market a drug and when U.S. companies market similar medicines.
Concern over drug safety, prescription drug prices, and conduct of clinical testing has caused people to attempt to resend recent reforms and seek greater prescription drug regulation. Instead of trying to increase the approval time and effort for drug companies, advocates should, instead, seek further reform in the drug approval process. This could shorten development time without increasing the number of hazardous drugs. Such reform would provide greater incentive for innovation in the pharmaceutical industry and cause an increase in the number of useful drugs, thus, providing more people with increased health and longer lives.

1. Kaitin, Kenneth I. 2000. “Don’t turn back the clock on drug regulatory reform,” Tufts Center for the Study of Drug Development Editorial: Commentary on Critical Drug Development Issues. Pgs 1-4.
2. Bandow, Doug. 2004. “Drug Makers Under Siege: Hampering the Search for Cures for Tomorrow’s Epidemics,” Institute for Policy Innovation Issue Brief. Pgs 1-6.
3. Matthews, Merrill Ph.D. 2004. “Riding the on the Coattails of U.S. Patients: Other Countries Are Shirking Their Share of Drug R&D Costs,” Ideas. 27: 1-2. Institute for Policy Innovation.
4. Ward, Michael R. “Drug Approval Overregulation,” Regulation: The Review of Business and Government. Cato Institute.

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