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The Ill Effects of Regulation in the Pharmaceutical Industry
(rough draft)

Recently pharmaceutical companies have been the object numerous lawsuits and attacks from the media, politicians, and activist groups. There has been rising concern in the public over the safety of new drugs and many complaints 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 and the U.S. already pays most of the money that goes into the research and development of these drugs.

In the current pharmaceutical industry, it takes many years to develop a new drug and to put that drug on the market because of the high standards placed on drugs by the U.S. Food and Drug Association (FDA). For a drug to be approved, the company making the drug must first apply for a use patent and then begin testing on animals to determine appropriate dosage levels. Then, to begin human testing in the U.S., the company must get a investigational new drug application with the FDA and then testing may proceed in three phases as described by the FDA. 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.

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). Most of the money spent developing a new drug is not actually spent in the process of making the drug but in discovering how to best use the drug. This causes controversy because people don’t want to have to pay such high prices for prescription drugs especially since publicly funded institutions perform much of drugs’ research. Based on these facts, people believe that they should not have to pay such high prices on drugs and that pharmaceutical companies should not be allowed to earn such high profits.

To give validity to these claims, a few more factors must be considered. First, the actually 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. industry as a whole. This increase is due in large part to the length of time it takes to develop and market a drug. 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.

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 R&D. 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 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 by American companies. Some people believe that it is unfair that Americans have to pay so much more money for prescriptions. As a result, more and more people have been using the internet to buy prescription drugs from other countries, and a few people even cross the border and buy their prescriptions in Canada or Mexico. Canadians only 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, who has a much lower gross domestic product (GDP) per-capita than the U.S. The Organization for Economic Co-operation 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 other countries. This index, while not perfect, is the best way to estimate 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, shows that they pay about 23.3 percent less than what they should for prescriptions even after the difference in living expenses is taken into account. These same 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. In addition to the already low prices, foreign governments continue to try and lower prices.

All of these facts show how it is increasingly harder for pharmaceutical companies it make a decent profit. 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 is evidence that many of the complaints about high profits made by pharmaceutical companies is ungrounded because, despite their high profits, many drug companies are only able to make small returns due mostly to the rigorous regulations already placed on pharmaceutical products.

If regulations continue to increase, the number of life saving drugs will most likely diminish. 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 and increase in the number of ineffective drugs. This causes, yet another detriment to U.S. pharmaceutical profits.

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, and shortened the development time for new drugs, which, in turn, has decreased the lag time between when foreign countries market a drug and when U.S. companies get drugs to market.

Concern over drug safety, prescription drug prices, and conduct of clinical testing has caused people 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 that would 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.

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