Blame Big Pharma

  • October 18, 2016

Epinephrine or EpiPen has sparked legislative and consumer outrage; the new owners of the patent have hiked prices. The large pharmaceutical companies are convenient targets for politicians trying to whip up support among a restless electorate. Politicians love to criticize the pharmaceutical companies’ “obscene profits.” Of course, what constitutes “obscenity” with respect to profits depends on the proverbial eye of the beholder. From an ethical standpoint, are there any limits to the profits a company may reap, especially if it emanates from a government-granted monopoly power?

This article does not purport to delve into the complexities of the EpiPen situation, but to discuss a more general point. Publicized pharmaceutical profits need to be interpreted with care. The process of inventing and marketing a new drug differs in key ways from other products. Two factors, in particular, should be recalled, when comparing pharmaceutical profits with profits in other endeavors. Pharmaceuticals face considerable risk in inventing new drugs and delays in placing their products on the market. Both of these factors serve to whittle down the profitability of winning drugs.

Each successful drug must drag along the carcasses of its failed siblings. Many drugs are called; few are successful. A pharmaceutical company, therefore, must spread the profits of a winning drug across the failed efforts. There is considerable uncertainty involved (and, in some cases, serendipity, as apparently Viagra was initially seen as a blood pressure and angina treatment) in seeking, developing, and marketing drugs. Profit figures for a particular drug, then, should be adjusted for risk.

Developing a successful drug is a lengthy process: creating, testing, gaining FDA approval, producing, and marketing. Although many products have a lag between invention and selling, pharmaceuticals face lags of many years. Meanwhile, their patent clocks are ticking toward expiration.

A pharmaceutical company incurs costs early on and can only hope to reap revenues years later. Those later revenues have to be converted into “present value,” in order to make a meaningful comparison. Future dollars received are discounted relative to dollars spent immediately. For readers unfamiliar with the concept of present value, the concept occurs when you buy insulation for your house; you pay money today for the insulation and installation and receive savings in heating bills in the years to come. Had the savings occurred today, you could have invested those savings today and earned a rate of return (I would say “interest,” but interest rates today are insultingly low).

Due to the timing of costs and revenues, the pharmaceuticals’ reported profits, therefore, exaggerate their true rate of return. Once adjusted for risk and converted into present value, such profit figures shrink considerably.

The public often forgets or ignores the fact that successful drugs often prove cheaper than alternative forms of treatment. Suppose someone invents an anti-cancer pill; one swallow and a patient’s cancer is completely eradicated. Before a price is set upon such a pill, I suspect a large proportion of people might agree that such a benefactor deserves to become rich, very rich indeed. They might even agree that the inventor deserves to become Silicon-Valley rich. As the old, late-night television advertisement might intone, “You’d be willing to pay $59.95, but wait….” Chances are patients would be willing to ante up tens of thousands of dollars or more; those patients lacking tens of thousands of dollars might find themselves able to obtain the pill through charitable donations or by some sort of discount given to demonstrably indigent patients. Taking a pill might not only save you money, but also pain and suffering and exposure to hospital-borne infections and errors. The manufacturer clearly benefits from the anti-cancer drug, but so does the patient. Squelching the incentive to discover wondrous new drugs (and, admittedly, not all successful drugs are wondrous) is likely to injure people seeking treatment for serious afflictions in the long run.

All of which is not intended to elicit tears of pity for the pharmaceutical companies. Pharmaceutical companies gain patent rights under our laws. These patent rights afford the inventor monopoly power, although one should not overstate such power due to the existence or development of substitute products. Does a company granted monopoly power have an ethical duty to limit its exploitation of such power? The public appears to think so, given the adverse reaction to the epinephrine price hike. Limiting monopoly power, though, may reduce the incentive to research new drugs; as with any action, there are gains and losses. In other cases, the government encourages research by subsidizing pharmaceutical companies, and the same issue recurs as to whether there is an inherent ethical duty on the part of the pharmaceutical with respect to pricing. In debating public policy, however, let us avoid using dramatically inflated numbers to inflame outrage.

The views and opinions expressed are those of the author and do not imply endorsement by the University of Northern Iowa.

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