Drugs & Politics by Dr. Sowell

[SecDef]

Is the drug market competitive marketplace like other businesses? That is by defining competitiveness as ratio of producers relative to market size.

and

How does government negotiating prices (really another term for price fixing) mean allowing free market or Adam Smith's "the invisible hand of the market" to work? If anything, allowing the government to set the price ceiling means not allowing the invisible hand of the market to work.

No, you are misunderstanding me. It is when the govt DOESN'T negotiate that capitalism is cutoff at the knees.

But you did hit on a side issue, prescription drugs don't quite fall into a free market since obtaining them is restricted.

Also, what do you think is the human capital involved in venture capital funding of San Diego's biotech version of Silicon Valley? Do you it's high or low? If it is high, do you think VC(venture capitalist) would keep on funding startups with very high human capital when profit is not high?

Yes. VC's care about taking a company public and reaping the rewards. They absolutely do not care about the profit margins apart from how it affects market price (non-negative). Thus, R&D costs are on par with advertising costs as a way of driving brand awareness higher.

 

[Playboypenguin]

If the work of majority of developing new drugs is already done by the US government (which means the information is available publicly to everybody in US and pharmaceutical companies in other countries), then how come companies in other doesn't develop the drugs themselves?

Do you understand how subsidies work?

The govt is not doing the research. They are reimbursing the companies for the money they spend doing the research.

The question as to why the govt does not then own a piece of the patent is a matter of great contention. Many feel that since the govt pays the bill with taxpayer money then the taxpayers should own part of the product.

Unfortunately, the govt does not ask for the money they are giving to be returned in any fashion. It is a pork barrel project gone wild.

 

[theinvisibleheart]

SecDef? capitalism & fairness to VC,PhD

It is when the govt DOESN'T negotiate that capitalism is cutoff at the knees.

Sorry, that goes against any book or research I've studied, both at undergraduate and graduate level. Perhaps, you can explain to me what your definition of capitalism is in terms of price and government involvement or point me to a book/article/paper on your understanding.

But you did hit on a side issue, prescription drugs don't quite fall into a free market since obtaining them is restricted.

Not really. Consumers always have the choice of not buying the product.

Yes. VC's care about taking a company public and reaping the rewards. They absolutely do not care about the profit margins apart from how it affects market price (non-negative). Thus, R&D costs are on par with advertising costs as a way of driving brand awareness higher.

R&D cost are expensed annually via GAAP regulation(it's FASB, not the government BTW).

Profit from successfully drug need to cover several years of R&D cost for both successful and failed drugs.

SG&A(advertising cost) are needed insofar as to maximize the sale of successful drugs.

So comparing annual R&D cost to annual profit WHICH NEED TO COVER SEVERAL YEARS OF BOTH SUCCESSFUL AND FAILED DRUGS doesn't make sense. Advertising cost in SG&A relate only to successful drugs, however profits for the successful need to cover several years of development cost for both successful and unsuccessful drugs.

VC are usually involved in a very risky projects and also, their human capital is very high. Asking a PhD in biochemistry to work for less than market wage means that he is not compensated for 4-6 years of graduate studies and post-doc work he did when the amount of sweat and labor he poured in is tremendous. A typical failure rate for VC projects was that only 1 in 10 give out enough return to make up for the other 9...the problem is that they can't figure out ahead of time, which one will make it and which one will not be profitable.

So how fair is to ask investors who fund VC companies and PhDs who work for pharma companies to accept lower profit when they take tremendous risk and pour unbelievable investment into their super high human capital?

 

[theinvisibleheart]

Playboypenguin: ? about subsidy

Do you understand how subsidies work?

The govt is not doing the research. They are reimbursing the companies for the money they spend doing the research.

The question as to why the govt does not then own a piece of the patent is a matter of great contention. Many feel that since the govt pays the bill with taxpayer money then the taxpayers should own part of the product.

Unfortunately, the govt does not ask for the money they are giving to be returned in any fashion. It is a pork barrel project gone wild.

Do you regard expensing of R&D costs as subsidies? If a company spent $100M on R&D and it's expensed, it means that they pay less tax on final NI(Net Income) on I/S(Income Statement).

They still had to spend $100M that year on R&D. The fact they pay less tax because amount on NI is less is not the same as the government giving them $100M and therefore, are entitled to that company's patent.

I can't do more than this on this topic...I can't cover what accounting books cover in a short reply format. If by "subsidy", Playboypenguin meant expensing of R&D cost.

You should ask your accountant if "subsidy" is same as "expensing" of R&D cost. Make sure that accountant is familiar with GAAP requirement at corporate level.

--John

 

[Playboypenguin]

Do you regard expensing of R&D costs as subsidies?

Yes, of course it is considered a subsidy. The companies are not simply writing off expenses on their taxes. They are receiving funds directly from the govt to conduct research.

Subsidies are usually given by the govt to further the progress of an idustry while maintaining low prices.

In the case of drug companies, they receive funds to further their industry but then are allowed to patent and profit from the product without price control.

 

[theinvisibleheart]

Playboypenguin, you need to see a CPA

Quote:
Do you regard expensing of R&D costs as subsidies?
Yes, of course it is considered a subsidy. The companies are not simply writing off expenses on their taxes. They are receiving funds directly from the govt to conduct research.

Subsidies are usually given by the govt to further the progress of an idustry while maintaining low prices.

In the case of drug companies, they receive funds to further their industry but then are allowed to patent and profit from the product without price control.

you really need to see an accountant...if expensing is equivalent to "subsidy" and therefore, US government has claims to intellectual property or other asset of any companies that does any kind of expensing, then the US government should have some claim on all the companies that file US taxes and have expense cost greater than zero.

Expensing simply means that corporation pays less tax because it spent that amount on cost of operating a business. Subsidy means government transfers money received from tax payer to the subsidized entity less transfer cost.

But you really should talk to an accountant.

--John

 

[Playboypenguin]

Man, are you on drugs.

The drug industry does receieve SUBSIDIES. Not just tax write offs.

They receive non-payable grants, they receive product protection from the FDa, tax credits (not write off, credits) in addition to laws of non-negotiation on drug prices.

 

[theinvisibleheart]

Senior Member

Join Date: 02-27-2006
Location: Great Pacific Northwest
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Man, are you on drugs.

The drug industry does receieve SUBSIDIES. Not just tax write offs.

What are your definitions of R&D expensing, subsidy, and tax write offs?

When and where does US government give money directly to pharmaceutical companies? Can you point me to any such resources?

Thanx.

--John

 

[Playboypenguin]

Like I said in my previous post...

They receive non-payable grants, they receive product protection from the FDA, tax credits (not write off, credits) in addition to laws of non-negotiation on drug prices.

All of these things constitute subsidies.

In fact, all you have to do is follow the news to know that there has been a big stink lately about drug companies using grants made for educaional purposes to pay marketing expenses.

Maybe it has something to do with the fact that drug companies donated 87 million dollars to politicins in a six year period.

Are you actually trying to say drug companies don't receive subsidies????

Whether you are or not you can continue to post all the strange pro-drug company propaganda you want IN BIG BOLD LETTERS FOR SOME ODD REASON. I am done being involved sine this discussion seems meaningless.

 

[theinvisibleheart]

Playboypenguin, more ?

Like I said in my previous post...
Quote:
They receive non-payable grants, they receive product protection from the FDA, tax credits (not write off, credits) in addition to laws of non-negotiation on drug prices.
All of these things constitute subsidies.

Is expensing of cost of operating a business a "subsidy"? Because that is what R&D cost is, even though it may not be officially classified as one.

Because lot of these companies profit margin depend on development of successful Rx drug product release which is the result of R&D expense.

In fact, all you have to do is follow the news to know that there has been a big stink lately about drug companies using grants made for educaional purposes to pay marketing expenses.

This is very common outside of pharma industries...in fact, in foreign countries such as Germany, corporations are well known for income statement smoothing.

Maybe it has something to do with the fact that drug companies donated 87 million dollars to politicins in a six year period.

This is very common...not limited to pharma companies. In fact, quite often, they donate to both parties since they can't predict which way the tide will flow. It's also partially necessary since if your competitors tries to curry political favor, in order not to lose a competitive advantage, you are motivated to do the same.

These factors are not unique to pharma industries or even to US.

--John

 

[theinvisibleheart]

Playboypenguin, reply

Like I said in my previous post...
Quote:
They receive non-payable grants, they receive product protection from the FDA, tax credits (not write off, credits) in addition to laws of non-negotiation on drug prices.
All of these things constitute subsidies.

In fact, all you have to do is follow the news to know that there has been a big stink lately about drug companies using grants made for educaional purposes to pay marketing expenses.

Maybe it has something to do with the fact that drug companies donated 87 million dollars to politicins in a six year period.

Are you actually trying to say drug companies don't receive subsidies????

Whether you are or not you can continue to post all the strange pro-drug company propaganda you want IN BIG BOLD LETTERS FOR SOME ODD REASON. I am done being involved sine this discussion seems meaningless.

Playboypenguin,

I don't consider expensing of cost of running a business to be a subsidy. While some may consider expensing of R&D cost to be a subsidy, I don't consider it in the sense of other subsidies I'm familiar with such as farm subsidy.

In regards to "strange pro-drug company propaganda," most of my knowledge and understanding was gained through reading and studying articles/books/journals in the areas of finance, economic, and public choice. AFAIK, they are generally not considered to be "pro-drug propaganda."

My position on this issue closely mirrors that of Cato Institute and other think tank such as Hoover Institute. AFAIK, their work is not considered to be "pro-drug propaganda."

Here is a link to one article by Hoover Institute:
http://www.hoover.org/publications/digest/5854816.html

I really don't see it as drug company propaganda, but your mileage may vary.


Best regards.

--John

 

[theinvisibleheart]

Playboypenguin, PS drug company propaganda

there is one crucial differences in the material I read and study...they are usually published in a journal where discussion takes place based on issues and open exchange of ideas take place. Furthermore, qualification or validity of an opinion is not based on family experiences such as brother-in-law being in industry that is under discussion. Also, people who read such a journal usually have required background and education.

 

[SecDef]

Sorry, that goes against any book or research I've studied, both at undergraduate and graduate level. Perhaps, you can explain to me what your definition of capitalism is in terms of price and government involvement or point me to a book/article/paper on your understanding.

It is not a free market when the govt pays whatever the asking price is. (i.e. not negotiating). Well, not pays, but forces end users to pay that price under a govt plan like medicare.

What would you call it?

Consumers always have the choice of not buying the product.

Unless they have anthrax.
Unless they are unable to obtain a prescription because they can't access a doctor (how many ER's give scripts for viagra?)

 

[Eghad]

Almost a 2-1 ratio of Marketing expenses to R&D. I feel a draft up my underwear.

When I am in the Doctor's office I see the pharmaceutical guys with loot galore for the docs not to mention the lunches and stuff for the Doc's.

Lets take Mevcor, Lipitor and Crestor..they are being advertised as wonder drugs for cholesterol on the television. These are all variants of the same medicine. So by changing the recipe you now have a drug that is not innovative but simply a moneymaker.

America is simply a profit center for the drug companies. About half the drug companies are not even American companies any more. Wonder why those International companies have research centers here?

three reasons:

Public research in universities and the NIH and grants. freebies for them. Thanks to the Bayh-Dole Act. This allows universities and others to use public funds to develop drugs. The university can then patent the drug and then sell the patent to the drug companies. All the drug company has put out is the cost to buy the patent? Even the NIH can make deals with drug companies. Before then the discoveries remained in the public domain. Transferring discoveries made with public funds to private companies. What a sweet deal ! So basically the only R&D cost the drug company incurs is the purchase price or royalties paid. We usually call politicians and bureaucrats who use public money for enrichment crooks and send them to prison

So tell me Mr. Heart how many of these new drugs came from the company itself vs. public research?


How many here know about that champion of the people Henry Waxman? He and Orrin Hatch passed something called the Hatch-Waxman Act.

exclusive marketing rights.....administered by the FDA/US patent Office have extended the period of exclusive use for some drugs to fourteen years.

which means that now to milk the most years out of a drug since laws are involved you need lawyers, lots of them! Do lawyers work cheap? Heck No.
so now in addition to marketing costs we have the overhead of lawyers to add to the marketing costs. So I wonder it thats like a 3:1 ration by now?

that could be your answer as to why we don't see more companies in the drug business..that and the fact that there have been mergers and buyouts.

The FDA is controlled by the executive branch and Congress has oversight. I wonder how much money has been poured into politics by the drug companies?

So now not only do we pay for marketing and lawyers but the goodies given to politicians...I wonder what that does to the costs vs. R&D ratio? Kickbacks to doctors also? I wonder if the kickbacks are going to marketing costs?


The sad part is that the greed of the drug companies will be their downfall. who do drug companies depend on to get these dollars. Private insurance plans would be first on the list. lately insurance plans have been putting more cost on the participants for drugs. If people with insurance plans had to pay the full cost they would be up in arms as retired people who live on fixed incomes without prescription plans. The drug companies are making their own noose in the long run.

Just exactly how many "new" drugs have been put on the market lately vs. change the ingredients and get a patent drug?

In 2002 out of 78 drugs only 7 were deemed new by the FDA!

In 2006 13 out of 113 drugs were deemed as new molecular entities

were any of the new drugs made by American companies?

www .fda.gov/cder/rdmt/pstable.htm.

The new medicare drug plans enacted by Congress are a new windfall for drug companies... so expect more of the "I have one of these drugs too" to be marketed. of course Congress had to pass this legislation to save the drug companies from political wrath. Which means that the politicians are now using more taxpayer money to subzidize the drug companies and divert the political lightning. This is only delaying the inevitable.

So much for the costs of bringing innovative drugs to the market.

Remember a guy named Billy Tauzin and the Medicare Prescription Drug Bill he helped ram through Congress. He left Congress and on the same day became the head of the PhRMA the head of the drug companies propaganda firms who tell us that it costs billions of dollars to make "innovative" and "new" drugs.

So now we know that many of the major costs in these "innovative" and "new" drugs are marketing, lawyers, political contributions, kickbacks and other gimmies to doctors not R&D. Not to mention the cost of Mr. Tauzin's salaries and other at the PhRMA. The R&D expenses incurred are the purchase of patents or royalties paid for drug patents done with a majority of public money or reformulating to make "I have one of those drugs to" prescription medicines.

The average brand name prescription costs a person without health insurance about $1500 dollars a year

So Mr. Heart I respectfully decline to disagree with you and feel a smoky draft up my undershorts from the PhRMA. Watch as the drug companies kill the goose that laid the golden egg in the future due to greed.

 

[Eghad]

Consumers always have the choice of not buying the product.

LOL...yeh right due to exclusive use.

dont buy the drug...die

thats some choice.

 

[theinvisibleheart]

SecDef & Eghad

SecDef,

what you are referring to is not free market per say and it is capitalism. High patient co-payment for Rx drugs via medicare is simply the same thing as expensive health insurance with poor benefits package in free market.

Same thing happens in private health insurance but in the case of private health insurance, you have a choice and not only that, competition takes place. The same mechanism that forces Fedex to provide much better service than US Postal Services.

I'm not Dr. Sowell or Milton Friedman so I have to think on how to explain this.

Let me think.

Eghad,

you need to read the replies I wrote since you keep on doing a direct comparison of annual R&D expense and advertising expense.

I'm compassionate in the sense I choose long term good over short term good. For example, our prisons are full of dysfunctional people who came from broken families of the 1960s generation which normalized co-habitation, divorce, step-families, and out-of-wedlock children...all the result of a selfish generation that focused all their desires on themselves at cost of broken children who developed deeply traumatized psyche when they grew up. So when I have a chance, I tell people what the result of cohabitation or divorce will do to their children. I've worked in homeless shelter and studied the problem of welfare recipients. And I've done numerous other things.

Let me think on how to answer your questions in terms you can understand.

--John

 

[kjm]

Aside from all the back and forth between 3 members here, I'll add my 2 cents:

I take a small portion of my pay and invest it personally. I'm one of those stupid day-traders. It wouldn't add up to a whole lot of money, but I do make money in the stock market. I don't care where I invest, so long as it produces a profit for me. There's a political and economic lesson out there for all of you.

It is all too easy to believe that "Big Oil" and "Big Pharmaceutical" companies are making a killing by screwing us little guys- but honestly- they file a form that you can look at to determine where they spend money and how much they make. Ultimately, they have several dozen outside analysts who are intimately familiar with their business, and who write research on their companies. Sometimes the system fails but it always comes out in the wash, i.e.: Enron. Enron got away with it for a couple years and then collapsed due in large part to scrutiny. It is inescapable that reporters and Wall St. analysts are watching what your company does.

So- that being said- the profit margins right now are much better in Utilities than they are in Pharmaceuticals. They just don't make that much money. I am sure certain sectors are making more than Utilities, but if Pharma was- I'd be an investor. In the interest of open disclosure- I have invested my entire amount in TXU and then NRG. I've made a pretty large percentage.

Again- I'm not in it for the pleasure- I'm in it to make money. It is how I finance my gun-buying. If the large pharma companies were raking in such large sums in profits, I'd know about it and I'd have some stock in Merck. I just don't see their SEC filings as proving they are as profitable as other options.

Make your own decisions. I know it is difficult to pay $25 for a pill that cost a tenth of that to produce, but when I was running my own company, folks would ask me why I am charging them $700 for a job that cost me $150. A simple reply is that my kids need health insurance, shoes, food and my truck needed gas, oil and that to maintain my license cost me a few hundred bucks too. It takes investment to make money. Pharma companies invest a pile of money in to lots of dead-ends. Add money they must donate to politicians and lobbying as well as marketing and lawyers- you have a pretty tidy sum.

Their profits aren't as attractive as you may think.

 

[SecDef]

Make your own decisions. I know it is difficult to pay $25 for a pill that cost a tenth of that to produce, but when I was running my own company, folks would ask me why I am charging them $700 for a job that cost me $150. A simple reply is that my kids need health insurance, shoes, food and my truck needed gas, oil and that to maintain my license cost me a few hundred bucks too. It takes investment to make money. Pharma companies invest a pile of money in to lots of dead-ends. Add money they must donate to politicians and lobbying as well as marketing and lawyers- you have a pretty tidy sum.

Their profits aren't as attractive as you may think.

Don't get me wrong. I have no problem with companies charging what the market will bear. My gripe is that I pay a different amount than my neighbor simply because one of our providers refuses to try and get the best possible price.

 

[Eghad]

you need to read the replies I wrote since you keep on doing a direct comparison of annual R&D expense and advertising expense.

the ratio is about 2:1 between advertising and R&D. If you look at the FDA table there is not much "innovative" drug research done by the drug companies. Just a recipe change with only 13 new drugs for 2006.

The drug companies are running a shell game....

If Congress had not bailed them out with the medicare prescription programs things might have been worse for them. Now private insurance companies are paying less on brand name drugs and the policy holder more. That trend will continue.

tick tock

 

[theinvisibleheart]

Eghad, reply to "The drug companies are running a shell game..."

Quote by John/theinvisibleheart:
you need to read the replies I wrote since you keep on doing a direct comparison of annual R&D expense and advertising expense.

the ratio is about 2:1 between advertising and R&D. If you look at the FDA table there is not much "innovative" drug research done by the drug companies. Just a recipe change with only 13 new drugs for 2006.

The drug companies are running a shell game....

If Congress had not bailed them out with the medicare prescription programs things might have been worse for them. Now private insurance companies are paying less on brand name drugs and the policy holder more. That trend will continue.

tick tock

Eghad,

can you follow this example? This is a toy example to illustrate a point.

__________________________________________________________________________
1. Let's say, R&D cost is always annually $100M($100,000,000).

2. advertising cost is always annually $200M($200,000,000). NOTE THAT IN THIS EXAMPLE, ANNUAL ADVERTISING EXPENSE IS ALWAYS TWICE THE ANNUAL R&D EXPENSE.

3. the company always has 10 drugs in the pipeline....so the R&D cost for each drug annually is $10M.

4. 3 drugs out of 10 drugs in the pipeline always gets approved in 10 years.

5. out of 3 drugs that gets approved, only 1 is profitable.

6. patent time of 10 years(yeah, I know, it's longer).
__________________________________________________________________________

At the end of 10 years, TOTAL R&D cost is 10x$100M or $1B for 10 drugs. However, only 3 got approved and out of 3, only 1 will prove to be profitable enough to cover all the cost.

Furthermore, we know that competing drug companies are close to coming up with a different patented Rx that will treat the same problem and be approved in couple of years, sharply reducing the profit opportunity. This competition gets worse, longer and longer the patented drug is on the market.

So out of 3 approved drugs, 1 financially successful drug need to generate enough profit to recover $1B during first couple of years. So spending $200M annually in advertising expense to recoup $1B in original total R&D seems what one would expect.


Here are the actual facts as of 2006:
As of 2006, average FDA approval time for clinical testing only was 8.5 years(this is only the clinical testing, not actual development preceding it). Fewer than one in 3 drugs that do get FDA approval are actually profitable, recouping all the accumulated cost. For companies such as Merck, a typical expectation is that about 10% of early-stage products will eventually reach the market.


--John