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Tuesday, October 13, 2009

Small Biz Health Care Daily: To Innovate, or Not to Innovate?

Do we want an innovative pharmaceutical industry that invests and takes risks to produce new and improved medicines, or not?

That is a straightforward question. But the answers coming out of Congress too often are more about political pandering, than sound economics.

Consider the push by U.S. Senator Sherrod Brown (D-OH) to effectively strip down the returns on such investment and risk taking.

In July, Brown declared:

“Health reform is about protecting the interests of middle class families, not the windfall profits of big drug companies. Biogenerics would save consumers and businesses billions of dollars by putting a stop to open-ended monopolies that produce windfall profits for drug makers. We have a choice between locking in excessive monopoly periods for big Pharma or helping more patients get access to cheaper drugs. I hope my colleagues in the Senate will put consumers first… Drug companies should be able to recoup their research and development costs, but they are not entitled to open-ended monopolies and unlimited, windfall profits.”

There are many things that Senator Brown gets wrong here.

First, when it costs more than $800 billion and 10-15 years to bring a drug to market, and that only one in 5,000 compounds make it into preclinical testing, it’s pretty hard to say that we’re talking about “unlimited, windfall profits.”

Second, most pharmaceutical firms are not “big drug companies,” but in fact, are small to medium-size drug companies – with 90% of manufacturers having fewer than 500 employees, and 56% fewer than 20 employees.

Third, there are no “open-ended monopolies” or “excessive monopoly periods.” In fact, there are no monopolies at all. Firms are free to invest in new drugs that compete with existing drugs. Drug patents do not limit competition or create monopolies, but instead, spur competition.

Fourth, profits also spur competition. Profits serve as a signal in the marketplace, and attract new investment and innovations. That’s how markets work.

Slashing the period for which firms would have the exclusive right to sell their own product would only serve to reduce potential returns, and therefore, reduce investment in research and development. That, of course, would mean fewer life-enhancing, life-saving drugs for health care consumers. It’s straightforward economics.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

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