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Thursday, October 08, 2009

Small Biz Health Care Daily: Pharmaceuticals and Small Business

Various members of Congress are intent on squeezing the pharmaceuticals industry in the current effort to pass some kind of revamp to our health care system.

Price controls are a favorite. One path to such controls is drug reimportation. Another is through the Medicare prescription drug program.

Given that pharmaceutical firms are in the business of developing life-enhancing and life-saving medicines, this political hostility might seem a bit bewildering – at least at first. But then one realizes that this amounts to a shameful effort at pandering, with politicians pitting health care consumers against so-called big bad drug companies. The assertion is that these large companies should simply sell their goods at a lower price.

This ignores a couple of important points.

First, there is the economic reality that investing in prescription drug research and development is a very risky and pricey endeavor. According to the PhRMA, it takes 10-15 years for a drug to travel from the lab to the U.S. patient; one in 5,000 compounds that enter preclinical testing make it to human testing; and one in five that are tested in people is approved. As for the cost, according to a 2001 study, it costs an average of $802 million to bring a drug to market. Given these odds and costs, price controls will only to serve to divert investment elsewhere, meaning that there will be fewer medicines brought to market.

Second, the notion that the pharmaceuticals industry is all about big business is dead wrong. In 2006, according to the latest Census Bureau data, 90% of pharmaceutical and medicine manufacturers had fewer than 500 employees. In fact, 56% had fewer than 20 employees. The pharmaceuticals manufacturing business is very much about small and medium-size businesses.

Any effort to impose more costly regulation – including price controls – on the pharmaceuticals industry will have dire effects for small businesses and health care consumers.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

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