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

Attacks on Medicine, Attacks on Small Business

What’s the deal with politicians picking on pharmaceutical manufacturers? After all, what do these companies do that’s so bad? Oh, that’s right, they make medicines that improve and save lives.

But this costs a lot of money in terms of research, development, etc. And many politicians just think – contrary to basic economic common sense – that government can wave its magic wand and make those costs just disappear, at least for consumers.

Consider a few points from an article in the January 23 Wall Street Journal titled “Pharmaceutical Industry Faces Increased Scrutiny.”

• All the leading Democratic presidential candidates and, on the Republican side, Arizona Sen. John McCain, support importing less-expensive drugs from Canada. Democrats also back allowing Medicare, the federal health-care insurance program, to negotiate with the industry over pharmaceutical prices.

• Democrats' plans to expand health care to more Americans, though they could add customers to the drug companies' rolls, also risk granting Washington even more influence over the industry's revenue.

• On the campaign trail, Sen. Clinton told a crowd recently at the California State University Northridge campus that she wants to "give Medicare the opportunity to bargain to get cheaper drug prices." The New York Democrat added, "We pay for clinical trials...and then we end up paying the highest cost in the world because other countries drive a better bargain." Her rhetoric echoed similar attacks by her Democratic rivals, and even Sen. McCain, in a debate on Jan. 5, asked, "Why shouldn't we be able to reimport drugs from Canada?" answering himself, "It's because of the power of the pharmaceutical companies." When former Massachusetts Gov. Mitt Romney urged him not to cast the drug makers as the "big bad guys," Sen. McCain countered, "Well, they are."

What’s being talked about here is the imposition of price controls. There’s a reason why the U.S. is the global leader in developing new drugs. It’s because, unlike most other nations, we do not have price controls. Businesses and investors have a chance to earn a return for their massive risk taking and investments. Inflict price controls initially through Medicare, or indirectly through re-importation, and there goes the U.S. pharmaceutical industry’s leadership. And with it will go many high paying jobs.

And by the way, this is not just about big companies. According to the latest data (2005) from the U.S. Census Bureau, 55 percent of U.S. pharmaceutical and medicine manufacturers have fewer than 20 employees, and 90 percent less than 500 workers. A political attack on the pharmaceutical industry amounts to another political attack on small, entrepreneurial U.S. firms.