Rational Drug Pricing, by Jeff Sachs: Drug pricing has taken center

stage in U.S. politics, and it's high time that it should. ...
Drug pricing is not like the pricing of apples and oranges, clothing, or
furniture that well and good should be left to the marketplace. There
are two major reasons. First, the main cost of drug production is not
the cost of manufacturing the tablet but the cost of producing the
knowledge embedded in the tablet. Second, there is often a life-anddeath stake in access to the drug, so society should take steps to
ensure that the drug is affordable and accessible.
To ensure that financial resources flow to scientists to produce the
knowledge embedded in the tablet, the government does two things.
First, the government pays directly for a substantial part of the
research and development (R&D). ... Second, the government grants
patent rights for drug discovery. ...
It's a basic insight of economics that patent rights are a "second-best"
solution to drug pricing, not an optimal solution. A patent creates an
artificial monopoly to incentivize R&D. Yet it also reduces access to
the product, perhaps with unacceptable and immoral life-and-death
consequences. Rational drug pricing would get the best of the patent
system but ensure that it is compatible with access to the life-saving
drugs.
Unfortunately, the current rules of the game in the U.S.
pharmaceutical sector do not compensate for the weaknesses of
patents. They amplify them. ... What should be done? Here are three
key principles.
First, private R&D should certainly be protected by patents but only
enough to elicit the needed R&D, not to produce outlandish profits. ...
Second, when the U.S. government pays for much of the R&D, it
should share in the property rights. This should be a no-brainer, but in
fact the NIH simply gives away most or all the intellectual property
that it has financed, so the taxpayer pays part of the R&D bills but the
returns are fully captured by private companies.
Third, when companies ... make profits from their U.S.-based research
and U.S.-based production and sales, they should certainly pay U.S.
taxes on their profits. The fact that the IRS lets them hide their
profits in overseas tax havens is scandalous and without any logical
justification whatsoever.
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Posted by Mark Thoma on Thursday, September 24, 2015 at 10:42 AM in

Economics, Health Care, Market Failure, Regulation | Permalink Comments (42)
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DrDick said...
"Should we rationally expect rational drug pricing?"
Depends on what you mean by "rational". In economic terms Shkreli's
could be said to be "rational" (getting the most value out of it that he
could. If you mean reasonable and balanced, the markets will never
produce that for any medicine or medical treatment, which always be
priced at the most the market will bear. That is why medicine should
always be socialized. Nobody should ever make a profit off the
suffering of others.
Reply
Thursday, September 24, 2015 at 11:08 AM

pgl said in reply to DrDick...

Good point but me thinks Shkreli's arrogance is only highlighting what
Jeff Sachs is saying.
Reply
Thursday, September 24, 2015 at 12:24 PM

DrDick said in reply to pgl...

My point is really more about the ways in which economics
conventionally defines "rational", with which I have numerous issues,
both professional and personal. Privileging "economic rationality" in
this since is just wrong, even in economics, as Stiglitz and others have
pointed out. It is also the case that markets are terribly inefficient

means to provide certain kinds of services and goods, precisely

because of the profit motive.
Reply
Thursday, September 24, 2015 at 01:47 PM

pgl said in reply to DrDick...

What is rational for Gilead Sciences is not good public policy. But hey there are people in Congress whose only goal seems to let large
companies pocket huge profits and pay no taxes.
Reply
Thursday, September 24, 2015 at 02:03 PM

Brian said...
This notion that the cost of pharmaceuticals is mostly the cost of the
knowledge about the pharmaceutical, discovery costs, etc. is mostly
bunk. The vast majority of research knowledge is obtained for free or
next to nothing from academia.
In many cases, this is also true of the actual compounds. Those are
identified, kinetics nailed down, etc. A company might license one.
Where there is work put in by pharmaceutical companies it is mostly
in development. For instance, a drug like Enbrel was developed
because the soluble receptor for TNF-alpha was known, and so was the
sequence for the Fc chain of human antibodies. Put those together,
you know it will work. An huge amount of pharma work is even less
than that.
The costs are incurred for a number of reasons. First, lots of products
get developed and killed for business reasons. Related to this, there is
a ton of IP held by universities going begging because the treatments
don't fit big pharma's business model for maximum income.
Second, more than a few projects get started and keep going for 10-15
years (which is pretty much the adult career of a PhD scientist) that
should have died early. I use the example of anti-myostatin for
treating muscular dystrophy. The mouse model was wrong. I seriously
doubt nobody figured this out before the clinical trial that didn't work
at all. In fact, based on my knowledge of the area, I tend to think it
may have been known from near the beginning. But, a bunch of
people put their kids through college, and blowing the whistle would
have made that person a pariah.
In other words, knowledge doesn't necessarily mean it is being used
for the benefit of the company. Individuals have motives too
Third, the patent system also motivates stupid R&D. Stupid research is
when you dedicate huge resources to finding me-too chemicals. Look
at SSRI and SNRI drugs for an example. This is a high-throughput
problem that requires little real thought. There is little value added to
the real economy by these products.

I agree with the patent discussion. The outrageous profits that pharma
can make on a patented chemical motivate expenditure of outrageous
money on pursuit of more patent-protected monopolies, not cures. I'm
in this business. I see it. Pharma is NOT interested in cures. At the top,
pharma executives are interested in profit, first, last, and only.
I don't think the author properly understands the Bayh-Dole act. It is
universities who are the gatekeepers of most government patents. It's
sort of correct that the research is given away, but that's also how
patents work. You can't patent natural laws, math, etc.
Universities are lousy at developing and marketing patents. They are
cream-skimmers, gatekeepers, not sales. This is another problem.