United Press International - Wednesday, August 11, 2004
**David Mcintosh, A UPI Outside View commentary

Closer inspection of the proposals reveals that they will undermine America's leadership position in developing new biotech drugs that can save lives in the fight against cancer and AIDS. In fact, they will crush America's flourishing biotech industry, because these bills not only import foreign drugs, they also import foreign price controls.

Importing Canadian and European policies on drug pricing has several negative effects. Incentives will be significantly reduced for large biotech and pharmaceutical companies to engage in research and development and for venture capitalists to invest needed funds in startup biotech firms. Healthcare as a whole will suffer as the overall cost of care will rise when the introduction of innovative treatments for deadly illnesses is slowed. The quality of care will decrease as the supply of innovative medicines falls short of demand. Cancer and AIDS patients hoping for a final cure will have to wait even longer for new biotech drugs. This is simply too high a price to pay for saving a few dollars in the short run.

Under the Dorgan/McCain/Kennedy bill (S. 2328), which has gathered the most attention, registered importers and exporters will be able to immediately sell certain medications to Americans that were manufactured for distribution here and Canada, and one year later from other "permitted" countries. Unlike earlier legislation, such as the MEDS Act of 2000, the Food and Drug Administration would not need to pre-certify that medicines imported from these countries are safe. Rather, the bill relies upon after-the-fact FDA oversight, considering safety certification "a poison pill."

The Gregg/Smith bill (S. 2493) differs in a few particulars, but it too relies upon after-the-fact FDA oversight instead of pre-certification.

The legislation's proponents discount safety concerns in favor of anticipated drug savings. But the Congressional Budget Office has discounted the expected savings from importation, noting that although the average prices for patented drugs in other industrialized countries are 35 to 55 percent lower than in the United States, added costs would arise due to profit-taking by importers and other intermediaries.

Drug Importation Imports Price Controls: At first blush, these lowered drug prices would appear to benefit Americans, but that view fails to consider foreseeable future ramifications. Because foreign price controls would be imported along with the drugs, future industry investment in R&D will decline.

In France and most EU countries, specific authorities set prices for pharmaceutical products, creating formal price controls. Canadian drug prices are set similarly by a government body. Germany's price-control system is more complex, albeit hardly less interventionist. Some German drug prices must be discounted by a fixed amount; others are subject to a reference pricing system. German doctors are also discouraged from prescribing newly developed, costly drugs by being penalized if a given budget is exceeded.

Importers and exporters will capitalize on these foreign price constraints by purchasing the drugs at the lower cost available elsewhere and reselling them in the United States. The Dorgan/McCain/Kennedy bill protects these arbitrage possibilities through decreased patent protection and "anti-discrimination" provisions. The latter provisions prohibit any person from charging a higher price for prescription drugs sold to an exporter to the United States than to another person in the same country or denying supplies of prescription drugs to those exporters. Thus, several normal market-distribution actions by drug companies become illegal.

Importation Threatens R&D for New Drugs: Economists have deemed the quest for highly profitable drugs as a form of "virtuous rent-seeking," where profits are used to offset tremendous R&D losses and bankroll the development of new drugs.

Money paid for successful drugs is used to recuperate the billions of dollars that it has cost to develop that drug and all of the R&D costs for unsuccessful drugs too. Recent statistics indicate that of every 5,000 potential new drugs, about 250 proceed to the animal-testing stage, around five go on to human clinical trials, and one makes it into the market. Even at that point, only three of 10 new drugs actually make money.

The FDA's approval process for new drugs and biotech products is very expensive and becoming more so every day. "Between the time research begins to develop a new prescription medicine until it receives approval from the FDA to market the drug in the U.S., a drug company typically spends $802 million over (10 to 15 years)," up from $231 million in 1987, according to a 2003 study published in the Journal of Health Economics.

Patents and other forms of intellectual-property protection allow investors to recoup these R&D costs as part of the price of successful drugs. Indeed, the industry recently introduced a small number of supremely important breakthrough drugs, after years of costly failures, which are just as supremely expensive. Chemically complex new drugs now available to prolong the lives of patients with leukemia, sepsis, and advanced HIV represent significant new cost pressures on the system.

As we spend this money to save people who, prior to the drugs' introduction, simply died, we are all, in effect, economic victims of our own scientific successes.

Biotech as the Key to the Future: Historically, large drug companies have self-funded this tremendously expensive R&D process. Today, however, more than 33 percent of biotech R&D expenditures were by firms with less than 500 employees, who require venture capital to make it through the process.

The success of this new model has been tremendous. Over the last two decades, 325 million people worldwide have been helped by more than 155 biotechnology drugs and vaccines. America's biotech industry is the world leader in R&D for treatments of cancer, Alzheimer's, MS and other ailments.

In 2002 half of the new drugs approved by the FDA were biotech, Hopkins, supra, and possible breakthrough drugs for treating breast cancer and other diseases are currently in clinical trials.

America's leadership role in this biotechnology explosion has created high-paying American jobs. From 1992 to 2001 over 400,000 new jobs were created in the biotech and related industries. And this is only the beginning. A recent study by Hutten-Czapski and Desai predicted that Massachusetts could reap up to 150,000 new jobs in the biotech and related industries by 2010.

Venture capital and grants from "angel investors" have made these jobs and this promising industry possible, since most biotech firms engaging in R&D are small and medium-size enterprises that need capital to survive. These investors know that .0002 percent of potential new drugs make it to the market and that most firms receiving venture capital fail. But they invest the funds knowing that the U.S. patent system allows companies to price a successful drug to recover the R&D costs not just for that drug but for the many other promising drugs that didn't make it to the market. This preserves the incentives for new R&D efforts and propagates the cycle of drug improvement and innovation.

But by importing price controls and decreasing patent protection, importation proposals will lower the expected returns from investing in the emerging biotech industry, and venture capitalists will go elsewhere. Free markets are similarly important. In 1994 and 1995, when Hillary Clinton's national-healthcare proposal threatened to control drug prices, the growth rate in biotech venture-capital investment contracted by 6 percent and 16 percent, respectively. But in 1996, when price controls had fallen from the horizon, that rate expanded by 44 percent.

The same trend happened with pharmaceutical research expenditures. "Every year since 1980, pharmaceutical companies have increased research expenditures by double digits -- except in 1994 and in 1995, when there was only single-digit growth," according to a recent article in the New England Journal of Medicine.

Remember: These results came about when price regulation was only threatened.

A growing body of research indicates that the development of innovative medicines helps curtail total healthcare costs. As one study indicates, replacing 1,000 prescriptions for older drugs with newer drugs would increase drug costs by $18,000 but slash hospital costs by around $56,000, corresponding to shorter, as well as fewer, hospital stays.

Europe, on the other hand, can be seen as a case study of the harm caused by price controls.

As Europe introduced price controls on medication they have lost ground. From 1993 to 1997, 81 unique new drugs were launched in Europe, compared to 48 in the U.S.; but from 1998 to 2002, the European number had declined to 44 while the U.S. number rose to 85 according to Gilbert & Rosenberg in the March 2004 edition of In Vivo. Regarding the biotech industry, "the top positions in the U.S. market are dominated by relatively newer products than is the case in Europe."

This decrease in innovation has led to European job loss. Swiss giant Novartis recently moved its research facilities to the United States. From 1990 to 2001 the number of high value-added employees in Germany's drug industry fell by 36 percent (while those in the United States increased by 52 percent). And the quality of healthcare has suffered, creating "a huge difference between a possible optimal treatment and the treatment delivered to the patient," according to Dr. Oliver Schoffski's analysis of the diffusion of medicines in Europe.

Europe has even longer delays in getting drugs to the market than America because once a new drug has been approved for safety, it must go through a second round of price-control regulation. This delay is on top of the general decrease in supply of innovative medicines.

Schoffski recently compared the care that patients with AIDS and other diseases received in Europe to the United States. Among his many stark findings, he noted that 40 percent of all breast-cancer patients die in Germany -- compared to 26 percent in the United States -- due partly to a lack of use of innovative medicines. And with cardio-vascular disease, 83 percent of Italians, 77 percent of Brits and 74 percent of Germans receive suboptimal treatment, compared to only 44 percent of Americans.

As Schoffski notes, European countries would have been better off trying to encourage innovative medicines rather than "cost-cutting."

These dire consequences resulted from socialist healthcare policies in Europe and their strict regulation of costs. Indeed, without the United States supporting the development of new drugs and biologics, the whole world would suffer. As FDA Commissioner McClellan recently stated, "The heart of this problem is that we are not all paying our fair share of the costs of bringing new treatments to the world. And this problem is getting worse."

Some argue that importation would curtail foreign "free riding" on American investment in R&D. But in so doing we may well throw out the baby with the bath water. By adopting drug-importation measures, we simply import the problems of price controls and diminished incentives for innovation. Thus, although the relative discrepancies between countries will be decreased, everyone will be worse off overall.

There is a better way to bring down drug prices in America.

The United States could allow its biotech companies to continue to invent and save lives. U.S. trade negotiators can demand that countries stop threatening to undermine our patents with compulsory licenses. Our government can cajole countries into including a fairer share of the R&D costs in their price-control systems. At home, Congress can address the problems of excessive lawsuits and the cumbersome FDA approval process for new drugs that adds millions to drug-development costs.

Certainly before any action is taken on the drug-importation legislation, Congress should take care to consider the full cost of such policies and the danger they pose to quality healthcare in the United States in the future.

**(A former three-term congressman from Indiana, David McIntosh also served as chairman of the House Subcommittee on Regulatory Reform. He wrote the Report on National Biotechnology Policy, Bush administration, 1991.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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