A key goal of the Central Authority, as it contemplates how best to run our healthcare system, is to do whatever it can to stifle medical progress. Medical progress usually means introducing new drugs or new medical devices, which are often very expensive in themselves, and worse, which often threaten to improve the survival of some category of patients with chronic disease. So typically, medical progress greatly multiplies the costs of healthcare, and all the Central Authority gets in return is more chronically ill people to contend with. For this reason, suppressing medical progress is a critical aspect of covert healthcare rationing.
It goes without saying that a major tactic in achieving this goal is to demonize the drug companies. If the pharmaceutical industry can be made out to be sufficiently evil, corrupt, greedy, and callous to the needs of the people, then it will become the duty of our leaders to constrain them, and in so doing, to limit their ability to develop and introduce new products. This is easily done by adding daunting new regulations, or by piling on oppressive new taxes, or by legislating “windfall profits” penalties, or by using the threat of the regulatory speed trap to threaten them with massive fines or imprisonment. It is indeed fortunate for the Central Authority that the drug companies are, in fact, not the most fastidious members of the corporate community, and that their actions and methods often suggest many fruitful avenues for demonization.
One such avenue that is particularly fruitful, since it recruits the public squarely into the camp of the prosecutorial horde, is to show how the corrupt pharmaceutical industry feeds at the trough of the American taxpayer.
A few years ago, to specifically document this sort of reprehensible behavior, the New York Times pointed us to the case of Dr. Laszlo Bito and the anti-glaucoma drug Xalatan.
In the early 1980s Dr. Bito, a researcher at Columbia University, made a key discovery about a new class of substances that could potentially treat glaucoma. His research was funded with American tax dollars through the National Institutes of Health.
Subsequently, the pharmaceutical giant Pharmacia purchased the rights to Bito’s discovery for a mere $150,000. Based on Bito’s tax-supported work, eventually Pharmacia released the anti-glaucoma eyedrop preparation Xalatan. Xalatan rapidly became a worldwide best-seller, yielding as much as $500 million in sales per year. For their part in this unalloyed success story, Columbia University has netted over $20 million in licensing fees and royalties, and Bito himself became a millionaire.
Meanwhile American glaucoma sufferers are forced to spend upwards of $50 every six weeks for a tiny vial of the drug, which costs the company only a small fraction of that amount to produce, and whose discovery the glaucoma sufferers paid for with their own tax dollars. And, as if to guild this already brazen injustice, Pharmacia makes Xalatan available in Canada, France, and most other countries around the world (where taxpayers decidedly did not support the discovery of the drug), for less than half what American patients pay for it.
It seems, the Times points out, that the American taxpayers are the only parties in this little scheme who reap no financial return on their investment. All they got were some expensive eyedrops.
And so, drug-company demonizers would have us conclude, this is a particularly egregious example of how the evil pharmaceutical industry is ripping us off. Not only are the drug companies mercilessly profiteering from sick Americans (which indeed is their openly-admitted business model), but they are also picking the pocket of every American by using our tax dollars to invent new drugs, then selling those drugs back to us at exorbitant prices. This, one could reasonably argue, is at least as sociopathic as anything the tobacco companies ever did. (The tobacco companies, in contrast, at least had the good graces to eventually stop claiming that their products were beneficial to one’s health.)
And (we in the great unwashed are all supposed to agree), if this reprehensible behavior doesn’t give our government the right to control the prices charged by drug companies, one would be hard pressed to say what does.
DrRich certainly doesn’t want to absolve the pharmaceutical industry of all responsibility for drug prices that seem obviously too high, or for the striking disparities we see in the prices they charge for their drugs between the U.S. and other countries. He has read the complex justifications, published by apologists for the pharmaceutical industry, as to why drugs in Canada cost so much less than in the U.S., and why a tablet whose actual manufacturing cost is five cents is sold to our elderly sick for five dollars. DrRich thinks that, despite all the pretty explanations the pharmaceutical industry gives for these “seeming disparities,” drug companies simply do what every other industry does – they charge the highest price the market will bear, for each market in which they participate. If they didn’t do this, they would be abrogating their fiduciary responsibilities to their shareholders.
There is much not to like about high drug prices, or the fact that people in other countries reap the benefits of American research for far lower prices than Americans do. And it is reasonable for us to seek to address these pricing issues. But as we address certain inequities in drug pricing, we should be careful that in doing so we don’t throw the baby out with the bath water. So if we’re going to alter the arrangement we have with the pharmaceutical industry, let’s be clear on how that arrangement works, and why we set it up in the first place to operate as it now does.
Consider once again the glaucoma drug Xalatan, and consider how Dr. Bito’s discovery was actually used by Pharmacia.
Bito did not discover a finished product. Instead he discovered a new concept for reducing intraocular pressure (that is, for treating glaucoma), and demonstrated that it could be effective – but the specific compound he discovered was not marketable. In fact, it was so highly irritating when applied to the eye that it was simply not suitable for human use. (DrRich does not understand why the drug companies are the evil players in this story, when Columbia University so obviously allowed research to proceed in their facilities in which irritating substances were intentionally placed into the eyes of bunnies or other cute animals.) Indeed, Bito’s new compound was so impressively unusable that, before Pharmacia bought the rights, his discovery had been offered to and rejected by a host of other drug companies as being completely infeasible.
So when Pharmacia finally agreed to pay for the rights to Bito’s patent, they took on an expensive risk that, some estimated, had less than a 5% chance of achieving success. Pharmacia assumed the difficult task of developing a brand new synthetic molecule that would have all the benefits described by Bito, but at the same time would not have the prohibitive side effects. There was no assurance at all that such a molecule could ever be developed, and the cost of searching for one would dwarf the cost of purchasing Dr. Bito’s compound in the first place.
If such a thing turned out to be feasible, then the company then would have to conduct painstaking and extraordinarily expensive human research trials, and if successful, would then have to shepherd their new compound through a time-consuming and costly regulatory gauntlet – which explains why the vast majority of promising new drugs fail to ever gain FDA approval. That their efforts were ultimately successful does not diminish the fact that, when Pharmacia agreed to invest the time, money and opportunity cost to develop Dr. Bito’s discovery, the company was committing itself to an expensive and extremely risky proposition, with no assurance of making a profit or even recouping their losses. It was, in fact, a very long shot.
The folks occupying Wall Street ought to remind themselves that the cool products they are using each day (such as the iPhones they use to organize their flash demonstrations) all came about because the profit motive – and only the profit motive – encouraged some entrepreneur to risk his/her time, treasure, and sacred honor on some new idea. And for each risk-taker who becomes a millionare or billionare, thousands of others achieve only modest success – or fail altogether. (That’s why it’s called “risk.”) But the lure of big profits drives the whole system, and accounts for American progress.
Bito’s (tax supported) idea was a promising one, but the challenge of developing that idea into a product that was useful to patients and that could be brought to market was very expensive and highly risky. Pharmacia took on that risk (all of which was borne by its shareholders, and not by taxpayers) only after difficult, internal corporate soul-searching. If not for the prospect of making enormous profits if this risk worked out, the company (like several other drug companies did in this particular instance) certainly would have walked away.
Before 1980, it is likely none of this would have happened. The Bayh-Dole Act of 1980 was passed expressly to encourage the further development of federally financed, university-based basic research. Until then, a large proportion of basic university research was never “translated” into useful medical products. Such translation of basic research was recognized by Congress to benefit society not only by advancing the practice of medicine, but also by stimulating the overall economy. So industry was actively encouraged to take on the risk of developing promising ideas that came out of federally-funded research. And the profit that greeted successful enterprises was designed to be the one thing that would lure industry into taking that risk.
So when the Times “discovers” a company “profiteering” from work done with tax dollars, it should not be a revelation, nor should it be an unmistakable sign that the company is inherently evil or dishonest. Nor does the company’s activity in this regard give us a justification to arbitrarily restrict its profits. Rather, that’s simply the deal we taxpayers (through our elected officials) have made with the drug industry. We made this deal because we felt it would benefit American society, the American economy, American patients, and quite probably, us as individuals. Of course, if we want to change that deal now, it is within our rights to do so.
Without Bayh-Dole, perhaps patients with glaucoma would still be getting surgical therapy and wearing those coke-bottle eyeglass lenses instead of just using eyedrops. And if we wish to allow the Central Authority to put the brakes on such medical advances (ostensibly to prevent unseemly profiteering, but actually to stifle medical progress), we certainly can. It’s how covert rationing works.
But we shouldn’t vilify the drug companies for taking us up on the deal we offered them, back when we were thinking more clearly.