Regarding Taxpayer Support of the Evil Drug Companies

DrRich | November 14th, 2011 - 7:00 am


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.

14 Responses to “Regarding Taxpayer Support of the Evil Drug Companies”

  1. withouteyes says:

    The problem is that for every story like this were tax payer money went to something useful, there are probably 10 (yes, I made that up) examples where tax payer money is going to some worthless CAM study such as the ongoing fiasco of the NCCAM 8 year study of chelation therapy for atherosclerosis, in which the designers of the study, in their wisdom, recruited the owners and operators of chelation clinics to conduct the research.

    The study:

    Why the NIH Trial to Assess Chelation Therapy (TACT) Should Be Abandoned:

  2. Do drug prices fall as did the prices for Apple computers and the like? Is Xalatan more expensive, less expensive or the same as it was in the 1980′s?

    • DrRich says:


      Drug prices remain high until the patent runs out, which, by the time new drugs clear the regulatory process, is often only for a few years. Xalatan is now available in generic form, and is pretty cheap.


  3. Jupe says:

    How does this harrowing tale play out if there is (and was) no left? What if there are no leftists in power anywhere, and absolutely all of the people in power are pure oligarch-capitalists and their minions operating as dems and repubs?

    Does the story change at all? (very honest question.)

    The Occupy protesters, btw, absolutely are lefties (80%, at least. Another 20% are Ron Paul libertarians). But they/we have never had any sort of power in our entire adult lives. I don’t have an iPhone, but many do. I also am bankrupt from epilepsy, wage garnished to pay for it, etc. When I had health insurance, it was 50% of my and my husband’s collective income.

    The standard of living has been going down my entire life. I live in a world where economic segregation means that the burden of caring for the destitute (kids knock on my door and beg for food every day) falls upon the simply poor.

    So, a lot of wealth has been redistributed upwards compared to my parents and grandparents. How much more do you people want? I suppose I could be thrown into a modern debtor’s prison over having the audacity to be epileptic and poor?

    • DrRich says:


      As I have said many times on this blog, I am not a conservative because I believe dog-eat-dog capitalism is an unalloyed good, but rather, because it’s the only economic system that matches up with human nature (which is inherently flawed), and with appropriate constraints, can optimize economic outcomes.

      In the late 19th century, 40 years of unfettered capitalism led to great economic disparities, with an apparently permanent underclass working in sweatshops. Progressivism came along and, for several decades, compromises with Progressives led to an improvement in the equalization of economic opportunity.

      In the 1960s, Progressives led us into a frankly redistributive “New Society” agenda, which has created another kind of permanent underclass, dependent on government handouts for their survival. Most of us can see where that is leading. To me, the solution is not more redistribution.

      Sounds like we agree on the problem, but don’t see eye to eye on the cause, or the solution.


  4. Jupe says:

    Dr Rich, Clinton repealed welfare! I recently had my best friend become legitimately disabled from multiple broken vertebrae, and the waiting list for disability is years! She lives with an abusive spouse to survive. Another woman I know is absolutely insane and believes fungal mold is out to get her (I’m not making this up! She’s crazy) but the waiting list for housing is around 5 years here. She prostitutes to survive.

    The “new dependent culture” did exist, but was abolished under Clinton.

    I’m very interested in the “culture of dependency” that emerged in the US and the UK, and why it never emerged in the Nordic welfare states.

    But before we discuss the causes I need you to acknowledge that we don’t really have a welfare state any more in the US. It was a problem, I agree. And it is still a problem in the UK.

    For us to see eye to eye on the cause, I need you to look at modern Scandinavia. They have large immigrant populations there. And those immigrant populations often use the safety net and then bounce back and rejoin the economy, as far as I can tell. Also, the transition is often gov jobs.

    Look at Norway. Their unemployment figures tend to be far smaller than ours. But their unemployment office tends to not pay people to not work, but rather employ people in the public sector.

    An incentive many refuse to acknowledge is the incentive inherent in human nature to be contributing members of their societies. People feel like crap when they behave as parasites, are seen as parasites, and are referred to as parasites. It’s simple human nature. Depression is a real phenomenon and often situational. I think it’s possible that the Nordic countries understand this and have compensated for it. I could be wrong, and I eagerly await your rebuttal, as I consider you, Dr Rich, to be a great thinker (no joke!)

    • DrRich says:


      I’ll let the Cato Institude address the question of the Nordic states and socialism.

      The Great Society destroyed the nuclear families that used to exist in the underclass, an underclass that used to have a realistic chance of upward mobility (as illustrated by my grandparents, for instance). But we now have generations of Americans who grew up in poverty, without fathers, uneducated, nearly unemployable. In fact, I consider the state of public education in the US to be a far more fundamental problem than the state of our healthcare system, and is the most likely thing to bring us down. Whatever the state of our welfare system today, we have created a permanent underclass with our redistributive policies.

      But aside from the poor, we have many others dependent upon the government for their daily survival – the elderly (Social
      Security, Medicare), federal and state employees, teachers, even doctors. (If you don’t think that doctors depend on the government for their livelihood, watch their behavior when the Supercommittee fails this week, and Medicare reimbursements are cut.) All of these people directly depend on government policies for their survival.

      To support all these government dependents, we are accumulating enough unsupportable debt to make us Greece (not Norway) within the decade. To avoid pissing off all these government dependents, we are unable to negotiate a reasonable method of bringing our federal budget back onto a sustainable path.

      The money to pay for all this, ultimately, can come only from the private sector. The private sector is induced to the monumental task of converting intrinsically worthless natural resources into cars, iPads, fancy new medications, skyscrapers, and ice cream, by the possibility of making profits. This is not only hard work (everyone, after all, works hard) but it takes insight, dedication, sacrifice – and above all, risk. (Most would-be entrepreneurs fail, and their investments in time and money evaporate.) Profit is the engine that drives them despite the odds.

      And now, when they do earn a profit, the ones who are successful – and whose works feed the entire beast – are called greedy by the Occupadoes and by our President, despite the fact that (if they live in NY or CA) more than 50% of their “profits” are already taken back as taxes.

      The founders warned us, in the Federalist Papers, against the day that 50% of Americans depend upon the government for their livelihoods. On that day, tyranny becomes inevitable. As I see it we are at that tipping point. We may or may not have one more election to reset our course.

      We do not need to imagine what will happen if we do not change our course. The 20th century was rife with examples of the end-game of socialism. Living examples are available if we look across the pond.


      • Jupe says:

        Your CATO link about Scandinavia is not compelling. All they’re saying is that we have a larger GPD (ignoring the fact that a lot of it goes to the oligarchy while the masses are impoverished relative to Norway’s masses) so that means the US is better. Also some apparently circular logic about how government jobs are bad, so that means having people working for the government is bad?

        Maybe you can distill the valid points of the argument better?

        Regarding tipping points and tyranny, we have less welfare than (almost) ever in the US when it comes to the poor (we might have more welfare when it comes to doctors, corporate welfare, etc.) but how does Scandinavia prove the tyranny hypothesis?

        Also, in the Federalist papers, many founding fathers expressed a love of progressive taxation to redistribute wealth to find a sort of societal average in terms of wealth. Not that I put too much stock in that group. Being slave-owners and all. (also, being of the age before the industrial revolution, what they thought doesn’t necessarily apply. Like, in the pre-industrial era, land and rents were wealth. There was little industry. It’s not the same now.) They were brilliant in many ways, as many modern thinkers are now, and also flawed in ways, as we all are.
        Don’t mean to be heretical!

        Anyway, I’d like to talk to you more about the Nordic countries.

      • DrRich says:


        Regarding Scandinavia, I’ll admit to a fair level of ignorance there. And the American press has been quite favorable to “Swedish Socialism” for decades, and certainly makes it sound like a people’s paradise. But even if it were as good as the media makes it sound, it would be the exception that proves the rule, when you consider the “success” and the travesties perpetrated by the USSR, Cuba, North Korea, communist Eastern Europe, and other socialist states.

        Also, Sweden had certain unique “advantages” that supported their socialism for decades. 1) They remained “neutral” in WWII, and made lots of money selling the Nazis iron ore and other natural resources. 2) So at the end of the war, they had the strongest economy in Europe, which supported their socialist agenda for several decades. 3) The Swedish people in the 1930s – 1970s were a very homogenous population with a culture of hard work and relative selflessness, which sustained them much longer through a “collective” society than would be likely with most other populations. That is, the fatal flaw of socialism (that it demands suppression of individual striving in favor of working for the collective) did not manifest for a generation or two. So until the mid-1980s, Sweden really did look like the collective paradise.

        But newer generations of Swedes had lost their parents’ work ethic, and Sweden went through their economic “Greek crisis” in the mid-1990s. Outlays for social programs greatly outstripped revenues. That’s when capitalist reforms began kicking in, and entrepreneurs were “invited back.” Since then, there has been the inevitable back-and-forth between the forces of collectivism and the forces of free markets – and it looks like the free market is in the ascendency. Perhaps Sweden will eventually strike a nice median which we can all emulate.

        As for tyranny, I agree that Sweden never went through the kinds of pogroms that are the rule for most socialist societies. Their “tyranny” has been of the “softer” sort – the kind I am expecting to see in the US. For instance until the mid-1990s, would-be entrepreneurs were officially discouraged, and even punished for being “greedy,” and for wishing to destroy the collectivist paradise. More telling, from the early 1930s until the early 1970s, Sweden had a very active program of eugenics going on. Eugenics, as I’ve pointed out elsewhere, seems to be an invariable component to collective paradises, as the ruling elite figures out it needs to get rid of the undesirables, in order to create a more perfect population which will be more cooperative to the dictates of the “experts.”

        You can read about this Swedish eugenics program in the August 29, 1997 edition of the, Washington Post. A brief excerpt:

        “From 1934 to 1974, 62,000 Swedes were sterilized as part of a national program grounded in the science of racial biology and carried out by officials who believed they were helping to build a progressive, enlightened welfare state…In some cases, couples judged to be inferior parents were sterilized, as were their children when they became teenagers.”

        Most victims, by the way, were women.

        The problems with collectivist systems are inherent, and will always manifest themselves, sooner or later. Even in Sweden. Collectivism flies in the face of human nature, causing the elite leadership (which knows the true path to paradise – if only the people would behave) inevitably to go through stages frustration, anger, and finally violence against those they see as being too “selfish” to support the collective goals of the people.

        In our country, our elite know-it-all leadership is currently in the “frustration” stage, but is quickly moving toward anger.


  5. Jupe says:

    Also, a real situation for me today:

    I have exactly 5 pieces of bread left (seriously). Kids come around asking for 4 (this actually happened today).

    I can either side with power or say to hell with debunked theories that crashed the economy. I say “to hell with it”. I give the last of our bread away.

    This actually happened to me today.

    The powerful economists will never, ever admit that people are also altruistic. But the fact will survive. My humanity will never be killed. Never.

  6. Jupe says:

    I’m kind of neurotic and obsessive about ideas coming from people I admire that don’t line up with my own thoughts and understandings. I want to genuinely understand more, even if that means that cherished notions are killed (deconverting from Christianity was especially brutal in this regard.)

    You say “The Great Society destroyed the nuclear families that used to exist in the underclass”

    How? The wave of divorces that happened in the era of feminism transcended class divides. In the post-welfare era, there are still poor women getting pregnant with children they can’t afford from multiple fathers. It seems to me that the idea that women should not be abused was the biggest factor in destroying the nuclear family as it used to exist (where almost 100% of marriages were never dissolved?)

    I look at it like feminism might have “destroyed” the (often abusive) nuclear family. I don’t see the Great Society/welfare as doing anything but a safety net function there, though.

    I would completely agree that what sprung up in its place sometimes (the actual size was small and greatly overblown) of the gov unproductive dependents, was bad. Bad for everyone.

    But I have a hard time seeing that small number of people that used to exist and are no more as nearly the threat to liberty and happiness that the cult of self-interested Oligarchy are.

  7. Jupe says:

    Where are you, Dr Rich?

  8. Jupe says:

    Dr Rich,
    I agree that Sweden did some evil, creepy things along the lines with things the US did during that era (and at the behest of the US Progressives.)

    Norway, it seems, also did it.

    What does nationalizing oil companies have to do with eugenics, tho? I mean, we don’t have nearly the public sector Norway does, but our eugenics movement was just as strong if not stronger, and seems unrelated to nationalizations.

    Like, many cities still have public ownership of water supplies (as opposed to privatization). Do you think my publicly-owned, super cheap water means I’m about to be sterilized by the PTB? (I am epileptic. And I do know eugenics were widespread from 1900-1970) I’m not sure that public ownership of roads, water, etc correlates with eugenic scariness?

  9. Prometrium says:

    While I agree that there have been some products brought to market which should have been more thoroughly researched, there are alternatives to buying medications in the U.S. Yes, it may not be the popular thing to do but medication can be purchased overseas and in Canada at a fraction of the price that we often pay in the states.

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