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August 4, 2014

So Do We Need Pharmaceutical Innovation, or Not?

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Today in the Wall Street Journal, there is good op/ed about the threat of Ebola and other infectious diseases that urges us to invest more money in medical innovation.

There's also another op/ed complaining that cutting edge, innovative medical cures are too expensive, and that we need something apparently just short of price controls to do something about it.

So which is it? Do we want pharmaceutical and biotech companies taking risks and innovating new cures, such as Sovaldi, the new cure for hepatitis? Or not?

Ms. Ignagni's piece is particularly egregious. It's part of a campaign that she's behind to get the federal government to forceably lower the price of Sovaldi, a blockbuster new miracle cure for hepatitis C. Note the word "cure."

First, she writes as if concern over high drug prices is a recent phenomenon, which of course it isn't. I've been hearing statists complaining about high drug prices for the 20 years I've been doing public policy. In fact, the first paper I ever edited and published at IPI was on this very topic. The redistributionists have never understood why they can't have all their diseases cured and their pain alleviated without it costing anyone anything. They're always focused on the second order concern--how goods are distributed--without fully appreciating the first order concern--how goods come to be in the first place.

Distributing existing goods is easy--innovating a new product or service that never existed before, now that's impressive. But apparently not to Ms. Ignagni.

Second, she seems to think that markets don't exist in the presence of patents. It's true that, because a patent is a particular type of temporary monopoly, patents insulate a product from competition with itself. You can't just go out and copy the thing and then sell it for 5 percent less. But patents don't really eliminate competition--if two companies both create cures for hepatitis C, based on different molecules or different therapies, there might very well be vicious competition between the two patented therapies.

So, for those who don't follow these things, Sovaldi does not have a patent on curing hepatitis C--the patent only covers that specific drug. Come up with a different molecule or therapy that cures hepatitis C, and you're good to go.

But even without a competitor, companies still have to price their products for what the market will bear, and if not enough people are buying Sovaldi, I assure you the price will come down. So the price function of markets still works, even with a patented product.

Ignagni has a yearning for price controls. That's what she means by "rational" prices, and it's why at the end she says she's not calling for price controls, since price controls are the logical conclusion of her argument. What is a "rational" price, anyway? In Ignagni's world, it's a government-approved price, which means either a direct or indirect price control.

We long ago figured out how best to determine what a rational price for something is. We let markets determine prices, through the supply and demand function, and as I discussed above, supply and demand still work even for patented products.

Third, Ignagni downplays the significance of innovation. Note that she says Sovaldi "offers a chance to cure hepatitis C." That's about as weak a construction as one could manage. Actually, Sovaldi CURES hep C in 90 percent of cases. 90 percent. That's not "offering a chance to cure"--that's a breakthrough cure.

Which is worth a bit more comment. For about a decade now, critics of the pharmaceutical industry have been complaining that the industry spends its R&D dollars on lifestyle drugs for the upper class instead of on blockbuster cures for the truly needy. So now, along comes a true blockbuster cure, for a disease that frankly isn't typically an upper class infection, and the critics are not happy because it's too expensive. A pox on them.

Fourth, Ignagni is thinking about costs in a very non-businesslike way. Sovaldi CURES hepatitis C, which means that, while the costs are all upfront, insurers are going to save a TON of money by NOT having to pay for ongoing hep C treatment, which includes liver transplants and antirejection drugs. The New York Times (yes, really) has an excellent piece about how Sovaldi will actually bring down costs to insurers and to our health care system overall. Which is simply the latest example of something honest healthcare analysts have known for a long time: Prescription drug therapies are generally cost SAVERS. If an expensive drug allows you to avoid an even more expensive surgery, the drug is cheap, not expensive.

Critics of Sovaldi pricing aren't thinking very deeply about either healthcare innovation or even about the healthcare business. Unless, of course, Ms. Ignagni is so cynical that she thinks her industry can reap all the cost savings that will come down the road from curing hep C while also using political demagoguery to save the upfront costs as well. Naw, that couldn't be it.

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