Drugs Via Canada? The Side Effects Could Hurt
Those high prices for winners provide the incentive for R&D
A major challenge for health-care policy is the high price of prescription drugs. In his speech at the Democratic Convention, Senator
John Kerry endorsed proposals to cut prices by facilitating reimportation of cheaper drugs from Canada. The rationale is to spur
competition. Companies would be forced to compete with themselves. For example, Pfizer Inc.'s (PFE ) direct sales of Viagra to the
U.S. market would compete with its indirect sales, which go to Canada and would then return to the U.S.
The key feature of the pharmaceutical business is the up-front outlay for drug discovery. Drugmakers spend billions to develop new
treatments and prove their efficacy and safety to the Food & Drug Administration. Much of this research-and-development
expenditure goes into drugs that fail. However, once a company succeeds, the costs of production and distribution are small. Making
and selling a million Viagra tablets costs little compared with the earlier R&D spending.
In order for the pharmaceutical market to function efficiently, companies must have incentives to invent new drugs. One possibility:
The government could pay large prizes for successful drugs. Unfortunately, figuring out how much to award and for what is
technically difficult and politically unlikely. Therefore, the incentive has to come from profits for selling successful drugs at high
prices -- higher than the costs of producing already invented drugs.
THE INCENTIVE TO INVENT NEW DRUGS depends on worldwide profits. Some profits come from the U.S. market and some
from abroad. U.S. consumers may not like paying the high prices that generate such profits. But everyone in the U.S. should be happy
about foreigners paying high prices. Profits generated overseas raise the incentive to invent new drugs without requiring even higher
U.S. drug prices.
So how does Canada fit in? If customers could be separated into distinct market