If you want to kill an innovative industry, first undermine its intellectual property rights.

Every few years, when the FDA's user fee agreements come up for reauthorization (and this year is no exception), the usual suspects line up in Congress to try and pass legislation that would allow for the importation of drugs from price controlled countries like Canada.

This is bad economics, bad public health policy, and bad for medical innovation.

Allowing the importation of price-controlled medicines into the U.S. market undercuts protections for intellectual property rights and dampens incentive for medical innovation. It also opens the U.S. prescription drug market to penetration by counterfeit drug manufacturers run by criminal (or potentially even terrorist) enterprises, since it is impossible to completely certify the provenance of drugs imported from even close trading partners in Europe or Canada.

But the foolishness of the approach is also underscored by an article in the New York Times on a related topic - the expiration of patent protection for the blockbuster drug Plavix.

Notes the Times:

For more than a decade, cardiologists treating patients who have had a heart attack have routinely scribbled one drug onto their prescription pads: clopidogrel bisulfate, better known as Plavix. But now, in a farewell that has been years in the making, the story of Plavix is coming to an end. The drug is set to lose its patent protection on Thursday. ...

Bristol-Myers is hardly the only company to face the loss of a best-selling drug: at least 19 are set to lose patent protection this year, which is expected to cost the pharmaceutical industry about $38.5 billion in lost sales, according to an analysis by Barclay's. About 80 percent of the prescriptions written in the United States are now filled with generic drugs.

Pause and consider that for a moment: 8 out of 10 prescriptions written in the U.S. are for cheap, highly effective generic medicines. The industry has been losing patent protection for many blockbusters in recent years, and will continue to lose billions of dollars in sales from patent expirations over the next several years.

(Cue the cheers from public and private insurers.)

But wait! Each of these drugs was once an expensive branded medicine, and the profits of those drugs paid for the next generation of marketed drugs. So without the branded medicines that preceded Plavix, there would be no cheap generic Plavix now.

There is no other health care good or service like prescription medicines in this respect: MRI machines don't suddenly plummet in price after 10 years. Newer, better machines come along, to be sure, but they are also more expensive. Doctors who graduated from medical school ten years ago aren't any cheaper than their colleagues who graduated last year.

Prescription drugs are unique in that after patents expire and prices fall to pennies on the dollar they will continue to be widely used for decades and continue to generate enormous health benefits for consumers.

But you cannot get the benefits of cheap generics without paying a premium price for branded medicines. The U.S. - which generally lacks price controls for prescription drugs - pays somewhat higher prices for new medicines, but also has much lower prices than almost every other developed nation for generics, because of fierce competition among generic manufacturers after a drug loses patent protection.

This is a win-win for American consumers, who benefit both from rapid innovation and a widening array of cheap generics.

But it also means that the U.S. underwrites the lion's share of global medical innovation, allowing our wealthy trading partners to "free ride" on our investment (just as Europe underinvests in defense spending because the U.S. provides Europe with a security guarantee).

No one has better illustrated the economics than my colleague Peter Huber, who wrote in Forbes several years ago that:

Almost all the cost of a drug is in the development and the complex hardware required to concoct the chemicals that become the medicine. These costs are fixed, and they are sunk. Like the jet's fuselage, you pay for them once, up front, regardless. Once a drug is in production, churning out one more little pill costs next to nothing. You can almost give it away to the desperately poor in sub-Saharan Africa. Provided, of course, that somewhere else [someone] pay billions.

Drug-buying collectives and cartels have an unconditionally negative impact on economic welfare. As they coalesce, they transform drug manufacturers into price-regulated utilities. Sure, you can go ahead and invest a billion to develop a new vaccine or AIDS drug. But just like your electric power company, you can sell your product only at a price acceptable to Canada's minister of health. Or maybe Kenya's. Yes, Merck or Pfizer has honestly earned the government-issue, fixed-term monopoly that we call a patent. But when it tries to cash in at the store, it meets a government-established buyers' cartel on the other side of the counter.

Patent a miracle drug, choreograph the pricing just right and you recover your sunk costs efficiently, earn a good profit and move on to your next miracle. You can survive the arrival of me-too generic competitors: They put an end to your sunk-cost recovery only after the patent expires. Collectivized buying, however, imposes generic pricing from the get-go. ...

When rich people form buying cartels to put a price squeeze on properly patented drugs, the few win in the short term and everyone loses down the line.

The U.S. already subsidizes prescription drug coverage for the elderly and poor, through Medicare and Medicaid. Wal-Mart and other large buyers offer dozens of generics drugs for $4 for a 30 day supply to everyone, including the uninsured. Pharmaceutical companies offer their own prescription drug assistance programs offering free or low cost medicines for those without insurance or who cannot afford their insurance co-pays.

All this is by way of saying that the near term policy justification for any legalized importation scheme is thin to non-existent, while the long term repercussions are dire. Expanding de facto generic pricing - whether through direct importation, government drug price "negotiations" for Medicare Part D, or through expanding Medicaid's mandatory discounts - is another powerful signal to drug companies and their investors that they're investing in the wrong business.

We may cheer when many of the drugs we use are cheap generics. We'll rue the day when they all are.

(For another great article by Peter Huber on drug pricing and innovation, see this.)

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