[Politech] Replies on Canadian drugs and Internet re-importation

From: Declan McCullagh (declan@private)
Date: Tue Sep 21 2004 - 22:01:26 PDT

Previous Politech message:

-------- Original Message --------
Subject: 	Re: [Politech] Conservative group says Internet drug
reimportation = higher $$$
Date: 	Tue, 21 Sep 2004 11:13:06 -0300
From: 	Stephen Downes <Stephen.Downes@nrc-cnrc.gc.ca>
To: 	Declan McCullagh <declan@private>
References: 	<41502756.7030500@private>


If they avoid selling in Canada, the drugs will simply be manufactured
in Canada by generics - the drug companies have already tried this, and
that's what happened. Drug costs in Canada are regulated, and are based
on the actual cost of drug production, not whatever the market will
bear. Drug companies make a fine profit in Canada and enjoy strong
patent protection, the cost of which was price regulation. Deregulate
the prices... lose the patent protection.

-- Stephen

-------- Original Message --------
Subject: RE: [Politech] Conservative group says Internet drug 
reimportation =higher $$$
Date: Tue, 21 Sep 2004 10:06:54 -0400
From: Leibowitz, Wendy <wleibowitz@private>
To: Declan McCullagh <declan@private>

I think this is just another scare tactic by the pharmaceutical
companies to try to stop people from buying their products at a lower
cost. Somehow, that's going to lead to drug shortages. Right.

-------- Original Message --------

I think the problem is that if the drug companies refuse to sell to the 
Canadian market, then the Canadian government might feel justified in 
violating their patents and creating the drugs themselves.  I know that 
sounds a little third-worldish, but hey, that's why I live here.  So, if 
that's the case, then the drug companies are basically forced to follow 
Canada's rules or lose really big.

-------- Original Message --------
Subject: RE: [Politech] Conservative group says Internet drug 
reimportation =higher $$$
Date: Tue, 21 Sep 2004 10:34:52 -0500
From: Paul Higgins <pahiggins@private>
To: Declan McCullagh <declan@private>


I can't claim to have any special expertise on this topic, but I'm
guessing that part of your confusion has to do with length of run.  In
the short run you are almost certainly correct: if transborder arbitrage
in prescription drugs is permitted to occur on a sufficiently large
scale, then the prices in Canada and the United States would presumably
equalize eventually (aside from a differential that would endure due to
differences in tax laws, transport costs etc.).  The IPI seems to be
saying that the long-run arbitrage price would be too low to support the
ongoing research necessary to keep the pipeline of new drug therapies
filled, and that this would eventually raise health care costs to

The IPI's argument seems absurd on its face (again, with the caveat that
I can claim no particular expertise in pharmaceuticals economics).  Why
should we think that arbitrage would force U.S. prices down to the
unsustainably low Canadian level?  It seems more likely to me, in view
of the relative sizes of the two markets, that prices in both nations
would settle at an equilibrium level somewhere in-between -- probably
closer to the current U.S. price level than the Canadian one, but that's
only a guess.  The point is that the drug manufacturers aren't idiots;
they employ smart people who are perfectly capable of figuring out what
prices they need to charge to cover their ongoing research costs.

The really important questions, it seems to me, are political rather
than economic: Canada has chosen to be a free-rider, enjoying the
benefits of pharmacological research that other (mostly American)
consumers pay for.  As a result, Canadians citizens enjoy access to
drugs at below-market prices.  One cost Canadians bear as a result of
this policy is that, as the IPI news release infers, Canada loses out on
some of the research that might otherwise have occurred there, and thus
also loses out on the valuable spin-offs that that would have generated.
It's more or less the opposite for the U.S.: our citizens pay higher
prices for drugs than Canadians do, but our economy is the more
technologically advanced, in part because more of the pharma and
biopharma research occurs here.  So . . . is the U.S. government willing
to risk angering the Canadians in order to toss the A.A.R.P. and rest of
the consumer lobby a bone?  If the pressure on the U.S. government
mounts to the point where it has to permit reimportation, how far is the
Canadian government willing to go in opposing the U.S. in order to
protect its policy?  One thing we can rest assured of, though: the
pharmaceutical industry will protect its interests and remain

Paul Higgins
Madison, Wisconsin

-------- Original Message --------
Subject: Re: [Politech] Conservative group says Internet drug 
reimportation = higher $$$
Date: Tue, 21 Sep 2004 10:50:53 -0400
From: Mike Pettit <mpettit@private>
To: Declan McCullagh <declan@private>
References: <41502756.7030500@private>

(Declan, I've always wanted to communicate privately with you, and not
have you post my observations.   But I've watched this drug
reimportation thing and know some senior citizens impacted by these
nonsensical policies, so I grant you permission to post the following
if you think it would be useful.)


Your observations are right on the money.

First, the big drug companies said reimportation was a huge public
safety issue.  Then a funny thing happened (while you were traveling
last week):  their safety argument was completely debunked by the Vice
President of Marketing at Pfizer.  Appearing at a press conference in
Montgomery County, Maryland, last week to comment on the County's
proposal to allow county employees to buy lower-cost prescription drugs
from Canada, Peter Rost said, according to the Washington Post (Sept.
14, p. B1), that he was tired of hearing colleagues say the practice is
a public health risk.

"This has proven to be safe in Europe," said Rost, who cautioned that
he was not speaking on behalf of Pfizer.  "The real concern about
safety is about people who do not take drugs because they cannot afford
it.  The safety issue is a made up story."

So now that they realize they've lost on the safety issue, they've
resorted to this ridiculous argument about R&D and how reimportation is
going to lead to higher prices in the long term.

If you have any older relatives or know any senior citizens who can't
afford the drugs they need, you know this is serious business.  The
drug companies ought to be embarrassed.  If there is no safety issue,
they ought to let the economics play out and see what happens.  The
Internet allows more efficient distribution.  Some smart people have
seen and are taking advantage of opportunities for some to deliver
drugs to real consumers who need them at prices that are sometimes 50%
less (or more, according to my aunt).

If the Pfizer VP for marketing agrees that the real safety issue is the
poor people who can't get their hands on drugs, then I believe we are
entitled to be skeptical about the integrity of some of these other
(undoubtedly drug company financed) arguments.

Mike Pettit

Hi Declan,

The argument given is that U.S. drug companies make a minimal profit in
foreign countries where the government has artificially enforced a
market price, and some of this minimal profit goes into R&D, which
benefits consumers worldwide.  Additionally, U.S. drug companies decline
to export some drugs to countries when those countries' governments set
the market price too low, so we know that they must make some profit.

If U.S. consumers are allowed to reimport those drugs at the
artificially lower prices set in those foreign countries, then the U.S.
drug companies will make the rational economic decision to protect its
U.S. market, and they will stop selling more drugs in those foreign
countries.  (especially Canada and Mexico)

This means that U.S. consumers will pay for all future R&D, rather than
just the significant majority of it, raising the drug prices in the U.S.
in the long term.

Obviously, someone has to pay for drug R&D.  On the other hand, given
the high cost of prescription drug benefits for consumers, industry, and
the government  higher drug prices may continue to push more U.S. jobs
to foreign countries.  It already has a significant impact on the
automobile industry.


Name Withheld

PS: Drug companies also enforce "export quotas" to pharmacies (at least
in Canada) so that the amount of drugs exported to there is only
sufficient to meet local demand.

-------- Original Message --------
Subject: Re: [Politech] Conservative group says Internet drug 
reimportation =	higher $$$
Date: 21 Sep 2004 21:12:02 -0400
From: John R Levine <johnl@private>
To: Declan McCullagh <declan@private>
References: <41502756.7030500@private>

 > [I don't quite follow this argument.

Well, of course.  That's because you're trying to follow it from the
beginning to the end, rather than taking the correct course which is to
start with the conclusion, that reimportation is bad, and then work
backwards to try to justify it.

I think the least bogus version of the argument is that high US drug
prices support all that research that makes wonderful drugs possible.
But when I see that big drug comapanies regularly report multi-billion
dollar profits every year, even after spending all that money developing
new drugs, and, say, Pfizer has a 15% profit margin and 11% return on
equity, Bayer has a 28% profit margin and 42% ROE, again, after paying for
all their R&D, I can't feel very sorry for them.

 > According to a new study by the Institute for Policy Innovation (IPI),
 > reimporting drugs is not a guarantee for cheaper prices, and in the
 > long-run, may result in more expensive drugs and medicine shortages.

See, since he's an expert, he can be sure that merely because you pay less
for reimported drugs you aren't actually paying less for them.  Or
something like that.

John Levine, johnl@private, Primary Perpetrator of "The Internet for 
Information Superhighwayman wanna-be, http://iecc.com/johnl, Mayor
"I dropped the toothpaste", said Tom, crestfallenly.

-------- Original Message --------
Subject: RE: [Politech] Conservative group says Internet drug 
reimportation = higher $$$
Date: Tue, 21 Sep 2004 10:05:54 -0400
From: Adam Goldberg <adam_g@private>
To: 'Declan McCullagh' <declan@private>


I think you're right re arbitrage, but the problem isn't that Canada is
unsustainably low, rather that the US is unsustainably (in a functional free
market) high.  The US patent protections, coupled with the statutory
PROHIBITION against Medicaid negotiating for volume pricing and our quite
inefficient (from a costs point of view) health care system yields high
prices (by design).  On the other hand, Canada has strong intellectual
property laws, but a more societal benefit theme to its health care policy -
yielding lower drug prices (that is, prices that are more reflective of
realistic development, production and marketing costs).

I heard an interview on NPR yesterday with a Canadian exporter - who
actually now operates out of the Bahamas with European suppliers.  He
refused to name his suppliers for fear of the drug companies cutting them
off the way they did to his Canadian suppliers.  That is, the drug companies
are refusing to sell drugs to wholesalers who sell to retailers who sell to
the US.  If that isn't indicative of a significant market failure (on our
part), I don't know what is.

Adam Goldberg

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