Hey, Whaddya Know -- Drug-Price Controls Don't Kill Medical Innovation
Drug price controls will punish innovation and drive down R&D spending -- that's the familiar mantra of the pharmaceutical industry. But a new report from Canada, which has strict price controls, shows no relationship between R&D spending and price regulation.
The report, by Canada's Patented Medicine Prices Review Board, says that drug prices in the U.S. are about twice as high as most other countries, and that U.S. drug companies spend less on R&D in the U.S. than they do in many countries with strict price regulation. Drug sales are growing faster in Canada despite price controls, and Canadians spend about the same on drugs as a percentage of GDP as Americans do, the report shows.
It's all statistics, of course, and thus should be taken with a pinch of salt. Plus, the geographic location of drug R&D spending is unrelated to sales, as companies move their labs and testing facilities to the cheapest countries, such as China and India.
Still, the report has some interesting things to say about the kind of "socialized" healthcare system that many Americans bitterly oppose. Canada's price control system is about as draconian as you're likely to find in the Western hemisphere: It literally prevents drug companies from charging what it deems are excessive prices. Those who break the rules are required to give back the excess charges through future price cuts.
The most socialist system you can think of ... works
In theory, it's the most socialist, market-deforming system you could apply within a free market economy. In practice, it's rather less dramatic. The biggest giveback in 2010 was by Novo Nordisk (NVO), which overcharged C$6.5 million for its Levemir Penfill diabetes product.
In terms of delivering cheaper drugs, price controls work, the report says: The U.S. is the only major Western country that has no formal system of controlling prices or bargaining with drug companies for supplies. And it shows, with drug prices roughly twice in the U.S. what they are elsewhere:
Critics might point to the fact that in Canada, drug companies spend only 8.1 percent of their sales on R&D while in the U.S companies spend 19.4 percent. But those same critics are unlikely to point out that in the U.K., which like Canada has a fully public system, R&D spending is 42.3 percent of sales. In Switzerland -- home of Novartis (NVS) and Roche (RHBBY) -- R&D is apparently 120 percent of sales. Switzerland has a three-yearly cycle of government price controls:
The flow of new drugs seems uninterrupted, unless you're only willing to look at the numbers since 2006:
Crucially, price controls have not stopped drug sales in Canada (the way they have in Greece, where the government has apparently stopped paying for drugs altogether).
Canada has increased its share of global sales from 2.4 percent to 2.7 percent; and drug sales are growing faster in Canada (a 6.4 percent increase) than in the U.S. (4.6 percent). The two countries spend about the same portion of their GDP -- 1.8 to 1.9 percent -- on pharmaceuticals.
If you want a real treat, check out this appendix to the report, which lists each individual new-drug approval and then ranks them by usefulness. Most received a grade of "Slight or no improvement."
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