TCS Daily

Reimportation Storm

By Duane D. Freese - September 28, 2005 12:00 AM

You'd think Louisianans would know the importance of good levees, following Hurricanes Katrina and Rita. But Sen. David Vitter, R-La., is seeking to lower America's levees against reimportation of prescription drugs from abroad, all in the hopes of a false savings for Americans on drug costs.

Vitter is seeking to attach an amendment to an agricultural bill that would have the Food and Drug Administration police drug reimportation. If FDA has authority to oversee the traffic, reimportation supporters figure, then safety concerns raised by critics of reimportation, including the FDA, will disappear.

Nobody likes to pay more for their prescriptions than they absolutely must. But at the same time people want the best medicine for their ailments they can get. And the fact is that the panacea of drug reimportation doesn't save a lot of money, and comes at the cost of deterring development of new medicines. Just consider Europe's experience with drug reimportation.

Lessons From Europe

As Katrina was barreling down on the Gulf Coast in late August, Nature Biotechnology was reporting on Europe's attempt to shore up a rapidly declining pharmaceutical industry.

Once a bastion of drug development, Europe has become a backwater to the United States in innovation. According to a study by Boston-based Charles Rivers Associates and commissioned by European Union bureaucrats in Brussels, the number of new drug approvals in Europe dropped from 27 in 1999 to 17 by 2003. As economist Kevin Hassett reported for TCS, a study by the U.S. Department of Commerce reached a similar conclusion: price controls abroad are discouraging innovation and actually raising the prices of generic medicines in those countries.

A study by the global management consulting firm Bain & Co. and the World Economic Forum in Davos, Switzerland in 2004 found that while Europe from 1993 through 1997 introduced 81 new drugs to 48 in the United States, from 1998 through 2002 the numbers had reversed -- to 85 in the United States to 48 in Europe. As Hassett noted in a column for Bloomberg, "If you have a disease that has yet to be cured, your best hope is the U.S. pharmaceutical industry." It definitely is not Europe.

What happened? Two things.

In the late 1990s, the Food and Drug Administration accelerated its drug approval process, lowering the time for companies to bring new drugs to market. As the Commerce Department study showed, the average time in the United States was 273 days for approvals versus 468 days in Europe. That significantly lowers the cost of getting drugs to market.

As important, though, Europe has increasingly become a market in which price controls in one country are spread to other countries by its regime of parallel trading (reimportation). Under Europe's trade rules, if a company introduces a drug in one country it must do so in all member countries. Some countries, such as Greece and Italy, require steep discounts at nearly cost of production pricing that doesn't account for research and developments costs. With free trade among EU members, the drugs end up going into the low price countries, being repackaged and sent back to those countries with higher prices.

This is the drug reimportation so many in Congress want to foist upon the American market. And it's wiping the incentives for European drug firms to research and develop new drugs as there are diminished rewards for innovation.

And making things even worse for consumers, there's not much pricing benefit for consumers either, as both the Commerce Department study and Panos Kanavos, who led a study by researchers at the London School of Economics, wrote The Washington Post last September:

        "Reimporting prescription medicines has flourished in the European Union because national 
        health policies in some member countries ... have led to declines in the local prices of 
        patent-protected medicines -- as much as 70 percent in some northern EU member 
        states. ... Our study found combined sales of reimported versions of these drugs saved health 
        care payers ... a miniscule 0.3 to 3.6 percent of their annual drug budgets. ... Moreover, these
        savings were not passed on to consumers. ... The biggest gains from selling reimported drugs 
        ... went straight to repackagers."

There thus is every reason in Europe to put money into becoming a repackager -- or intermediary between drug companies and patients -- and not a drug innovator. Indeed, at a luncheon in Washington for health care experts from free-market European think tanks put on by the Institute for Policy Innovation and the Galen Institute last week, one of the presenters noted that the largest drug company in Europe today isn't a developer of new pharmaceuticals but a repackager.

That may explain why, as the Nature article quoted Aisling Burnand of the United Kingdom based Biotechnology Industry Association, "U.S. companies can raise significantly larger amounts of capital than their European counterparts at every stage" -- up to 16 times more for young six- to 10-year old companies.

Reimportation Storm

Reimporting drugs amounts to importing foreign price controls and inflicting all the damage they cause. And it will only get worse the more involved the government becomes with paying for drugs, as will be the case with the new Medicare prescription drug benefit.

As Tim Evans of the Centre for a New Europe noted at the luncheon: "Twenty years ago if you talked about money and health care in Europe, you would be called cruel, right wing and uncaring. But today politicians are talking constantly about money and health care. Because of their budgets they have to take money into account in their health care considerations."

The European health budget overseers are squeezing savings for prescription drugs to lower their budgets for those drugs, driving down innovation and delaying people having access to the newest and best drug treatments. But as the drugs could save on other costs, the cascading effect of cost controls on it leads the bureaucratized health care of Europe to reduce other health care treatments as well to save money.

Evans noted that the joke going around about Tony Blair's latest innovation in rationing care for Britons, the National Institute of Clinical Excellence -- acronym NICE -- is that it should have been dubbed NASTY, for Not Available, So Treat Yourself.

Hurricanes Katrina and Rita have truly been a nasty experience for the United States. But drug reimportation anticipated by some in Congress as providing cost savings here may lead to a perfect storm of decreased investment, less drug innovation and higher costs down the road. The United States needs to maintain its drug reimportation levees.


1 Comment

Different prices for different customers
This story reminds me of my trip to Hawaii (the big Island). In this locale, like many tourist places, there is this culture of Us (the locals) and them (the tourists). I went into this little shop off the main road in Waimai to get a snack. Nothing on the shelf had a price on it. So I asked the shop keep "How do I know the price of this stuff?" to which she said "You ask me."

So this was there solution to being able to charge locals a different price from the tourists, cause if they posted the price, the gig would be up.

In the supermarket its the same deal but more computerized. You have to have a special card to get the real price. So I asked for a card and the lady said I had to live there (I guess she could tell I was tourist). I said I was living there for a week so could I please have one.

So this drug price thing is the same deal. They want to have their cake and eat it to. They want to be able to charge what the market will bear in each individual market AND make it the law. I don't blame them for trying, but making it illegal is just plain wrong. The usual limit to this kind of activity is that entreprenures will move the product between markets to level pocket the delta and this has the effect of leveling the playing field. But big pharma is trying to make it illegal under some phony baloney "We'll protect you from yourself" kind of BS.

The latest thing is these TV commercials that are offering discounted drugs to individuals. This is just a way to try manipulate the market to keep the list prices high for the goverment customers (Taxpayers) and stop people from going around the system by removing the incentive for people that it would be worth it.

They say of you don't keep alocating more and more of the GDP to for profit drug makers you won't get all these wonder drugs. Last I checked, research for profit targets profitable sectors- old men with ED. Other drugs I have no adea what they're selling, I just see a lady running through a meadow, or a guy dancing on a clock. The commercial says "tell your doctor you need clarizol". If you're telling your doctor what drugs you need, isn't he pretty much your dealer? (thanks Bill) Perhaps this money would be better directed by a public agency that would target cheap cure over ongoing treatment, or actual need rather than net-worth. Reference what the Gates foundation is doing with Malaria.

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