The Cost of Innovation - Pharmaceutical Executive


The Cost of Innovation
Highlights from "Large Molecules, Large Dreams: A Forum on Global Drug Pricing and Sustainable Medical Innovation," held August 12, 2004, at MIT's Sloan School of Management.

Pharmaceutical Executive

With more promising treatments in the pipeline than ever, I don't believe that the billions of people around the world who are suffering from diseases that should be treatable in the near future should have to wait. It's time for all of us—policy makers, developers of new treatments, and health professionals—to act on our shared interests in bringing better treatments to patients, and to work together to find ways to reduce costs and share them fairly, not just try to take advantage of the benefits of new drugs and assume that they're going to keep coming. We can set an example in a world that's getting smaller every day and that should be getting healthier every day as well.

Pricing for Access Judy C. Lewent

Executive Vice-President, CFO, President, Human Health Asia, Merck

Judy C. Lewent
Differential pricing is an important subject but one that is widely misunderstood. Part of the reason may be the nomenclature. I prefer to call it "pricing for access." Drug companies sell their products for different prices in different countries so people can buy them, use them, and benefit from them. When we price for access, it's a reflection of our belief in the power of free markets to advance social good: our conviction that in meeting the world's health needs, we can also make a profit and thus continue to help prevent, treat, and cure disease.

There's a misconception that people in Europe and Canada enjoy the same standard of living we do. In the UK, the per capita GDP [gross domestic product] is 72 percent of that in the United States. In Germany and Canada, it's about two-thirds of ours, while Italy's is just 57 percent of ours. When I hear that Americans pay more for prescription drugs than Canadians, I think we need to put that in context. When you adjust for differences in income, US prices proportionally are actually slightly lower than those in Canada, Italy, Germany, and the UK.

We need to help people understand the merits of pricing for access. If we don't, the risk is real that the United States will repeat the mistake Europe has made. If we go down that path, Kendall Square, Research Triangle Park, and America's other research hubs will find themselves eclipsed by their counterparts in whatever nation is smart enough to duplicate the conditions right now in our country. The last thing any of us want is to be asked by some future president to serve on a task force on how to rebuild our pharmaceutical and biotech research base. We would know how to do it, but what a tragedy it would be if we had to.

A Price They're Willing to Pay Tomas Philipson

Senior Economic Advisor to the Administrator, Centers for Medicare & Medicaid Services

Economists have known for a long time the problems of patents. Patents reward innovative activity with something we don't really like—monopoly power—and as a result, we get restricted access to products.

Tomas Philipson
If a monopoly is engaged in uniform pricing, it must ex-clude certain consumers in order to make as much money as it can. They don't want to price at marginal costs, because then they can't recoup fixed costs. They want to price somewhere above marginal costs, essentially at the point at which if they lowered prices, the revenue they gained by adding new consumers would be less than the revenue lost by losing old consumers.

Economists think that's very inefficient, because consumers who cannot afford the product would be willing to pay for it, and all parties would be better off. The consumers would get the product at a price they were willing to pay, and the companies would make more money. Hence the inefficiency—and it is all due to the fact that they can't price discriminate.


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