The NewStandard ran an article outlining that Drug Firms ‘gouge’ consumers by taking taxpayer handouts. The article points to the government grants offered to Big Pharma companies, which then make huge profits off the drugs they sell. Hence, the argument goes, we are paying twice for drugs.

If only it were that simple.

American consumers spent nearly $200 billion on prescription drugs a year. The cost reflects growth in the availability and use of prescription drugs and also a steep surge (twice the rate of overall inflation) in the price of drugs. And, the absence of pharmaceutical price containment in the United States leaves consumers paying two to three times as much as consumers in other countries, including neighbors Canada and Mexico.

The article points out that Genentech reported total product sales for the first quarter of 2006 increased 39 percent, to $1.64 billion, while sales of their colon-cancer drug Avastin increased 96 percent, raking in $398 million. Currently, colorectal cancer patients pay about $46,640 for a ten-month treatment regimen of Avastin.

The article tries to make a connection that drug prices are maintained at high levels due to the political leverage of pharmaceutical companies in Washington. Admittedly, a 2005 study found that the pharmaceutical and health-product industries spent $87 million on campaign contributions to federal candidates between 1998 and 2005. Probably not just as a goodwill gesture.

It seems, though, that it is more than just a lack of political will in Congress to stand up to the drug companies and enforce rules that require the drugs to be priced fairly. Clearly, it’s difficult for the government to argue fair prices after a drug is proven to be beneficial and establishes its value on the market. You end up asking how much is it worth to keep a person alive.

The drug industry is dependent upon on government-granted monopolies in the form of patents and Food and Drug Administration (FDA) regulations. However, although nearly half of biomedical research spending in the United States is supported by either the government or non-profit sector, the bulk of the research involved in actually carrying drugs through the clinical testing process needed to gain FDA approval is carried on by the pharmaceutical industry and financed through patent protection. And, in exchange, we get access to newer and (presumably) better drugs. Drug companies need to make money to support research and to generate profits but who’s to say how much is enough?

Basically, the prices drug companies charge appear to have little relationship to the costs of making the drugs. Research and development (R&D) is a relatively small part of the budgets of the big drug companies – more is spent on marketing and administration. And generally speaking, the industry has been the most profitable in the US. But is that necessarily wrong?

It could be argued that we receive a partially-subsidized drug cost based on taxpayer-funded research and grants. These funds help lower the prices of drugs from the full price. But, like all subsidies that are not 100%, it’s difficult to say how much is enough. And drugs are different than common goods. People depend on them for their health and even their lives. People want there to be some checks and balances on the costs.

How can the pharmaceutical industry respond to the building wave of support for government intervention? Drug companies need to decide to make some changes by trimming their prices, or at least make them more equitable, and put more of their money into R&D. That would go a long way in smoothing over the unrest among consumers.

Meanwhile, as drugs come off patents, the costs should ease for patients. This week, Indian pharmaceutical firm Dr. Reddy’s Laboratories received final approval from the Food and Drug Administration for its generic version of allergy medication Allegra (fexofenadine hydrochloride), which in allergy-prone Cincinnati should be put into the water supply like fluoridation. Mylan Laboratories also got tentative approval to sell a generic version of Allegra, joining Barr Pharmaceuticals and Teva Pharmaceuticals.

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    The Price of Pharmaceuticals

    [Today’s post is a guest commentary on the NewStandard article about drug companies getting taxpayer supported government grants and then extracting large profits on drug sales.] If I may comment on the [previous post: Do Drug Companies ‘Gouge’ Consume…