Drug Imports: The Unappreciated Downside

Lower prices on drugs sound great, and if the Beltway can take credit for such goodies, so much the better. So Congress has passed an amendment to the Food and Drug Revitalization Act allowing the importation of medicines from a number of countries in which governments "negotiate" — that is, impose — prices.

If implemented, this law will yield fewer new medicines, less safety and a weakened system of intellectual property protection.

Those foreign prices are far lower than those paid by Americans, even in economies approximately as wealthy as ours. Thus do the Europeans and others use their pricing policies to obtain free rides on the massive investments — about $1 billion per drug — needed to bring new medicines to market.

It is that free lunch that is the siren song for Congress, which now wants in on the action.

The amendment forces the pharmaceutical producers to sell to the foreign exporters all the quantities that they demand, including supplies intended explicitly for the U.S. market.

So the prices received by the drug producers will fall sharply, a prospective effect now applauded loudly by politicians and groups eager to offer or receive wealth transfers, and by others who can be described as merely myopic.

"Free," of course, is the last adjective appropriate for such legislative outcomes. Lower prices inexorably will reduce the willingness of the market to invest in the research and development of new and improved medicines. Recent research shows that even small price effects — barely more than 1% annually — compounded over time yield a loss of almost 200 medicines over a 20-year period.

There are good reasons to predict that the importation of drugs subject to foreign price controls would yield effects even worse. After all, Congress has few incentives to think small and, in the context of wealth redistribution from an industry as unpopular as Big Pharma, bigger is better.

So say goodbye to some substantial number of new medicines and to the increased life expectancies that would have resulted. That effect has been quantified also: An expected loss of at least 5 million life years annually. At only $100,000 per expected life year, that loss can be valued conservatively at $500 billion a year, far more than the entire U.S. market for drugs.

Are drugs imported on a large scale from Canada or Germany really from Canada or Germany? Maybe.

A system of parallel trade in drugs — characterized by direct shipments, indirect shipments, cross shipments and reverse shipments — is one in which the unscrupulous have a decided advantage over government bureaucrats constrained by limited budgets and by the usual array of incentives and insanities that are the very definition of government in action.

Inspections can do only so much, and it is far from obvious that such technological approaches as smart packaging can be expected to stay ahead of criminals in various parts of the Third World masquerading as "western" drug producers.

Horror stories about purportedly genuine medicines actually produced by foreign mafias already are common, a criminal dimension unlikely to be dampened by legislation opening the huge U.S. market to imported medicines.

In the context of public health, the potential effects of such criminal activity are staggering.

Consider a relatively benign form of adulteration: the production and sale of diluted drugs less potent than listed.

For cancer patients and others, this is bad enough. But for various contagious diseases, this is a potential nightmare.

It's easy to envision the effect of such adulterated drugs in terms of highly — or even totally — resistant disease strains, a process observed among some tuberculosis patients.

Given that the ability of government to police drug imports is subject to serious question, the contagion problem is one powerful rationale for federal policies excluding imported drugs from the market.

Nor is such policing likely to be feasible for the drug producers. Unlike government, the producers have the values of their brand names to protect, brand names valued by consumers and thus reflected in market prices.

When counterfeit products bearing counterfeit brand names begin to show up in the market, confidence in the brand names must decline, and with it the willingness of the market to invest in the products of the brand name.

So Gresham's Law lives: The bad inexorably will drive out the good.

Presto: yet another effect of Beltway magic.

The drug-importation debate carries implications for far more than the drug industry alone.

If the sunken costs reflected in the price of medicines are fair game for the redistribution process, why not any or all intellectual property?

The ongoing effort to confiscate the intellectual property embodied in drugs in reality is an attack on a broad swath of the U.S. economy. Industries that view themselves as safe while the drug producers are under siege are the most myopic of all.

This piece originally appeared in Investor's Business Daily

This piece originally appeared in Investor's Business Daily