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PHARMA: A bizzaro world view on reimportation

Roger Pilon from Cato, the thinking man’s libertarian think-tank (as opposed to AEI or Heritage) last week, decided that the US should give up on the reimportation ban. The basic reasoning is that it won’t be a big deal as the drug companies won’t let too much inventory go overseas, and if we let importation happen, the American market will force price rises abroad.video of this debate between Cato’s Pilon in favor of reimportation and an AEI staffer Jack Calfee who opposes it. Almost a doppler world here in which the AEI scholar is arguing that price controls are OK in poor countries because they keep drugs available in poor countries. Reimportation would, according to both of these "free-marketers", see higher prices abroad. They are of course both opposed to price controls here–such as happen abroad. But what that means in real life is monopsony purchasing by the government. That could happen here very easily by CMS, the VA and the states agreeing to negotiate with the drug companies, as the VA does and Medicaid sort of does. This type of "price control," PhRMA tells us all the time, would ensure that R&D for pharma would collapse, and we’d all be dying in the streets. Both Pilon and his AEI counterpart note that as government’s share of the drug market increases, these "price negotiations" are likely to happen anyway.

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No one mentions the obvious question which is, in which industry would people invest their money if margins in pharma went down slightly? Seems to me that a blockbuster is a blockbuster and will find investment capital whether it’s returning 30% or 20% net margins. Of course that would mean that reductions in costs at pharma companies would have to happen somewhere, and the obvious answers are from the two biggest slices of the revenue pie at pharma companies–those being sales & marketing and profits. (R&D is the third biggest number). It’s also worth noting that many industries such as high-tech and autos spend large amounts on R&D without either patent protections or such high margins. And yet they manage to bring out new products all the time at continually lower prices.

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