Thanks to Arnold Kling, I found this piece on the economics of the drug industry. It comes from the remarks at a recent industry conference, and it's worth reading (even if it does make an approving reference to Marcia Angell near the end) - an excerpt:
If the prosperous flow of innovations was to be sustained (he said), either the industry would have to find a way to dramatically alter its cost structure, or else "we are going to have to figure out collectively some way across political parties and countries to construct and maintain a structure of global price differentials."
With the promise that changes in the cost structure would be addressed in another meeting later in the fall, attention turned to various schemes for differential pricing.
Berndt skimmed quickly over the traditional argument for differential pricing. Many industries had high fixed costs and relatively low marginal costs, he said -- electricity, telecommunications, software, database services, movies, and so forth.
But none was the same class as pharmaceuticals, where the difference in incremental cost between the first tablet of a new medicine and the second is on the order of $800 million for an average medicine --$800 million to "get the science right" and make certain that the treatment works in some degree, 25 cents to make the second copy, and the third and as many more tablets as can be sold.
Not being an economist, I'd never thought of it in quite that way. It's a familiar illustration of the problem of software piracy, though, or file-sharing of copyrighted work. We don't have as much of a piracy problem in pharmaceuticals (although it's certainly there), since it's harder for a third party to run off further copies of our pills.
The focus on differential pricing is justified. That's what the whole drug reimportation debate comes down to, and it's the corner my industry has painted itself into. This meeting seems to have mostly tried to find ways to maintain the existing system, which is at least better than suddenly yanking it down. That is, it's better for all of us who would be suddenly pitched onto the street, and it's better for our customers, who in a few years might wonder why there haven't been any new drugs to treat their diseases for a while.
But I'll really be interested in the next conference mentioned above. I think that eventually we're going to have to move to a new pricing structure, and I don't know what it's going to look like. The article itself has a suggestion, which I'll address separately - Arnold Kling has a follow-up on it here. Whatever it is, we're going to need some time to get ready for it.