Friday, August 29, 2008

Regulate Pharmaceutical Prices?

If you glance casually through the black books of the globalisation watchdogs, you'll never find global pharmaceuticals far away from the "worst of the worst" list. In every campaign, some get targeted more than others, and here it's the Pfizers, Johnson & Johnsons and company that bear the major brunt of the attack.

The concerns are fully understandable. We have volumes of sickness with a ready cure, and by virtue of a patent they earned through research and development, a pharmaceutical powerhouse has full control to set whatever price they like, regardless of what their customer can afford. That, at least, is how the matter is viewed by the antagonists.

While I am a strong proponent of the free market system, to deny that I feel a little queezy about the setup would be clear indication that my heart was replaced by a biomechanical pump at a young age, probably one with a pharmaceutical logo on it! Nevertheless, we have to look at the implications of taking action on this matter.

My interest in this matter was perked by speaking at length to a senior official in the KZN Dept of Health (DOH) yesterday. Working in the hospitals as a pharmacist for years, he now serves as a supervisor in the province and monitors the purchase, provision and use of the medicines that the department uses. There is an obvious bias to sourcing locally, one I support, but more rare drugs as well as uniquely patented ones are sourced from international firms.

As an aside, I should mention that in some cases, contracts are given to BEE firms who source from Indonesia and Malaysia rather than to white-owned firms in South Africa. How crazy is that? In fact, how corrupt is that?!

That aside, what has emerged is of grave consequence. The DOH has a special list of high priority drugs that are critical to operations. But there are no industries willing to produce them. Why? They can't make any money off them - the government sets the price too low and there's no interest from the private sector. This is a critical situation!

What happens is that these firms now switch to the private sector, scale down their operations (government is the major buyer in the market), and when the government has a shortage and needs supplies, the firms can only promise a tenth of what is needed. The government is now either stuck, or has to switch to paying high market prices to overseas suppliers.

Let me say right here that what is occurring here is indeed free market trade, and the government is not in contravention of that. DOH is simply a buyer and the manufacturers are the suppliers, and the free market system involves the constant play-off between the two, which usually results in some kind of equilibrium.

So who buckles at this point? There are sections of activists suggesting we force a price on the manufacturers. If the price is below production costs then this is clearly unfeasible. If the profits are huge, and the market is open (ie. government hasn't regulated it!), new entrants will come in because the opportunity is so good, undercut the others in order to get contracts and sales and force the price down.

There are three scenarios left. Firstly, the profits may be insufficient to entice new suppliers. There is no problem here really then. Secondly, the startup costs may be too steep in terms of technology, skills required and basic financial outlay. Frankly, in my view if the market is that good, then some big competitor will come in with the necessary funds - the open entry principle is important again. It's fascinating in this example that you could even have multi-national corporations coming in from the outside to compete with other multi-nationals and force the price down.

The last scenario is where a patent allows one company to have complete dominance and set unfair prices. I'm fascinated to know how often this occurs in practice. I'll be honest and say I'm not really sure on this one. What if there is only ever one cure for AIDS and some company finds it, patents it and has subsequent monopoly control? The first question is: can there ever be only one cure? Secondly, would they have developed the cure without the incentive? (That's meant to be an open question, not a rhetoric one)

My general take is that in practice, free market works better than regulation, so if in doubt, stick with free market. I personally don't feel that we're at the point of needing to intervene, but we do have a role to play in giving feedback to the companies. To show a headline like "Pfizer charging way too much for medicine" can cause people to stop buying other general Pfizer products, causing them to rethink their strategy. The simple act of protesting without regulating is fine, because it gives consumers the freedom to make an informed choice, and informed choice is what makes the free market tick.

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