High pricing key to innovation
Grabowski and Manning ’17 [Richard and Henry; June 2; Partner in the Life Sciences practice at Bates White; Professor specializing in investigation of economics in the pharmaceutical industry, government regulation of business, and the economics of innovation; Health Affairs, “Drug Prices And Medical Innovation: A Response To Yu, Helms, and Bach,” https://www.healthaffairs.org/do/10.1377/hblog20170602.060369/full/]
Essentially, the authors imply that the US price premium could be significantly reduced without affecting research and development investments or having other adverse effects. This is a strikingly bold and unfounded conclusion. There is no sound economic rationale to suggest that price ratios across countries or revenue premiums in the United States should match current research and development spending. Hence, the fact that price differences and research and development spending levels fail this arbitrary test does not offer a basis for sound policy making.
The issue of drug prices is always controversial, but in today’s politically charged environment, it seems particularly important to carefully evaluate this post’s methods and conclusions—and to do so through the lens of the economic principles that drive companies to search for new medicines and set prices for them. Thought leaders and policy makers would be well advised to approach this issue with a clear-eyed view of facts and underlying principles that govern economic behavior.
The Authors Have A Fundamental Misunderstanding Of The Research And Development Investment Process
The research and development investment process in pharmaceuticals is Only a small proportion of new drug candidates that enter clinical trials (around 10 percent) become new drug introductions. It generally takes more than a decade for the maker of a new drug to perform the costly trials and gain Food and Drug Administration approval, and there is uncertainty concerning a drug’s efficacy and safety at every stage of the process.
Economic models of investment behavior under uncertainty indicate that spending will be driven by the expected future gains from these investments. If US policy makers were to enact regulations that drive prices down significantly, as Yu and her colleagues suggest, many projects that now have positive expected returns would no longer be profitable. Current prices would be lower but so would the expected level of future innovation.