The political economy of the pharmaceutical industry.

Abstract

E CONOMICSis a practical science. Since its inception as an independent discipline, it has probed the major policy issues of the day. The topics that aroused the interests of its practitioners have generally been those that presented government officials with critical choices. The modern literature on the economics of the pharmaceutical industry is no exception. This body of material originated with the investigations of the Kefauver committee in late 1959. Public interest was aroused by the spectacle of confrontation between committee and industry. The record made by this committee and its successors grew to tens of thousands of pages as claims and counterclaims were offered regarding industry conduct and performance. The primary line of attack concerned pharmaceutical prices and profits. The committee demonstrated that prices generally exceeded direct costs of manufacturing. For 22 major pharmaceutical firms in 1958, costs of goods sold were merely 32 percent of total sales (U.S. Senate Report 1961, p. 31). The committee argued that this fact alone demonstrated the presence of monopoly power. While the substantial difference between revenues and production costs permitted high expenditures on research and development, it also paid for even higher selling outlays. Moreover, reported rates of return after taxes during this period, on the order of 21 to 22 percent, exceeded twice the average for all manufacturing. The industry replied that, on the contrary, prices were low relative to the value afforded consumers. And high returns on successful products were required to balance the losses from the large numbers of unsuccessful ones. The relevant concept of marginal costs, according to the industry position, must include the costs of developing and marketing new products, and therefore prices were not excessive at all. Although it admitted earning substantial profits, the industry argued that without these returns, research outlays would be limited and the number of new drugs reduced. The committee countered that little of social value arose from industry research. Molecules were manipulated, and the new drugs that resulted were therapeutically similar to those already on the market. Indeed, it suggested that much

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