Congress Tampers With a Winner in the U.S. Pharmaceutical Industry

Many Americans bemoan the inroads that foreign automotive, steel and electronics companies are making in our traditional markets, both domestic and overseas. But there is a shining exception. The United States can properly boast of a world-class pharmaceutical industry, which is clearly the international leader.

Of the 97 new drugs that were introduced in world markets between 1975 and 1989, the United States was the source of 47--almost half. We also have more major drugs in the pipeline than any other country in the world. Moreover, the March 9, 1992, issue of Fortune magazine contains a score card on international competitiveness. Fortune gives the pharmaceutical industry one of only two A’s. In comparison, electronics received a dismal D.

The pharmaceutical industry’s contribution to the domestic economy likewise is impressive. While manufacturing companies as a whole averaged a 2% decline in employment during the decade 1980 to 1990, the drug manufacturers increased their job forces by 24%.

While so many other industries complain about rising import penetration, this industry generates a substantial excess of exports over imports, year after year--with Japan, as well as with many other nations.

So what is the prevailing response in the Congress? Are the members ecstatic over the industry’s stellar performance? That is hardly the case. Senators and representatives alike regularly take the floor to berate the pharmaceutical companies. It seems that their prices and profits are too high.

Our distinguished legislators ignore the basic role of economic incentives in a private enterprise system: high profitability is the carrot for superior performance. These members of Congress are also too busy to notice the extent to which those company profits are reinvested in the vital category of research and development.

In any event, those emotional denunciations are quickly followed by onerous proposals to increase the operating costs and reduce the earnings of medicine manufacturers operating in the United States. Perhaps the low point in a recent floor debate occurred when one senator exclaimed: “It is hard to believe that a company could charge so much for such a tiny pill.” It is also hard to believe that such a tiny intellect serves in what its members call the world’s greatest deliberative body.

Meanwhile, the House has been holding hearings on legislation to increase the enforcement authority of the Food and Drug Administration--to enable that already powerful agency to “crack down” on makers of medicines. The proposed food, drug, cosmetic and device safety amendments of 1992 would give the FDA very broad and vaguely defined powers. For example, the agency could issue subpoenas requiring the attendance of any witness and the production of any document that relates to any matter within its vast jurisdiction.

This would, of course, be in addition to the agency’s substantial existing enforcement powers, which include inspecting pharmaceutical factories without warrant, seizing batches of a product if the batch is adulterated or mislabeled, and carrying out multiple seizures, effectively eliminating a product from the market.

Some members of the Senate are also trying to establish tax-enforced price controls on prescription medicines. In addition, they want to create a review board to study how other countries control prices of prescription drugs. Of course, those senators are deeply hurt when they are accused of advocating the discredited approach of price controls. They respond that they only want to study the subject and then take away some tax credits only if a pharmaceutical company raises its prices above a designated level.

By, in effect, putting a lid on prices, Congress would be reducing the incentive for new investment. The risks and expenses of pharmaceutical research and development are increasing dramatically. It costs about $231 million to bring one successful new drug onto the U.S. market. Most proposed medicines don’t make it. These investments take a long time to pay off, even when they do. A study at Duke University reported that only three of every 10 drugs introduced in a recent decade recovered their research and development costs. A study at Tufts University concluded that, on average, it takes 12 years to bring a new prescription drug to market in the United States.

It is fascinating to consider the implications of the specific price controls proposed by the senators: To escape the tax penalty for exceeding the arbitrary price ceiling, manufacturers would have an incentive to introduce new products at the highest possible prices. That would enable them subsequently to show price reductions from those high initial bases and thus continue to qualify for standard tax treatment.

Moreover, the proposed prescription drug payment review commission being considered in the Senate ignores the fact that prescription medicines are often the low-cost alternative to surgery or intensive hospitalization. It is foolish, under such circumstances, to attempt to hold down the cost of this one highly productive element of medical care. The more sensible approach is to focus attention on ways of minimizing the total health care package.

There is an alternative to Congress merely responding to citizens who understandably are griping because the cost of medicine is rising--and many health care plans reimburse little or none of this visible item of cost to the patient. Congress should study the excellent performance of U.S. pharmaceutical companies in order to come up with lessons that could be applied to other industries that are not doing nearly as well in competing with foreign enterprises.

For starters, we can note that the pharmaceutical industry has not grown through highly leveraged acquisitions or the issuance of junk bonds. Rather, it has expanded because the companies invest heavily in long-term research and development of new products--about $11 billion annually. The industry allocates about 16% of its sales to R & D--four times the average for other manufacturing industries. Not surprisingly, this industry leads the world in developing new and better products, at least for the time being.

But the approach of Congress seems to be: “If it ain’t broke, break it.”