British Medical Journal agrees with GI

By Alex Singleton | 29 November 2005

The pharmaceutical industry argues that free trade should not be allowed in pharmaceuticals. They say if American drug stores were able to buy from Spanish wholesalers, where prices are lower, pharmaceutical companies would not be able to raise the revenue for research and development. They claim Europe is "free-riding" on American consumers.

Here at the GI, we have argued that the spending by pharmaceutical companies on R&D; is actually quite low (as a percentage of turnover) - under half as much as Microsoft - and yet they enjoy profit levels three to four times the Fortune 500 average. American drug prices could lower to European levels with no effect on R&D; spending. Moreover, high prices in America have led to a growing problem of counterfeit drugs, often bought over the internet from unscrupulous websites. Legalising free trade would have a huge effect in preventing the sale of counterfeits.

Now the British Medical Journal has published research which says that Europe is not free-riding. The authors, Professors Donald W Light and Joel Lexchin, write:

We can find no convincing evidence to support the view that the lower prices in affluent countries outside the United States do not pay for research and development costs. The latest report from the UK Pharmaceutical Price Regulation Scheme documents that drug companies in the United Kingdom invest proportionately more of their revenues from domestic sales in research and development than do companies in the US. Prices in the UK are much lower than those in the US yet profits remain robust.

Companies in other countries also fully recover their research and development costs, maintain high profits, and sell drugs at substantially lower prices than in the US. For example, in Canada the 35 companies that are members of the brand name industry association report that income from domestic sales is, on average, about 10 times greater than research and development costs. They have profits higher than makers of computer equipment and telecommunications carriers despite prices being about 40% lower than in the US.

America's pharmaceutical protectionism is simply indefensible. American consumers deserve the low prices that Europeans benefit from.