Drug Importation and the Capital Markets –

Over the past two years the dialogue over health care spending and access to “affordable” prescription drugs has reached a fevered pitch. At the center of the debate is the issue of whether or not individuals, municipalities and states should be allowed to import prescription drugs from Canada and other countries.

At the center of the debate is the issue of whether or not individuals, municipalities and states should be allowed to import prescription drugs from Canada and other countries. Drugs sold in these countries can be up to 60% cheaper than those sold in the United States. Seniors and a growing number of politicians support drug importation as a way to lower drug prices in the United States, while the FDA and the biopharmaceutical industry oppose such a course. While it is both irrational and unfair that the American consumer pays inordinately higher prices for drugs than do consumers in other developed countries, importation is not the answer.

It is necessary to examine the economics behind the cross-border movement of drugs to fully understand the potential negative affects of importation. The Canadian and European governments act as monopsonies, or single purchasers, of drugs. That allows those governments to essentially name the price that they will pay for a product. Companies are willing to sell the drug at the dictated price as long as the price is greater than the cost of manufacturing the drug. Put another way, the Canadian government usually pays only the cost of manufacturing and some markup while the American consumer pays manufacturing costs, research and development costs (for a particular drug plus all the drugs that failed during development), administrative costs and some markup.

It is impossible to import cheaper price-controlled drugs without importing price controls. As an investor in a number of small biotechnology companies that are working to provide unmet medical needs to consumers, I find the idea of importation unsettling. The companies I invest in still face the daunting fact that it can take an average of 12 years and $800 million dollars to bring a drug to market.1 Adopting a policy of importation, de facto price controls, would lower the potential return on investment for biopharma investors without decreasing the risk of the investment. To put it simply, these small biotech companies seeking innovative cures for diseases ranging from cancer to lupus would become much less attractive to investors. Less investment would translate into fewer life-saving therapies and fewer high-paying jobs in states like Massachusetts, California, and North Carolina, to name only a few.

It is unlikely that Congress will take up an issue as contentious as importation before the November elections. But there is a flurry of activity in a number of states, including California, Illinois and Minnesota. The National Venture Capital Association, along with a number of its allies, is proactively engaging politicians in these states by holding forums on the negative impact of importation and other price controls on life-saving therapies and life science jobs. The NVCA points to the affects of the comparatively modest health care proposals by the first Clinton Administration on the investment climate as a gauge of what we might expect if an importation policy was adopted.

While importation is clearly not the answer, something must be done to lift the burden off of the U.S. consumer. Part of the solution lies with the implementation of the Medicare Modernization Act (MMA), which will help seniors pay for their prescription drugs. While a help to seniors, this legislation only shifts the burden to the taxpayer. A complete solution must include a mechanism by which all developed countries pay their share of drug development costs. The beginning of such a mechanism could be emerging in talks between the governments of the United States and Australia.2 The U.S. is requesting that Australia create an appeals process that would allow drug companies to appeal the prices that the government sets for their products. This could be the first step in moving the focus of the prescription drug debate from price controls to trade talks, a move that would greatly benefit the American consumer and allow for the continued success of the biopharmaceutical industry.

Ansbert Gadicke is the Founding General Partner of MPM Capital and a Board Director of the NVCA. He may be reached at agadicke@mpmcapital.com.