Alex Singleton: Wild Card

In the past, I've given the Adam Smith Institute and the Globalization Institute a lot of guff in my posts on vulgar libertarianism--often with good cause. But Alex Singleton, a close associate of both of the above, now gives me reason to be careful in my pigeonholing. He has a couple of good posts on the drug industry, which is about as "free market" as Boeing. In one of them, appropriately titled "On the Statism of the Pharmaceutical Industry," he writes:

Given that pharma has been the most profitable sector in the US economy for most of the last quarter century, and given that - to give some perspective - they spend less on R&D than on marketing or on profits to shareholders, their claim that free trade would affect their R&D makes no sense. All they are trying to do is protect their profitability. As one Pfizer vice-president has explained, profit is the sole reason drug companies oppose free trade in drugs.

When you also note that drug companies are heavily reliant on government-funded research for many of their most innovative, most socially-important new drugs, one thing becomes clear: the economic system the research-based drug companies support today is not the free market. It is statism.

In the other, "Why free trade won't make Atlas shrug," he belittles the drug industry's official figures on the cost of developing new drugs.

In the past, I have pointed out that drug companies spend more on marketing and profits than on R&D. I am not trying to make the argument that marketing and profits are, in and of themselves, bad - both have an important social function. I state this simply in order to help people get some perspective about the cost of R&D as percentage of their turnover....

Prof. Donald Light is a Professor of Comparative Health Care Systems at the University of Medicine & Dentistry of New Jersey and a member of George W. Bush's Presidential Business Commission....

The figures he uses say that the investment by drug companies in R&D is 11.8% of turnover, but this goes down to 7.1% when you deduct taxpayers' contributions. Bear in mind that Microsoft invests 17.3% of its turnover on R&D even though an IDC study says that 36% of software is pirated.

In their campaign against free trade in pharmaceuticals, drug company lobbyists repeat the claim that it costs $802m to develop a new drug. This figure has been completely discredited. Principally, the problem is that the study behind the figure (which, of course, was funded by drug companies) takes a subset of very expensive new drugs, rather than new drugs in general. Many people have attacked the study because half of the cost is the opportunity cost of doing other things. Prof. Light says the average costs for all new drugs - not including opportunity cost - is less than $100m.

So the average cost of developing new drugs is a lot less than drug companies claim. But the most important fact comes when you look at drug company profits. Drug companies have been in the most profitable US industry sector each year for most of the last quarter century. They enjoy profits three to four times the Fortune 500 average. If their profit margins were below average, then they might have a point.

By the way: the current healthcare model, based on the highest-cost patented medicines, has some opportunity costs of its own. Between them (as I've argued in the past) the drug patent system and the medical licensing monopolies collude to crowd out lower cost alternatives, and to criminalize a lot of what Schumpeter called "product substitution." A lot of existing knowledge is underutilized, and crowded out by conventional models of treatment, because they're not as lucrative as patented drugs.

Anyway, this just goes to show that some caution should be exercised in banishing anyone to the outer darkness.