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Mutualist Blog: Free Market Anti-Capitalism

To dissolve, submerge, and cause to disappear the political or governmental system in the economic system by reducing, simplifying, decentralizing and suppressing, one after another, all the wheels of this great machine, which is called the Government or the State. --Proudhon, General Idea of the Revolution

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Location: Northwest Arkansas, United States

Monday, May 22, 2006

"The High Cost of Developing Drugs"

My last post on patents led to an interesting exchange between a couple of regular readers taking opposite views of the subject: Joshua Holmes, a frequent contributor to No Treason, and quasibill, an apparent former drug industry insider who often weighs in against Ron Bailey's (stipulation--unpaid) cheerleading for Big Pharma at Reason Hit&Run.

Josh made the point that new food recipes, with relatively low development costs, were hardly typical of product innovation. Quasibill, in response, provided some new and (for me at least) mind-blowing information on just why the cost of developing new drugs is so high. I was aware that the FDA testing regime added considerably to the cost--not only its excessively stringent safety testing requirements, but its requirement since the 1960s of testing for efficacy. And I understood that such regulatory inflation of costs served as a market entry barrier, effectively cartelizing the drug industry between a handful of highly capitalized firms. What I didn't realize was just how much of the cost comes, not from testing specific drugs, but from gaming the patent system: i.e., testing a spectrum of related drugs in order to secure patent lockdown on alternative versions of the same drug, and thus forestall competition.

What generally gets included in the accounting for research costs are some amazing things, that I can't do justice to on a blog - I get surprised everytime I talk to my friends in the industry about how much waste is involved - but it's all invisible to them. It's just "how it needs to be for the FDA to keep track of everything." If you want, I can give you some examples, but I'd rather focus on another point for now -

Namely that what big pharma is researching is cancer meds. It's not. In the rare instances that big pharma produces and markets such medicines, it has purchased them from small start-ups that themselves are the result normally of a university laboratory's work. When big pharma cites to billions of research costs, what it is talking about is the process whereby they literally test millions of very closely related compounds to find out if they have a solid therapeutic window. This type of research is directly related to the patent system, as changing one functional group can get you around most patents, eventually. So you like to bulk up your catalogue and patent all closely related compounds, while choosing only the best among them, or, if you're second to market, one that hasn't yet been patented.

This work is incredibly data intensive, and requires many Ph.D's, assistants, and high powered computers and testing equipment to achieve. But it is hardly necessary in the absence of a patent regime. In the absence of patents, (and of course the FDA), you could just focus on finding a sufficient therapeutic window, and cut out the remaining tests. It would be an issue of marginal costs to determine whether someone would go to the effort to find a "better" therapeutic window, or related parameter.

So the "high cost of developing drugs" is really the high cost of maintaining a monopoly against potential competitors pursuing similar lines of research. Think of that the next time you see one of those smarmy, soft-lit Glaxo or Pfizer ads with the elevator music in the background, where some biochemist gets all teary about her Alzheimer's-afflicted grandma.


Blogger Eric H said...

Gee, so ... what started as regulatory intervention for The Public Good ... somehow morphed into rent-seeking? Who'da thunk it?!

May 22, 2006 6:23 PM  
Anonymous Anonymous said...

Joshua Holmes, a frequent contributor to No Treason

You flatter me with your lies. *laugh*

Concerning quasibill's response, I think he's absolutely right about the FDA being part of the high cost of drugs. I certainly wouldn't argue that.

The problem here is several-fold. The first is the tremendous disparity in information between drug companies and doctors, and the even greater disparity between drug companies and patients. Asymmetric information, the dorks call it. Basically, the drug companies have all the understanding of how drugs work, and to the patients it's a black box (pill?). In other areas of the law, the law protects consumers who are basically helpless, such as the lemon laws for car dealers, and strict liability for products in general.

Drugs are that much more dangerous, and consumers that much more needed to be protected, because the wrong drug kills. In fact, for all (because all?) the regulation drugs and prescriptions have, thousands of people die due to misprescription every year.

The second problem is that the FDA basically invented the pharmaceutical industry. How many life-saving drugs were developed before the FDA was given regulatory power in 1938? Despite a 140 year-old patent system, not many. Before the FDA invented the clinical trial, the pharmaceutical industry was ably summed by Justice Holmes: "I firmly believe that if the whole materia medica could be sunk to the bottom of the sea, it would be all the better for mankind, and all the worse for the fishes." Libertarianism recognises that fraud is an actionable offence, and the sum of pharmacy before the FDA was, basically, fraud.

What troubles me is that, in a libertarian world, these drugs never exist. What would have existed in its place is a counterfactual we'll never know, but I tend to doubt we would have been the healthier for it.

- Josh

May 22, 2006 10:03 PM  
Blogger Kevin Carson said...

Wow. That's another fascinating bit of lost (to me at least) history. I'd have to do some more reading of my own to decide whether I agree with your assessment of the free market counterfactual, but I commend your honest pessimism.

I wonder if a "pull economy" version of the drug industry might not have arisen from a decentralized research effort directed mainly by the needs of practitioners.

I suspect if we could achieve a synthesis of these two strands of underground analysis from you and quasibill, the result would be pretty revolutionary.

May 22, 2006 11:12 PM  
Anonymous Anonymous said...

Of course I'm a bit more lenient than Kevin is when it comes to conditions of fraud in market transactions. I think producers should basically be exempt from liability if they can establish that the customer wanted them to be exempt at the time the transaction occurred. Otherwise, some risky transactions that people nevertheless want to try (experimental cancer drugs come to mind) can never be made. The counterweight to this libertarian prescription is of course that if the seller uses misleading or false language to make their sale then they can be held liable. For instance, just slapping the label "Satisfaction is not guaranteed" on a car whose engine is filled with sand doesn't absolve me from liability if I sell it, since the general meaning of the word "car" denotes something not filled wtih sand. But of course there are ways around this problem in a free market. I could sell a "moving vehicle" instead of a car, and then stipulate that it may or may not be filled with sand. But I suspect that dealers that split such hairs wouldn't do well in a free market anyway.

As for prescription drugs, I couldn't care less if the specific drug industry we have today wouldn't exist. The market provides for human needs, and since health is a human need, a truly free society of motivated, intelligent individuals will either have prescription drugs or something to perform the same function. And if violence, hate, and coercion are necessary for people to live healthier lives, then perhaps they don't deserve to live healthier lives at all.

May 23, 2006 3:59 AM  
Anonymous Anonymous said...


I appreciate the kind words, but you might be slightly over-emphasizing my point a little, and I'll admit my post's language is susceptible to being over-emphasized.

While gaming the patent system is certainly expensive, I have no way of calculating just how much of drug development costs it constitutes (excuse my grammar, I'm on my first cup of coffee) - I'm not sure that big pharma could even break that out! And there are some fine lines there, such as when drug A has a given bioavailability which is quite low. Is the broad spectrum research that ensues truly gaming the system, or would a company in the free-market have done it anyway, knowing that drug A is going to be a dog on the market?

As I've seen you note several times before in other subjects, we just don't know what would happen in the free market. But there are certainly areas that are "bright line" and those you can rightly point to as state induced waste.

I also agree with Josh (Wild Pegasus) that the FDA "created" the current U.S. market (10 years ago the stat was that something like 80% of the world's pharmaceuticals revenues were generated in the U.S.). However, it is useful to take a step back and see how this occured. "ethical" pharma companies (a term which now has a slightly different meaning) wanted FDA regulation and embraced to show that their products were good. And for a while, the FDA functioned very much like a CR type free market organization (and in fact, it still doesn't engage in much enforcement.) It's only since thalidomide scare that it slowly got more and more onerous in its regulatory function.

So I'm not so sure that in the absence of the state, a free-market CR-style organization couldn't have been just as effective as the FDA in promoting safe, efficacious pharmaceuticals, AND without becoming the onerous regulatory body that the FDA has become.

It's a tremendously complex field that I've been studying for a while now, and I still learn something new almost weekly.

P.S. my "insider" status is probably overblown as well. I merely worked in labs for a couple of international corps, and continue to have friends in varying levels of power in two or three internationals.

May 23, 2006 5:54 AM  
Blogger Ricketson said...

There's a relevant article at Nature. Unfortunately, you guys probably can't access it:

Basically, the author is asking the question "Why aren't biologists prepared to work in industry?"

There's a section with the title, "How Can I Ensure a Smooth Personal Transition Into an Industry Job?", in which this advice is given:

"Scientists should be prepared for tedious detail work of a nonscientific nature. 'In a GLP [Good Laboratory Practices] environment, you sometimes need to do tedious work for other reasons--to comply with federal regulations, to lock down intellectual property, to make a partnership happen. You can find yourself spending effort on things you normally wouldn't in academia for reasons that are not close to the reasons you grew up thinking were the most important.'"

May 23, 2006 10:47 AM  
Blogger iceberg said...

Kevin, Quasibill, and WP,

This is all fascinating material. One often encounters the 'free rider' argument, which somehow because it's not solvable to the interlocutor's liking, in their mind it will require and justify the destruction of individual liberty in the process.

Of course there are wonderful essays which have attacked this problem from the economical aspect, showing the overall disutility of policies which favor IP laws, it's also wonderful to learn how the very IP laws themselves are the cause of those high-costs (R&D and regulatory costs), which are used to justify the anti-free ridership policies!

Keep up the great work.

May 23, 2006 1:26 PM  
Anonymous Anonymous said...

Lots of good ideas, but it should likely be considered that, even in the pharma industry, Gabriel Kolko's discovery that the prime reasons for creating regulation were corrupt reasons, businesses, and people.

I don't think any significant medical drug advance has been made since 1938. We already had all the cures for cancers and most every disease anyone could ever need, if they are willing to alter their diet and consider natural cures that Big Pharma try to oppress and/or make illegal. (Graviola, Red Yeast Rice, stevia, etc, opium, cannabis, coca products not forgotten either.)

Oddly enough, my move towards mutualism from anarcho-capitalism was in part due to natural food, medicine and diet studies, leading to study of permaculture, etc. and the work of people like Weston Price and www.westonaprice.org.

May 23, 2006 1:55 PM  
Anonymous Anonymous said...

Folk remedies cure cancer. The moon landing never happened. The US government blew up the WTC.

The truth is out there!

- Josh

May 23, 2006 6:21 PM  
Blogger Kevin Carson said...


Thanks for the reference. It sounds like you distilled the money quote for us. At least, if there's anything more damning than that, it must be pretty bad.


Actually, your position on fraud sounds pretty much like mine. Barring some special agreement (as in your example of experimental drugs), the issue should be decided by what's considered "reasonable expectation" for a product in the given market.


Thanks for clarifying. I'm not sure how much the cost of "patent lockdown" for a whole spectrum of related drugs is, compared to just one "therapeutic window." But I'm guessing it's considerable.

Carlton and Josh,

I don't think I'd go as far as Carlton in denying that there's been any significant medical advance since 1938. But I suspect that the FDA's "safety" (and even more, efficacy) requirements have as much to do with suppressing competition from product substitution as with a genuine concern for safety. At least, the institutional pressures lead toward that end result in practice.

And I wouldn't dismiss alternative/folk remedies quite so summarily. I've done some reading myself on graviola, red yeast rice, and hoxsey's red clover formula myself. Inductive reasoning and learning from collective experience existed a long time before the controlled, double blind study. Hell, 150 years ago handwashing was "alternative medicine." Some forms of conventional treatment, like balloon angioplasty, are by their very nature not amenable to controlled double blind studies--and yet the medical establishment swears by them on the basis of what would be considered inadequate statistical evidence if it were used to support an alternative remedy.

On the other hand, there is some controlled, double blind testing of herbal and nutritional medicine, with promising results in many cases. The problem is, it's crowded out by a heavy research emphasis on stuff that's amenable to lucrative income from patents, which skew the research in other directions.

May 23, 2006 9:19 PM  
Blogger buermann said...

"the FDA basically invented the pharmaceutical industry. How many life-saving drugs were developed before the FDA was given regulatory power in 1938"

The other half of this is the creation of the NIH, according to its own history created out of the US' Chemical Warfare Service and the federal Laboratory of Hygiene that started the first public investment into R&D beginning in 1930. The drugs coming out the university system wouldn't exist without the public funding and there'd be little to monopolize via the patent-FDA regime without it. Little of what is spent on R&D in the private sector isn't subsidized, directly or indirectly (R&D costs are 34% tax deductable, for example), by the public.

If you then go ask ask consumer watchdog groups about this they'll go on to explain how FDA data indicates that only 22% of new drugs brought into the market offered therapeutic gains - while the rest (and excluding those copycats that do offer gains) were primarily copycat drugs from the 'therapeutic window' that offered no real innovation. I'm pretty sure this particular method of development - throwing shit at the wall until something sticks - would not exist in anything like a free market or a democratically managed system of public investment.

May 25, 2006 8:49 AM  
Anonymous Anonymous said...

Just to provide a definition for a term I used, which I'm not sure everyone shares my definition:

The therapeutic window of a drug is the range of blood concentrations with concentrations below the range being ineffective in treatment, and concentrations above the range becoming toxic, or providing severe side effects.

As a concrete example, IIRC, Coumadin has a very narrow window. That's why it requires very intensive monitoring of blood concentrations while you're on it.

Clearly, the broader the window the 'better' a treatment will be. But it is also good to have a low efficacy threshold from several standpoints.

As far as the point about double-blind studies, they are great, but hardly the invention of the FDA. Furthermore, they can be "twisted" like another data if you're not watching carefully. Finally, as Kevin notes, most surgical treatment was never subjected to double blind study before widespread use, and yet it is clearly a useful treatment in many aspects.

May 25, 2006 11:34 AM  
Blogger buermann said...

quasibill: thanks for that clarification, it's a lovely piece of jargon. I should have referred to research boarding up the therapeutic window.

May 25, 2006 7:31 PM  

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