The Pharma Canard

The Administration is carrying a lot of Big Pharma water (as it is for Big Tech). The One Big Beautiful Bill manages to lock in, rather than eliminate, the kind of tax arbitrage/offshoring policy my former colleague Brad Setser has long flagged as undermining the national interest. Meanwhile, the U.S. Trade Representative’s office is propagating Pharma’s (silly) claim that Americans are paying more for pharmaceutical products because people in other countries are paying less. The President is also toeing this “damn furriners” line, and that’s where USTR’s marching orders are coming from. No surprise, then, that a bunch of Ways and Means Members are following suit. It’s the approach Ambassador Lighthizer takes in his 2023 book No Trade is Free.

But, as is so often the case, the President also has a completely contrary position. He is advocating a pharma “MFN” policy that flags all kinds of domestic mechanisms to slash prices, like direct-to-consumer sales (to cut out middlemen), price targets, and parallel imports from Canada.

Sounds like the Administration thinks the real freeloaders are right here at home.

Which is it? Let’s dig into the question of drug pricing and innovation and find out..

NIH & Innovation

In Jump-Starting America, which I’ve blogged about, Simon Johnson and Jon Gruber discuss the huge public investments the American government made in the runup to World War II – and thereafter. Agencies like the National Institutes of Health (which predated FDR) were part of this overall ethos that the government could fund research and drive innovation and prosperity. It worked! When it comes to innovation, the United States has been the envy of the world — perhaps a true case of American exceptionalism. In his Executive Order, the President recognizes the NIH’s contributions, though not the fact that he’s gutting the agency’s ability to carry on delivering them.

Pharmaceuticals present a particularly interesting issue, because branded medicines tend to benefit from patent protection. A patent is a government-granted monopoly for a fixed term – these days, 20 years. Pharmaceutical companies have the exclusive right to manufacture or license a medicine for the duration of the patent. If the drug is popular, that means huge profits for the company that owns the patent. After the patent has expired, others can make the product, though not use the brand name, which is why they’re called “generics.”

Does Pharma do all the research and innovation that leads to those blockbuster medications? Nah. It’s not that they don’t do any. But the NIH, by design, has done a lot of research that has then fed into the pharmaceutical innovation pipeline. The President’s Executive Order recognizes as much.

What’s “Fair Market Value” in a Monopolized Market?

The U.S. government, despite footing the bill for the innovation that Pharma is later able to capitalize on (literally), has been reluctant to impose price controls on those medicines. Why?

You’ll often hear something along the lines of “government shouldn’t interfere with the free market.” USTR’s notice refers to “fair market value.” But it’s a government-granted monopoly! It’s not a free market: it’s a not-free market, by design.  So if the government, which has granted the monopoly, wants to say “ok, in this not-free market that we, the American people, have given you, we, the American people, are going to limit your monopoly rents,” that is a perfectly reasonable thing to do. And other governments have been prepared to limit these monopoly rents for a long time; for at least some of them, it’s because they have universal health care, the government foots the bill for it, and price controls are a tool of sound fiscal policy.

Pharma responds by saying: “oh noes, if you limit my monopoly rents, I won’t be able to make enough money to fund all this innovation! No new blockbuster meds!”

Bullsh*t.

Ways to Spend Monopoly Rents Other Than on R&D

Pharma makes money hand over fist. They have had lots of money for share buybacks, including in the midst of the pandemic. Share buybacks were barred until the Reagan Administration because they were seen as a form of market manipulation. Pharma also has lots of money for advertising, which is why we see Reddit (NSFW) users losing their minds over the ubiquity of Jardiance ads. (Direct-to-consumer advertising of pharmaceutical products is heavily restricted in other places and used to be restricted here. Imagine if we plowed all that that marketing money into R&D and at the same time were relieved of those earworms….) 

Pharmaceutical companies spend so much on marketing that they don’t want the government to know the details. In 2016, Congresswoman Schakowsky introduced legislation, with the late Senator McCain, to, among other things, force Pharma to disclose marketing expenditures for medicines. What did Pharma do? Stuff a provision into the boring-sounding “Sectoral Annex” of USMCA to obstruct it.

Indeed, there is a valid question as to whether this penchant for spending money on marketing and share buybacks is undermining Pharma’s ability to innovate. According to the Financial Times, these companies are increasingly looking to license Chinese inventions – that is, pay to use somebody else’s innovation — even as they have spent huge sums on marketing and buybacks.

Stopping the Madness

When we were in office, we were onto this con. We stopped the tried-and-true USTR practice of objecting to other countries’ use of the very legitimate – and WTO-enshrined -- tool of being able to license production of a patented medicine, even in the absence of the permission of the patentholder. (Even the U.S. government can do it! Looks how much it upsets Monopolists R Us.) During the pandemic, we were willing to relax some rules at the WTO to make it easier to do just that. We also asked the independent United States International Trade Commission to conduct an investigation related to the question of broadening those flexibilities, with a specific request to explore the relationship between IP protection and R&D, taking into account expenditures on share buybacks, dividends, and marketing. Let’s just say the companies were not interested in engaging in a discussion of these, um, other expenditures.

But, for our troubles, Pharma’s Congressional buddies launched an investigation. Apparently, these arguments are really powerful, and Pharma would very much like people to stop making them.

And now critiques of compulsory licensing are back in at USTR.

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To the extent that the American people have been subsidizing anybody, it has been the pharmaceutical companies, through the funding of the NIH. But that funding has been slashed, and with it the purported subsidy. The same is true of the purchasing power of the “Federal and State healthcare programs” referenced in the President’s Executive Order, since the OBBB assaulted those too.

Let’s be real, though. The Administration itself has acknowledged that the problem is domestic, or there would be no effort to eliminate middlemen in pharmaceutical sales. Now, if they are able to reduce pharmaceutical prices by browbeating the price-gougers instead of foreign countries, that will be a good thing. And another good reason not to have tried to fire two of the Federal Trade Commissioners who helped surface the problem.

But in the end, reducing the price of, to quote the President, “the fat shot drug” for the rich won’t cure the stripping away of health insurance for poor people — nor will it restore the federal R&D infrastructure that helped make the 20th century the American century.