The Multinational Pharmaceutical Companies – are they greedier than us?

March 31, 2008 by khshin

Let’s say I want to sublet my on-campus room for the summer. I’m paying $1,000/month. Because staying on campus is extremely convenient for whatever reason, but it is difficult to find a place, someone proposed me $1,200/month for the sublet, while others proposed less than $1,000/month. Which offer should I choose? And, if there is one offer of $500/month from a handicapped person who really needs on-campus housing, should it make my decision any different? If I decide to take the highest bid, am I being greedy or am I making a rational decision? Would you call me unethical?

One of the presumptions of economics is that people are rational beings. By implication, people are expected to act in their best interest. Does it apply to pharmaceutical industry? The multinational pharmaceutical companies may seem to earn a lot of money using their patent on medicine. But what if in reality, they barely make enough to survive?

It is said that it takes around 15 years to introduce a new chemical into a market place. Although the company starts with many candidates, some are dropped in the 2nd year, some in the 5th year, and some just a month before commercialization due to various reasons, such as chronic mammal toxicity, harmful environmental profile, or newly established regulations. Very few candidates survive, but the company has to pay for the cost for all of them. Is the whole process expensive? Definitely. Is it more expensive than it was before? Sure. How high is the success rate? It depends, but now it is far lower than it was before. Why is it like this? Could the high cost and low success rate justify the “greedy-looking” behaviour of pharmaceutical companies?

I think the demand for a higher safety standard in the developed countries is one of the prime reasons of the high cost and low success rate of new medicine development. The people in those countries are getting more sensitive about their health. From our grandparents’ view point, we are just being hypersensitive. The result of increased sensitivity, at least in the pharmaceutical industry, is more regulation and higher potential of liability. In turn, it means more money for more scientific tests to meet more stringent regulations, more time for preparing more data with higher uncertainty of getting a marketable chemical. Usually people living in the developed countries like
Canada are those who lead this trend to the extreme where only a few companies could meet the standard and survive and where people in developing countries cannot afford. Are we willing to accept lowering safety standard to the level of 20 years ago for a new medicine if it could help people in desperate need of a certain medicine by faster and cheaper development and production of medicines?  If we wouldn’t, are the companies still to blame?

Acquiring a patent in pharmaceutical industry requires a lot of investment, which continues to increase, prior to any actual return. This urges the companies to try to get their investment back more quickly than before. Around 15 years ago, the target pay-back-period (the time for recovering all the money invested) was roughly 10 years. Now many companies apply 5 years. The high rate of Mergers & Acquisitions (M&A) for the last 15 years in this industry tells me that the companies were going through a difficult time to produce enough profit to survive or to satisfy shareholders’ request. Some suggests that these companies needed access to quick cash. But M&A usually resulted among leading players in the industry such as Hoechest, Zeneca, Russell etc. Who are the owners of the firms and who gets the money? The managerial people there are just one of the employees, and the number of those managerial positions will be reduced by half by the M&A. Then why merge? One explanation is that the companies had seen little opportunity to survive on their own, probably by the lack of profit to support continuous business in that field or lack of budget to invest for new medicines. They were driven to merge without a choice.

It is true that they want more control over the market with their patent for more money. Some may label their actions as “greedy”, but I would say that they are being “rational”. It does not seem like we can call them greedier than any one of us. The profit gained by the commercialization of new patented medicines alone cannot in itself be the basis for our judgment.  (Kwang Hoon SHIN)

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