 |
|
 |
|
11.16.2004
Differential pricing is good for your health
|
Although not intended as such, the article in Monday’s WSJ (“How Drug’s Rebirth as Treatment for Cancer Fueled Price Rises”) provides a good illustration of how important pricing flexibility is to innovation in the pharmaceuticals industry. The story traces the history of thalidomide from its tragic beginnings as a drug taken by pregnant women to prevent morning sickness, but which caused horrible birth defects, through its several reincarnations as a treatment for leprosy, AIDS and, now, cancer.
The story starts with Dr. Sol J. Barer, a founder of Celgene and current CEO, roaming the halls at the Rockefeller University in New York searching for new ideas, and running into a scientist who was studying why thalidomide was helpful in treating leprosy. From that beginning, Celgene got approval to market the drug in the U. S. for leprosy. Since then, it has had major benefits as a treatment for AIDS and, currently, cancer (a drug that is approved for one indication can be legally prescribed for other “off-label” uses). The drug is effective in treating multiple myeloma and Celgene is seeking FDA approval to market it for that purpose. Although the original patent on the drug expired some time ago, Celgene has patented a method of distribution that keeps the drug away from pregnant women, which apparently gives it de facto exclusivity.
During this period, the price of the drug has gone from $6 to $29 for “the same white capsule,” which, the article points out, is sold in Brazil for seven cents and in the Netherlands for $2.60? But this misses the point. If these prices were prevalent here, it is probably safe to say that Dr. Barer wouldn’t have been roaming the halls at Rockefeller looking for new ideas. Why would he, if he could only sell them for seven cents or $2.60? And, it is unlikely that the rest of the story would have happened. Patients would probably not have thalidomide available as a treatment for multiple myeloma - one that is less expensive than the other available treatments, as the article points out. Celgene would not be in the process of obtaining a new FDA approval and also developing a new cancer drug with the help of a $123 million research budget funded by thalidomide sales.
The article appears to criticize Celgene’s practice of charging what the market will bear. But this sort of demand-based pricing – what economists sometimes call differential pricing – is in fact a good way of covering the cost of goods like pharmaceuticals (and other “information goods” like movies, records and software) that have large up-front costs and low costs of replication. The thalidomide story illustrates that there also may be significant costs along the way – i.e., for researching new uses probably never envisioned by the original developers.
The bottom line: Brazil and the Netherlands are lucky we don’t price pharmaceuticals the way they do. They are in the fortunate position of being able to benefit from the discoveries made here. But everyone can’t be a free-rider. If we all priced the way these other countries do, hungry entrepreneurs like Dr. Barer would go elsewhere – maybe to roam the halls of the Stanford computer science department – and we would all be the poorer for it.
posted by Tom Lenard : 11/16/2004 05:45:37 PM
|
|
|
|
|
|
