We have been carefully watching the debate on the issue of importing drugs from Canada. We can definitely appreciate the serious threat it poses to the profitability of American pharmaceutical companies, but interestingly enough, no one has yet come up with an argument that makes sense even to the grandma who is ordering her drugs from Canada, what to say of convincing an analyst.
What that means is that it is only a matter of time that something drastic will happen to drug prices. There are several possible scenarios (e.g. drug prices go up the world over, or they drop in the US, or drug imports are allowed from other countries into the US) but ultimately we believe that market forces will win over regulatory hurdles.
Why are pharmaceutical firms making such a big deal about drug imports?
They have a valid point that if they are not as profitable as they are now, research and development will suffer. While not everyone agrees with this logic (their profits are still much higher than many other sectors), we can accept it and can also buy their argument that R&D will suffer. The following are the reasons we agree with the logic of the pharmaceutical industry:
- While the cost of drug development continues to grow, sector participants face serious regulatory, pricing, and competitive threats.
- Cost of bringing a drug to market from concept stage is approximately $800 million and can take 10-15 years.
- Out of as many as 5,000 drugs tested, only about 5 reach the clinical trial stage, and typically just one is approved by the FDA.
- Only three out of ten marketed drugs produce revenues that match or exceed average R&D costs.
- Generic share of prescription drug units rises to 72% in just 18 months after entry of generic substitutes
- R&D costs in the drug industry are among the highest. During last ten years, R&D/sales ranged between 15-17%
- During the last decade, pharmaceutical companies outside the industrialized world have become increasingly sophisticated in reverse-engineering or developing counterfeit drugs (operating sometimes in clear violations of international intellectual property rights)
- Pharmaceutical companies in the United States operate under a highly regulated business environment, with constant scrutiny by governments (federal, state, and even cities/towns) and/or government agencies. The media, not-for-profit groups, think tanks, research establishment and similar other social and public policy establishments also regularly monitor activities of pharmaceutical companies, none of which happens in other countries.
Why offshore outsourcing of pharmaceutical R&D is an option?
R&D is a major expense for the pharmaceutical firm (as indicated above, it can be as high as 15-17% of sales). By offshore outsourcing of R&D, companies can expedite drug development and can also work on development of multiple drugs. Through offshore outsourcing, scientists and technicians will benefit in two ways:
- Three-shift research & development work will literally speed up the process by 3X
- American scientists and technicians can focus on more complex processes while staff in offshore locations can do repetitive tasks (along the lines of what other sectors like IT have accomplished through offshore outsourcing).
Only then will it be possible for pharmaceutical companies to continue to produce high-quality R&D and maintain high profitability levels. Their argument for stopping drug importation is not convincing enough and it is better to change their business model than to fight the market forces. A simple way to do is to embrace offshore outsourcing. Incidentally, McKinsey & Co. has found in a recent survey that one out of three American companies is investing in offshre outsourcing of R&D.