That is exactly what a recent US government study finds. We have always been made to believe that we have a free market and because of prices that are determined by market forces, pharmaceutical companies can invest more into R&D and develop new drugs that are then made available to Americans first. But new research by the government proves both the government and the pharma industry wrong. (Related article: Why drug prices are high in the US?)
While I have been arguing for a long time, for somewhat different reasons. that the US pharmaceutical industry needs a makeover and the CEOs have to take charge by focusing on business model transformation, it seems that now there is another important reason why pharmaceutical companies need to reevaluate their strategies to find out what are they doing wrong. My advice has fallen on deaf years and what I still see is a bunch of whining CEOs who are relying on regulatory and public policy changes as a way to revive the sector. (Related article: US drug companies need a business model transformation)
Over the years, the industry has focused on what I characterize as "anti-customer practices", which are not the best thing to do to create shareholder value or to grow an enterprise. Whether it is opposing import of prescription drugs from Canada or lower drug prices or selling drugs whose safety is in doubt (e.g. Vioxx, Celebrex, Prozac, etc.), the drug industry has done everything it can to avoid making fundamental changes in their business model. In the process, the drug sector is among the most disliked sectors among Americans and many pharmaceutical leaders sometimes show their concern. (Related article: Strategic lessons from Vioxx recall)
Interestingly enough, the US administration has essentially repeated the story supplied to it by the drug industry. We were told that drug prices are lower in other countries because of price controls and Americans should pay more for drugs so that American drug companies can recover the cost of developing new drugs and be able to sell them in other countries at lower prices. (Related article: Offshore outsourcing of R&D will lower drug development costs)
A study published by the Department of Commerce, "Pharmaceutical Price Controls in OECD Countries; Implications for U.S. Consumers, Pricing, Research and Development, and Innovation" (December 2004) actually tells a different story. The study looked at 11 OECD countries and found that "The benefit to U.S. drug purchasers from the new drugs that would be developed and marketed if there were no price controls is in the range of $5 billion to $7 billion per year. In the short term, the deregulation of OECD prices is not likely to have any impact on U.S. drug prices. The increased competition in the U.S. market resulting from price deregulation abroad could have some effect on U.S. prices in the long term. Relaxation of foreign price controls, if coupled with appropriate reform of foreign generic markets, could potentially bring about much of these gains from the flow of new drugs, even without increasing foreign spending on prescription drugs."
Now if $7 billion (the higher range of the estimate) sounds like a lot of money to you, then look at the overall size of the global pharmaceutical industry (~$500 billion in 2003, according to IMS Health). In other words, it is a very small fraction of the overall pie. The United States, which accounts for approximately half of this market and is experiencing double digit growth, rightfully so, will not see any impact even if 11 of the largest economies in the world eliminated price controls, the government finds. Ouch! (Related article: The pharmaceutical business model is failing)
So something does not seem right with this picture. In other words, pharmaceutical companies have no excuse for higher drug prices in America. What they really need to do to lower drug prices is reinvent themselves rather than spend their resources to lose whatever little customer goodwill that they have right now. If not, as any good management consultant, while I do not typically support price controls, I propose that we seriously look at other options to bring down prices of drugs in America.
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