The Drug Price Dilemma
March 6, 2001

How much should pharmaceutical companies charge for their drugs?

In the face of skyrocketing health care costs, this question has come to occupy a prominent role in public policy debate. Consumer groups favor reining in drug prices, arguing that medical care should be affordable for all. Health and profits don't mix, they say: companies like Merck and GlaxoSmithKline should not be in a position to reap excessive profits from their treatment of AIDS and other diseases.

Drug makers respond that bereft of profits, they would cease to engage in research and development (R&D). Government price controls, they argue, would stifle the incentive to develop new and improved drugs, leaving society unquestionably worse off.

But will price controls squelch R&D spending? In a research paper to be presented at a conference later this month, Marc von der Ruhr and I consider the effect of imposing price controls on firms that are monopolies (companies with drug patents fall in this category). We find, contrary to conventional wisdom, that R&D spending in such cases may not be adversely affected.

The argument over high drug prices is not confined to the United States . In Africa , where the scourge of AIDS has assumed monstrous proportions, afflicting 25 million of its population, Western pharmaceutical companies find themselves in the unenviable position of battling impoverished governments over the right to set their own prices for patented drugs. But such prices place the treatment for the dreaded disease far beyond the reach of the average African.

Bowing to public opinion, the drug makers have relented somewhat. They have agreed to supply, through a UN-brokered program, AIDS drugs in Africa for about $1,000 per patient. While that figure is a fraction of the $10,000 to $15,000 charged per patient in the United States and Europe , it would still bankrupt the health agencies of many an African nation.

In an interesting development, and one fraught with peril for the Western drug companies, an Indian company, Cipla Ltd., has offered to sell generic versions of the drugs to Doctors Without Borders, a Nobel Peace Prize-winning medical relief agency, for $350 a year per patient in Africa . The aid group would then provide the drugs for free to patients. Cipla also plans to sell the drugs to other government aid programs working in Africa for as low as $600 per patient, provided they in turn offer the medicines for free.

Western drug companies are crying foul. Accusing Cipla of violating patent protection rights, they want the African governments to enforce their patent laws and prevent the Indian upstart from selling the drugs at lower prices. In view of the magnitude of the AIDS tragedy in their countries, and their inability to procure brand-name drugs at affordable prices, Africa 's governments are unlikely to oblige.