In May, the Washington state legislature passed a package of executive-requested legislation related to health care and prescription drugs. The legislation includes a bill, “Importation of Prescription Drugs from Canadian Wholesalers,” that directs the state Board of Pharmacy to submit a waiver request to the federal Food and Drug Administration to authorize the state of Washington to license Canadian prescription drug wholesalers to contract with U.S. pharmacies for shipment of imported drugs.
According to a May 5 news release from the office of the governor, Washington Gov. Christine Gregoire (D) said, “This bill says to the federal government, show us what’s wrong with Canadian prescription drugs. Why shouldn’t our citizens be allowed to buy safe, affordable prescription drugs?”
In December 2004, a report issued by the U.S. Department of Health and Human Services’ (HHS) Task Force on Importation documented a multitude of cost and safety concerns related to commercial prescription drug importation.
State R&D Jobs Threatened
The HHS task force report also confirmed what economists and industry experts have long argued: That drug importation would diminish R&D incentives and eventually lead to fewer new drug therapies.
That could have a direct effect on the state’s economy. During the 30-month recession that ended in June 2003, Washington’s economy was among the hardest hit in the nation–the state economy shed more than 115,000 private-sector jobs.
One bright spot during that storm was the biopharmaceutical sector. As home to some of the nation’s leading pharmaceutical firms, Washington benefits from hundreds of millions of dollars in industrial R&D investment annually. According to the Milken Institute, the biopharmaceutical industry generated more than 28,000 jobs in Washington in 2003.
Of those, 8,700 people were employed within the industry; the remaining 20,000 were a result of the industry’s powerful multiplier effects. (See sidebar.)
Price Controls Suppress R&D
Proponents of price controls often argue drug companies could lower prices and continue to fund the current level of R&D spending. But experts say one reason biopharmaceutical firms spend so much on R&D is the prospect of what economists call “monopoly profits” that come with patented products.
“Pharmaceutical firms are willing to invest in research and development because patents obtained on any product developed enjoy protection from competition for a set number of years,” noted Devon Herrick, Ph.D., a health economist and senior fellow of the National Center for Policy Analysis. “This short-term monopoly of sorts allows drug firms the opportunity to recoup their investment. After the patent expires the drug faces competition from makers of generic drugs and the corresponding price falls about 75 percent.”
Another potential impact on the industry is the negative impact on venture capital investment. Most biotechnology companies in Washington are small companies, employing fewer than 100 people. These firms typically rely heavily on venture capital investment to fund research.
In 2004, 85 Washington state companies (nine of which were biopharmaceutical firms) raised more than $770 million in venture capital, the state’s largest total since the Internet bubble burst in 2001.
Economic Impact Serious
In September 2004, the Institute for Policy Innovation (IPI) concluded a prescription drug price control policy implemented at the federal level could result in a loss of $14.8 billion (in net present value terms) in industrial R&D spending nationwide over the first 12 years of implementation.
The authors further estimated the failure rate of drugs entering clinical trials would increase by approximately 70 percent, and the average number of new drugs approved each year would fall from 31 to just nine.
Washington, which benefited from more than $496 million in bioscience R&D in 2001, would be among the hardest-hit states in the nation. The accompanying table illustrates the annual loss in R&D spending and its consequent economic impacts.
Importation Savings Minimal
According to the HHS task force report, “Total savings to drug buyers from legalized commercial importation would be 1 to 2 percent of total drug spending and much less than international price comparisons might suggest. The savings going directly to individuals would be less than 1 percent of total spending. Most of the savings would likely go to third-party payers, such as insurance companies and HMOs.”
If the FDA approves Washington’s waiver request, there is the distinct possibility that policymakers will harm a vibrant local industry while failing to provide meaningful relief to consumers.
Douglas Giuffre, MSEP ([email protected]) is an economist at the Beacon Hill Institute. This article is based on a briefing paper written for the Institute for Policy Innovation. Used with permission.