BOHANON & STYRING: Drugmaking business has economics like no other

October 29, 2016

Economic AnalysisPoliticians love to beat up on drug companies. Mylan Corp. took a congressional grilling for pricing its EpiPen epinephrine injector at $800 for a two-pack. This isn’t the first case nor the last, but the question is always the same: Why should something cost so much when the cost of making it is so much lower? The epinephrine in an EpiPen, for example, costs about $4.

We’ll leave it to St. Thomas Aquinas to decide if these pricing policies are “fair,” but the basic economics of the pharmaceutical industry are indeed a bit weird. A drug company’s most valuable asset is a piece of paper from the U.S. Food and Drug Administration giving it permission to manufacture and sell, for certain medical uses, some molecules combined in a certain way.

Manufacturing the drug itself typically costs pennies, but getting FDA approval certifying the drug as “safe and effective” can run upward of $2 billion. Moreover, lots of those costs come after the patent giving the drug company a monopoly on the compound takes effect but before approval. Typically, a drug company has only about a decade to recover startup costs before its patent goes public and generic competitors ensure the compound sells for pennies.

Billions are often spent on dead-ends and blind alleys. A can’t-miss whizzbang drug sometimes bombs out in late Stage III double-blind trials. And an FDA sign-off on your drug as “safe and effective” won’t protect you from a rapacious class action plaintiff’s bar. Ever notice all those TV ads from Dewey Cheatem & Howe law firm barking, “Think you’ve been harmed by (fill in blank)? Call us for free and get easy MONEY!”?

All this is expensive, and the FDA’s bureaucratic culture is genetically wired against approving new drugs. In 1962, FDA employee Frances Kelsey blocked thalidomide, a morning sickness drug approved in Europe. Turned out the drug was later linked to birth defects and Kelsey became an instant heroine. President Kennedy awarded her a medal in a White House ceremony. Today, the Kelsey Award is given annually to an FDA employee.

Could the message be any clearer? Approving anything that might conceivably somehow possibly harm someone is a no-no. Violate this canon and your new posting will be inspecting aspirin tablets in Keokuk.

We can think of less stressful ways of making a living than being a drug company executive.•


Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.


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