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A shot in the arm...or the foot?

By Keith D. Cummings
web posted December 15, 2003

The Virginia Department of Health announced on December 8th that it had run out of vaccine for influenza. The Department also stated that it had 100,000 more doses of the vaccine en route to the state, to deal with the higher than average demand of flu vaccine in the commonwealth this year. The high demand for flu vaccine is not the first, but at least the fifth shortage for vaccine since the year 2000, according to Richmond’s Morning News on WRVA-1140. In fact, flu, diphtheria and other vaccines have been the subject of shortages in the past and will likely be so in the future.

The reason for the failure of supply of the vaccine is the direct result in a decrease in the number of companies that provide the low-profit product to the American marketplace. According to the Wall Street Journal, the number of companies producing traditional flu and other vaccines is down, way down, over the last 30 years. In the 1970's, there were 25 companies that produced vaccines. In 2003, that number has dropped to 5. That’s an eighty percent decrease in thirty years. At this rate, there may only be one provider of flu vaccine in 2030. Of course, this is exactly what the liberals want, provided that the one provider is the federal government.

The reason that vaccine producers have faded from the market is that most vaccine is now purchased and distributed by state governments. The combination of artificially low prices (virtually eliminating profits) and risk of lawsuit has made the production of much needed vaccine a business that isn’t worth the time or money invested. As a result, we see fewer companies producing these beneficial, preventative medicines.

With President Bush’s (and Marge MacDonald’s) Medicare prescription drug benefit, it’s really only a matter of time before what we are seeing with vaccines becomes the norm with all prescription medications. As the government, the only body in the nation that can use the power of the gun to enforce its demands, insists on ever decreasing prices for drugs, pharmaceutical companies are simply going to decide that it isn’t worth the time and effort to develop and distribute new drugs.

In Canada, with the single payer health care system, the government has imposed severe price controls on drugs. These controls are so strong that it is actually cheaper for Americans to buy drugs from re-importers. These re-imported drugs are purchased at the Canadian mandated price, a processing fee is added for the re-importer and finally shipping charges are mounted on top of everything. Even in this regime, it may be cheaper to buy Celebrex from Canada that from the Rexall down the street. That’s a good thing, because the market is dictating prices, right? Wrong!

In fact, the Canadians may well begin to see shortages like those experienced with vaccines in the USA. As pharmaceutical companies can only provide these drugs at the lower prices demanded by the Canadian government by charging more in markets that can bear higher prices, they have no incentive to provide their supply to Canada on the cheap when they can get more in America for the same drugs. Just as one can’t expect BMW to sell 540s in Canada for $20,000 when they can get $60,000 or more in the US, one can’t expect Merck to sell its products on a cheaper market.

So, what will happen in Canada? Regardless of the re-importation question, there can be no doubt that the higher prices gleaned for the same products in the US will be an incentive for all pharmaceutical companies to sell what supply they have to the American consumer. Prices of drugs in the US will remain artificially inflated to cover loss of profits in Canada, and the US consumer will continue to subsidize others.

However, since the liberals in Washington have already pushed through free (or at least cheaper) drugs for seniors, using an alleged conservative President to do it, how long can we expect Congress to to resist price controls for all drugs sold in the United States? It’s not a stretch to imagine millions of Americans, declaring their aversion to subsidizing drugs for the entire world, demanding cheaper drugs themselves. As a result, price controls will happen in the United States, and that could well ring the death knell to new drugs.

The process of bringing one new drug to the market is staggering. Billions of dollars are spent in development, trial, FDA approval and marketing of any new medicine. The potential for lawsuit is very high whenever a new drug his the market. If you doubt that, just look at what happened to Wyeth when PhenFen was discovered to be dangerous. AH Robins’ Dalkon shield problems forced that company into bankruptcy and eventual takeover.

Patent laws mitigate the risks of creating a new drug. Whenever a pharmaceutical giant like Glaxo SmithKline creates a product like Paxil, its patents allows it to reap exclusive benefit from that new drug for a period of years. However, if the US, British and Canadian governments are going to immediately place a limit on the price they can charge, they’re going to have to ask themselves, where is the benefit? When a firm spends billions or tens of billions of dollars on development of a new produce, the shareholders are going to demand that a return on the investment be produced, and soon. Price controls make that impossible.

If the liberals like Howard Dean have their way, we will soon be seeing lower prices for drugs across the board. Of course, these will be the same old drugs that are already be on the market, because there will be no advantage to creating anything new. Today, if I want a flu vaccine, I may have trouble getting that shot in my arm. If the free drug juggernaut isn’t stopped, we’ll be shooting ourselves in the foot.

Keith D. Cummings is the author of Opening Bell, a political / financial thriller. His website is http://www.keith-cummings.com.

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