Politics: Onward from New Hampshire

[sgtclub]

Originally posted by Hank Chinaski
*beside JWblack

I've always been a grey goose man myself (even though it's French), mainly because it's odorless.

[Tyrone Slothrop]

Originally posted by Hank Chinaski
burger and I have reached agreement. He thinks that perhaps some limited price control over drugs in the patent period might result in a more optimum amount of research.

Burger can correct me if I'm wrong, but you guys (you and club) keep confusing profits and R&D expenditure as if they're the same thing. You seem to think that pharma companies do not exist to benefit their shareholders in some way, and that the only money available in the world economy to be invested in pharma R&D must come from the pharma's holdings. Neither of these things is true. The question about profits has to do with setting the optimum prices in the context of a business that has monopoly characteristics. It's not always a monopoly, because you have generics, etc., but there are short-run monopolies. You and club do not want to think of pharma companies as having this characteristic, so you keep fighting off the obvious truth that patent rights are about bestowing this sort of limited monopoly power. If you accept this -- at this point, I understand that this is a highly counterfactual hypothetical -- then it follows from very basic economic principles that net social utility is maximized by some sort of price regulation. (This tends to reduce pharma profits, and may reduce funds available for R&D, although I think that argument is not as interesting as what I keep waiting for one of you to say, which is that we should permit pharma to exploit their monopoly power because we want to incent them to invest in R&D and create wonderful things. I asked about government spending on R&D to offer an alternative to this, but you guys are so busy fighting the notion that pharma has monopoly power that you haven't gotten there yet.)

So, to recap: We are talking about two things at once -- (1) what pharmaceutical pricing is optimal, and (2) how do we encourage pharma to invest the optimum amount in R&D.

[Hank Chinaski]

Originally posted by Tyrone_Slothrop
Burger can correct me if I'm wrong, but you guys (you and club) keep confusing profits and R&D expenditure as if they're the same thing. You seem to think that pharma companies do not exist to benefit their shareholders in some way, and that the only money available in the world economy to be invested in pharma R&D must come from the pharma's holdings. Neither of these things is true. The question about profits has to do with setting the optimum prices in the context of a business that has monopoly characteristics. It's not always a monopoly, because you have generics, etc., but there are short-run monopolies. You and club do not want to think of pharma companies as having this characteristic, so you keep fighting off the obvious truth that patent rights are about bestowing this sort of limited monopoly power. If you accept this -- at this point, I understand that this is a highly counterfactual hypothetical -- then it follows from very basic economic principles that net social utility is maximized by some sort of price regulation. (This tends to reduce pharma profits, and may reduce funds available for R&D, although I think that argument is not as interesting as what I keep waiting for one of you to say, which is that we should permit pharma to exploit their monopoly power because we want to incent them to invest in R&D and create wonderful things. I asked about government spending on R&D to offer an alternative to this, but you guys are so busy fighting the notion that pharma has monopoly power that you haven't gotten there yet.)

So, to recap: We are talking about two things at once -- (1) what pharmaceutical pricing is optimal, and (2) how do we encourage pharma to invest the optimum amount in R&D.

when I first made GGG gilligan, I was so proud, but since then, on 2 occasions, I realize I acted rather rashly.

[Hank Chinaski]

This is my kinder answer: Ty said
"but there are short-run monopolies. You and club do not want to think of pharma companies as having this characteristic, so you keep fighting off the obvious truth that patent rights are about bestowing this sort of limited monopoly power. If you accept this -- at this point, I understand that this is a highly counterfactual hypothetical -- then it follows from very basic economic principles that net social utility is maximized by some sort of price regulation."

What you say here ignores the fact that there are almost always alternatives to a patent right. more importanly, you question the basic underpinning of why the country benefits from patents.

Orville and Wilbur had to tell every one how to make an airplane, then thery got a patent for 17 years. now, because they explained how to make an airplane other companies do make them. now there are no patents that can block flight- and there are no patent that block any treatment. maybe Z-pack is patented but you can take tetra-cycline.

patents are an exception to basic economic principals that helped us beat the USSR and become the worlds only superpower.

[Atticus Grinch]

Originally posted by Hank Chinaski
What you say here ignores the fact that there are almost always alternatives to a patent right. more importanly, you question the basic underpinning of why the country benefits from patents.

Lord knows I'm not an economist, but I thought it was obvious to all that patent law exists in almost perfect counterpoise to antitrust law, from which the country also benefits. Supposebly we limit patents to particular kinds of inventions in order to address the specific concern that some incentive to innovate would slip if (1) there are high costs of innovation and (2) there were low barriers to market entry and therefore a free rider problem. Otherwise, our natural disinclination toward monopoly would win the day and we would allow people to manufacture Viagra and Claritin if they can do it more cheaply.

"Monopolies are very bad for the marketplace, except when the product is patentable under 35 U.S.C. § 101, in which case they're very good for the marketplace" is a position that puts a lot of faith in Congress and 36 words, which is uncharacteristic of you.

[sgtclub]

Originally posted by Tyrone_Slothrop
Burger can correct me if I'm wrong, but you guys (you and club) keep confusing profits and R&D expenditure as if they're the same thing.

No. You have attributed that to me 3 times now and I have already corrected you twice, so I'm done.

Originally posted by Tyrone_Slothrop You seem to think that pharma companies do not exist to benefit their shareholders in some way

No. That is the ONLY reason why they exist. It just so happens that by benefitting their shareholders they are also benefitting society as a whole.

Originally posted by Tyrone_Slothrop , and that the only money available in the world economy to be invested in pharma R&D must come from the pharma's holdings.

No, but the large majority of it does. You fail to realize that most of the government investment comes in the form of university research, which is typically done in conjunction with pharma as a joint venture. In certain cases, the base research has been completed by university, but the regulatory/approval process and the marketing process is untertaken in conjunction with pharma. In either case, pharma has to bring significant $ to the table.

Originally posted by Tyrone_Slothrop The question about profits has to do with setting the optimum prices in the context of a business that has monopoly characteristics. It's not always a monopoly, because you have generics, etc., but there are short-run monopolies. You and club do not want to think of pharma companies as having this characteristic, so you keep fighting off the obvious truth that patent rights are about bestowing this sort of limited monopoly power.

The truth I have been fighting off is that you are failing to recognize that while pharma a may have monopoly power for drug A (a) it may not be engaged in predatory pricing (b) likely does not have a monopoly in pharma industry as a whole, and (c) is subject to competition from other remedies and company's with patents for similiar uses.

Originally posted by Tyrone_Slothrop If you accept this -- at this point, I understand that this is a highly counterfactual hypothetical -- then it follows from very basic economic principles that net social utility is maximized by some sort of price regulation.

"Net social utility" is another word for government controls of markets, because, in essense, you believe that men are better than markets at determining the optimals involved. I do not share this belief and history is clearly and unequivacally on my side on this.

[Not Me]

Originally posted by sgtclub
You fail to realize that most of the government investment comes in the form of university research, which is typically done in conjunction with pharma as a joint venture. In certain cases, the base research has been completed by university, but the regulatory/approval process and the marketing process is untertaken in conjunction with pharma. In either case, pharma has to bring significant $ to the table.

Actually, what usually happens is that the university does the research by itself. Then the unversity applies for a patent on the government-funded research under the Bayh-Dole Act.

Then pharma exclusively licenses those patents and goes on to develop the technology to a useful product.

[bilmore]

Originally posted by ltl/fb
Yeah, bilmore, I'm totally unfamiliar with the concept of unintended consequences. Thank GOD you are around to educate me.

Hmmmm . . . one of the unintended consequences of the government having encouraged an employer-based system (through tax breaks etc.) is that a ton of people don't have any coverage. It's my understanding that the push for the employer-based system was part of the fight against the USSR/communism/labor unions, but I wasn't born at the time all that was formulated. Perhaps here you could provide some historical context?

So, yeah, I kinda get it that choices made by private and governmental actors pretty much always have unintended consequences.

Here is a quarter. Go and put me on perma-ignore.

We will both be happier.

[Tyrone Slothrop]

Originally posted by sgtclub
No. You have attributed that to me 3 times now and I have already corrected you twice, so I'm done.

I keep trying to figure out what you are saying, and obviously I just can't get it.

No. That is the ONLY reason why they exist. It just so happens that by benefitting their shareholders they are also benefitting society as a whole.

If Big Pharma Inc. makes profits of $100 million, it can either pay this money as dividends or invest it in R&D. It can't do both. I understand that you think that the latter benefits shareholders by creating equity in the corporation, but profits need not be re-invested, and the company can borrow to invest in R&D.

No, but the large majority of it does. You fail to realize that most of the government investment comes in the form of university research, which is typically done in conjunction with pharma as a joint venture. In certain cases, the base research has been completed by university, but the regulatory/approval process and the marketing process is untertaken in conjunction with pharma. In either case, pharma has to bring significant $ to the table.

Pharma can borrow money to invest, if the return is there. If the expected return is there, it will do this even if it isn't earning profits at the time.

The truth I have been fighting off is that you are failing to recognize that while pharma a may have monopoly power for drug A (a) it may not be engaged in predatory pricing (b) likely does not have a monopoly in pharma industry as a whole, and (c) is subject to competition from other remedies and company's with patents for similiar uses.

In your (a), it's not acting rationally. So let's put that aside. Just call it monopoly pricing. Again, we're talking Econ 101 here. Your (b) is irrelevant, since other pharma products are not necessarily substitute products. Your (c) is undercut by Burger's observation that pharma earns its profits on the period before generics can compete. Since generics are substitutes, it suggests that there are not other substitutes.

"Net social utility" is another word for government controls of markets, because, in essense, you believe that men are better than markets at determining the optimals involved. I do not share this belief and history is clearly and unequivacally on my side on this.

You have a lot of faith in markets for someone who obviously hasn't taken any economics. In a competitive market, social utility is maximized by letting competition set prices. This is why government generally should not engage in price regulation. Monopolies are an exception to this rule. It is long since settled that monopolists will set prices too high, maximizing returns to them but producing a societally suboptimal distribution of resources. This is why local phone service rates are government regulated. I do not believe that the government is better than private actors at setting prices, as a general rule. But there are situations in which markets do not produce the best results, and this is one of them.

[Atticus Grinch]

They make fun of California's loosened standing requirements, but get this: A federal appeals court has agreed to hear a request from the woman formerly known as "Jane Roe" to reconsider the 1973 U.S. Supreme Court decision Roe v. Wade that legalized abortion.

WTF? In California, this would be a motion for reconsideration that's 31 years late.

[sgtclub]

Originally posted by Tyrone_Slothrop
I keep trying to figure out what you are saying, and obviously I just can't get it.

If Big Pharma Inc. makes profits of $100 million, it can either pay this money as dividends or invest it in R&D. It can't do both. I understand that you think that the latter benefits shareholders by creating equity in the corporation, but profits need not be re-invested, and the company can borrow to invest in R&D.


Pharma can borrow money to invest, if the return is there. If the expected return is there, it will do this even if it isn't earning profits at the time.

Allow me be more clear.

R&D is an expense which, along with other expenses, is subtracted from revenues to give you net income (i.e., profit). So to say that the $100 million in profits is "invested" in R&D is not technically correct.

The $100 million can be distributed to shareholders in the form of a dividend and this obviously benefits them as money in their pockets. The $100 million can also be kept in the company as retained earnings (i.e., shareholders equity), and this benefits the shareholders by increasing the enterprise value of their shares. "Investment" by the company in R&D theoretically benefits the shareholders in that it provides a platform for future profits.

Yes, the company can borrow for R&D, but whether it is efficient to do so is directly related to how profitable the company is, because the "cost" of borrowing is based, in nearly all cases, on the company's EBIT (earnings before interest/taxes) or EBITDA (EBIT plus depreciation/amortization). Thus, the more profitable the company, the cheaper the borrowing and vice versa. The company could also tap the equity markets for R&D, but the efficiency calculation in that case is also dependent on profitability.

And that is the magic link between profits and R&D*

*for one so quick to criticize my economics knowledge, your knowledge of finance and accounting leaves a whole lot to be desired.

Originally posted by Tyrone_Slothrop In your (a), it's not acting rationally. So let's put that aside. Just call it monopoly pricing. Again, we're talking Econ 101 here. Your (b) is irrelevant, since other pharma products are not necessarily substitute products. Your (c) is undercut by Burger's observation that pharma earns its profits on the period before generics can compete. Since generics are substitutes, it suggests that there are not other substitutes.

You obviously were not reading our conversation closely, but I'll just point out that you ignore in (b) and (c) my contention that it is not just generics that big pharma competes with, but other big pharma with patents for similiar uses, as well as alternative treatments.

Originally posted by Tyrone_Slothrop You have a lot of faith in markets for someone who obviously hasn't taken any economics. In a competitive market, social utility is maximized by letting competition set prices. This is why government generally should not engage in price regulation. Monopolies are an exception to this rule. It is long since settled that monopolists will set prices too high, maximizing returns to them but producing a societally suboptimal distribution of resources. This is why local phone service rates are government regulated. I do not believe that the government is better than private actors at setting prices, as a general rule. But there are situations in which markets do not produce the best results, and this is one of them.

I agree with this entirely in concept if we are in a true monopoly setting or an oligopoly with collusion. My (and I think Hank's) contention all along is that we are not convinced that is the case and that is why we have continued to explore the issue.

[edited for spelling and other non substative shit]

[Tyrone Slothrop]

Originally posted by sgtclub
Allow me be more clear.

* * * * *

And that is the magic link between profits and R&D

Thank you. I'm familiar with the accounting terms, actually, but thought you were making some economic claim about why it's important that we not do anything to limit pharma profits. I don't see any reason here to preserve pharma profits, other than the obvious ones.

You obviously were not reading our conversation closely, but I'll just point out that you ignore in (b) and (c) my contention that it is not just generics that big pharma competes with, but other big pharma with patents for similiar uses, as well as alternative treatments.

Of course this is true, to some extent. And yet it fails to answer the thing Burger says and I keep pointing to -- that this industry makes its profits before the generics compete. Since they are (almost) perfect substitutes, this shows that other alternatives are not. Consider again the profit margins on viagra, per Burger. You guys are insisting that there is adequate competition in the face of the specific facts of this industry.

[Mmmm, Burger (C.J.)]

Originally posted by Tyrone_Slothrop

Of course this is true, to some extent. And yet it fails to answer the thing Burger says and I keep pointing to -- that this industry makes its profits before the generics compete. Since they are (almost) perfect substitutes, this shows that other alternatives are not. Consider again the profit margins on viagra, per Burger. You guys are insisting that there is adequate competition in the face of the specific facts of this industry.

Let's get this party started again, because I have yet to hear a response to the following:

Are you, Hank and Club, contending that Rx drugs, patented or otherwise, are sold into a sufficiently competitive market that we can assume that allocations are close to pareto optimal? I can't see how that's correct. Let's put aside whether drug companies can charge supra-competitive monopoly prices. Even if they can't, the degree to which drug purchases are subsidized, through insurance or governmnet programs, is massive. Go back to my early example, or look at your last (insured) Rx purchase. Did you pay full price? No. You probably paid 25% or so, perhaps subject to a co-pay, or something. Suffice to say, you did not pay asking price (Bilmore did have to pay the price for his Viagra, but let's put that aside and assume some drug that is typically prescribed for insured ailments). Right there, you have demand that is far higher than would obtain in a competitive market. So drug companies are already benefitting from artificially increased demand. Once you're in that position, you cannot say that some form of Rx drug benefit, for the remainder of the population, will necessarily make society worse off. You're simply not in a competitive market.

Now, let's add to the hypo the existence of a monopoly, or duopoly, or oligopoly. Many branches of economic thinking will tell you that even in a duopoly or oligopoly without collusion competition is less aggressive. Why? Two reasons. First, companies still face a downward sloping demand curve, such that they have an incentive to price above marginal cost--this is not the world of atomistic sellers who take demand as given. Second, with limited competitors, companies often compete less aggressively. Game theory and econometrics both show this (to be sure, game theory can also show that it can be advantageous to "cheat" on the tacit cartel, but that doesn't always happen). Furthermore, the same studies that show (go to the ftc's website for the generic drug study) that the entry of a generic drops the price of the brand-name drug significantly also show that the entry of a second and third generic reduce the price further. What does that tell us? That a second competitior for a given type of drug does not reduce prices all the way to their competitive level.

So it's great to play Milton Friedman and say "markets are great". They are. But you're assuming a competitive market where it's quite clear none exists. So you have to do more than simply say competition is better than government regulation to make your argument.

[Secret_Agent_Man]

Originally posted by sgtclub
I've always been a grey goose man myself (even though it's French), mainly because it's odorless.

I'm a bourbon drinker -- my palate is just not as sophisticated as those of you effete conservatives.

(Although, as I have aged, I have come to appreciate the smoother tastes of Jim Beam (green label) and some of the "premium" bourbons over the raw power of Jack Daniels.)

S_A_M

[Secret_Agent_Man]

Originally posted by sgtclub
The truth I have been fighting off is that you are failing to recognize that while pharma a may have monopoly power for drug A (a) it may not be engaged in predatory pricing (b) likely does not have a monopoly in pharma industry as a whole, and (c) is subject to competition from other remedies and company's with patents for similiar uses.

I've mostly stayed out of this discussion, but I'll now chime in to say that:

(A) Pharmaceutical companies with short-term monopolies over drug A absolutely engage in predatory pricing to the maximum extent possible. They maximize profits while they can.

That is, for example, why Schering-Plough charged $80 per month for Claritin -- a drug that NO ONE actually needed (i.e a non-sedating weak antihistamine), but which lots of people wanted. They were able to do so because of the existence of health insurance (speaking of incentives for irrational prices).

The prices dropped (and Schering agreed to switch OTC) when they: (a) were in the midst of losing their patent coverage -- after extending their monopoly for several years after the base patent expired by meritless litigation that nonetheless escaped the category of Rule 11 sanctions due to very competent and creative counsel; and (b) thought that they had a new monopoly lined up (i.e Clarinex-- the metabolite of Claritin).

Schering was, however, screwed when insurance providers refused to cover Rx Clarinex because of the availability of OTC Claritin and its generic substitutes. Ha. Ha.

So, as Hank notes -- the market corrects things eventually -- but don't pretend that there is not rampant predatory pricing.


(B) Of course that is true, but its also irrelevant. The "pharma industry" is segmented into thousands of markets. If you mean thst they likely don't have monopolies over all possible treatments for a single condition -- actually -- they often do for a time.

(C) That's true eventually.

Atticus' point about the odd interplay betwen patent law and antitrust law is well taken. Also, under the law, objectively meritless patent suits are an antitrust violation. Otherwise -- feel free to exclude others. All policy choices made early on -- and probably very good ones, net-net.

S_A_M

S_A_M