Against Monopoly

Re Drug Prices to Plummet:

Sadly, Justin Levine disabled comments on his article about drug prices to plummet, which links expiration of patents to supposedly more availability and cheaper prices, with a cynical comment along the lines of "funny how that happens." Well, maybe it is not so funny.

Dozens of generic drugs, especially life-saving cancer drugs, are in short supply. Worse, the prices of these GENERIC drugs are skyrocketing beyond the prices the drugs were when they were patented. The common refrain on this website has been that without patents, anyone could produce these drugs and the prices would drop and the availability would rise.

In fairness, the prices did drop, precipitously, and availability did increase, for a while. However, as generic prices decreased to near zero profit, fewer generic manufacturers were interested in producing an array of generic drugs. In fact, for some generics there is now a single manufacturer. In other words, there are de facto monopolies because there is insufficient profit to lure other manufacturers. So when the monopoly supplier has a glitch in production, like contamination of the drugs with something harmful, the supply drops to zero and there is a shortage.

Several articles have noted that short-term glitches in production do not entice other generic manufacturers to enter the market because the monopoly producer will solve their problems and the price will drop once again. Essentially, there is no money in many generic drugs. Perhaps NOW is the time to say "funny how that happens."

There are numerous articles reporting on the record shortages of generic drugs.

http://www.nytimes.com/2011/08/20/health/policy/20drug.html?_r=1&pagewanted=all

http://www.healthbeatblog.com/2011/08/cancer-drug-shortage-why-is-this-not-front-page-news-.html

http://health.usnews.com/health-news/family-health/cancer/articles/2011/08/24/cancer-drug-shortages-getting-worse-fda-says?PageNr=1

http://pipeline.corante.com/archives/2011/08/08/more_on_cancer_drug_shortages.php

The cause of these shortage-prone generic-monopolies is actually burdensome FDA regulations that create a high barrier to entry into the market. Otherwise, generic drugs would be as easily profitable as any other cheap-to-manufacture commodity with fairly inelastic demand, such as staple foods, disposable diapers, tissue paper, razor blades ...

Beeswax:

Nearly all the generic drugs that are in short supply are produced offshore. Many are produced by one manufacturer because of the low profits. The FDA does not prevent anyone from entering the market or producing the drugs. All the FDA does is inspect the drugs when they arrive in the United States to make sure they are not contaminated and that they are what they say they are.

In one particular example, a shipment of a cancer drug was stopped by the FDEA because it was contaminated with bacteria that might have been fatal to cancer patients. The supplier blamed the FDA. The FDA pointed out that the supplier had to have known that there was an issue with the drug and they could have had additional batches in preparation.

Since you read the articles about this situation, then you already know that, yes, the FDA has slowed release of shipments in some cases because it takes time to test the drugs, but in most cases the problem is that no one is interested in making the drugs. A number of articles and investigators have noted that the problem is more complex than simply pointing at the FDA, whose primary role here is preventing contaminated or improperly formulated drugs from entering the market place.

None of this changes the fact that we face the most serious shortage of life-saving drugs in history, and nearly all of them are generics. The prices of some of these generics has skyrocketed well past their prices when they were patented.

Beeswax:

I am a bit puzzled regarding your statement about entry to the market for generic drug manufacturers. Since the FDA covers ony 300+ million people out of the 6 or 7 billion in the world, and since the vast majority of generic manufacturers are in foreign countries, how does the FDA prevent new generic manufacturers from entering the market place?

One other thing puzzles me as well. I read the articles at the links. The articles stated that other generic manufacturers did not want to produce the drugs in short supply because they would be unable to obtain enough profit to make producing the drugs worthwhile. That seems to have nothing to do with the FDA at all.

I also doubt whether a manufacturer could mess up production of razor blades enough to cause them to throw out an entire production run, though that has happened with staple foods. However, the number of staple food manufacturers has decreased also as profit margins have tightened. For some staple foods there are only two or three suppliers. In some places there is only a single supply, which by definition would be a monopoly for that location. Transportation costs prohibit bringing in competitive products because the competitive products would then be more expensive than the local generic.

The reason "no one is interested in producing the drugs" is because of artificially high barriers to entry. Those FDA inspections cost money, and it's not the FDA that foots the bill.

Since the FDA covers ony 300+ million people out of the 6 or 7 billion in the world, and since the vast majority of generic manufacturers are in foreign countries, how does the FDA prevent new generic manufacturers from entering the market place?

1. The FDA has counterpart agencies in other developed nations.
2. The developed nations are the largest market, money-wise, for the drugs.

Beeswax:

Since all drugs produced in the United States and imported into the United States are subjected to the same inspection, the "barrier" is the same to all producers. If all producers have the same cost with respect to the FDA, why would that be a barrier?

Many of the drugs in short supply were previously produced by multiple generic suppliers. As the profit level dropped, they exited those particular markets. Some people have tried to talk former suppliers of drugs in short supply to re-enter the market, but thus far there is zero interest. The answer from those generic suppliers is that there are more lucrative generic drugs to produce than the ones in short supply.

Since all drugs produced in the United States and imported into the United States are subjected to the same inspection, the "barrier" is the same to all producers. If all producers have the same cost with respect to the FDA, why would that be a barrier?

You clearly do not understand what is meant by "barrier to entry" in economics.

Beeswax:

And you clearly have not answered my question.

There are literally thousands of generic drug manufacturers in the world. Some of them are regional suppliers. Others are national suppliers. Others are multi-national suppliers. All generic manufacturers focus on products that give them the greatest benefit for cost. I believe nearly all the multinational generic producers have either a manufacturing or marketing presence in the United States. They already produce hundreds or even thousands of drugs and deal with the FDA on a daily basis. What makes the 118 drugs in short supply any different, other than the fact that nearly all of them are produced outside the U.S.?

you clearly have not answered my question.

No, instead I explained why it wasn't relevant.

Go learn some economics. Then you can come back here and try to cogently argue your pro-IP position, Alonniemouse ... if you still believe in it, that is.

Beeswax:

I will try one once more.

A number of individuals have argued that the elimination of patent laws would permit drug prices to plummet and would increase availability. These same individuals never said that elimination of the FDA or decreasing FDA inspections to permit contaminated or improperly formulated drugs from entering the market would be one of the steps needed to decrease prices and increase availability.

Now we have examples of roughly 118 drugs, and increasing, that are not covered by patents. Those drugs did decrease in price by roughly 60% to 90%, depending on the nature of the drug. Prices did drop, but availability has also dropped, effectively to zero in some cases. Prices on those same drugs have now increased by up to 20 times, or roughly four to six times their cost when they were patented. Clearly, elimination of patents alone does not in fact guarantee availability and reduced price.

Even though the roughly 118 drugs can be produced by any generic company with the capability, a number of these drugs are produced by only one company. There is nothing to PREVENT another company from stirring up a batch of these drugs and attempting to market them. Yet, the situation exists. In many cases, people have actively been lobbying generic producers to make the drugs. So, elimination of patents on drugs alone does not guarantee that more than one drug company would be interested in producing a particular drug.

Furthermore, several individuals on this site have stated that a monopoly is possible only with government intervention. Yet, there are now several (only a fraction of the 118 drugs that have severe shortages) that are produced by only one company. By definition, when there is only one source of a product, the producer has a monopoly. So, government interference was unnecessary to create a monopoly and elimination of patents did nothing to prevent a monopoly. While not important, every one of the monopoly companies is in a third-world country.

FDA regulation is still government intervention, and I think most people here think that at the very least it needs to be carefully tuned. The Corante article blames the shortage at least partially on price regulations making it difficult for prices to come back up once the heated race for market share calms down. That too is government intervention, and it seems to be a poorly designed way of dealing with a problem. The better solution would seem to be seeking competitive bids on a fairly regular basis, although there may be other unforeseen issues.

There's also the issue of competition of patented drugs with unpatented drugs. Patented drugs can give higher profit margins, so the existence of patents on new lucrative drugs would dissuade their manufacture of the drug after the patent expires, especially if the unpatented drug competes with one of their own drugs.

The non-profit approach may prove successful in time, as the low margins wouldn't seem to be a grave concern for such an organization.

Last Anonymous:

The FDA is government intervention of a kind, but the intent is to have a safe drug supply. Rarely is the FDA criticized in the press unless someone dies or becomes ill because contaminated drugs slip through. One of the drugs that was rejected recently was for bacterial contamination. The bacterial contamination had the potential to kill patients with compromised immune systems, and since the drug is a cancer drug it will be going to patients with compromised immune systems. The FDA properly rejected the shipment.

There has been some criticism of the FDA because of the current shortages, but at least some of the criticism seems misplaced. Generic manufacturers are blaming the FDA for slow inspection of their drug shipments. However, that flies in the face of the approach to quality in most industries. Companies first have a responsibility to build quality into their products and to assure their safety. The government should not have to inspect products to be sure they are safe. Companies next should have a responsibility to assure there are backups in case of a hiccup in supply. I have worked in aerospace and in other metal-forming industries. Those companies always do their best to build quality into their products and assure their customers have a steady supply. Why should the pharmaceutical industry be any different?

Some of the shortages are due to rejected shipments by the FDA. The drug companies claim that had they had faster notification of the rejections, they could have started replacement batches. The FDA fires back, rightfully so, I think, that the companies with the rejected batches could have had other batches in process in advance of the rejections. They also point out that these companies had as much ability to inspect their drugs as the FDA has, or they certainly should have.

The price regulation issue is a more complex problem. I was confused by the "price regulation" because in general the U.S. government does not regulate prices. After a bit of reading, I learned that the price regulation was the amount the government would reimburse or pay for certain drugs. So, private individuals are not under the same "price regulation." However, since a good chunk of these drugs are paid for by the government via various public dole systems, they are a huge customer for these drugs. That presents a bit of a problem because they are unable to adapt to variations in price.

I do not see much of an issue with competition between patented and unpatented drugs, unless a patented drug has greater effectiveness. Many times the original patent holder continues to produce the patented drugs, though they are probably not the best choice from a cost-effectiveness viewpoint. At the current pace, the whole issue of patented versus un-patented drugs is quickly becoming moot as the number of drugs coming off patent is accelerating rapidly and these drugs are not being replaced by similar numbers or better products. In another five to seven years the number of important patented drugs is going to be a small percentage of all drugs.

I have my doubts about the non-profit approach. It would be difficult for a non-profit domestic company to compete with a foreign company for an array of reasons. The end result is that the non-profit will have products without customers since drug buyers will choose the lowest cost source, and most of the time that source is available. I wish them success with their endeavors.

"The FDA is government intervention of a kind, but the intent is to have a safe drug supply"

Most regulations at least nominally have some benevolent purpose, but that doesn't make them not regulations. I'm not saying that it needs to be gotten rid of entirely, but looking to streamline various processes would cause less overhead and benefit the market.

"I do not see much of an issue with competition between patented and unpatented drugs, unless a patented drug has greater effectiveness."

Let's say Acme makes two patented cancer drugs, Drug A and Drug B. Drug A and Drug B have the same clinical effectiveness and are virtually the same. The patent on Drug A expires (and thus would be less profitable), but we've still got several years of the patent on Drug B. Acme might stop making Drug A to boost Drug B profits, and might try and influence various aspects of the market to favor Drug B despite it not having a real advantage over Drug A.

"Many times the original patent holder continues to produce the patented drugs, though they are probably not the best choice from a cost-effectiveness viewpoint."

If that is the case, then we shouldn't have a shortage. Perhaps the price would be too high, but the pills would still be made. I'm also not sure why they wouldn't be the best choice from a cost effectiveness viewpoint. They've already got the infrastructure for making the pills, which is a competitive advantage.

"It would be difficult for a non-profit domestic company to compete with a foreign company for an array of reasons"

If the foreign firms are truly competing to the point where a non-profit won't have enough customers to stay operational, then the foreign firm is doing a good job, and the non-profit is not needed. If the foreign firm can't be matched on price but isn't providing enough supply, I'm sure the patients would be happy to have slightly more expensive drugs instead of no drugs at all.

Last Anonymous:

"Most regulations at least nominally have some benevolent purpose, but that doesn't make them not regulations. I'm not saying that it needs to be gotten rid of entirely, but looking to streamline various processes would cause less overhead and benefit the market."

If there are opportunities to accomplish the benefits you state, they should be implemented.

""I do not see much of an issue with competition between patented and unpatented drugs, unless a patented drug has greater effectiveness.""

"Let's say Acme makes two patented cancer drugs, Drug A and Drug B. Drug A and Drug B have the same clinical effectiveness and are virtually the same. The patent on Drug A expires (and thus would be less profitable), but we've still got several years of the patent on Drug B. Acme might stop making Drug A to boost Drug B profits, and might try and influence various aspects of the market to favor Drug B despite it not having a real advantage over Drug A."

I absolutely agree that is the case. On the other hand, Teva, or some other generic, is out there making Drug A and trying to influence the market to buy Drug A. In their court are huge insurance companies (the one I have does this) trying to influence their customers to ask for generic drugs. We get all sorts of materials from our insurance company and my company asking us to use generic drugs on a frequent basis. Since we see these sorts of things at work, in work email, in mailings from work, and from our insurance company, the generic drug companies have a huge advantage.

""Many times the original patent holder continues to produce the patented drugs, though they are probably not the best choice from a cost-effectiveness viewpoint." "

"If that is the case, then we shouldn't have a shortage. Perhaps the price would be too high, but the pills would still be made. I'm also not sure why they wouldn't be the best choice from a cost effectiveness viewpoint. They've already got the infrastructure for making the pills, which is a competitive advantage."

They may have the infrastructure, but they also have higher overhead. One of the facts of life is that products inherit the overhead of the company, which makes production of generic drugs by a company that relies on patented drugs much less profitable, or even unprofitable.

""It would be difficult for a non-profit domestic company to compete with a foreign company for an array of reasons""

"If the foreign firms are truly competing to the point where a non-profit won't have enough customers to stay operational, then the foreign firm is doing a good job, and the non-profit is not needed. If the foreign firm can't be matched on price but isn't providing enough supply, I'm sure the patients would be happy to have slightly more expensive drugs instead of no drugs at all."

I agree with everything you said. The problem is consistency of supply. If a generic supplier is unable to provide a drug for two months out of a year, a non-profit will never be able to compete because customers will buy from the generic for ten months a year. If the supply is truly sporadic, then consistency of supply will outweigh price. However, it appears that the drugs that make the shortage list varies with time. That makes it hard to entice a competitor to make up what is typically a short-term shortage. However, try explaining a shortage is temporary to someone who relies on a life-saving drug.

"Since we see these sorts of things at work, in work email, in mailings from work, and from our insurance company, the generic drug companies have a huge advantage"

I'm not so sure about that. Large pharmaceutical companies have more money to spend, and advertising and promotion is a big part of their budget. If the over the counter market is any indication, the prevalence of Claritin, Bayer Aspirin, Tylenol, and Tums all suggests that consumers aren't especially concerned with choosing generics when absolute medical equivalents are available, let alone choosing a generic over a name brand when the drugs aren't identical.

"They may have the infrastructure, but they also have higher overhead. One of the facts of life is that products inherit the overhead of the company, which makes production of generic drugs by a company that relies on patented drugs much less profitable, or even unprofitable. "

I understand that drugs have the overhead of the company that makes them, but I don't see why they would necessarily have more overhead. About the only additional expense they would have is advertising, which is entirely voluntary, and isn't actually limited to company that had the patent (although I can't recall a generic that did much advertising other than a perhaps something like Equate or other store brands).

"The problem is consistency of supply."

Part of that might be an issue of buying practices, which would need to be improved. There may be some shelf life issues in some instances, but a bit of stockpiling on drugs with few vendors would seem to solve the problem.

Last Anonymous:

Re overhead: If you have an R&D facility that absorbs $500 million per year (or more), and an advertising budget of $300 million per year, or more, then I suspect that those two factors alone will be a huge difference.

Most of the biggest generic producers are offshore in countries with cheaper electricity, cheaper land, cheaper labor, and significantly cheaper benefits than western countries, which are where most of the facilities of the companies that most frequently produce patented drugs are located.

The bottom line: Their overhead can be hugely different.

Re Tylenol vs. generic acetaminophen: Up until recently, Tylenol has generally outsold its generic equivalents, though sales have slowly eroded since the Tylenol patent expired. This year, thanks to an FDA-mandated recall of Tylenol (from...you guessed it...bacterial contamination), generic acetaminophen is outselling Tylenol. Tylenol sales are unlikely to recover as customers finally realize that generic acetaminophen is just as effective as Tylenol.

As for Claritin, Bayer Aspirin, and Tums, none of them hold a dominant market share. There are too many competitors with too many options. I recently visited my local Wal-Mart and Bayer Aspirin is almost hard to find because there are so many competitors.

Re stockpiling drugs: Stockpile = inventory = cost. If you are in a market with minimal profit, the last thing you want is to have a lot of cash tied up in inventory. Yes, stockpiling would be a lovely option, but who wants to tie up the cash, particularly when hundreds of drugs might potentially need stockpiled?

"Re overhead: If you have an R&D facility that absorbs $500 million per year (or more), and an advertising budget of $300 million per year, or more, then I suspect that those two factors alone will be a huge difference. " That would be the case if they only produced one drug, but those expenses for one product line, which they probably easily make back several times, wouldn't really add overhead to other product lines. Perhaps they would be at somewhat of a disadvantage at a transition, where the would be advertising a drug with available generics, but I don't see that taking more than a couple of months, and it's probably not going to be a surprise anyway. Manufacturing overseas being cheaper seems to explain differences, though.

"Re Tylenol vs. generic acetaminophen: Up until recently, Tylenol has generally outsold its generic equivalents, though sales have slowly eroded since the Tylenol patent expired." The Tylenol patent expired a long time ago, so that seems strange. Some patents on different variations may have held on a fair bit longer.

"As for Claritin, Bayer Aspirin, and Tums, none of them hold a dominant market share. There are too many competitors with too many options. I recently visited my local Wal-Mart and Bayer Aspirin is almost hard to find because there are so many competitors. " They don't hold a majority, but I believe they are still the best selling brands, making them a plurality.

"If you are in a market with minimal profit, the last thing you want is to have a lot of cash tied up in inventory. Yes, stockpiling would be a lovely option, but who wants to tie up the cash, particularly when hundreds of drugs might potentially need stockpiled?" Are pharmacies and hospitals markets with minimal profit? Those are the parties I would expect to be stockpiling, not generic drug companies.

""Re overhead: If you have an R&D facility that absorbs $500 million per year (or more), and an advertising budget of $300 million per year, or more, then I suspect that those two factors alone will be a huge difference. ""

"That would be the case if they only produced one drug, but those expenses for one product line, which they probably easily make back several times, wouldn't really add overhead to other product lines."

The reality is that most companies do not separate overhead between product lines. Companies typically lump all their overhead into a single number that gets applied to all products. While that means some products pay an excessive amount of overhead based on where they are in product life cycle, it is much easier on accounting. Some companies that have very mature products with minimal overhead either spin them off to another manufacturer or set up a subsidiary that manufactures only those products. Pharmaceutical companies do not appear to take this approach.

""Re Tylenol vs. generic acetaminophen: Up until recently, Tylenol has generally outsold its generic equivalents, though sales have slowly eroded since the Tylenol patent expired.""

"The Tylenol patent expired a long time ago, so that seems strange. Some patents on different variations may have held on a fair bit longer."

The original tylenol patent expired literally decades ago. However, continued high power Johnson & Johnson marketing (read significant overhead) has convinced a significant percentage of the American public that the Tylenol brand is better than generic alternatives.

""As for Claritin, Bayer Aspirin, and Tums, none of them hold a dominant market share. There are too many competitors with too many options. I recently visited my local Wal-Mart and Bayer Aspirin is almost hard to find because there are so many competitors.""

"They don't hold a majority, but I believe they are still the best selling brands, making them a plurality."

Tums is the number three best-selling brand of antacid. I am not sure where Claritin ranks, but Allegra is the number one allergy medicine. Bayer Aspirin holds a 14.9% share of the pain killer market, which makes it the number one for aspirin, but not number one for painkillers. However, Bayer may not hold the number one position for producers. Perrigo makes private label aspirin for a huge array of stores and may be very close to Bayer in total market share - just under a multitude of names.

""If you are in a market with minimal profit, the last thing you want is to have a lot of cash tied up in inventory. Yes, stockpiling would be a lovely option, but who wants to tie up the cash, particularly when hundreds of drugs might potentially need stockpiled?""

"Are pharmacies and hospitals markets with minimal profit? Those are the parties I would expect to be stockpiling, not generic drug companies."

While you would think they would stockpile, most keep inventories down to X number of days. Space is given as one consideration. Then there is the cost of inventory. Most pharmacies have guidelines, some quite strict, on how much medication they are permitted to carry. Of course, no one wants to have to throw away medicine, which is yet another reason to keep inventories down to a useable level.

Hospitals are great examples of overhead assignment. A single aspirin can cost $9 in a hospital. Not because of the cost of aspirin or even the cost of administering it, but the cost of overhead in a hospital.

Re overhead, I'll agree that companies don't always treat different lines as having different economic costs. However, while they might push the costs from one line to another, they may also divert profits from one line into competing with another. If a company were compelled to for some reason, they could produce dirt cheap generics sold at a loss. There generally aren't many reasons to do that that wouldn't be illegal, though. The company in question wouldn't be cost-ineffective because they can't in this situation, but rather because being cost-effective would be less profitable, and that adding costs to the old lines can help them compete in establishing new lines. In that case, the competition between patented and unpatented lines becomes a concern again.

"The original tylenol patent expired literally decades ago. However, continued high power Johnson & Johnson marketing (read significant overhead) has convinced a significant percentage of the American public that the Tylenol brand is better than generic alternative" Then the decline would have more to do with people gaining a better understanding of how generics work than the expiration of patents.

"Tums is the number three best-selling brand of antacid. I am not sure where Claritin ranks, but Allegra is the number one allergy medicine." Are the other two antacids calcium carbonate, or is the active ingredient different? If it's different, than it isn't generic Tums, but rather a different antacid. And Allegra is certainly not generic Claritin. It's fexofenadine while claritin is Loratadine. In case I wasn't clear, I was specifically talking about exact medical equivalents. Tums and Alka-Seltzer are both antacids, but that doesn't make them the same medicine.

"While you would think they would stockpile, most keep inventories down to X number of days. Space is given as one consideration." In that case, the solution would seem to be to have the stockpiling be done by a party for whom space is less of a concern.

"Most pharmacies have guidelines, some quite strict, on how much medication they are permitted to carry. " Do you know if these are generally internal policies or legal restrictions? The latter doesn't seem horribly unlikely given that a lot of drugs have recreational uses.

Last Anonymous:

Re your lengthy discussion of overhead and patented versus unpatented: You bring up discussions that manufacturing companies have all the time. There are an array of methods for handling old lines that either are no longer as profitable as the company would like or are a drain on resources the company would rather not devote.

The solutions chosen most often are: (1) Shut the line down. This seems to be the equivalent of what the pharmaceuticals do most often. (2) Spin that line off into a subsidiary with lower overhead. You would think that major pharmaceutical companies would have a generic subsidiary to take on products coming off patent, but I am unaware of any that do. (3) Sell the product and brand to someone else. It seems like major pharmaceuticals rarely do this as well.

Regardless of what they do and why, we are not going to change their behavior.

Re your Tylenol comment. I think you stated part of the answer. It has not helped Johnson & Johnson that they have had recalls of Tylenol in the last couple of years because of contaminated product. Their market share plummeted from about 36% to somewhere around 8-10% after the recalls. I suspect that will give people incentive to try generics, and they may not come back to Tylenol.

Re your antacid comment. I missed that. I thought you were talking about antacids as a product category, and not a specific type. Tums may well be the largest brand for whatever is in Tums. I do not know.

Re your last comment about pharmacies stockpiling drugs: Internal policy. To the best of my knowledge, there are no legal limitations on how much stock a pharmacy can carry. However, most pharmacies are limited in space and the head pharmacist tries to balance customer needs with available space in determining how much of a particular drug that pharmacy carries. I have yet to see the pharmacy that could afford to carry a year's supply of most drugs.

Part of the problem with drugs is shelf life. Many drugs have a shelf life of one year. A huge number of drugs have a shelf life of two years. Shelf life and the need to turn over stock limits the amount of stock a distributor can and is willing to carry. If no one buys the drug before the shelf life expires, or is nearly ready to expire, the distributor eats it. While I am sure that distributors make money on selling drugs to pharmacies, I doubt they make enough to be able to be able to throw away many drugs because they are expired. Also, I think distributors have to dispose of those drugs in a certain manner as a legal requirement, which adds to their costs.

I agree that without massive changes to the way the pharmaceutical industry is structured, things probably won't change much.

Stockpiling does seem a problem with the way things currently run, but one thing to consider is that that there wouldn't be a need to stockpile all or most drugs, but rather the drugs for which stockpiling is most important. The factors to consider would seem to be the number of suppliers, the importance of the drug, and the availability of acceptable substitutes. That would mean that penicillin wouldn't need to be stockpiled, but a cancer drug with only one producer and no good substitutes would be a good choice for having a bit of extra stock in case of complications arising.

If I had to guess, there would be an inverse correlation between the drugs with shortages and the typical number of patients. The good side of that is that stockpiling a two months supply for five patients has much less of a cost than stockpiling a two months supply for five hundred patients.

Last Anonymous:

All good points.

Question: Who is going to finance the stockpiling?

As a side note, apparently someone (not the generic manufacturer) HAS stockpiled at least some of the drugs in question and they are charging up to 20 times the normal price for the drugs. I am sure that was not what you had intended in your stockpiling suggestion, but that is what has happened.

As you previously noted, price controls by the government and by some insurance plans prevents patients from obtaining the drugs at the ridiculous prices. Unfortunately, there is nothing illegal about what the "stockpilers" are doing. Unethical, of course, but illegal, no.

Shortage of Generic Drug Threatens Pet's Lives

A shortage of the only medicine approved for the treatment of heartworms, melarsomine dihydrochloride, is in critically short supply. This drug was patented until about 2006. Since then, the drug has been in short supply several times, even though anyone in the world capable of making such drugs may do so, since the drug is no longer patented.

Without the life-saving drug, dogs suffering from heartworm may die. What is puzzling about the shortage is that there is nothing preventing anyone with the capability from making the drug, since it has not been covered by a patent for years. This drug joins dozens of others off patent that are in increasingly short supply. Though the price of this drug has yet to skyrocket past the price when the drug was patented, it may join other drugs that have done so.

One of the shortages was caused by a shutdown of the only plant in the United States that produced the active ingredient. The manufacturer was no longer interested in producing the ingredient. Another shutdown was caused by contamination of one of the batches.

Funny how that works.

The key word in the above being "approved". The presence of government regulation creates artificially high barriers to entry into the market and means there is still a kind of monopoly.

Beeswax:

The situation is worse than you imagine. At this point it appears that no one makes the drug in the U.S. anymore, and only one supplier - who is looking to import. If the supplier is unable to import and no one sells the drug in the U.S. anymore, what would you call that?

Fido could be in serious trouble.

Once again, patents are not at fault here. Indeed, they are irrelevant. But how bizarre that the drug was readily available for all the time it was covered by a patent, and now that anyone with the capability and desire to make the drug can, it is in short supply.

Patents, specifically, may be irrelevant, but monopoly isn't. If, as you say, there's a sole worldwide supplier, there is in fact a worldwide monopoly.

Furthermore, it's possible that drug companies "pine away for patents" when they contemplate making a generic drug; if there were no patents this effect might disappear, in time.

Beeswax:

There are multiple suppliers worldwide, and I believe there are multiple manufacturers worldwide. However, there is only one U.S. supplier. That supplier is trying to import supplies from Europe. There are several difficulties. The European supplier already has commitments it must meet and there is uncertainty as to whether there is any stock to ship to the United States. Then the material must clear customs and the FDA. Since the active ingredient is arsenic based, there are complications.

I have never heard of the "pining away for patents" with respect to generics. That would not seem to make sense, since most prescription drugs are produced by generic suppliers after expiration of patents. Indeed, these companies are typically enthusiastic about producing a drug off patent as soon as possible. The current U.S. supplier of the heartworm medication never held a patent on the drug.

the material must clear customs and the FDA

Well, there you go, then.

Beeswax:

the material must clear customs and the FDA

Well, there you go, then.

Yep, not a patent in sight anywhere. Once again, simply eliminating patents does not necessarily solve problems relating to supply of drugs. So, yes, there you go again.

was that ever a point of contention? I don't think I recall any claims saying that patents are the only way there can be problems with drug supplies.

Last Anonymous:

There are many here who claim that without patents drugs would be cheaper and more readily available. Justin Levine is one of those individuals. So, yes, patents are frequently blamed for high prices and some people here associate availability of drugs, or the lack of availability, with patents as well.

However, recent events have shown that expiration of patents has led to higher prices and reduced availability for some drugs, numbering about 110 - 120 this year. In some cases, expiration of patents has led to a single generic manufacturer being the only producer of certain drugs, meaning a de facto monopoly, which certain individuals posting in this room have argued would be impossible if patents were eliminated. Not once have these individuals said something along the lines of "If patents were eliminated, if the FDA would permit contaminated drugs to enter the United States, and if U.S. Customs would permit the same drugs to enter the United States without inspection, THEN drugs would be cheaper and more available."

If we have to eliminate FDA inspections, which will never happen (in fact, there have been recent suggestions by the general public that FDA inspections are too weak), as well as eliminate patents, and then move U.S. Customs out of the way, we may as well wish for Tinkerbell or the tooth fairy, because it will never happen. That pretty much means all the rhetoric about the evil of patents is for naught.

But you're missing a significant point: that this does not happen with all, or even most, drugs that go off-patent. It didn't happen with Aspirin, did it?

The real problem with the affected drugs seems to involve there being very few people that need to take them.

You didn't address the concern at hand, which was whether or not there were claims that ONLY patents can cause problems with the drug supply.

I also don't think I can recall anyone claiming that a de facto monopoly is impossible without patents.

Beeswax:

You are absolutely correct, this situation has not happened to most drugs that have gone off patent - yet. You are also correct, and what may be a key point, in that most of the drugs involved affect only a few hundred thousand people rather than millions.

The problem is that a single batch of most of the affected drugs will supply the entire world for three to six months. That is part of the reason that only a single company is interested in making many of these drugs.

But, there is a significant point that could indicate severe future problems. The number of drugs in short supply has gone from 10-20 just several years ago to nearly 120, a six-fold increase in a few years. Looking forward, we see indications that the number of drugs in short supply, particularly those that treat life-threatening illnesses, is set to continue increasing.

Look at the shortfalls from a different perspective. About 7% of all drugs off patent are in short supply. If that number continues to increase at the present rate, that number could easily reach 20% to 40% in five years. Scary. The number of people affected could change from a few hundred thousand to millions, or maybe even tens of millions.

Last Anonymous:

I am not going to dig through all the thousands of posts on this website to see what people have claimed. However, with the exception of utilities, the only government-sponsored monopolies in the United States are via intellectual property. If there is a monopoly in a drug that is off-patent, it is an artifact of economies of scale and profit. While government regulation, or even common sense (testing to make sure your drug is not contaminated with poison or bacteria), affects price, there is nothing that any government has done to PREVENT entry in the market place by anyone with the capability to make a drug that meets the formulation requirements originally approved for use on people, as long as that drug is not contaminated with toxic substances.

People have posted on this site MANY times that monopolies are impossible without government intervention. I do not believe that is true. We nearly had a monopoly in production of large commercial aircraft until the European government intervened financial to keep Airbus going. So here is a circumstance where governments intervened to PREVENT a monopoly. Quite humorous. I suspect many on this site would have said that was wrong and evil.

Where is Bill Stepp when you need him?

"However, with the exception of utilities, the only government-sponsored monopolies in the United States are via intellectual property." There are a few other exceptions, Mallinckrodt Incorporated has a monopoly on the legal cocaine market.

"there is nothing that any government has done to PREVENT entry in the market place by anyone with the capability to make a drug that meets the formulation requirements originally approved for use on people, as long as that drug is not contaminated with toxic substances. " So, other than the government mandated barriers to entry, there are no government mandated barriers to entry?

"People have posted on this site MANY times that monopolies are impossible without government intervention." I do not agree with those people. It's a pretty ridiculous statement to make, at least with a loose interpretation of monopoly.

"We nearly had a monopoly in production of large commercial aircraft until the European government intervened financial to keep Airbus going." I'm not particularly familiar with the commercial aircraft industry, but I'm going to go out on a limb here and guess that there's a fair amount of regulation for putting something into the air, making it not a good example of monopoly without government involvement, and it's also quite possible that patents in that field could make competitive entry into the market difficult.

"So here is a circumstance where governments intervened to PREVENT a monopoly. Quite humorous. I suspect many on this site would have said that was wrong and evil. " Perhaps. While I'm not generally a fan of government intervention, it does seem appropriate to use government intervention to counter government intervention.

Last Anonymous:

From your perspective, there is a "barrier" to entry whether you are opening a lemonade stand or a gas station, since EVERY business has regulations of some sort or other requiring compliance. My next question is: What is the point? Even though there are barriers to entry in ALL fields of business, businesses continue to open at a fairly brisk pace. Obviously, the barriers to entry are insufficiently onerous to keep people from starting new businesses, including pharmaceutical, where many suppliers of generic drugs have started business in the last decade.

The size of the barriers differs greatly from industry to industry, and more heavily regulated industries have higher barriers to entry. The existence of a barrier doesn't mean that you won't have new businesses, but rather, that you'll likely have fewer competitors than you would otherwise. Whether or not these barriers are worth their social costs is a different issue, but they do tend to result in less competition than we would have in their absence.

Last Anonymous:

Absolutely true statements. You can see some of the effects on what may be among the most heavily regulated industries that exhaust, aerospace and vehicle manufacture, including engine manufacturing. While drug manufacturers pop up fairly easily (India went from having virtually no drug industry to being an international force in generic manufacture in a mere decade), regulations on vehicle engines are so tight that it can take a year or more to get approval on a new design. Vehicles are similar. There are a host of regulations that require compliance. Drugs are definitely easier. If you are copying a drug already invented by another company, all you have to do is meet the formula of the original.

You are absolutely correct, this situation has not happened to most drugs that have gone off patent - yet.

Oh? And when are you expecting it to happen to aspirin?

About 7% of all drugs off patent are in short supply. If that number continues to increase at the present rate, that number could easily reach 20% to 40% in five years.

Pure hyperbole. That assumes, probably incorrectly, that the forces affecting that particular 7% will affect them all. Perhaps they will mainly only affect those 7%.

With the exception of utilities, the only government-sponsored monopolies in the United States are via intellectual property.

I think there are some local transit companies that are government-sponsored monopolies -- or do you count those as utilities, or not count them if they are municipal rather than state or federal?

People have posted on this site MANY times that monopolies are impossible without government intervention. I do not believe that is true. We nearly had a monopoly in production of large commercial aircraft until the European government intervened financial to keep Airbus going.

Which company nearly had a monopoly? I seem to recall that aside from Airbus there are, at the very least, Boeing, McDonnell-Douglas, and Lockheed-Martin making large aircraft. How do you get "nearly a monopoly" from a market with at least four entrants? And this is a market substantially impacted by government safety regulations, not unlike pharma.

From your perspective, there is a "barrier" to entry whether you are opening a lemonade stand or a gas station, since EVERY business has regulations of some sort or other requiring compliance.

Some barriers are much higher and wider than others -- read: more expensive to overcome.

Even though there are barriers to entry in ALL fields of business, businesses continue to open at a fairly brisk pace.

But that pace varies from sector to sector, partly based on demand but partly based on the sizes of the barriers in each sector.

Vehicles are similar. There are a host of regulations that require compliance. Drugs are definitely easier. If you are copying a drug already invented by another company, all you have to do is meet the formula of the original.

Vehicles are also much more "one size fits all" than drugs. You can substitute a Honda Insight for a Toyota Corolla. You can't substitute levostatin for chlorpromazine.

Beeswax:

I do not know how to do the tab thing that you do, so I am going to use quotation marks. Sorry.

""You are absolutely correct, this situation has not happened to most drugs that have gone off patent - yet.""

"Oh? And when are you expecting it to happen to aspirin?"

lol...You are funny. I do not expect this situation to affect any over-the-counter drug that was previously patented. However, those drugs make up a tiny fraction of all drugs the have gone off patent.

""About 7% of all drugs off patent are in short supply. If that number continues to increase at the present rate, that number could easily reach 20% to 40% in five years.""

"Pure hyperbole. That assumes, probably incorrectly, that the forces affecting that particular 7% will affect them all. Perhaps they will mainly only affect those 7%."

I speculated with an "if-then." That is not hyperbole, but cautious speculation. The fact is that the number of drugs that were previously patented that are now in short supply has grown steadily and rapidly. The fact is that the number is many times greater than it was five years ago. The fact is that the number of drugs in short supply is not decreasing. It does not take a rocket scientist to speculate that the numbers COULD increase and that increase could be dramatic. Will it be dramatic? Who knows? Only time will tell.

""With the exception of utilities, the only government-sponsored monopolies in the United States are via intellectual property.""

"I think there are some local transit companies that are government-sponsored monopolies -- or do you count those as utilities, or not count them if they are municipal rather than state or federal?"

I do not know about those. How could any transit company be a monopoly? Does that mean there are no other transit companies that exist or provide competition? If they do exist, I would not count those as utilities.

""People have posted on this site MANY times that monopolies are impossible without government intervention. I do not believe that is true. We nearly had a monopoly in production of large commercial aircraft until the European government intervened financial to keep Airbus going.""

"Which company nearly had a monopoly? I seem to recall that aside from Airbus there are, at the very least, Boeing, McDonnell-Douglas, and Lockheed-Martin making large aircraft. How do you get "nearly a monopoly" from a market with at least four entrants? And this is a market substantially impacted by government safety regulations, not unlike pharma."

McDonnell-Douglas is now part of Boeing. Lockheed-Martin has not built a commercial airliner since 1984, when production of the L1011 ended. So, there are only two producers of large commercial aircraft. A Russian company is trying to get into the business, but their aircraft are so far below western standards that to my knowledge they do not have any customers.

Both Airbus and Boeing have gone through periods of financial instability and both have been on the brink of collapse more than once, though they are both currently solvent. Boeing recovered the last time with huge cost-cutting measures and thousands of layoffs. Airbus recovered with an infusion of billions from the participating governments.

""From your perspective, there is a "barrier" to entry whether you are opening a lemonade stand or a gas station, since EVERY business has regulations of some sort or other requiring compliance.""

"Some barriers are much higher and wider than others -- read: more expensive to overcome."

Absolutely.

""Even though there are barriers to entry in ALL fields of business, businesses continue to open at a fairly brisk pace.""

"But that pace varies from sector to sector, partly based on demand but partly based on the sizes of the barriers in each sector."

I agree.

""Vehicles are similar. There are a host of regulations that require compliance. Drugs are definitely easier. If you are copying a drug already invented by another company, all you have to do is meet the formula of the original.""

"Vehicles are also much more "one size fits all" than drugs. You can substitute a Honda Insight for a Toyota Corolla. You can't substitute levostatin for chlorpromazine."

Each time a vehicle is built, it has to be pass an array of tests before the U.S. permits the vehicle to take to the road. You cannot substitute a Honda Insight for a Toyota Corolla until the Honda Insight meets all the test and documentation requirements required.

On the other hand, if you want to make levostatin, the FDA runs a test, makes sure it is levostatin, makes sure it does not contain something that is not levostatin (like poisons and bacteria) and you are in business. The FDA doesn't even care what the factory looks like. Once a drug is off patent, anyone is permitted to make the drug as long as the formulation is that originally approved by the FDA.

On the other hand, try designing a new engine. The EPA not only requires a boatload of documentation under a huge array of conditions, they also force themselves into your facility to look at test facilities and procedures. Then there are follow up and spot checks to make sure that you have not changed anything and that you are still compliant with their regulations.

Bottom line: As long as you duplicate an existing drug exactly, the FDA gives you a pass even if you are making the drug in a dirt hovel in Africa. You could never get away with that for a new vehicle or engine.

I speculated with an "if-then." That is not hyperbole, but cautious speculation.

No, it's you spreading FUD about patent abolition, as usual, Lonnie.

How could any transit company be a monopoly?

Duh, how else? Either they have a municipal grant or they simply don't have a competitor. But tell me, how many cities do you know with two independent and competing bus companies, let alone more? Indeed, cities that also have a subway or aboveground light rail usually seem to have a single organization run both that and the buses. And even intercity transit seems to be controlled by just a handful of companies, with individual routes commonly being served by only a single bus company and zero or one train companies. There's probably more competition if you fly, but flying's more expensive to start with...

With city bus companies the most common story you hear is that running city buses at prices people will pay for just isn't profitable, so the only way you get even one entrant into that market is if the city subsidizes some company fairly heavily. In this case, arguably the monopoly isn't due to government intervention but due to lack of profit in that market -- which really means we need to make the transit more efficient, so the cost of providing it is lower than presently. Of course, besides making the vehicles very efficient the primary means of doing that would be to have dedicated bus lanes. If there are already dedicated HOV lanes they might suffice; if not, those bus lanes become the subsidy, with access presumably granted to "the" bus company, and we have a monopoly again -- this time, technically, a government monopoly of the bus lanes themselves.

You cannot substitute a Honda Insight for a Toyota Corolla until the Honda Insight meets all the test and documentation requirements required.

Whoosh!

My point was that if the barrier from those requirements stops the Insight making it to market, the Corolla is still there to serve the same function, whereas if the same barrier blocks a heart drug from entering the market, hemmorhoid cream isn't going to do in a pinch. (And I don't mean if it blocks a heart drug that's dangerous or ineffective; I mean if the drug would have been approved, but the regulatory processes makes things too expensive to enter the market profitably.)

""I speculated with an "if-then." That is not hyperbole, but cautious speculation.""

"No, it's you spreading FUD about patent abolition, as usual, Lonnie."

Quote: "Spreading FUD"? Let us review.

Fact: About 7% of all drugs that are off patent are in short supply.

Fact: The number of drugs in short supply has been increasing at 20-25 per year, and that number has increased each year over the last five years.

Fact: The number of drugs off patent in short supply is the greatest it has ever been.

Where is the "spreading FUD"? Does it take a rocket scientist to speculate that if the trend of the last five years holds, that the number of drugs in short supply could become significant?

""How could any transit company be a monopoly?""

"Duh, how else? Either they have a municipal grant or they simply don't have a competitor. But tell me, how many cities do you know with two independent and competing bus companies, let alone more? Indeed, cities that also have a subway or aboveground light rail usually seem to have a single organization run both that and the buses. And even intercity transit seems to be controlled by just a handful of companies, with individual routes commonly being served by only a single bus company and zero or one train companies. There's probably more competition if you fly, but flying's more expensive to start with...

I see what you mean. Sorry, I was not thinking about public transportation. I believe "public transportation," i.e., subways, bus lines, and els, are owned by the various cities in which they are located. Yes, they are monopolies, but on the other hand they all seem to be losing money, as you noted. Regardless, you are correct, that is yet another government-sponsored monopoly.

""You cannot substitute a Honda Insight for a Toyota Corolla until the Honda Insight meets all the test and documentation requirements required.""

"Whoosh!

As far as I can tell, all drugs that have come off patent are being produced by at least one generic supplier. Where the dividing line is may be the number of people interested in the drug, as you had previously noted. A low number of buyers equates to a low number of batches, and if the number of batches is below a certain point then there is an insufficient market for there to be two suppliers.

The price of the drug remains low because of at least two factors. If the sole supplier raises prices too much, then a second supplier will stir up a batch and the price will drop again. Also, at least in the United States, the government has set prices on generic drugs and if the sole supplier sells at a price greater than that, then the entity responsible for the bulk of medical payments in the United States refuses to pay.

The only regulatory factor in play here is the price the government says it will pay for the generic drug. Otherwise, anyone can stir up a batch, submit it to the FDA for approval, and sell it. Indeed, hundreds of generic manufacturers do exactly that.

As one might expect, as the number of drugs coming off patent has grown, the number of generic drug manufacturers has skyrocketed. I tried counting the number of generic suppliers in the United States and stopped. The number of suppliers in the U.S. alone appears to equate to a ratio of about 1.5 generic drugs per supplier, which means that there is a ton of competition out there.

The situation is more dramatic world-wide. There seems to be somewhere around four generic manufacturers for every drug off patent. However, that number may be misleading because many of the "suppliers" may actually be buying from the same source. Perrigo is a perfect example. I read somewhere that Perrigo supplies about 65% of all generic aspirin, but it is rebranded into literally hundreds of brands.

The problem still seems to be that the demand for some drugs is so low that the market will not support two suppliers. That is basic supply and demand rather than some sort of regulatory requirement.

As far as I can tell, all drugs that have come off patent are being produced by at least one generic supplier. Where the dividing line is may be the number of people interested in the drug, as you had previously noted.

And that, of course, limits the scope of the threat of undersupply. Only the drugs with smaller than some threshold number of users are likely to be at risk, and that 7% of all generic drugs might already be most or all of the ones at risk.

A low number of buyers equates to a low number of batches, and if the number of batches is below a certain point then there is an insufficient market for there to be two suppliers.

There are three ways to change this. One would be to increase demand; population growth may do that. Another would be to make it more efficient to generate batches, and particularly to generate smaller batches with a still-acceptable economy of scale. Finally, lowering the regulatory barriers to entry (without making the supply unsafe) and in particular the cost burden imposed on entrants would reduce the amount of overhead they have to amortize over that small number of batches.

The only regulatory factor in play here is the price the government says it will pay for the generic drug. Otherwise, anyone can stir up a batch, submit it to the FDA for approval, and sell it. Indeed, hundreds of generic manufacturers do exactly that.

The submitting to the FDA for approval is, obviously, a second regulatory factor.

In the long run, the problem will be solved with nanotechnology. You'd just feed kitchen waste into some machine in the home that can construct arbitrary organic molecules, and out pop the pills you need. Unless, of course, the Big Pharma patent lobby outlaws such machines as the "Boston Strangler to the pharma industry" the way the MPAA famously tried to outlaw the VCR, terrified of napsterization of their "intellectual property".

Beeswax:

You bring up good points all around. Once again, we will have to see what happens over the next couple of years to know for sure.

Nanotechnology is interesting and may ultimately be a source of salvation. Currently, the nanotechnology needed to replicate medicine is still very far in the future.

If by "very far in the future" you mean possibly as little as 10-20 years, then yes, I suppose it might be. :)

Beeswax:

I will be amazed if they are making any medicine affordably using nanotechnology within 10 years. I could see 20 years, depending on how quickly nanotechnology progresses. Based on the current pace of progress in nanotechnology, I would suggest more in the 20-50 year time frame, assuming it can be done affordably at all.

I see Boeing is about to deliver their first Dreamliner. I also noticed that the analysts are saying that if Airbus is unable to deliver their next airliner this coming year, they will be at a serious disadvantage to Boeing and Boeing could end up with the lion's share of the commercial airplane market.

Of course, this situation has happened more than once in the past, with Boeing in the same position and being on the brink of serious financial issues. Considering that there are only two manufacturers of large commercial aircraft, you would think that they would both have plenty of market to share.

Sadly, the explosive growth in generic drug shortages has continued over the last four months, and tripled since 2005. I notice from the earlier post above that about 118 generic prescription drugs are in short supply. The current number has grown to 215, and the growth in shortages appears set to continue into the near future.

The shortfalls continue to lead to instances where the prices of the generic drugs have expanded well beyond the price they were when the drugs were patented.

While it is easy to blame the government, and they do deserve part of the blame, the bigger problem is that the vast majority of generic drugs are purchased by way of third-party suppliers, who buy in bulk and have established, inelastic, price levels for generic drugs. The extremely low prices for generic drugs has resulted in more and more of these drugs being produced by only one company in the entire world because the demand for many of these drugs is relatively low in comparison to the amount produced in a single batch.

While President Obama has supposedly given the FDA broad leeway in dealing with the problem, several analysts have pointed out that the problem is not regulatory, but economic. Until the profit for generics rises to the point where more than one company becomes interested in producing them, a huge number of generic drugs, which now account for 70% of all prescriptions in the United States, and rising rapidly, are going to be monopoly products.

Against Monopoly

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