Does the US Really Account for So Much Pharma Profit?

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There's quite a lot of question about whether Obama can turn health insurance reform around when he comes back from vacation next week.  My guess is that he has to do it pretty quickly--within a few weeks--or any idea of really substantial reform is fairly hopeless.  But I certainly don't think it's impossible.  The man can talk.

But I gather that liberals are getting more and more worried.  Why?  Because the gratuitous nastiness from across the aisle.  Take this post from the American Prospect:

I'm not saying The Atlantic should fire her. But perhaps her bosses ought to sit her down and have a discussion about the rigor with which one should approach writing, even blog writing. For instance, there are claims of opinion ("Coffee ice cream is tasty"), which require no particular support or justification, and then there are claims of fact ("Pharmaceutical companies make most of their profits in the United States") which do require that one be accurate. McArdle doesn't seem to know the difference. Fortunately, today we have this thing called "the Internet," which on a whole range of topics allows one to quickly and easily verify whether the impression one has, or something one vaguely remembers hearing somewhere, is actually true. If you can't be bothered to look it up, you might try inserting some qualifiers - "I seem to remember that..." or "I believe that..." or "I'll have to check this, but I think that..." - before making emphatic empirical claims. That way, if it turns out that you're wrong, you can easily correct the record, without looking like an idiot or a jerk (or maybe both).

If they had that conversation with her, then maybe she'd be less likely to find herself saying things like, "It wasn't a statistic - it was a hypothetical."

The reference is to my off-the-cuff remark about slashing pharmaceutical profits by 80%.  I should note, to be fair, that there were two portions of the comment:  one in which I repeated an estimate I had heard from several people, that the US accounted for something in the range of 85% of pharma net profits after you accounted for various issues, which I then turned into 80-90% when typing--a fairly common way to give a range on an uncertain verbal statistic.  And then I said, "So if you slashed pharma profits 80% . . . "  When asked about it on the Washington Post live chat, I forgot the first, and thought the commenter was referring to the postulated hypothetical destruction of all US profits.  It's not clear which part of the comment they are referring to. 

But this "error" that I didn't check was not, contra Waldman, in a blog post, but in a comment, followed by a live chat on the Washington Post's site.  Waldman doesn't seem to know that, which implies that he didn't look.  I mean, I'm not saying that Waldmann should be fired.  But maybe his bosses should sit down and have a talk with him about primary sources.

I may be in error on that--I've heard 80-90% from people in healthcare consulting, and I've seen that sales and profits in the US are usually larger when they're broken out on financial statements, which they aren't all that often.  But they were not speaking on the record, and  financial statements are not necessarily a very good guide to allocating the net profitability of a drug, because of various tedious pricing strategies involving market timing that you can read about in an exhaustive volume from the OECD that I have on my desk, if you want to come to my office, or spend $100 to buy it yourself.  There are also issues of the way that companies allocate profits across international borders, which vary for all sorts of reasons, including the location of the company.

For example, GlaxoSmithKline, which Waldman mentions as a counterargument to my estimate, just had a catastrophic collapse in its US revenues due to the expiration of important patents like Wellbutrin XL, Paxil CR, Imitrex, and Lamictal.  Waldman would have known this had he, like, Googled it.

But there are other ways that we can back into the question of which markets are the most important.  Sadly, there are no definitive numbers on the topic that I am aware of.  And I've asked a lot of researchers, left and right.

We can, first of all, look at financial statements longitudinally.  We can examine what happens to profits of pharmas when sales in the US decline, while sales in Europe (and overall revenues) rise.  The answer, for GlaxoSmithKline, was that profits fell 13%.  The US is punching massively out of its weight class on their balance sheet.

Next, we can look at where the revenues come from.  According to the OECD's invaluable Pharmaceutical Pricing Policies in a Global Market, which really is a bargain at the price, 45% of global sales come from the United States, 30% from Europe, and 9% from Japan, meaning that the US accounts for the lion's share of profit--sales in other countries are too low margin to be currently important markets, though they're undoubtedly nice gravy, and serve an investment function.  The OECD also says that the United States accounts for more than half the growth in pharmaceutical revenue.  And it singles out the United States as the "important exception" to the otherwise iron rule that no country's prices much affect the level of R&D spending.

We can look at per-capita pharma spending.  The United States spends about twice the OECD average, and as aforementioned, does more than half of the OECD spending on pharmaceuticals.

We can back into it from prices.  We know that prices are higher in the United States than anywhere else for on-patent drugs (our generics can actually be cheaper, which further ups the implied profit on first-line treatments).  How do we know this?  Because the American Prospect, among many other media outlets, spends a great deal of time complaining about the fact that we don't use Medicare's "purchasing power", etc. etc.  If the prices are higher here, so are the profits.

We can look at prices in Canada and Mexico.  They're higher than they should be, relative to the general price level in those countries and other national health systems.  This implies that companies are protecting a very profitable US market.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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