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Tuesday, September 22. 2015

In what may be the classic example of bad journalism in the field of economics, I offer this example

"In what may go down in history as the textbook example of how dangerous an unregulated free market can be when a company decides it wants to be greedy, Turing Pharmaceuticals of New York hiked the cost of a powerful drug used to treat people with life-threatening illnesses like AIDS and cancer by over 5,000 percent overnight."

The last time I looked, patents were government-protected monopolies. The benefits of patents are debatable in the discussion of free markets. Most economists recognize their value as an tool for creating the incentive for innovation. However, it is recognized as a temporarily assigned privilege.

I don't hold a particular stance on whether or not patents are viable tools. Unlike Jeffrey Tucker, I'd venture that removing patents altogether would not be good for innovation. I'm willing to accept his arguments, they do make a great deal of sense, I just don't think they have practical applications (I could be wrong...saying something doesn't have practical application just means it hasn't been tried, so we're wary. In fact, patents didn't exist for many years and humans still made tremendous innovations without intellectual property rights.)

Since patents are a government rigging of market management (controlling production), perhaps the length of patents should be reduced. Or perhaps upon the sale of a patent, the protections are eliminated within a shortened time frame.

Patents are government regulation and an inhibition on markets. Thus, the government has the means to 'fix' what it broke with patents. That said, the journalist needs to learn quite a bit about what a free market is.

Late note: A comment mentions that Daraprim is off-patent and the firm purchased 'exclusive rights', which the journalist failed to look into and assumed was a patent. I looked into it at lunch, because I'd assume the same thing. There are no 'exclusive rights' without a patent. What the firm purchased was the only factory currently making the drug. There are no 'exclusive rights' at all. By keeping the price down, the current company was making a profit and reducing competition (which should have, oddly enough, brought it up on anti-trust laws). But the new owner may make a short term large margin, only to face a competitor who decides to now enter this market and drive prices down.

All in all, the free market is working far better than this journalist ever imagined, even if the short term hit for people is substantial. My guess is the competition will push the price for the drug far lower than it was previously.

Posted by Bulldog in Hot News & Misc. Short Subjects, Politics at 11:33 | Comments (26) | Trackbacks (0)

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Daraprim has been around for 60 years and is off patent. Turing does not have a monopoly, they have an exclusive license from a previous manufacturer. At $13.50 per pill the economics did not justify other players making this product. At $750 per pill, others will likely enter this market, driving the price back down, without government intervention. Turing may get a one time increase in profits, but with others in the market the price may go below $13.50. This is the magic of capitalism.

#1 BillS on 2015-09-22 12:05 (Reply)

My main point being that it's journalistic idiocy - and if what you've written is true, my point remains intact.

They don't understand what they are writing about, and did not present the facts properly.

That said, patents are still an issue and are often misunderstood.

I'm not sure how "exclusive rights" work for an off-patent drug though? If I wanted to produce the drug, how does one company have exclusive rights without a patent?

#1.1 Bulldog on 2015-09-22 12:27 (Reply)

Your point is well taken. An "exclusive license" just means licensing whatever rights the grantor of the license holds. For example, aspirin is off patent. Bayer could grant another manufacturer the exclusive rights to make Bayer aspirin. This would not preclude other manufacturers from making aspirin.

#1.1.1 BillS on 2015-09-23 02:51 (Reply)

Boldrin on patents is my go-to (podcast)

http://www.econtalk.org/archives/2009/05/boldrin_on_inte.html

Everything you learned about patents is wrong, in short; his opinion is that they do no good and lots of harm.

#2 rhhardin (Link) on 2015-09-22 12:06 (Reply)

Your link is to Mercatus, which I visit frequently. I'm familiar with Boldin, Tucker cites her.

I'm still ambivalent on that concept, though. I do believe the current structure is wrong. Just not 100% sure getting rid of it is a good idea.

Here's why. I have a friend who got a patent on a brilliant idea for our industry (this is true). He doesn't have the money to push it forward on his own. Nobody had thought of it until he presented it to them.
Most firms are hesitant to adopt it. Not because they don't like it, but because he's a small firm. The ONLY thing he has is the patents.

With the patents, he at least has the opportunity to sell the idea without worrying about somebody he presented it to stealing it.

In other words, patents do protect the person who brings it to market first - which I think is justifiable. I can see the stance that Boldin takes, I just don't agree with it 100%.

#2.1 Bulldog on 2015-09-22 12:23 (Reply)

I subscribe to the thinking that there has to be a period of exclusive ownership for intellectual property or expensive solutions to problems would not be sought.

What gripes me, and I am going off on a tangent here, is that copyrighted property can be held in virtual perpetuity while a patent holder usually gets about 17 years.

Why should the author of a book get to keep that property forever while a man that invents a revolutionary widget is only allowed to own his property a few years?

#2.1.1 feeblemind on 2015-09-22 13:20 (Reply)

I agree with you on the copyright issue. It is a bizarre thing. Better that they get a limited time of 'privilege' for an idea, then make it open to the general market.

#2.1.1.1 Bulldog on 2015-09-22 14:00 (Reply)

Years ago the VP of a major pharmaceutical company gave the commencement speech at the university I attended. In a newspaper interview he was asked why new drugs cost so much and he explained it cost a billion dollars and took ten years to bring a new drug to market. Out of every 10 new drugs they produce only three make money. The winners have to pay for the R&D costs of the losers. He was asked why they didn't just develop the winners. He said if they knew how to pick the winners they would just go to the race track to make money.

#3 Ray on 2015-09-22 12:08 (Reply)

Hidden in all this is the incredible cost of FDA Drug Regulation. The reason why the medication can't be produced cheaply is because the cost has to cover the millions of dollars required to comply with government requirements. The drug is available in other countries for much less...

The patent issue is secondary and not relevant in this particular case.

On a 60 year old medication, those requirements should be relaxed.

They certainly have the right to charge whatever they want. Unfortunately, by doing this, they attract a lot of attention as in the Streisand Effect.

#4 EarlW on 2015-09-22 12:28 (Reply)

Without patents, the need for trade secrets skyrockets.

#5 Dr Tox on 2015-09-22 12:46 (Reply)

Patent attorney here. What BillS said is accurate. This has nothing to do with the patent system. Rather, it's a case of a hedge fund manager finding an arbitrage opportunity in a third-party payment system.

Obamacare and the medicare/medicaid expansion is going to drive a lot more of this type of activity as it incentivizes big pharma to focus capital on drugs with high prescription counts. The only question in this case is whether the quoted number of 12,700 prescriptions/year will be sufficient to justify a competitor to enter the market. I suspect not.

An aside of interest to readers of this blog: Dylan contracted histoplasmosis, a somewhat related illness, in 1997.

#6 Guest on 2015-09-22 12:55 (Reply)

Here's a question.

If there isn't enough consumption to yield a competitor, then is it possible for a 3-D printer (or some other, similar type of method) of small-scale production to make this?

I have no idea what goes into making this drug, so maybe the individual parts are not readily available. But in today's day and age, it seems to me even small scale 'boutique' drugs would find manufacturers with all the new tools available.

#6.1 Bulldog on 2015-09-22 14:04 (Reply)

The short answer is the technology is not there yet, and there's no regulatory scheme that would allow it to be used if there were.

First there's no way yet invented to do the kind of bulk nano-scale manufacturing you seem to be envisioning. we're talking about manufacturing scales millions of times smaller than what can be achieved using todays additive manufacturing techniques, or else needed to be replicated millions of times more often than today's atomic-scale assembly techniques.

Secondly, even if such a magic box existed, every time you moved the hypothetical dial to produce a different drug, you would in effect be creating a new manufacturing process that would need to go through the full regulatory approval process.

#6.1.1 Another guy named Dan on 2015-09-22 14:49 (Reply)

Yeah, well that regulatory procedure is a whole other issue....

#6.1.1.1 Bulldog on 2015-09-22 14:56 (Reply)

I think he is trying to cash on a different kind of arbitrage. people value being healthy more than they value being sick, and being alive almost infinitely more than being dead. Pharmaceuticals thus create a large perceived value-add. He, along with every other healthcare company is attempting to monetize a share of this value to his benefit.

The article also mentions that Medicaid, Medicare, and other big insurers already have price lock-ins on this drug, so only a small percentage of recipients are likely to be hit with the new prices.

Given that due in part to government regulations, any potential competitor is going to have to amortize a huge fixed cost of getting a production process approved and running before he can deliver dose #1. It's pretty reasonable to assume that the new price was calculated based on the present value of establishing this new process divided by the number of scrips written annually.

#6.2 another guy named Dan on 2015-09-22 14:04 (Reply)

re Rather, it's a case of a hedge fund manager finding an arbitrage opportunity in a third-party payment system.

One wonders how many other opportunities for arbitrage there are/have been in the pharmaceutical industry? Surely this is not the only one? I have heard of other drugs taking stratospheric price hikes like this and wonder if the reason is the same as in this case?

One also wonders if the higher drug price is calculated to maximize profit while still making it less than worthwhile for someone else to crank up a competitive line and compete?

Smart people can find really clever ways to make a lot of money.

Final thought: Though probably not a major item in the big scheme of things, it is one more thing to ratchet the price of health insurance upward.

#6.3 feeblemind on 2015-09-22 15:53 (Reply)

When did journalists become so stupid? There have always been smart and not so smart journalists but it's getting ridiculous. It seems there may be a requirement to be somewhat ignorant of things in general these days.

#7 Tom C on 2015-09-22 13:41 (Reply)

They all have an agenda, usually anti-capitalist, these days. We are, slowly, becoming like the Soviet Union's press corps. Not by law, but simply by tacit acceptance of myth.

#7.1 Bulldog on 2015-09-22 13:59 (Reply)

The product of news media isn't news. It's you. They sell your eyeballs to advertisers.

There's no market for hard news. Think city council meetings. Hard news can't pay the bills.

Soap opera women, 40% of women, will tune in every day, so long as there is soap opera. That's enough to pay the bills. So all news is soap opera. Their tastes edit every public debate.

That business fact draws journalists who are willing to do the soap opera work. Since politicians free-ride on this market force, journalists tend to be lefties, and stupid.

#7.2 rhhardin (Link) on 2015-09-23 12:29 (Reply)

There's some truth to what you wrote, but not as much as you'd think.

I'm 30+ years in media (of some form or another) and I spent at least 10 of those years in news or information dissemination. Not only is there a market for it, it's a TERRIFIC market.

Here's the problem.

Hard news is unpredictable. Hard news is expensive. Hard news means you need educated people serving up information and you're likely to only attract educated people as your eyeballs. Those are expensive eyeballs to serve, but they garner a terrific price.

Meanwhile, soft news is like candy. Almost everybody likes it, everyone will comment on it, whether they are interested or not (I have no interest in the lives of celebrities, but I sure do know who Miley Cyrus is and what a wackjob she is). It doesn't get a high price, but there's tons of it and it's easy to create. It's predictable. It's conventional.

Most news organizations, when you get in with them, lament the nature of what they have to do. To make matters worse, the most intelligent people in news organizations usually wind up going off on their own and doing opinion style work.

The best news journalists want to write a book or a film. Think Bill O'Reilly, who started doing puff pieces and now is doing opinion work, or Keith Olbermann, who was doing sports (and was great at it) and is now once more looking for work as a talking head (which I hope he doesn't get since he's reprehensible).

Ayn Rand, in The Fountainhead wrote about the nature of news with a short story about 2 people, one who was changing the world with scientific endeavors, and one who was the wife of a criminal who was sent to jail, but she was raising 2 small children. The criminal's wife got tons of donations. The man laboring to change the world with science got very little.

We are driven by emotion rather than reason. As a result, it's easy for journalists to write emotional puff pieces excoriating 'rapacious, greedy capitalists' because that's easy to understand and relate to.

If they had to explain the nature of prices and why this guy is actually helping people by raising the price of the drug, that's rather boring and reasoned.

But make no mistake, I made a good living at those news organizations, and they were very profitable. It's a question of balancing the hard news with the stuff that pulls people in. Hard to do, harder to manage. You get addicted to candy too easily.

#7.2.1 Bulldog on 2015-09-23 12:46 (Reply)

I won't disagree with what you said but I think there is more to the story. Absolute power corrupts absolutely and the news media for decades had absolute power. They became politicians and activists and used the power of the nightly news and the printed news to control and direct rather than to inform. It is no accident that they prefer soft news to hard news. Make no mistake, they still report hard news as long as it furthers their agenda. The news, the media, print news, MSM, whatever you call them, cannot be trusted. They intend to deceive and mislead. The closest thing to a honest news person in my lifetime (72 years) is Paul Harvey.

#7.2.1.1 GoneWithTheWind on 2015-09-23 20:34 (Reply)

See, now if there was only one source for news, and only one provider, then maybe I'd agree.

But there's still competition. Even the conspiratorial crowd have their sources.

So there's always a way to get to what you need.

They have tons of power, but it's also considerably dispersed.

I'm not concerned too much with who provides the news, or how it's delivered. What I'm concerned about is how well it's deciphered. That requires an education. Sadly, that's not as widely available as it once was.

#7.2.1.1.1 Bulldog on 2015-09-23 20:50 (Reply)

The greatest threat to the MSM strangle hold on the news is the internet. It has forced them to cover stories they wanted to hide and it has made them report both sides of stories. They still hide the facts but the truth dogs them. If my local media reports a crime and there is no description of the perp than it is a African American. If they report a crime but no name is given as well as no description than it is an illegal alien. If they report a crime and call the perp "a resident of Portland" or some other city than it is an illegal alien. If someone is killed and for two days there is no name associated with the death because they are waiting to notify the next of kin than that too is an illegal alien. All of this is done intentionally but give it 24 hours and go on line and you can discover what the MSM didn't want to say.

#7.2.1.1.1.1 GoneWithTheWind on 2015-09-25 15:43 (Reply)

I highly recommend 'The Most Powerful Idea in the World' by Rosen, William. Excellent book that tracks the industrial revolution but the "idea" is patents.

QUOTE:

Instead, like all the world's earlier explosions of invention, it, in the words of one of the phenomenon's most acute observers, "fizzled out." One unique characteristic of the eighteenth-century miracle was that it was the first that didn't.

The other one, the real reason that the threads leading from Rocket [the first steam locomotive] form such a challenging knot, is that the miracle was, overwhelmingly, produced by English-speaking people. Rocket incorporates hundreds of invention, small and large --safety valves, feedback controls, return flues, condensers -- to say nothing of the iron foundries and coal mines that supplied its raw materials. If one could magically edit out those steam engines invented in Italy, or Sweden, or --more important -- France, or China, Rocket would still run. If the same magic were applied to those invented in England, Scotland, Wales, and America, the platform in the Science Museum would be empty.

That is a puzzle for which there is no shortage of proposed solutions (see Industrial Revolution, Theories of, above). The one propose by the book you hold in your hands can be boiled down to this: The best explanation for the preeminence of English speakers in lifting humanity out of its ten-thousand-year-long Malthusian trap is that the Anglophone world democratized the nature of invention.

Even simpler: Before the eighteenth century, inventions were either created by those wealthy enough to do so as a leisure activity (or to patronize artisans to do so on their behalf), or they were kept secret for as long as possible. In England, a unique combination of law and circumstance gave artisans the incentive to invent, and in return obliged them to share the knowledge of their inventions. ... Human character (or at least behavior) was changed, and changed forever, by seventeenth-century Britain's insistence that the ideas were a kind of property. This notion is as consequential as any idea in history.

We should note a lost hero of our modern world, Sir Edward Coke. Not only did he argue to overturn many Medieval laws by going back to the Magna Carta, as well as his Institutes of Law were brought to America on the Mayflower and used to train Jefferson and others, but he also wrote the Statute of Monopolies, which includes the powerful Section 6, which is where the modern patent saw its first articulation as an exception.

#8 JK Brown on 2015-09-22 14:48 (Reply)

Price shocks are ugly things when it comes to necessities of life, as I guess this drug is for a small number of unlucky people. The problem is in thinking that "under-regulation" is the issue. The kind of regulation this journalist no doubt has in mind is some kind of benign price controls, but all you get with price controls is the substitution of supply shocks for price shocks, and they're every bit as bad--in many ways worse.

Show me a journalist who isn't addicted to the idea of price controls, though. It would be nice if more of them tried to study a little science and a little economics.

#9 Texan99 on 2015-09-22 14:49 (Reply)

Copyrights and patents both need sunsets and terminations to stimulate growth from new ideas.

These intellectual property rights need new limitations - perhaps one generation duration, but sufficient guards and protections to encourage the risks of idea development.

#10 Tamarack on 2015-09-22 21:15 (Reply)

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Tuesday, September 22. 2015

Is It a Free Market?