While US news stories occasionally mention the breathtaking cost of some medications, they almost always skirt the issue of why American drugs are so grotesquely overpriced by world standards. The pharmaceutical industry has managed to sell the story that it’s because they need all that dough to pay for the cost of finding new drugs.

That account is patently false.

First, part of the story the drug industry chooses to omit is that a substantial portion of drug R&D, and the riskiest part (basic research) is heavily funded by the National Institutes of Health and other government agencies. It’s hard to put all the data together, but the latest estimates I’ve seen put the total funded by the government at over 30%.

Second, Big Pharma spends more on marketing on R&D. And it markets in the highest cost manner possible: in person sales calls to small business owners (doctors). The fact that it is worth it to sell in such an exceptionally high cost manner is proof of fat margins (the marginal value of a sale supports such a costly sales effort).

Third, and this is where the foreign debate over the TransPacific Partnership comes in, one of the big reasons US drugs are so costly is we allow drug companies to milk patents to a degree that is unparalleled elsewhere. Consider this section of an article from The Star (Malaysia) by Martin Khor:

It’s really a matter of life and death. For the TPPA can cut off the potential supply of cheaper generic life-saving medicines, especially when the branded products are priced so sky-high that very few can afford them. The fight for cheaper medicines has moved to cancer and other deadly diseases, when once the controversy was over AIDS medicines. Last week, a cancer specialist in New Zealand (one of the TPPA counties) warned that the TPPA would prolong the high cost of treating breast cancer because of new rules to protect biotechnology-based cancer drugs from competition from generics. And this will affect the lives of cancer patients. Some cancer medicines can cost a patient over US$100,000 (RM329,600) for a year’s treatment, way above what an ordinary family can afford. But generic versions could be produced for a fraction, making it possible for patients to hope for a reprieve from death. In India, local companies are leading the fight to make medicines more affordable to thousands suffering from breast, kidney, liver and gastrointestinal cancer and chronic leukeamia. For example, an Indian company produced a generic drug for kidney and liver cancer 30 times cheaper than the branded product – US$140 (RM461) versus US$4,580 (RM15,100) for a month’s treatment – after it was given a compulsory license. India has a patent law that disallows patents for newer forms of drugs or known substances unless it improves the medicine’s efficacy or effectiveness. Under WTO rules, countries are free to set their own standards for novelty, or whether a product is novel enough to be eligible for a patent. Also, in many countries, including Malaysia, the patent law allows for companies to obtain compulsory licences to import or make generic versions of original medicines

The implications of the discussion above may not be obvious, so let me unpack them.

First, US pharmaceutical companies have been willing to sell drugs in foreign, including third world countries, even though the intellectual property regimes are not as favorable as in the US. That means the profit levels, even if less rich, are still acceptable.

Indeed, the drugs regime in the US looks a lot like the electronics business in Japan in the 1980s, where products in the domestic market were priced much higher than in the rest of the world as the electronics companies duked it out in front of very demanding Japanese customers. But there are several big differences. Electronics gadgets weren’t subsidized by the Japanese governments. Japanese electronics makers really did innovate like crazy in Japan (you’d see much more variety than anywhere else in the world, the manufacturers really did throw a lot of stuff against the wall to see what stuck). And this was electronic gear, not products that are critical to some people’s survival.

Second, for the last 15-20 years, the big drug companies have done perilous little in the way of actual new drug research. I recall reading about 8-10 years ago, in either the Financial Times or the Economist, that 88% of the so-called new drug applications were really very minor reformulations whose intent was to extend patent life. This picture is confirmed by intellectual property lawyers who work at firms that specialize in FDA work.

For instance, a drug might have been originally formulated to be taken once every eight hours. The very same drug, formulated now so that it need be taken only once a day, would count in the US as a new drug application and thus extend the patent life. That is why the distinction made in India is critically important: “India has a patent law that disallows patents for newer forms of drugs or known substances unless it improves the medicine’s efficacy or effectiveness.” It nixes the sort of patent gaming that has become widespread in the US.

Third, it is quite likely that the profitability of milking patents has actually discouraged investment in finding new drugs. Big Pharma keeps claiming there are no new world to conquer in light of abundant evidence to the contrary. Cancer medications are limited, of mixed efficacy, and extremely taxing to people who take them. We are growing superbugs that are more and more anti-biotic resistant. Drug resistant tuberculosis is rising. The treatment for autoimmune diseases are not cures but symptom-suppressants that become less effective over time and successor treatments are typically even less effective with more side effects. We don’t have a treatment for Alzheimers or multiple sclerosis (for the latter, beyond somewhat delaying progress of the disease).

Sadly, it’s unlikely that the fight over the TPP and its evil sister, the TransAtlantic Trade and Investment Partnership, will lead to reforms of America’s extortionate drug regime. But at least the U.S. drug companies may be blocked from exporting their model.