Pharma makes a pragmatic left turn in this election, by Steven S. Clark

Reversing trends where drug makers routinely throw their financial support behind the Republicans, big pharma decisively backed the Democrats this election year. Pharma gave the Obama campaign more than three times the money they gave to Republican, John McCain. Compare that to four years ago when drug makers gave Bush twice as much as Kerry. Indeed, over the last decade, the drug industry has spent millions to keep Republicans in the White House as well as in Congress, according to a report in Politico.

Even more revealing about the industry’s left turn is how poorly McCain fared during the primaries. As of the end of September, drugmakers gave $758,724 to Obama, $632,219 to Clinton, and a paltry $284,900 to McCain—just 20% of the Democrats’ total.

This trend was repeated in the Congressional races where, for the first time in six election cycles, House and Senate Democrats reveled in receiving the lion’s share of pharma campaign donations. Clearly, the industry preferred equids over pachyderms this election year.

Does all this reflect a love affair with Obama and the Dems, disappointment with McCain and the Republicans or both?

Factoring into all of this is McCain’s feud with the pharmaceutical industry, which he famously tagged “the big bad guys” and he likes to boast about “taking on the drug industry,” which certainly didn’t sit well with pharma executives.

But are hurt feelings enough to reverse historical trends? The evidence suggests that the issue is deeper and more complicated and is, in fact, tied to a significant shift that is underway in the health care market in this country.

Both parties favored similar drug policies

When looking at the two presidential candidates’ policies, it is hard to understand pharma’s Obama obsession. For instance, headlines during the campaign declared the following: "Obama plan could whack Big Pharma", "Big Pharma could be big loser under Obama health plan", "...neither candidate loves pharma" and this, "Barak Obama and John McCain go to war with Big Pharma."

According to the Boston Consulting Group, Obama favors letting a federal agency set discounted drug prices, which will cut the drug industry’s revenues by a whopping $10-30 billion a year. And the Wall Street Journal’s Health Blog speculates that this would be further exacerbated if private insurers, following the government’s lead—and why shouldn’t they—also insist on paying less for prescription drugs. To make matters even worse, the Dems’ favorite son also favors importation of cheap drugs from abroad.  These are issues that are hotly opposed by the drug industry.

"These are issues that are hotly opposed by the drug industry."

Meanwhile, according to the BCG study, John McCain was “officially silent” on the issue of negotiating drug prices. But, a few years back, he voted against President Bush’s Medicare drug benefit plan partly because it didn’t allow the government to negotiate drug prices.  Furthermore, just like Obama, McCain favored the re-importation of prescription drugs to save money.  Both candidates also endorsed increased use of generic drugs and favor making the exclusivity period of biological drugs as short as possible, all of which pharma steadfastly opposes.

Clearly pharma didn’t feel the love from either candidate, so what explains their swoon for Obama? Did they just close their eyes while kissing up to the presumptive winner?

What are the stakes?

In order to answer this question, we first need to understand basic economics of health care in the US. This country has long favored a free market model for health care, believing that this leads to increased consumer choice and promotes the production of new medicines. A big new drug is reckoned to cost $800 million to develop and the drug giants argue that they need the higher profits from the US free-market in order to drive the R&D required to develop these expensive new drugs and therefore protect their product pipeline and future revenue.

It is said that scientific research follows the money and this is no more evident than in Europe which is not free-market driven and regulates drug prices. Europe also is simultaneously steadily losing its pharmaceutical edge to US labs, which generated two thirds of the new drugs launched in the world over the past five years.  So, while the US produces most new drugs, its free market also almost entirely subsidizes the cost of their development from high consumer drug prices. It follows that any reduction in US drug profits will diminish the ability of pharma companies to support future R&D for new drug development. 

Thus, as Motley Fool analyst, Charly Travers, often points out, any US government policy that caps drug costs will reduce both the number of drugs that can be developed as well as the profits for already approved drugs—a double whammy for the pharmaceutical industry.

Unfortunately, this argument is tempered by the troublesome fact that drug prices in the US are rising at a rate of 7% a year, which is difficult to continually absorb. Hence, the political pressure for price controls on drugs in the US has increased to the tipping point where, for the first time, presidential candidates from both parties favored price controls on drugs—a move away from the free market.

A health care monopsony favors the Dems

It seems that big pharma is looking into a gathering perfect storm—blockbuster drugs are coming off patent protection, drying up current profits; a thin product pipeline imperils future profits and the unprecedented specter of government regulated drug prices, which further threatens future profits.  However, there is a glimmer of hope that explains their leftward lean in this election cycle and, ironically, we can thank President Bush’s un-conservative profligacy for this political realignment.

“…we can thank President Bush’s un-conservative profligacy for
this political realignment.”

Historically, insurers have picked up most drug costs, but during the Bush administration, the heaviest burden has shifted to the federal government, which currently picks up about half the tab. Thus, there is a growing shift in the US health care market away from private insurers and toward federal health care programs—a shift that was accelerated by Bush’s expensive Medicare drug plan for senior citizens.  It truly is ironic that this erosion of the health care free market is driven by a Republican President.

The word economists use for a market in which goods or services are offered by several sellers, but purchased by only one buyer, who can dictate prices, is “monopsony.”  It is a word that too often comes with the antecedent modifier, “government.”  But, despite the tremendous purchasing power of the growing government monopsony, US taxpayers right now get no pricing leverage like they do in most European countries and Canada, where the governments negotiate and regulate drug prices. Clearly, this is going to change with a Democratic monopoly in Washington.  This government monopsony will invariably lead to regulated drug prices in the US, moving us away from the current free market, and as explained above, this worries the pharmaceutical industry enormously.

It light of these shifting market forces, it makes perfect sense that drugmakers are beginning to view the US government as their primary future market and, for this reason, they understandably want to make sure that government-run health programs are robust and bountiful. They know that Dems are more likely than Republicans to deliver on this magnanimity, and this explains why pharma cozyied up to Obama and Congressional Democrats, both of which favor more government-run healthcare.

No one ever accused drugmakers of not being pragmatic and it is in the sprit of such pragmatism, coupled with an eye to the future that accounts for pharma making nice to Dems.  But, with liberal Democrats ruling Washington and Republicans likely relegated to passive observer status after the election, pharma’s leftward lean this year could quickly return to the right if the liberal monopsonists take too big a bite out of US drug profits.

Comments

[Robert]

I agree!