PER 2015
sense. When a pharmaceutical company first develops a new drug to be used for a disease condition, it is initially sold under a brand name by which the clinicians can prescribe the drug for use by patients. The drug is covered under patent protection, which means that only the pharmaceutical company that holds the patent is allowed to manufacture, market the drug and eventually make profit from it. In other words, the company has a monopoly power over a particular type of drug. Under this monopoly market, the monopolists, in order to maximise profit, will deliberately set a much higher price and restrict output. An increase in price of the drug will be followed by an increase in the producer surplus and hence the total revenue of the company. In most cases, the drug patent is awarded for around twenty years in the United States. Since the company applies for a patent long before the clinical trial to assess a drug’s safety and efficacy has commenced, the effective patent period after the drug has finally received approval is often around seven to twelve years. After the patent expires, the drug can be manufactured and sold by other companies. At this point, the drug is referred to as a generic drug 18 . Once the generic drug is on the market, the monopoly of the patent holder is removed. This encourages competition and results in a significant drop in drug price and cost of production as all firms are now keen to improve their productive efficiency, which ensures that life-saving and important drugs reach the general population at competitive prices. Knowing that the drug is under a monopoly market, a conclusion of whether it is moral or not for firms to charge large sums of drugs that are cheap to manufacture can be drawn. With an economical sense, it is immoral for pharmaceutical companies to restrict output and drive up prices because the existence of deadweight welfare loss. Monopolists can earn abnormal profits at the expense of efficiency and the welfare of consumers and society, in this case, the lives of patients. Allocative efficiency is not being achieved as the monopoly price is set higher than both marginal and average costs. Hence, consumers’ needs and wants are not being satisfied because the product is being under-consumed. There are many patients and health services for whom the drug becomes unaffordable since the monopolist is extracting a price from consumers that is well above the cost of resources used including the opportunity cost of financial capital invested in making the product. Therefore, the high price set by monopolist is not justified and not legitimate. Nonetheless, it is noticeable that part of the escalating drug price is unavoidable. Since the research and development cost of manufacturing a drug is enormous as mentioned above, sometimes a drug company has no choice but to sell at a high price to cover the huge fixed cost. Hence, it may not always be the case that drugs are cheap to manufacture if the development cost is taken into account. Most pharmaceutical companies will also probably defend themselves by claiming that the patients are not forced to buy their products, if they do not want to consume the medicines, no one is pointing a gun at their heads. A transaction can only occurred when both the buyer and producer agree with the price at which demand equals supply. This is how the free market mechanism works, people should somehow respect the free market system and functions of price. Thus, they say there is nothing wrong about charging a higher price. After all, they are the ones who bear the risk of not having enough buyers to obtain a profit. Nevertheless, there are two objections can be made to this line of argument. The first objection holds that, for those critically ill patients, the free market is not all that free. For most of the time, an expensive patented drug is a second line drug or third line drug, which means
18 A generic drug is identical -- or bioequivalent -- to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use.
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