It’s been a tough stretch for Big Pharma, which is getting a pricing beating from cheaper generic alternatives. Merck is offering big discounts on AIDS drug Efavirenz in Thailand, as Thailand considers producing generic versions of the patented medicine via Compulsory Licensing. Pfizer announced that it is cutting over 2000 sales jobs in the wake of stiff pricing pressure. Wal-Mart and Target made headlines by offering $4/month prescription drug plans. But the biggest hit could come when the newly Democratic Congress reconvenes next year.

The Republican Congress passed a prescription drug bill that prohibited the federal government from negotiating the price of drugs. (However much those lobbyists made, they were worth every penny.) Now Health and Human Services Secretary Mike Leavitt is trying to head off Pelosi & Co’s attempts to allow the government to negotiate lower prices.

“The idea of the government negotiating drug prices really isn’t about the government negotiating drug prices. It’s a surrogate for a much larger issue, which is really government-run health care.”

That the American health care system is screwed up and wasteful is without a doubt true. Whether the government should be spending hundreds of billions of taxpayer dollars on the plan is an interesting question. But if they are, surely “free market” principles would dictate that as the largest buyer, they can negotiate better terms. The logic of the argument, and/or the political appeal of saving billions of dollars while appearing to stick up for the little guy against big corporate interests, means that the “no negotiating” clause will likely go away next year.

The drug companies will have to figure out which parts of their existing portfolios provide better results (fewer side effects, easier compliance, shorter hospital recovery) than older, cheaper medicines to justify higher prices. In many cases, they’ll have to dig into shallow R&D pipelines to come out with new products.

The impact won’t stop there, however. Suppliers to these firms, from general business services to high tech lab equipment, will feel the pricing squeeze, and must similarly figure out how to offer differentiated value.

(The ethical dimensions of drug pricing are much more interesting that the purely economic context, but outside the scope of this blog.)

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