The Public Policy

If iPhones Were Pharmaceuticals

Congressionally imposed "forced sale" is a bad idea for any industry.

By 7.6.07

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Prescription drugs cost too much! Or at least that's what we hear, day-in and day-out, on television, in the news, and, of course, in Sicko.

Some health-care activists have rallied around high drug costs to agitate for more government regulation of the pharmaceutical industry and more government involvement in health care. Hoping to stoke public anxiety over prescription bills, these activists often point to "cheaper" foreign drug prices to garner support.

Fortunately, prescription drug price controls aren't coming to the United States. But now activists have turned to a new tactic: proposing to force American drug companies to sell their wares to foreign governments at whatever price and in whatever amounts those governments demand. American companies would also be unable to contractually bar those drugs from being imported back to the U.S. -- leading, in essence, to the imposition of foreign price controls and all their attendant safety complications.

Needless to say, this idea -- that the government should require an American industry to play cowering "yes-man" before the whims of foreign nations -- would be devastating to any of America's top industries. Imagine if a different sector of the economy -- say, a high-tech firm like Apple -- had to cope with such constraints.

Apple might schedule a meeting with a foreign distributor, but instead of haggling over bulk discounts and special deals on excess pink iPods, its representatives would find the terms of the sale already structured. The foreign buyer would be able to name its price and quantity, and it would demand permission to resell everything it purchases back to U.S. consumers.

In the background, the U.S. government would nod approvingly.

In other words, what used to be a process of negotiation would instead be a process of submission. Apple would have no way to protect its product or its revenues. It would certainly end up in deals that it would otherwise never agree to. And investment into the next generation of iPods, iPhones, and other products would decline.

Apple's domestic operations would suffer, too. Having just gotten a steal of a deal from Apple, the foreign distributors would be able to undersell domestic firms in the U.S. by reselling Apple products at a significant mark-up. Who benefits? The middlemen, of course. Consumers would only see a tiny price break and Apple and its domestic distributors would see a nosedive in sales. This isn't an example of market forces at work; it's the unfair exploitation of domestic firms.

Initially, Apple might find a way to adjust to forced sale. But in losing control over the terms of sale and distribution of its products, it's almost a certainty that the company's bottom line would take a massive hit.

In response to the loss in revenue, budgets would be slashed, with research and development into new products an early casualty. And with the threat of price controls destroying the prospect of new financial success, the next product would take longer to get to market and be far less innovative. Developing the next big computing device is a costly, time-intensive, and risky undertaking, so the stakes for a successful new product would be much higher.

With no margin for error, following up the iPod with the commercial equivalent of Betamax could be fatal. And that death would stand out as a blow not only to the American computing industry, but to broader American economic competitiveness as well.

Apple and the rest of the American high-tech industry may not have to worry about foreign governments dictating the prices they may charge while the U.S. government looks on approvingly. But advocates of forced sale are pushing for precisely this kind of absurd policy on pharmaceutical companies. The class of good may be different, but the effect is the same -- financial disaster and reduced innovation.

In fact, because drugs save our lives rather than simply entertain us, such stifling of the next round of research may be fatal not only to pharmaceutical companies, but to us as well.

Instituting a forced sale policy on any other industry would result in a great deal of outrage. It's high time that we treat such dressed up price controls on pharmaceuticals with similar looks of consternation.

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About the Author

Peter Pitts is partner/director of global health at Porter Novelli, a senior fellow at the Center for Medicine in the Public Interest, and a former FDA associate commissioner.