Steven Pearlstein Accuses U.S. of Violating WTO Rules with Respect to Pharma R&D

Pearlstein takes a look at Team Trump’s stance on pharmaceutical pricing. Dean Baker takes issue with this statement:

Because ours is the only country that does not negotiate prices with drug companies, using a national formulary, Americans pay roughly twice what patients in other countries do for the most widely used drugs still under patent. What that means, in effect, is that Americans pay for the 20 percent of drug industry revenue that is invested in researching new drugs, giving the rest of the world a free ride. In exchange for this largesse, a disproportionate share of the high-paying research jobs are located in the United States. Drug companies also used to pay a disproportionate share of corporate taxes to the U.S. Treasury until they became as innovative in tax avoidance as they are in product development.

Dean counters:

Pearlstein is asserting that the United States is making its citizens pay more than people elsewhere for their drugs, in effect as a bribe, to get drug companies to locate research jobs in the United States. This is a clear violation of WTO rules and would be quite a news story if Pearlstein has any evidence to back up this assertion. As a practical matter, we would expect drug companies to locate their research facilities where the cost of the research is lowest. The cost of research is not affected one iota by what a country's citizens pay for drugs. Most likely the reason most research is located in the United States is the enormous subsidies that the government provides through the National Institutes of Health (NIH). It is not a coincidence that a huge number of biotech companies are located in the Maryland suburbs of Washington, right next to the NIH campus.

While this may be true for basic research as phase I and phase II clinical trials, phase III clinical trials need to be conducted in the region or nation where the ultimate drug will be marketed and sold. Let’s take Gilead Science’s latest treatments for hepatitis C virus infection – Havroni and Solvadi – as an example. Gilead sold over $19 billion of these products in 2015 at very high profit margins. U.S. sales of these products were $12.5 billion in 2015. The initial research through phase II trials were not done by Gilead but rather by Pharmasset, Inc. So how Gilead acquire these rights?

Gilead Sciences to Acquire Pharmasset, Inc. for $11 Billion ... Pharmasset currently has three clinical-stage product candidates for the treatment of chronic hepatitis C virus (HCV) advancing in trials in various populations. ... Under the terms of the merger agreement, a wholly-owned subsidiary of Gilead will promptly commence a tender offer to acquire all of the outstanding shares of Pharmasset's common stock at a price of $137 per share in cash.

I suspect this subsidiary was Gilead Ireland Research UC. So this Irish affiliate (think Double Irish Dutch Sandwich) paid for the phase II rights. We can only guess who funded the phase III trials. But it seems a lot of the profits are sourced offshore. We can only speculate what Gilead thinks about the Destination Based Cash Flow Tax. As to the claim that we do not negotiate on prices, this passage from Gilead’s 10-K filing is interesting:

In July 2014, we received a letter from the U.S. Senate Committee on Finance (Senate Committee) requesting information and supporting documentation from us related to Sovaldi and the pricing of Sovaldi in the United States. The letter raised concerns about our approach to pricing Sovaldi, its affordability and its impact on federal government spending and public health. In December 2015, the Senate Committee released the results of the investigation, which alleged that we engaged in a revenue-driven pricing strategy in setting Sovaldi's price. Gilead disagrees with many of the conclusions in the report. In January 2016, we received a letter from the Massachusetts Attorney General that their office is considering whether our pricing of Sovaldi and Harvoni may constitute an unfair trade practice in violation of Massachusetts law. In February 2016, the Massachusetts Attorney General’s office served us with a Civil Investigative Demand requesting that we produce documents related to our HCV products.