Generics and Pricing, Part II - A Drug, A Price and a Senator

Recently Merck announced a lowering of the price of Zocor (simvastatin) in a move that presumably will put their brand name drug in a competitive position vis a vis an upcoming generic product, just approved by the FDA.  This brought a reaction from Senator Charles Schumer (D-NY) who questioned whether or not the move was "anti-competitive."  A U.S. Senator complaining that drug prices were being set too low?  And this, in turn, set some bloggers hair on fire.

But as we reach for the fire extinguishers, it is perhaps prudent to look at this matter from both sides before having a knee-jerk reaction that either one or the other side is exhibiting some inappropriate behavior.

On the pharmaceutical side, clearly it is in the best interests of the company to price their products competitively.  Free market theory does after all suggest that competition lowers price.  And studies demonstrate that the more generics on the market, the lower the price.  After all, if a second company wanted to produce generic simvastatin and came in at a lower price to compete with the first generic, would anyone be squawking?  Probably not.  So why shouldn't the band name company be able to do it?

On the other hand, the pharmaceutical industry has always stated that pricing is based on the value that the drug compound brings to the equation - a concept left largely unexplained to the general public.  Did the value of what a statin brings to a patient suddenly diminish because of the presence of a generic?  Actually, no.  So the two appear hard to reconcile, and no one has tried.

From the policy maker perspective, does it make sense to call a company anti-competitive when its actions actually, in fact, are competitive?  Isn't this how the market is supposed to operate?  Wouldn't it be nice if gasoline prices followed suit?

Stuck between the point of view of senators and the pharmaceutical industry is the consumer, who is likely to look at the lack of reconciliation that exists in all of this jockeying and become sunk in a little more cynicism about both sides.  After all, it is her or her life being saved here, while some money is being saved to boot. 

Comments

[Ed Vawter]

One thing to keep in mind is the the pricing of drugs is NOT a free market system. In almost all countries except the US, the price is set by the government (aka price controls).

Also, the ket point is that Merck is offering the low price to insurers only if they give Zocor the lowest co-pay and the generic the highest co-pay. Lowering your price is fine but demanding that someone raise the price of a competitors product in order to get the low price for your product is certainly questionable. Maybe not illegal but certainly it damages the companies reputation. And Merck certainly doesn't need any more bad press.

See my post http://www.qdinformation.com/qdisblog/2006/06/23/senator-upset-over-low-drug-pricefinance/ and http://www.qdinformation.com/qdisblog/2006/06/26/more-on-mercks-zocor-pricing/