I was reading an article today discussing a bill that would ban the import of cut-rate drugs from other countries. Specifically, the author hinted that those who oppose importing drugs (namely the Bush administration) are selling out their constituents health in favor of drug company profits, and that they were Bad People for doing so.

On the face of it, importing medications from Canada, Australia, etc. sounds like a good idea: the drugs are cheaper there, so we can save money by importing them, rather than buying them at home. In the short term, it probably is beneficial.

In the long term, it’s disastrous.

Potent, effective medications don’t just appear in the bottom of a test tube. Sure, most of them are fairly cheap to produce–chemical mixing and reactions are a fairly well-developed industry, and compounds can be made in massive scale for relatively insignificant amounts of money. These are the marginal costs: the cost of making, say, one pound of the stuff. Let’s take a hypothetical drug, Footrex. Footrex cures hoplophobia. Certainly, we can all agree that Footrex is a useful drug–possibly a miracle drug, if it’s effective–and that it can improve the quality of life for some people. (Some of us might even argue that it should be put into the water supply.) Let’s say that every pound of Footrex costs one dollar to manufacture–the cost of raw materials, the cost of paying the employees, the cost of packaging, etc. A dollar a pound from ten buckets of different chemicals to the boxes in the warehouse, waiting to go on the truck. Let’s also assume that a standard dose is 70 grains (deliberately chosen to keep the math simple).

Under these assumptions, then, a price of one cent per dose seems to be the breakeven point, right?

Not even close.

The problem is that, while it only takes a dollar to produce one pound of Footrex, we’re working from a known formula–three ounces Hodgdon’s, an ounce of Hoppe’s #9, two ounces of lead, a trace of copper, etc. Fairly easy to put together. That price reflects the cost of producing Footrex, but it doesn’t take into account the cost of developing Footrex. Let’s say, then, that it cost $100,000,000 to develop Footrex–research, development, clinical trials, reformulation after the trials, new trials, etc. Those costs are sunk before the first pill gets stuck in those damned blister packs and pill bottles.

Suddenly, that one-cent dose is starting to look like a losing proposition. At that price, Foomaceuticals could sell an infinite amount of the stuff, and still be a hundred million in the hole. Even at $1.01 per dose, they’d have to sell a dose to every third person in the country just to break even.

Now, consider that not every drug makes it to market; in fact, only a small percentage do. Let’s call it 1% (in reality, it’s much smaller than that). Now, we have to charge $100.01 per dose to cover the costs of everything that went into developing Footrex, and also cover all of the dead ends encountered along the way. And that’s if a third of the population (a ridiculously high number for almost all drugs) decides it needs Footrex.

So, Foomaceuticals develops Footrex, and prices it at $125/dose (because they want to make a profit on their not-insignificant investment). People balk at the price, say they can’t afford it. Socialists whine that “it isn’t fair, poor people can’t afford this!” Politicians, always looking for a way to buy more votes, hold Congressional hearings about the high cost of Footrex, and allege that Foomaceuticals is overcharging people for this drug that only costs one cent per dose to produce. Anxious to be seen Doing Something, Congress votes to import Barazine (the generic chemical name for Footrex) from Joe’s House of Random Compounds, based in Oz. Joe’s reverse-engineered the formula for Footrex, and is able to produce it for the same penny per pound. He offers to sell Barazine to the consumer at a dollar a dose, far below the cost of Footrex. The people rejoice, and re-elect their Congresscritters for bringing them cheap drugs–now all can be cured of this terrible disease for pennies! Good news, everyone: hoplophobia is a thing of the past!

Fast-forward five years. We have a new medical problem, bed-wetting liberalitis. BWL is a terrible disease; once you get it, you lose the power to think rationally, and automatically decide in favor of any argument that whines “but it’s for the chiiillldreeennnnn!” Everybody remembers that Joe’s House of Random Compounds came to the rescue five years before with a cheap, effective cure for hoplophobia, and asks him for a pill. But Joe ain’t got one–Joe doesn’t have a research lab, a staff of scientists and doctors, access to research hospitals and clinical patients. Joe can mix buckets, but he can’t create drugs.

Somewhere, off in the distance, somebody remembers Foomaceuticals. Yes, they had the cure first–in fact, they invented the cure! Surely they can help. And he goes off in search of Foomaceuticals, to start work on a new drug to cure BWL…

…and finds that, after losing a hundred million dollars developing Footrex (not to mention what it lost on other, non-marketable drugs), Foomaceuticals could no longer sustain operations, and went out of business.

Intellectual property law–patents, in particular–exist for a reason. They guarantee the inventor the opportunity to recoup his development costs (not guarantee recoupment, just the chance to try), and to profit from his cleverness. Without such laws, there would be little reason to try to develop new products, especially expensive ones. Would you want to sink a few million bucks into something if you knew that, as soon as you did, somebody would steal your idea and sell it for far less than you can? Without IP law, the up-front investments are lost; there’s no way to ever come out ahead, or to even come out at zero: innovation is a guaranteed losing proposition, unless the invention can be kept secret (and few things, none of them chemical compounds, can).

The foreign companies producing these generic drugs act exactly along these lines: they reverse-engineer drugs, then produce them for about the same marginal costs as the original inventors. Without the overhead of development, they can be profitable at drastically lower prices; only problem is, they’re riding on the coattails of the people doing the actual work. Sure, it feels good now to cure hoplophobia for a dollar a shot with Barazine, but the profits Foomaceuticals makes on Footrex will be used to fund development on the cure for BWL. By importing Barazine from Oz, we’re actually shooting ourselves in the feet–both feet, and the weak hand–for the future. When Congress acts to protect the intellectual property rights of Foomaceuticals, over the howling objections of those who say “it isn’t fair, we shouldn’t have to pay that much,” Congress is actually showing a little foresight, and protecting our research and development industries for the future.