An Economic Revisit to the Pharmaceutical Industry after Thalidomide

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On October 1, 1957, a “wonder drug” for insomnia, coughs, colds, headaches, and morning sickness was released on the German markets. Marketed under the name “thalidomide,” the sedative was heavily advertised to be completely harmless, nonaddictive, and effective, three settling qualities for consumers.  Thus, as regulations were primitive in Germany, Chemie Grüenthal, the creators of the drug, sold it as a nonprescription, over-the-counter product.  As time passed, it spread to England, where no serious confirmation of the drug’s effectiveness or safety was required, and it was later carried to the United States by an eager company that needed a miracle drug to balance its books.

But by the time the drug travelled to the United States, there had been numerous cases of severe birth defects in the progeny of mothers who had taken the drug for morning sickness during pregnancy. However, since scientists did not believe any drug taken by a pregnant woman could pass across the placental barrier and harm the developing fetus, the complaints were ignored and the rights to thalidomide were sold to the American pharmaceutical company Richardson-Merrell.  During its time on the market (1957-1962), thalidomide was distributed to more than 20,000 patients and was the drug behind countless genetic deformities. This scandal was an inexcusable blunder by regulatory agencies. Surprisingly, however, despite the irreparable damage caused by the drug across the globe, the population’s faith in the pharmaceutical industry did not seem to falter. The predicted uncertainty never seemed to materialize.

The pharmaceutical industry, or “Big Pharma,” has always been of interest to economists as a large and internationally competitive industry. To understand Big Pharma, however, it is important to first understand the market environment in which the industry operates. Of particular interest is the allure of the product. Although the practical and political motivations for studying the pharmaceutical industry are strong, the structure of demand for pharmaceuticals also holds great interest for many academic researchers. Pharmaceuticals are unusual in that the consumer of the product is typically not the one deciding which product to consume and often not the one paying for the product. Usually, it is a medical professional. In the case of the thalidomide scandal, medical professionals would not stop prescribing medications they were certain were safe and efficient, simply because one new drug had recently caused mayhem.

After the recall of thalidomide, the FDA enforced new regulations involving stricter methods of pre-sale drug testing. In 1962, Congress enacted the Kefauver Harris Amendment. The Amendment strengthened the U.S. Food and Drug Administration’s control of experimentation on humans and changed the way new drugs are approved and regulated. Before the amendment, drug companies only had to prove their drug was safe. This amendment made it obligatory to prove the drug was both safe and effective. Informed consent was required of patients participating in clinical trials, and adverse drug reactions were required to be reported to the FDA. This regulation seemed to favor larger companies, who could afford to spend more on research and development, and brush smaller companies under the bus. In the fifty years following the new regulations, the cost of research and development for legally marketable drugs has risen greatly.

Though it would seem natural that supply for pharmaceutical products would decrease because of the stricter regulations, the opposite occurred. In the years just after the incident, drug companies saw a 7% production increase. Yes, the new FDA regulations added costly complications to the lives of drug makers, but they still succeeded. The fact that it became more difficult to get clearance for a new drug simply meant that established ones, which traditionally had been eclipsed by the numerous “’me-too’ type competition, would now have longer and more prosperous economic lives.  Thus, though the supply of new drugs might have decreased, companies could focus their efforts on creating more of the same drug.

It was speculated that a decrease in uncertainty would follow a decrease in demand for new drugs. If people were afraid to purchase new drugs for fear of miscommunicated or possibly lethal side effects, then it would seem normal for the amount of drugs purchased to decrease. In reality, however, since medication is indispensable in the lives of many, since medical technicians had an ethical obligation to prescribe medication to patients, and since many patients were willing to take risks, the demand did not waver.  Risk includes the possibility of losing some or all of the original investments. In the case of drugs, risk would mean taking a chance that the negative consequences of a drug might outweigh the positive ones.

Looking back on the situation, it is evident that the public uncertainty caused by the thalidomide scandal was largely outweighed by the necessity for drugs on the market. Drugs are extremely inelastic products, and if people will not stop investing in them because the prices increase, they will most likely not stop taking them because of the risk of a malicious side effect.  Though the new FDA regulations have helped in monitoring the safety of drugs, the last thirty years has not been free of recalled drugs. The only way to completely free the drug industry of scandals such as thalidomide would involve a significant increase in expenditure from both the government and drug industries.  An expenditure that neither is quite willing to commit to just yet.



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