Depressing Drugs?

glaxosmithkline-logo

It looks like a certain pharmaceutical company has been caught being rather naughty once again. GlaxoSmithKline is currently being investigated for paying other drug companies to decrease their production of substitute drugs for their profitable antidepressant. This particular drug is known as “Seroxat” and GSK has been caught before with previous “pay-for-delay” agreements.

It is clear that if these allegations are true, that this is a flawless example of monopoly abuse. GSK is the UK’s largest pharmaceutical company and is a key supplier for the National Health Service. The investigation is currently being investigated by the Office of Fair Trading.

There is the potential for this to cause a domino effect, with the Office of Fair Trading beginning to crackdown on various agreements between competitors in the pharmaceutical market. There is a stereotype that pharmaceutical companies are “evil” conglomerates that over price drugs in order to keep their profit margin, and people ill.

This poses a serious issue for the NHS and taxpayers, if this becomes common practice for large pharmaceutical companies then the taxpayers will bear the burden. I would argue that it is unfair to stifle the competitiveness of the market; however it is clear that large companies that innovate will not be rewarded if a competitor can come in and recreate their drug. This is a very well established issue in the pharmaceutical industry as the question of how competitive? has gone on for a while.

The patent for Seroxat ended in 2004, and this led to the flooding of the market with cheaper substitutes. This obviously benefits consumers, but GSK then take a hit to their profits. It is arguable that the 10 year period of the patent was enough to settle the costs of research and development, and add to GSK’s already existing abnormal profit. However, it is clear that large pharmaceutical companies do not want to re-enter a R&D cycle every five years.

Seroxat-antidepressant-pi-001

If it were to be revealed that GSK actively pursued “pay-for-delay” methods, then I believe it is only fair for them to be penalised for these actions. Furthermore, a possible alternative for the pharmaceutical industry would be to introduce a system which regulates the introduction of substitute products into the market. There remains the issue of whether to stifle the competitiveness of the firm, in order to create savings for the NHS and as a result the taxpayer; or keep the market deregulated and encourage the firms to innovate thereby advancing medicine to a higher degree.

GlaxoSmithKline released a press statement stating:

“GSK supports fair competition and we very strongly believe that we acted within the law,”

Now, I hate to point the obvious, and the allegations have not been proven. But I personally feel that GSK is not too certain at all. Two European commissions had already investigated the firm, so it is evident that there is increasing suspicion concerning the firm’s behaviour.

Competition in the pharmaceutical industry is already difficult with extremely high barriers to entry. This is as a result of the expertise required for drug innovation, and developments. There is also the required “capital” machinery for testing and production which small firms cannot attain.

It is clear that in the existing market that GSK is not a “pure monopoly” there is an abundance of other British pharmaceutical companies, but they are not competing at the same level as GSK. The main rivals of GSK are Pfizer, Novartis, and Sanofi. Due to this and several other factors I would argue that GSK is partaking in an oligopoly.

The  argument forms as there several key indicators. Primarily in the pharmaceutical industry there is an ever increasing amount of asymmetric competition, as the technology and science behind the drugs produced becomes more complex the more complicated it is for the average consumer to truly “understand” the product.

A key factor is the existence of many small firms, but there are more than two large firms which have a significant degree of market power. In this case it can be identified as GSK, Pfizer, etc. The market power of the central four firms, dictates the relationship between them and the various aspects of market behaviour.

Moreover, there is the existence of personal decision making, and the factor that the four major firms are price setters. This identifies the existence of market power, in the short term (5-10 years), whereas in the long term (10 years +) firms must create new products to gain the market power edge. However there is still the factor of inter-dependency and this is where there is the game theory aspect in the pharmaceutics market structure. The firms will not collude with each other, but will consider their actions, and possible repercussions.

Finally, there is product differentiation. For a given period of time one company may have an individual product which gives it greater market power. However, after that given period of time substitutes will emerge in the market and reduce the significance of the market power.

These three key identifiers clearly correlate with the behaviour of GlaxoSmithKline, and the other major pharmaceutical companies. Which is why it is notable the GSK is being investigated for breaching competition standards; it would be in their interest to maintain market power and to create an environment in which they are more of a monopoly.

I personally believe that competition is what drives the pharmaceutical industry; this keeps new products coming out and forcing firms into R&D cycles. It is still important to ensure that the firms can compete without the burdensome bureaucracy of regulation. This is why I believe that the current model is benefiting the consumer as much as possible, while maintaining the firm’s desire for profit.

Milton Friedman in his book “Capitalism And Freedom” considers that this form of market power is the lesser of three evils in which the other possibilities are government backed monopoly, or a private monopoly. It is clear that there are drawbacks in this market structure for consumers, but does that not apply to most?

It will be interesting to see how GSK will continue to respond to these allegations, and how market power may shift over time to the largest firm Pfizer.

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