Patriotism or Profiteering?
On Wednesday, October 24, the Bayer Drug Corporation agreed to sell its anthrax-fighting antibiotic, Cipro, to the United States government for 95 cents a tablet. This price was about one-half the price of $1.75 it normally charges. Bayer announced it was sacrificing economic gain for the sake of the nation, and Tommy Thompson, Secretary of Health and Human Services, called this a “good deal” for the government.
Sometime I hate being an economist. I would love to see this as Bayer sacrificing profits for people. But as an economist, I know that this behavior is consistent with profit maximization, and there is much reason to believe that Bayer is just pursuing its own interests.
It’s a fact well-known to economists that when you have a monopoly -- Bayer is the sole producer of an FDA-approved Anthrax drug -- the price the monopoly will charge for its product is proportional to how sensitive demand for its product is to the price of the product. For example, if the amount of product I am willing to buy doesn’t change with price, then Bayer will want to charge me a very large price in order to maximize its profits. On the other hand, if I’m very sensitive to price changes, then Bayer will charge a lower price to maximize their profits, because if their price is too high, I won’t want to buy much of the product.
When the government decided to buy a bunch of Cipro, demand for Cipro became a whole lot more sensitive to price. Before the anthrax scare, Cipro was used to treat, according to the New York Times article that reported on Bayer’s decision, “critically ill patients in hospital intensive care units.” If you’re a patient who is critically ill, your demand isn’t going to vary much with the price. But when the government starts to buy Cipro, there’s a new type of consumer in the market, one whose demand is based on events that may happen in the future. In this case, the demand is much less urgent, and the quantity demanded can vary, depending on price. More importantly, there are non-FDA approved drugs, Levaquin, produced by Johnson and Johnson, and Tequin, produced by Bristol-Myers Squibb, that can also be used to treat anthrax. Since these drugs are not available to the general public, the general public’s demand for Bayer’s drug is fairly fixed. But since these drugs can become available to the government, who can give them FDA approval, the government’s demand for Bayer’s drugs is much more sensitive to the price.
There is much evidence to support the fact that Bayer is making a huge profit off its sale to the government. In countries where Bayer’s patent has expired, factories make a generic version of Cipro that sells for 20 cents. So it can’t cost these factories more than 20 cents to make the drug. And while some will argue that Bayer’s costs are higher because they need to meet government regulations, their costs are actually lower because they probably have more efficient production processes than factories in countries with no drug standards. I hardly believe that Bayer’s costs of production can be much more than 20 cents a pill, and since they are selling 100 million pills to the government, that’s a profit of $80 million dollars for Bayer.
Some may argue that Bayer has a right to profit off its drugs since it is the group that did the research and development to make the drug in the first place. And they may be right. My point here is not to condemn Bayer for looking out for its own interests, but to point out that they are not giving America a good deal. They are not flag-waving patriotic citizens of America, but a company maximizing its profit.
One more thing along these lines must be said. It is not necessary for Bayer to make a profit off its sale to the government in order to support research and development. When Bayer decided to research how to make an antibiotic that was effective against airborne bacteria (such as anthrax), it based its decision on the profits it could expect to make off the drug. Since this sale to the government is an unexpected event (hopefully), it shouldn’t have entered into Bayer’s decision-making process. In other words, Bayer would still have developed the drug if it knew that there was going to be a huge U.S. demand for the drug and that the United States would not allow them to charge above cost when they sold the drug to the government. Bayer’s current profiteering is not the necessary reward for research and development that normal drug sales are.
It’s times like these that make me hate being an economist. I’d love to sit back in blissful ignorance, thinking of Bayer as a corporation with a social conscience, doing its patriotic duty, but economics tell me that this behavior is just what we would expect from a profiteer.