Unhealthy Economics

Should the market try to be fair, or efficient, or both?

Photo: James Hellman, MD. Source: Wikipedia

Life isn’t fair. We know this. But something inside us recoils when a drug-maker buys the rights to a product that used to cost about $50, then raises the price to $600 over the course of 9 years, even though nothing has changed other than the market has gotten bigger.

In 2007, Mylan Pharaceuticals bought the rights to make and market the epipen, a device that injects an emergency does of epinephrine to people who are undergoing an anaphylactic shock. It can save someone’s life. It’s no fun to get anaphylaxis—a Esevere allergic reaction to a bee sting or eating a peanut or taking the wrong medicine. The symptoms come on suddenly: a rash, shortness of breath, and sever swelling in your tongue and throat. It kills a few hundred people per year.

Epipen. Photo: Tokyogirl79. Source: Wikipedia

Mylan isn’t the first company to do this. Valeant bought the rights to a couple of heart drugs and raised their prices by several hundred percent in few years; Pharma Bro did the same thing with an AIDs drug. This strikes most people as deeply unfair. These companies aren’t innovating and expanding the market, they’re just taking advantage of our patent law system.

Folks on the left see these as examples of corporate greed; those on the right see them as part of a poorly designed health-care system, with opaque pricing and government set-asides. Economists see it as rent-seeking: not payments on a lease, but attempts to extract income from others by manipulating the social or political environment—like a landowner who puts a chain across a river on his property and charges a fee on boats that pass through.

These hedge-fund-managers-turned-pharma-CEOs are like roving bandits, extracting rents wherever they can, contributing nothing to drug research. They fight among themselves for increased shares of the economic pie, rather than increasing the size of the pie itself. Eventually, rent-seeking can lead to a collapse in the political system, like what happened in Japan in the ‘90s. Political revolutions can actually be good things if you start with a clean slate.

One thing is certain: if you want to seek rents, victims of anaphylaxis aren’t the ones to extract it from. If these rogues wanted to feed a political revolution, they couldn’t have picked a more in-opportune target—or time.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:45+00:00 August 29th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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