Controls would damage this state's booming biotech industry

It looks like the new Medicare prescription drug benefit is not going to solve America's prescription drug challenge. Gov. Arnold Schwarzenegger recently pleaded with Congress to deal with escalating drug prices, lest more and more states - including California - take matters into their own hands.

The governor is now grasping for a risky "solution": using the power of the state to seize pharmaceuticals from Canada, where name-brand drugs often cost one-third less.

In 2004 the state Legislature passed four bills to encourage, or force, the diversion of drugs from Canada and other countries, which Gov. Schwarzenegger wisely vetoed. Although several other governors have championed drug diversion, their states don't have significant pharmaceutical or biotechnology industries. For California, the costs to one of our most dynamic industries - and therefore to the state's economy - would make drug diversion a devil's bargain.

Current law allows drug makers to decide how much medicine to sell in each country - a right enjoyed without question by businesses in any other industry. While the main reason is concern for safety, there is also an economic rationale. The price of drugs in virtually all other countries is limited by government fiat, preventing drug companies from recouping research and development (R&D) costs, which average $800 million per drug. So, drug makers must cover their costs almost entirely on their American sales. Nearly three of every four dollars of worldwide sales are generated in the United States.

Most of the world, including more-affluent countries like Switzerland, Germany or Canada, is free-riding on the back of the American consumer. Forcing drug makers to sell at government-set prices in the United States is simply importing their price controls. Lower revenue to biotech firms would drive away the risk capital needed for the R&D that has produced an accelerating pipeline of medical miracles.

Now, politicians in states without biotech and drug industries want to free ride on those states that do. California is home to more than half of the nation's biotech industry. Six of the top 12 so-called biotech clusters are here. Because the industry invests so heavily in innovation - at least twice as much as other high-tech industries like computers and software - it is exceptionally dynamic, and offers immense promise for California's economic future.

Importing price controls would end both a medical and an economic miracle. By my estimate, the bills the governor vetoed would eliminate at least 23,400 California jobs. When fewer scientists and engineers are employed, they have less to spend, causing severe ripple effects throughout the state's economy. The effects will be strongest around the state's six biotech clusters: Orange County, the Bay Area, Silicon Valley, the East Bay, Los Angeles and San Diego.

If, as is very likely, California's example were imitated nationally, the economic cost would be even greater, equivalent to over $800 per year for each family of four in the state. Other economists' studies of other states with significant pharmaceutical and biotech clusters, such as Michigan and Massachusetts, made similar findings.

Politicians sincere about the leadership they claim to aspire to can stand up for those who cannot hire lobbyists or hold demonstrations for the cameras: the future generations whose lives will be shorter, and less prosperous, because lifesaving drugs would not have been discovered because of the importation of foreign price controls.

Grandstanding politicians from elsewhere can buy votes at the expense of Californians. But California politicians should be the last people to demagogue this issue. The stakes here are far too high.