It’s hard, I mean really hard, to defend big pharma

  • Big Pharma is evading culpability for the crisis of rising prescription drug prices by point the finger at others, namely pharmacy benefit managers (PBMs).
  • Many drugs receive no rebates at all, including 89 percent of Medicare Part D prescriptions. For new drugs, where the price tag can run into the hundreds of thousands a year, rebates are rarely offered because there is no direct competition in the space.
  • Putting profits before people is what big Pharma does. Brand name drug makers have hiked the prices of their products at 10 times the rate of inflation over the last five years. 
  • Drugmakers historically have blamed higher prices on the costs of research and development but didn’t use and of the $7 billion tax benefit to increase R&D.

Drug prices in the United States are extreme. Many drugs cost more than $120,000 a year. A few are even closing in on $1 million. The Department of Health and Human Services estimates that Americans spent more than $460 billion on drugs—16.7 percent of total health-care spending—in 2016, the last year for which there are definitive data. On average, citizens of other rich countries spend 56 percent of what Americans spend on the exact same drug.

We need the money for R&D?

The most telling data on a disconnect between drug prices and research costs have received almost no public attention. Peter Bach, a researcher at the Memorial Sloan Kettering Cancer Center, and his colleagues compared the prices of the top 20 best-selling drugs in the United States with the prices in Europe and Canada. They found that the cumulative revenue from the price difference on just these 20 drugs more than covers all the drug research and development costs conducted by all the drug companies throughout the world—and then some.

To be more precise, after accounting for the costs of all research—about $80 billion a year—drug companies had $40 billion more from the top 20 drugs alone, all of which went straight to profits, not research. More excess profit comes from the next 100 or 200 brand-name drugs.

Drug companies tend to say they are unique in needing to spend a higher proportion of their capital on research than almost any other industry. But of all the companies in the world, the one that invests the most in research and development is not a drug company. It’s Amazon. The top 25 pharmaceutical companies reported a “healthy average operating margin of 22 percent” at the end of 2017, according to an analysis by GlobalData.

But what about the expensive cancer drugs?

In November 2017, a study published in JAMA Internal Medicine examined the costs of developing 10 cancer drugs approved by the FDA from 2006 to 2015 and provided a strong contrast to the Tufts study from a year before. Its authors, from Memorial Sloan Kettering and the Oregon Health and Science University, used annual financial disclosures from the Securities and Exchange Commission for companies that had only one cancer drug approved but had on average three or four other drugs in development. They found that companies took an average of 7.3 years to win FDA approval, at a median cost of $648 million. Only two drugs had research costs over $1 billion. Adding in the cost of capital at 7 percent increased the median research and development cost to $757 million—less than a third of the Tufts estimate.

But wait! Pharma also has many drugs that fail in trials and have to be paid for.

Pharmaceutical companies often claim that the research costs of unsuccessful drugs also have to be taken into account. After all, 90 percent of all drugs that enter human testing fail. But most of these failures occur early and at relatively low costs. About 40 percent of drugs fail in preliminary Phase I studies, which assess a drug’s safety in humans and typically cost just $25 million a drug. Of the drugs that clear this first phase of testing, about 70 percent fail during Phase II studies, which assess whether a drug does what it is supposed to do. The research costs of these studies are still relatively low compared with overall R&D costs—on average, under $60 million a study.

In the end it’s about profits. It’s been that way since the late 90’s when pharma realized the potential of huge profits with drugs like Lipitor. Too many good people are leaving pharma and too many others say nothing because of their paychecks. It seems in our country money can buy everything.

2 thoughts on “It’s hard, I mean really hard, to defend big pharma

  1. 1. You are ignoring risk. It’s fine to point out that the cost of failures have been kept low but going forward no one knows what will lose money and what will be a blockbuster. The prospect of massive profits is what gets investors to take on massive risks

    2. You are overlooking that modern pharma companies are really at-risk marketing and sales organizations who outsource core R&D to startups and smaller biotechs. That means that the true way big pharma pays for R&D is when they spend billions on acquiring those companies. Your R&D metric ignores those massive investments and only counts the late phase R&D that takes a compound over the finish line.

    3. The natural price of anything is its value compared to the next best alternative. If a drug avoids a $120k surgical procedure, then as a society we definitely want the prospect of earning $80k for a drug regimen that avoids it to motivate investors. It doesn’t matter what the pills cost. No one is compensating the investors if they spend a lot to develop a treatment and fail. If the investors succeed they can charge what the market will bear.

    4. Europe and much of the world free rides off the US market which covers R&D. Our government should take measures to make rich foreign countries pay more to spur more innovation and make more risky investments worthwhile. This can also help foster the development of multiple competitive treatments for any given disease which is the best way to bring down the cost of treatments without harming innovation where it’s needed.

  2. Richard: I have worked in the drug industry for over 30 years. It has provided me and my family with a good life but as you mention the industry has become obsessed with profits and stock price. Another aspect I have noticed is the complete lack of empathy with patients. Employees who do care seem to be weeded out by managers interested in political advancement. Thank you for having the honesty to tell it like it is. We need more voices like you.

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