Since the 1930s, the National Institutes of Health has invested nearly $900 billion in the basic and applied research that formed the pharma and biotech sectors. 75% of so-called new molecular entities with priority ratings (the most innovative drugs) trace their existence to NIH funding, while companies spend more on “me too” drugs.
A standard line by the U.S. pharmaceutical industry — that price hikes are needed to fund research into new drugs — runs up against the fact that the federal government subsidizes a large portion of pharmaceutical research. Besides offering tax credits to drug companies and other industries that conduct research and development since 1981, the lion’s share of basic research used by such companies is done through public institutions. According to the Los Angeles Times, while publicly funded research has led to innovations, drug companies have long prioritized developing minor variants on existing medications. Their funds are more often directed toward sales and to financial practices meant to boost shareholder payouts.
Rather than making patient, long-term investments, large shareholders in pharma companies are looking for a quick, easy, guaranteed return, which means buying smaller biotech companies.
Take Pfizer. Economist William Lazonick has shown that from 2003 to 2012, it spent $59 billion on share buybacks and $63 billion on dividend payouts — for a total payout to shareholders of 146% of net income. Meanwhile, Pfizer benefited immensely from U.S. government spending on life sciences research and drug development.
The pharmaceutical industry has used other excuses to support high prices. It has, for instance, argued that prices are proportionate to the intrinsic value of the drugs. However, studies looking at cancer treatments have shown no correlation between the price of cancer drugs and their benefits. Peter Bach, a renowned oncologist, has found that, for most drugs, a value-based cost is actually lower than the current market-based price.
Pharma should be asked to reinvest profits back into R&D rather than giving such a high percentage to shareholders. Furthermore, given that most drugs originated thanks to public funds, the prices of these drugs should be capped to reflect the taxpayers’ contribution.
The state of affairs is not simply a massive failure of the so-called free market but a long con. The supposed partnership between public and private sectors is increasingly parasitic, hurting innovation and fueling inequality through reduced investment, exorbitant consumer prices, and more money siphoned off for shareholders.
While pharma companies put some of their profits into research and development, real investments are made in marketing. Every year, billions of dollars are spent on ad campaigns designed to get doctors and customers interested in the latest drugs, and the amount spent keeps rising.
A 2019 study published by JAMA found that, between 1997 and 2016, marketing expenditures increased by $12.2 billion, with a hefty percentage of that spent targeting doctors. In the same time frame, the number of TV commercials promoting drugs to average viewers went from 72,000 to 663,000. And the money poured into sales and marketing can be deducted by pharmaceutical firms come tax season.
Drug companies are part of the revolving door issue — the movement of statesmen and government employees into private business and vice versa — as much as any industry. Many of the lobbyist’s pharma sends to Washington are former government workers. Former employees of the Food and Drug Administration, the agency tasked with regulating drug companies, make up a conspicuously large number of hires by the businesses they supervised. The salaries are tempting, not only for rank-and-file bureaucrats but for elected officials who’ve alienated voters.
It’s all part of the drug economy where profits and shareholder returns are more important than patients. It’s unconscionable but it’s our reality.