PhRMA is lying to protect its profits, and the lies have reached a new height as the Senate moved to adopt modest drug pricing negotiation measures in the Inflation Reduction Act. The bill “could propel us light-years back into the dark ages of biomedical research,” Dr. Michelle McMurry-Heath, president of the Biotechnology Innovation Organization, said last month. This is, of course, pure bullshit.
In the past 12 months, PhRMA and closely allied groups spent at least $57 million — $19 million of it since July — on TV, cable, radio, and social media ads opposing price negotiations, according to monitoring by the advocacy group Patients for Affordable Drugs. PhRMA spent over $100 million this year to unleash a massive team of 1,500 lobbyists on Capitol Hill.
First, let’s clarify how the bill saves taxpayers billions. It would save the Centers for Medicare & Medicaid Services about $102 billion over a decade, the Congressional Budget Office estimates. In 2021 alone, the top U.S. pharmaceutical companies booked tens of billions of dollars in revenue: Johnson & Johnson ($94 billion), Pfizer ($81 billion), AbbVie ($56 billion), Merck & Co. ($49 billion), and Bristol Myers Squibb ($46 billion).
The bill does not affect the list prices companies charge for new drugs, which increased from a median price of $2,115 in 2008 to a staggering $180,007 in 2021, according to recent research.
Of course, the drug industry warns that any price negotiation will kill innovation. Such warnings “constitute the pharma response in literally every instance since 1906,” the first drug regulation agency was created, said Dr. Aaron Kesselheim. He leads the Program on Regulation, Therapeutics, and Law at Brigham and Women’s Hospital in Boston. And yet, he said, regulatory changes rarely choked out investment in new drugs.
Some experts argue that Medicare drug pricing negotiations could hasten innovation if they steer companies away from drugs that modestly improve outcomes but can earn massive amounts of cash in the current system of runaway prices.
In 2020 JAMA found that the estimated median capitalized research and development cost per product was $985 million, counting expenditures on failed trials. Data were mainly accessible for smaller firms, products in some therapeutic regions, orphan drugs, first-in-class drugs, therapeutic agents that received accelerated approval, and products between 2014 and 2018.
The most telling data on a disconnect between drug prices and research costs has received almost no public attention. Peter Bach, a researcher at Memorial Sloan Kettering, and his colleagues compared the prices of the top 20 best-selling drugs in the United States to those 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 the 15 drug companies that make those drugs—and then some.
More precisely, 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. The 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 online retailer spends about $20 billion a year on R&D, despite being renowned for low prices and low profits. Among the 25 worldwide companies that spend the most on research and development—all more than $5 billion a year—seven are pharmaceutical manufacturers, but eight are automobile or automobile parts companies with profit margins under 10 percent. Amazon’s operating margin is under 5 percent. Meanwhile, 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.
Pharmaceutical companies often claim that the research costs of unsuccessful drugs also have to be considered. 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. 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.
High drug prices can limit patients’ ability to take what physicians prescribe; this, in turn, leads to worse health outcomes, larger medical bills, and often financial hardship for patients, including bankruptcy. It also raises healthcare costs for public and private insurers alike.
In my opinion, PhRMA has zero credibility. The pharma industry should have seen this coming years ago and prepared their companies, but they tend to allocate more money to lobbying in hopes of protecting their profits and outrageous CEO salaries.