The craziness of pharma drug pricing

  • Lilly says the net price for its Humalog insulin—the price after discounts and rebates—fell to an average of $135 a patient a month in 2018, from $147 in 2014. During the same period, the product’s average list price rose 51.9% to $594 per patient monthly.
  • Lilly hasn’t raised the U.S. list price for Humalog since May 2017. U.S. sales of the drug rose 4% to $1.79 billion in 2018, which Lilly said was primarily driven by demand.
  • Dug middlemen continue to take a huge chunk of prescription drug profits.

When people, who work within the drug industry, have a hard time trying to determine the actual price of a prescription drug you know things are screwed up. The data Lilly released around Humalog clearly shows that something is wrong. Although the list price has risen, the net price has fallen. Yet politicians like Mr. Sanders continue to jump on the anti-pharma bandwagon.

Pharma isn’t blameless

Drug companies justify the high prices they charge by arguing that their research and development (R&D) costs are huge. On average, only three in 10 drugs launched are profitable, with one of those going on to be a blockbuster with $1bn-plus revenues a year. Many more do not even make it to market.

Big pharma companies also say they only have a limited time in which to make profits. Patents are generally awarded for 20 years, but 10-12 of those are typically spent developing the drug at a cost of about $1.5bn-$2.5bn.

Excessive drug prices are the single biggest category of health-care overspending in the United States compared with Europe, well beyond high administrative costs or excessive use of CT and MRI scans. And unlike almost every other product, drug prices continue to rapidly rise over time. HHS estimates that over the next decade, drug prices will rise 6.3 percent each year, while other health-care costs will rise 5.5 percent. Basic economic principles suggest that drug prices should be going down, not up: For most drugs, manufacturing volumes are increasing, and little new research is being conducted on those already on the market.

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.


Per the Atlantic “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”.

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.

The 2017 JAMA Internal Medicine study incorporated all research costs on drugs not yet on the market into its final calculations. The pharmaceutical companies it examined had an average drug success rate of 23 percent, which the Tufts researchers argue is too high to accurately represent the amount of money that failed drugs would usually add to a company’s research costs. But cancer drugs, specifically, do have a success rate of 20 to 25 percent—so the selection of only successful companies does not seem to be the difference.

The bottom line?

Our SYSTEM allows drug prices to remain high because there is so much money, profit, in taking a piece of the pie. Until we, as a nation, are willing to sit down and deconstruct our healthcare pricing the figer pointing, the inaccurate stories and the demonazation of pharma is going to cintinue.