New Study Shows That High R&D Costs Don’t Explain High Drug Prices

from the the-billion-dollar-pill-nonsense dept

For years, defenders of pharma patents loved to claim that the reason that they needed patents and the reason they had to charge extortionate rates for drugs was because of the high cost of R&D for new drugs. The numbers keep going up. When I first started covering pharma patents, the number bandied about was $600 million per new drug. Then it jumped to $800 million. Then $1 billion. The latest I’ve heard them claiming is an average of $1.5 billion per new drug.

The number has always been bunk. Back in 2004 (at which time pharma companies were claiming $800 million per pill), Merrill Goozner wrote an excellent book, called “The $800 Million Pill” which completely rips this number to shreds, and shows how massively inflated it is. While the book is a bit out of date now, it’s still a really interesting read, and shows how almost every major new successful drug was mostly funded by the federal government (i.e., your tax dollars) with the pharma companies shouldering a tiny, tiny fraction of the purported costs. Similarly, the book “Against Intellectual Monopoly” showed that the costs claimed by pharma companies was greatly exaggerated, and often the vast majority of the money came from taxpayer funds, with only a tiny bit being taken on by private industry. In addition, much of the cost is from the clinical trials, and there’s an argument that that is also something that would benefit greatly from federal funding (there are plenty of stories of sketchy behavior by pharma firms when it comes to some clinical trials).

Anyway, given all that, there’s a new study out that highlights (in a different way) that the claims of high drug prices being due to high R&D costs is pure bullshit. The study did something I’m surprised no one has done before: compared drug prices with the price of R&D on those drugs. If the high cost of development was really what was driving the high drug prices, there should be some correlation there, right?

The researchers compared data on R&D costs with drug prices. They found no relationship between what pharmaceutical companies spend on R&D and what they charge for new medicines. The authors also assessed whether the therapeutic value of a product was associated with its price, but found no association there either.

“Our findings provide evidence that drug companies do not set prices based on how much they spent on R&D or how good a drug is. Instead, they charge what the market will bear,” said senior author Inmaculada Hernandez, PharmD, PhD, associate professor at Skaggs School of Pharmacy and Pharmaceutical Sciences.

Of course, that finding shouldn’t really be a surprise to anyone. Of course pharma companies are going to charge “what the market will bear.” But, therein lies the problem: we don’t have an actual market for most of these drugs. Patents create monopolies, meaning a total lack of competition, which allows pharma companies to set monopoly rents. Combine that with the US’s arcanely bizarre healthcare system, where patients have no idea how much drugs cost, and everything is opaque because insurance companies maybe pay some of it, and patients might get totally random bills at some later date, and its easy for “the market” to no longer function the way a market should function.

But, at the very least, don’t just accept the claim that drugs cost a lot because pharma has to spend a lot on R&D. All of the evidence suggests that’s ridiculous.

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Comments on “New Study Shows That High R&D Costs Don’t Explain High Drug Prices”

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Anonymous Coward says:

The argument was bad before when Michael Slonecker was still around to shill for it, and it’s just as bad now. The thing is, pharma companies are so well protected nobody actually holds them accountable. You can do what Slonecker did and simped for the sake of patent maximalists and still not be laughed out of society. It took Martin Shrekli to attempt jacking up the price of a drug before there was enough public outrage, and even then what finally nailed him to the wall wasn’t the fact that he was a smug rich pharma patent bro; it was that he was a loose end that his circle had to cut out.

John85851 (profile) says:

Drug companies also create the market

We may not have a pricing market for drugs, but drug companies create their own markets.
Turn on the TV during the evening news any night and you’ll see what I mean.
I’d say most of the drugs are for conditions that didn’t exist even 10 years ago.

Do your legs fall asleep when you sit down? You have restless leg syndrome and you need a drug!
Do you get tired around 1:00 am and you can’t stay awake? You have night time sleepiness syndrome and you need a drug.
Do you have allergies? Don’t take allergy medications that have been available for years, ask your doctor about this $100 per pill drug.

On a related note, how come these studies don’t ask how much money drug companies spend on advertising? Maybe that’s why they need $800 million per drug: to pay for TV commercials during the news and football games.

DNY says:


An unsurprising finding. When an enterprise holds a monopoly (in this case created artificially by a government edict called a patent) on a product for which demand is inelastic (as in the case of the only, or by far the most effective treatement, for a life-threatening illness), it will raise prices.

This is why “natural monopolies” called utilities, which provide goods (water, natural gas for heating and cooking, electricity) for which demand is inelastic have their prices regulated. This is not seen as an affront to the free market, even by us resolute Hayekians, because there is not a free market in goods the supply of which is controlled by a monopoly. Plainly the same principle should be applied to pharmaceuticals for which there are not good substitutes (and measures taken to improve competition between producers of interchangeable drugs for those for which there are).

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