Why Big Pharma’s Argument for Its High Drug Prices Doesn’t Make Sense

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America is only middle-of-the-road when it comes to innovation for dollar spent.

By Francie Diep

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(Photo: hopkinsii/Flickr)

Drug pricing in America has gained a lot of attention recently, with the price tags of everything from new cancer medicines to EpiPens skyrocketing. Many have wondered: Is it fair to make life-saving drugs so costly?

The classic argument for high drug prices is that it’s remuneration for the fact that pharmaceutical discovery is a risky business. That’s true — it’s expensive to hire talented scientists and to run clinical trials, plus the vast majority of experimental drugs fail. In a new paper, however, a team of researchers who study pharmaceutical regulation gathered evidence suggesting drug prices aren’t directly related to companies’ research spending and risk. Instead, they reflect market forces — how much insurers and sick people are willing to pay. In addition, pharmaceutical companies don’t necessarily need more revenue in order to run the science to stay competitive.

Here’s what the paper, which reviewed research on American drug prices since 2005, found:

  • One recent study estimated that companies spend $2.6 billion for every new drug they bring to market, but the new review argues that particular study had methodological problems and may not be correct.
  • One study of 26 transformative drugs — groundbreaking medicines, as judged by a panel of experts — found that many were developed at least in part with taxpayer funding. Some were discovered at universities, by professors using federal grants. Others were invented at institutes backed by public-private partnerships. The new review’s authors, a team from Harvard Medical School, suggest that government programs, such as the Veterans Administration, demand they receive such drugs royalty-free.
  • Drug companies may be able to stay competitive without charging more for their products. One study found that American manufacturers are middle of the pack when it comes to drug invention between 1992 and 2004 relative to how much money Americans spend on prescriptions. The Japanese and South Koreans spend proportionally more on drugs, compared to their ability to innovate. But companies based in the United Kingdom and Switzerland are able to innovate more for the proportion of their gross domestic product that their spend citizens spend on prescriptions.

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