If you believe that drug prices are so high because of R & D, Big
Pharma has done their job. And they’re going to be in your pocket for a
long, long time.
MYTH: Drug prices need to be as high as they are to pay for research
REALITY: Drug prices are as high as they are to support unconscionable
profits, with much of the research paid for by taxpayers.
The big claim by Big Pharma is that it costs $802 million
to bring a new drug to market.
It’s not true.
The drug industry figure comes from a Tufts
University study released in late 2001. There are some major problems
with the study (it affects your bank balance so it’s worth paying attention):
1. The $802 million included $400 million that had
nothing to do with bringing drugs to market. It was an estimate
of how much the drug companies could have made by investing in some
other way. This is an imaginary number that the drug companies do not
After deduction: $402 million.
2. The remaining $402 million included about $230 million for clinical
trials, but many
drugs are simply revamps of existing drugs so clinical trials are done
on only about 29% of drugs. That cuts the figure to $67 million, and we
can deduct another $163 million.
After deduction: $239 million.
3. The US taxpayer pays for 34% of that remainder through
a tax deduction drug companies take on R & D. I think encouraging R & D
this way is good policy, but it does reduce the cost of bringing the drug
to market by $81 million that’s paid for by you and other taxpayers, not
the drug companies.
After deduction: $158 million – $644 million
less than Big Pharma claims.
Multiplying the real cost by a factor of 5 is a lot of "shading," but
even the last figure is still higher than the average cost to bring out a
new drug: the study was limited to a number of drugs that were developed exclusively
within the drug companies.
What’s wrong with that?
This: the reality is that the majority of drugs are
developed with government support, paid for by American taxpayers:
A National Institutes of Health (NIH) internal document, dated February
2000 and obtained by Public Citizen earlier this year, showed that all
the top five selling drugs in 1995 received significant taxpayer backing
in the discovery and development phases. Investigations by the Massachusetts
Institute of Technology and The Boston Globe also have examined samples
of medically important and top-selling drugs and found that a vast majority
of drugs in each group received government support. [True
Figure of R&D Costs Likely Is 75 Percent Lower]
The explanation for this situation may be grounded in the fact that the
Tufts Center for the Study of Drug Development gets 65% of their research
funding from drug companies.
So when you hear spokesmen like Dr. Mark B. McClellan, commissioner of the
Food & Drug Administration [yeah, I know - he's supposed to be working
for us], claim that "the US is is paying the lion’s share of the
cost of developing drugs" you can believe him. [Business
But remember that we’re paying twice: once in government-funded research,
and again in drug prices that are much, much higher than in other developed
That’s where those "unconscionable profits" come from.
The drug industry is the most profitable business segment in the US, with
an average profit of 18% while the US industry average is only about 3% (Pfizer
hit 28% in their latest annual report, nine times as high as Wal-Mart).
No, they don’t need that money for R & D (start over at the beginning
of this article if that was still your knee-jerk reaction). Pfizer, for example,
spent $9.4 billion on R & D (after taxes) and $9.7 billion on stock repurchases
to offset management’s stock options (most
recent annual report). There seems to be more than enough money for management
to work with.
As the Republican Representative from Minnesota, Gil Gutknecht, said: "There’s
nothing wrong with the word profit, but there is something wrong with the
What to do? You could try buying drugs in Canada like many do, but Congress
and the FDA are working hard to prevent that:
… investigation suggests the FDA’s actions against Canadian imports have
been part of a concerted campaign to simultaneously discredit its counterpart
agency in Canada, provoke fear among American consumers who buy their drugs
there, blunt an exploding political movement among local and state governments
to begin wholesale drug buys in Canada and ultimately preserve the inflated
prices charged U.S. consumers and taxpayers. [Why
We Pay So Much For Drugs Time Magazine subscription]
Oh, you believe their "safety" red herring? Then try this:
Each year an estimated 50,000 to 100,000 people die as a result of adverse
reactions from FDA-sanctioned pharmaceutical drugs sold in America. In
fact, mistakes in administering drugs, often in hospitals, are the fourth-
or sixth-leading cause of death in the U.S., depending on how the cases
By comparison, the risk from defective, counterfeit or mislabeled drugs
from Canada is presumed but unproved by any evidence. When TIME asked a
spokesman for PhRMA, the drug-industry association, if there were any cases
of Canadian drug imports harming Americans, he said, "Yes, I believe
there have been some. I believe FDA has some on its website."
In fact, the FDA has no such record.
At a June 2003 hearing, members of Congress quizzed William Hubbard, the
FDA’s associate commissioner [he's supposed to be on our side, too],
on the issue: "As far as adverse events, where people have been harmed
by Canadian drugs coming across the border, did you bring any of those
examples for us?" asked Representative Burton of Indiana.
Hubbard: "We have very little evidence."
Later, Representative Gutknecht, the Minnesota Republican, pressed Hubbard
along the same line: "But the bottom line is, there’s no evidence
of anyone who has died from taking a legal drug from Canada. Isn’t that
Hubbard: "I have no evidence." [Why
We Pay So Much For Drugs subscription]
Sounds like the drug lobbyists are earning their keep:
One reason the industry does so well in the capital is its potent lobby.
It maintains more than 600 lobbyists—more than one for every member
of Congress. It spent $435 million to influence Washington from 1996 to
2003 and handed out $57.9 million in contributions from 1991 to 2002, according
to Common Cause. Says Representative Pete Stark, a California Democrat
who has waged a decade-long war for lower Medicare drug prices, a move
that government auditors say could save taxpayers nearly $1 billion a year: "These
guys are awfully good. I only wish they were on the right side of the issues.
They don’t care about curing people. They only care about profits." [Why
We Pay So Much For Drugs subscription]
So don’t buy into the drug companies’ claims. They’ve got a great PR effort
that has convinced the gullible that the high prices they charge are to pay
for research, and a lobbying effort that stops any legislation based on the
The following is in the comments below, but I don’t want you to miss it:
Merck CEO Raymond Gilmartin, who attended the Tufts Center event in
Philadelphia, contradicted PhRMA’s assertion. Gilmartin said there
was no direct link between R&D costs and prescription prices. "The
price of medicine is not determined by research costs," Gilmartin
stated. "Instead, it is determined by their value in preventing
and treating disease." [Tufts
Drug Study Sample Is Skewed12/04/2001]
In a free market system, that’s as it should be, but pharmaceuticals are not
in a free market.
Pricing and pharmaceutical industry profits are skewed by heavy lobbying and
the resultant legislation and regulation (e. g., the new Medicare Act).
They are also skewed by the fact that most drugs that do get to market are
based on R & D funded by the government and taxpayer dollars, rather than
out of drug company profits. The government pays for the research, then the
drug companies cherry-pick the most-promising drugs they want to take further.
I support government-funded medical and pharmaceutical R & D as good social
policy, but let’s let the benefits accrue to consumers, not CEOs and stockholders.