Just how expensive do prescription drugs need to be to fund innovative research?
Ezekiel J. Emanuel
March 23, 2019
How is it that pharmaceutical companies can charge patients $100,000, $200,000, or even $500,000 a year for drugs—many of which are not even curative?
Abiraterone, for instance, is a drug used to treat metastatic prostate cancer. The Food and Drug Administration initially approved it in 2011 to treat patients who failed to respond to previous chemotherapy. It does not cure anyone. The research suggests that in previously treated patients with metastatic prostate cancer, the drug extends life on average by four months. (Last year, the FDA approved giving abiraterone to men with prostate cancer who had not received previous treatment.) At its lowest price, it costs about $10,000 a month.
Abiraterone is manufactured under the brand name Zytiga by Johnson & Johnson. To justify the price, the company pointed me to its “2017 Janssen U.S. Transparency Report,” which states: “We have an obligation to ensure that the sale of our medicines provides us with the resources necessary to invest in future research and development.” In other words, the prices are necessary to fund expensive research projects to generate new drugs.
This explanation is common among industry executives. To many Americans, it can seem plausible and compelling. It’s easy to conjure images of scientific researchers in their protective gear and goggles carefully dropping precious liquids into an array of Erlenmeyer flasks, searching for a new cure for cancer or Alzheimer’s. But invoking high research costs to justify high drug prices is deceptive.
No matter the metric, drug prices in the United States are extreme. Many drugs cost more than $120,000 a year. A few are even closing in on $1 million. The Department of Health and Human Services estimates that Americans spent more than $460 billion on drugs—16.7 percent of total health-care spending—in 2016, the last year for which there are definitive data. On average, citizens of other rich countries spend 56 percent of what Americans spend on the exact same drug.
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.
Reducing these high drug prices has become a major political concern—and a rare bipartisan cause for Democrats and Republicans to rally around, albeit with disagreement about how to actually get it done. In his State of the Union address last month, President Donald Trump called the price discrepancy between the United States and other countries “unacceptable” and “unfair,” and vowed to “stop it fast.” In a Senate Finance Committee hearing on drug pricing a few weeks later, Senator Ron Wyden of Oregon compared the way the drugmaker AbbVie protects the exclusivity of one of its drugs to the way Gollum protects his ring.
Yet every time Congress debates doing something about drug prices, the industry—and the advocacy groups it funds—vociferously returns to the point that lower prices will thwart innovative research. The fear of missing a cure for Alzheimer’s or Lou Gehrig’s disease or depression contributes to stalling reform. But there are many reasons to question the widely held notion that high drug prices and innovative research are inextricably linked.
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 prices of the top 20 best-selling drugs in the United States to the prices 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 all the drug companies throughout the world—and then some.
To be more precise, 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. The online retailer spends about $20 billion a year on R&D, despite being renowned for both 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.
If you watch television, you know part of the answer to where this extra money is going: sales and advertising. Of the 10 largest pharmaceutical companies, only one spends more on research than on marketing its products. But it’s hard to figure out what it actually costs drug companies to conduct the research required to get FDA approval and bring a single drug to market. The pharmaceutical industry and its advocates tend to peg the cost of creating and bringing to market just one new drug at $2.6 billion. This figure comes from a cost report published in October 2016 by the Tufts Center for the Study of Drug Development.
Exorbitant drug prices have two bad effects. First, high costs mean that lots of patients are unable to take their medications. A recent study in the Journal of Clinical Oncology assessed patients’ access to 38 different oral cancer drugs and found that 13 percent of cancer patients did not buy approved chemotherapy drugs if they had a co-payment of $10 a month, while 67 percent did not when they had to pay $2,000 or more. Another study showed that 25% of diabetic patient underuse their insulin because of cost.
Second, the high drug prices distort research priorities, emphasizing financial gains and not health gains. Cancer drugs are routinely priced at about $120,000 to $150,000 a year, and more than 600 cancer drugs are now being tested on humans. This can lead to great societal benefits: The United States is expected to face 1.76 million new cancer cases and more than 600,000 cancer deaths in 2019 alone. But many of the drugs that companies are pursuing have low promise, where the health gains are small—weeks of added life, not big cures. While even this short extra time can be valuable to individual families, too much investment in oncology means not enough in drugs for other illnesses whose treatments cannot be so highly priced.
The simple explanation for excessive drug prices is monopoly pricing. Through patent protection and FDA marketing exclusivity, the U.S. government grants pharmaceutical companies a monopoly on brand-name drugs. But monopolies are a recipe for excessive prices. A company will raise prices until its profits start to drop.
Where cuts are made is up to drug companies. Their claims of lower R&D costs appear designed to generate fear, but as some former executives themselves have acknowledged, there is no necessary link between a decline in drug prices and a decline in R&D. Drug companies could make other choices that maximally improve the health of all Americans.