Stripping Away Big Pharma's Figleaf

Drug prices in the United States are out of control, and rising.

The reason is that the United States permits pharmaceuticals to be marketed by unregulated monopolies: Patent protection gives the drug companies monopoly control over their products. These companies face neither direct competition, nor price controls.

But what is the reason for the government grant of these patent monopolies (which often extend long beyond the official 20 years, thanks to a variety of Big Pharma "evergreening" tactics to block or delay the introduction of generic competition)?

Leaving aside the raw political power of the pharmaceutical industry and its allies, the policy rationale for patent monopolies is the cost of drug development. According to the drug companies, the cost of researching and developing a new drug is $800 million.

The myth of astronomical drug development costs is the figleaf behind which Big Pharma and its paid associates (inside and outside of government) hide to escape criticism for price gouging. If this myth were peeled away, Big Pharma would stand exposed. And the prospect of a more rational system of drug development and pricing would rise dramatically.

This matter could be resolved, simply, if the drug companies were to open their books and reveal their actual investments in R&D. Instead, they implausibly claim that this information would give away trade secrets and must remain proprietary.

The industry claim of $800 million costs per drug relies on a study from an industry-funded research center at Tufts University in Boston. Tufts researchers supposedly had access to industry data to come up with their figure, but no one else is able to see the underlying data. So if you choose to believe in this number, it is simply a matter of faith.

To get closer to the actual figures for the cost of drug development and company per drug expenditures on R&D, you have to peel away the assumptions and built-in biases of the Tufts-industry study.

Approximately half of the Tufts-industry estimates are attributed to financing costs, known as opportunity cost of capital. Money invested in drug R&D could have been invested in treasury bonds, say. While the bonds would start returning revenues right away, R&D returns are not realized for years, until a drug is discovered, developed, approved and put on the market. So in the Tufts-industry study, a "cost" of development is the forsworn income during the period of development.

This is all true, as far it goes, but it is not how people normally think about "cost." As James Love of the Consumer Project on Technology says, it is the equivalent of saying the cost of a car is not the sticker price, but the sticker price plus interest payments on a car loan.

Exacerbating the problem, the researchers may pick an unreasonably high interest rate. They may also set the period for drug development as too long -- in the Tufts-industry model, relatively small delays in getting the drug to market lead to big increases in the overall cost.

The Tufts-industry estimate is for the cost of new chemical entities for which the industry was wholly responsible -- that is, where there was no substantial public contribution to R&D.

It turns out, however, that the vast majority of new drugs Big Pharma brings to market do not involve new chemical compounds. A May 2002 study by the National Institute for Health Care Management (NIHCM) Foundation found that two-thirds of the prescription drugs approved by the FDA between 1989 and 2000 were modified versions of existing medicines or identical to drugs already on the market (and only about 15 percent were both new and deemed by the FDA to provide significant improvement over existing medicines). Pharma denies it, but there is every reason to believe these less novel products are far cheaper to bring to market.