Posts Tagged ‘R&D’


Back in June, Kim Hemphill, in her letter to the editor of the Washington Post, challenged pharmaceutical industry claims that it must charge high prices on lifesaving drugs to recover research and development costs.

The case detailed in the June 11 Business article “Max’s best hope costs $750,000” was yet another example of how the pharmaceutical industry continues to put profits above morals and humanity. . .

Research and development costs are a part of the business pharmaceutical companies are in and should have little, if any, bearing on the ultimate price of a drug. What they charge for these specialty drugs is profit-motivated price gouging, plain and simple.

The fact is, as is clear from the chart above, pharmaceutical prices (at the wholesale level) have risen since 1981 at a much faster rate than for all commodities—more than 7 times compared to just two.

Most people, like Ms. Hemphill, think this is a case of “profit-motivated price gouging” on the part of drug companies. But it’s a difficult charge to prove.

Until now.

A new study published in the JAMA Internal Medicine journal directly challenges the industry’s argument that the reason for high drug prices is the sizable research and development outlay necessary to bring a drug to the U.S. market.

What the authors of the study show is that, in the case of 10 cancer drugs, the median revenue after approval of the drugs was $1658.4 million while the median cost of developing a single cancer drug was only $648.0 million.

Moreover, given that total spending (including a 7 percent cost of capital) to develop these drugs was $9 billion and total revenue to date was $67 billion, the postapproval revenue was more than 7-fold higher than the R&D spending.


Thus, as is clear in the figure from the study, development costs are more than recouped in a short period—and some companies boast more than a 10-fold higher revenue than research and development spending.

So, Ms. Hemphill was right: the pharmaceutical industry continues to put profits above morals and humanity.


We see it on a daily basis. Contemporary capitalism is out of control.

The latest example is Valeant Pharmaceuticals International, which buys up existing drugs and raises prices aggressively, and does nothing to develop new drugs.

Valeant defended itself, saying in a statement that it “prices its treatments based on a range of factors, including clinical benefits and the value they bring to patients, physicians, payers and society.” It says patients are largely shielded from price increases by insurance and financial assistance programs the company offers, so that virtually no one is denied a drug they need. . .

If “products are sort of mispriced and there’s an opportunity, we will act appropriately in terms of doing what I assume our shareholders would like us to do,” he told analysts in a conference call in April.

What’s happening? Clearly Valeant’s strategy is undermining the usual rationale of the American pharmaceutical industry, that it “needs” its exorbitant profits to fund research and development.

It spends an amount equivalent to only 3 percent of its sales on research and development, which it views as risky and inefficient compared to buying existing drugs.

It also pays very low taxes, “because it is officially based in Canada, although Mr. Pearson operates from New Jersey.”

And it makes its profits not just by raising prices, but by laying off workers in the companies it purchases and by accumulating a mountain of debt to finance those purchases.

Everyone, of course, knows the counterargument: that Valeant is just one bad apple in the barrel. But it’s operating according to the rules of a system that every other major corporation follows in the United States: individual decisions that maximize the private gain of a few at the expense of everyone else, both consumers and workers.

The problem is, J. Michael Pearson is giving a bad name to the pharmaceutical industry and to capitalism as a whole. Surely, other heads of corporations should want to rein him in, because he’s generating bad publicity for their system (and, in addition, he’s forcing them to give up some of their profits to pay for inflated drug prices for their employees).

On the other hand, they don’t want to touch him, out of fear that their own profitable operations—on both Main Street and Wall Street—will be subject to public scrutiny and regulation.

So, the tiny group at the top, who make decisions that affect the rest of us, are caught in a bind.

Meanwhile, capitalism continues out of control.


As if to confirm what I wrote last night, here’s James Surowiecki on what the tiny group at the top could do, out of self-interest, to rein in rent-seeking profiteers like Valeant:

In place of closed distribution, the F.D.A. can require companies to make samples of their drugs available to competitors. The F.T.C., as Anderson argues, should be more aggressive in limiting mergers among generic-drug makers. And the U.S. and other developed countries should also adopt an arrangement known as regulatory reciprocity: if a drug maker has approval to sell a drug abroad, it should be able to sell that drug here, and vice versa. Safety concerns may rule out importing drugs from just anywhere, but there is no good reason for a company selling a drug in, say, Germany to have to spend time and money to get the right to sell it here. Foreign competition has played a central role in holding down retail prices in industries ranging from automobiles to consumer electronics. It’s time drug prices were subject to the same rules. Shkreli has said, since the backlash, that Turing will roll back the Daraprim price increase. But the fate of toxoplasmosis sufferers shouldn’t depend on the egomaniacal whims of a “pharma bro.”

Of course, these kinds of measures would make drug companies anxious, but they should be doing all they can to encourage competition, if only out of self-interest. If market forces and smarter regulations can’t limit price gouging, then drug makers could be subject to more drastic measures, like price controls or compulsory licensing—a system that compels companies to license drugs to other manufacturers. The Turing scandal has shown just how vulnerable drug pricing is to exploitative, rent-seeking behavior. It’s fair enough to excoriate Martin Shkreli for greed and indifference. The real problem, however, is not the man but the system that has let him thrive.