Big Pharma’s Go-To Defense of Soaring Drug Prices Doesn’t Add Up
Many pharmaceutical companies claim that exorbitant drug costs—some companies charge patients $100,000, $200,000, or even $500,000 a year—are necessary to fund expensive research projects that generate new drugs.
But “invoking high research costs to justify high drug prices,” Ezekiel J. Emanuel wrote last week, “is deceptive.” As even some pharmaceutical executives have acknowledged, he said, “there is no necessary link between a decline in drug prices and a decline in R&D.”
Too many people are focused on driving health costs down. It sounds intuitive, but it misses a bigger opportunity: making health costs most effective. This article is another example of this: Drug prices are significantly higher than raw production costs. We already know this will always be the case, so the only question is how much more should they be. And the author never answers that question. In fact, you’ll find there is no principled answer to that question, because lower profits will surely lead to lower research, though the exact relationship is unknown. Before you think this is just another “let the market run amok” reply, let me suggest a much more interesting proposal: Instead of trying to cap profits by pharmaceutical companies, tax the profits and reinvest them in public research. Today, no direct mechanism exists for that in the United States. If the author is right that research isn’t as expensive and costs are predictable, then we’ll see public research producing the next generation of drugs. This would allow generics to manufacture the next-generation drugs, truly reducing costs.
As for other countries placing a price cap, that is no different from any company charging different amounts for different geographies. If anything, other countries capping the price is forcing the U.S. health-care market to subsidize their market. It is no surprise that a company is seeking to maximize profits. Companies aren’t altruistic.
Additionally, the author parades the familiar “patents create monopolies” trope, as if that’s something bad. It should be obvious that not granting a monopoly would stop research dead in its tracks. Regardless of what the research costs are, the manufacturing costs are significantly cheaper than that, so any smart company would wait on the sidelines to rip off the next drug. Absent a patent system, companies would be forced to use contracts to prevent providers from “leaking” the drugs to competition, a result that would be much less conducive to knowledge sharing than what we get with the patent system.
In “Big Pharma’s Go-To Defense of Soaring Drug Prices Doesn’t Add up,” Dr. Ezekiel J. Emanuel argues that “lower revenue from lower drug prices could reduce marketing, administration, and excessive profits before R&D costs have to be reduced.” However, publicly available SEC filings show that R&D would not be preserved if companies absorb price regulation without compensatory R&D incentives. When revenue drops, drug companies cut R&D earlier and deeper than marketing, because this dampens short-term damage to sales despite reduced R&D doing more financial and social harm longer term. Likewise, following the 2017 tax cuts, drug companies didn’t invest extra revenue in R&D; they bought back stock. Neither reaction is good, but it’s what the current capital system encourages. Drugs cost too much, but to lower prices without hurting R&D, we need a more holistic strategy than pure price regulation, which would curtail new medicines whether we like it or not.
Nathaniel Brooks Horwitz
Most drug research at its earliest stages is funded by philanthropic and government organizations, such as the National Institutes of Health, and performed at public universities. In my view, this fact makes the tax-paying public the biggest investor in all this biotech intellectual property. As such, the public should receive a cut of any drug profits, just as any other investor might. And because members of the public are the ones taking the biggest risk with their early investment, their slice of profits should be that much bigger. It would be nice if this hefty investment translated into some kind of a discount on the end product.
Los Angeles, Calif.
Ezekiel J. Emanuel replies:
I agree with Pager that we have avoided discussing the “fair price” of a drug. I have an article in the April issue of Health Affairs in which I try to remedy this lacuna. I propose linking the price of a drug to people’s average lifetime earnings. This approach does result in tiered pricing in different countries, with the price correlated to average income.
One of my points is that drug companies choose how to their allocate their resources. As I wrote in The Atlantic:
Lower revenue from lower drug prices could reduce marketing, administration, and excessive profits before R&D costs have to be reduced. Where cuts are made is up to drug companies.
That drug companies preferentially cut R&D rather than their high profits with price reductions or buy back stock with tax benefits only reemphasizes that they have made their primary mission not health benefits or curing diseases but profits. It is their choice, not a legal requirement or a commandment from God. Once, long ago, sometime before the early-to-mid-1990s, drug companies were focused on health impact rather than profit maximization. And no one was screaming about exorbitant drug prices.
Drug research is essential. We all want drug companies to develop cures to diseases, especially ones where today there are no real therapies, such as Alzheimer’s or Lou Gehrig’s. But we also need to be clear that not all drug research is really valuable. Many drugs being researched are unlikely to make important health contributions. Drug companies continue to research marginal drugs because they can charge high prices for them. One thinks here of bevacizumab for progressive glioblastoma, which improves neither survival nor quality of life. One also thinks of Exondys 51, about which the director of the FDA’s Office of Drug Evaluation said: “I think it will be important for the regulatory record to reflect that there was no scientific basis underlying the conclusion of ‘reasonably likely’ [for Exondys 51 to be effective].” Cutting back on this type of drug research will not undermine our health.
There are different ways for the public to be paid back for its investment in the science that facilitates drug discovery. One way is to tax profits of drug companies. Another way, the way I suggest, is to regulate prices so we benefit by paying less.
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