While US news stories occasionally mention the breathtaking cost of some medications, they almost always skirt the issue of why American drugs are so grotesquely overpriced by world standards. The pharmaceutical industry has managed to sell the story that it’s because they need all that dough to pay for the cost of finding new drugs.
That account is patently false.
First, part of the story the drug industry chooses to omit is that a substantial portion of drug R&D, and the riskiest part (basic research) is heavily funded by the National Institutes of Health and other government agencies. It’s hard to put all the data together, but the latest estimates I’ve seen put the total funded by the government at over 30%.
Second, Big Pharma spends more on marketing on R&D. And it markets in the highest cost manner possible: in person sales calls to small business owners (doctors). The fact that it is worth it to sell in such an exceptionally high cost manner is proof of fat margins (the marginal value of a sale supports such a costly sales effort).
Third, and this is where the foreign debate over the TransPacific Partnership comes in, one of the big reasons US drugs are so costly is we allow drug companies to milk patents to a degree that is unparalleled elsewhere. Consider this section of an article from The Star (Malaysia) by Martin Khor:
It’s really a matter of life and death. For the TPPA can cut off the potential supply of cheaper generic life-saving medicines, especially when the branded products are priced so sky-high that very few can afford them.
The fight for cheaper medicines has moved to cancer and other deadly diseases, when once the controversy was over AIDS medicines.
Last week, a cancer specialist in New Zealand (one of the TPPA counties) warned that the TPPA would prolong the high cost of treating breast cancer because of new rules to protect biotechnology-based cancer drugs from competition from generics. And this will affect the lives of cancer patients.
Some cancer medicines can cost a patient over US$100,000 (RM329,600) for a year’s treatment, way above what an ordinary family can afford. But generic versions could be produced for a fraction, making it possible for patients to hope for a reprieve from death.
In India, local companies are leading the fight to make medicines more affordable to thousands suffering from breast, kidney, liver and gastrointestinal cancer and chronic leukeamia.
For example, an Indian company produced a generic drug for kidney and liver cancer 30 times cheaper than the branded product – US$140 (RM461) versus US$4,580 (RM15,100) for a month’s treatment – after it was given a compulsory license.
India has a patent law that disallows patents for newer forms of drugs or known substances unless it improves the medicine’s efficacy or effectiveness. Under WTO rules, countries are free to set their own standards for novelty, or whether a product is novel enough to be eligible for a patent.
Also, in many countries, including Malaysia, the patent law allows for companies to obtain compulsory licences to import or make generic versions of original medicines
The implications of the discussion above may not be obvious, so let me unpack them.
First, US pharmaceutical companies have been willing to sell drugs in foreign, including third world countries, even though the intellectual property regimes are not as favorable as in the US. That means the profit levels, even if less rich, are still acceptable.
Indeed, the drugs regime in the US looks a lot like the electronics business in Japan in the 1980s, where products in the domestic market were priced much higher than in the rest of the world as the electronics companies duked it out in front of very demanding Japanese customers. But there are several big differences. Electronics gadgets weren’t subsidized by the Japanese governments. Japanese electronics makers really did innovate like crazy in Japan (you’d see much more variety than anywhere else in the world, the manufacturers really did throw a lot of stuff against the wall to see what stuck). And this was electronic gear, not products that are critical to some people’s survival.
Second, for the last 15-20 years, the big drug companies have done perilous little in the way of actual new drug research. I recall reading about 8-10 years ago, in either the Financial Times or the Economist, that 88% of the so-called new drug applications were really very minor reformulations whose intent was to extend patent life. This picture is confirmed by intellectual property lawyers who work at firms that specialize in FDA work.
For instance, a drug might have been originally formulated to be taken once every eight hours. The very same drug, formulated now so that it need be taken only once a day, would count in the US as a new drug application and thus extend the patent life. That is why the distinction made in India is critically important: “India has a patent law that disallows patents for newer forms of drugs or known substances unless it improves the medicine’s efficacy or effectiveness.” It nixes the sort of patent gaming that has become widespread in the US.
Third, it is quite likely that the profitability of milking patents has actually discouraged investment in finding new drugs. Big Pharma keeps claiming there are no new world to conquer in light of abundant evidence to the contrary. Cancer medications are limited, of mixed efficacy, and extremely taxing to people who take them. We are growing superbugs that are more and more anti-biotic resistant. Drug resistant tuberculosis is rising. The treatment for autoimmune diseases are not cures but symptom-suppressants that become less effective over time and successor treatments are typically even less effective with more side effects. We don’t have a treatment for Alzheimers or multiple sclerosis (for the latter, beyond somewhat delaying progress of the disease).
Sadly, it’s unlikely that the fight over the TPP and its evil sister, the TransAtlantic Trade and Investment Partnership, will lead to reforms of America’s extortionate drug regime. But at least the U.S. drug companies may be blocked from exporting their model.
i take a generc med, phenofibrate 134 mgs. the patented med is 135 mgs. for that 1 milligram the difference in price is about $50/month. the doc who initially prescribed the patented med for me didn’t even know there was a generic substitute. i found out about the generic via research. this is but one example; it has happened to me, and i’m sure millions of unsuspecting americans, lots of times.
Perhaps a good place to mention the other kind of patent allowed by the corporo-fascist TPP: the patent on newly-invented medical procedures. A doctor who devises a lifesaving new way to stitch heart valves can now demand a license fee from anyone who tries it.
Just one question: at precisely WHICH point do we get the torches and pitchforks out?
Excellent essay Yves. The pharm industry has been playing the R&D card like the high cards in a trump suit for the fifty years I have observed it. Fifty years ago the drugs methotrexate (for rheumatoid arthritis, certain autoimmune diseases) and colchicine (for gout and familial Mediterranean fever) cost about the same as an aspirin tablet in the VA system. A few years ago these drugs were given patents unnecessarily after decades of clinical experience and use. Both drugs now are prohibitively expensive and are needed for chronic use. The pharm industry has put its R&D into drugs that need to be used chronically which is not the case for most antibiotics except in the case of tuberculosis. The TV ads tell one what the pharm industry is wanting to sell: psychotropic drugs, statins and anything else that needs to be taken for years. In my more suspicious moments I wonder if the agreement the Administration had with the pharm industry BEFORE the ACA debate and negotiations started, that theoretically kept the industry from opposing health care “reform”, didn’t include the Administration giving the pharm industry a highly favorable and profitable position under the TPP by prolonging patents and discouraging generic drugs.
Given that virtually the entire development process of the TPP has taken place behind closed doors, because the officials involved knew damn well that us proles wouldn’t like it if we knew what was going on, it’s certainly plausible.
Yep. I’ve learned to consider my “more suspicious moments” with regard to big business as simply “moments of mental clarity.” The TPP is monstrous not only for the specific gifts it bestows on particular industries, like big pharma, but also for the way it enshrines the general principle that considerations of the public weal can NEVER be allowed to hinder the full-bore extraction of profits by the multinationals.
The TPP protects “patents” because after NAFTA drug companies learned that US citizens were buying their drugs in Canada and Mexico. When they cracked-down (illegally and without a clear basis to restrict these free-market purchases) on these cross-border transactions, US pharmacies (speaking from first hand knowledge about a pharmacy I used to buy from – before the government shut them down) smuggled drugs out of Mexico because their mark up was so huge. Simultaneously with this smuggling I remember reports of Viagra tablets strewn along Interstate 80. No doubt somebody was getting rid of the evidence. So the TPP learned some lessons of the hazards of true “free” markets as a result of NAFTA and they do indeed plan to patch that hole. Not to mention the spurious mischief they will make of Big Pharma’s “losses” when we here in the mother country prefer to buy from India but are prevented from doing so by some arcane ruling, enforced at gunpoint.
Another idiotic argument is that absent profit, we’d all be living in caves for who would wish to invent. What rubbish. Indeed, it is seldom the inventor who reaps the windfall. I seem to recall that the fellow who truly invented the disk operating system (DOS), sold his copyright to Bill Gates who aggressively defended that copyright to the tune of many billions. We would be better off, yes, better off, if copyrights and patents were of fairly short duration, say 5 to 10 years, or adopt the position of one Benjamin Franklin, who was offered a patent on his highly efficient stove by the English Crown only to turn it down so that more people could benefit from his invention. There are things more important than money.
The basis for PC/MS-DOS, QDOS, was a clone of CP/M.
And i think Gates himself lamented that if software patents had existed in the 70s, none of personal computing would have happened.
here’s a good example of how Big Pharma practices research:
Hmm.. now there is a paywall. Never mind, it looks r/t to the link atop anyway.
A rare strategy for extending patent protection was used by Amgen to gain another 17 years of patent coverage for its $8 billion biologic product Enbrel (for rheumatoid arthritis). Just before Amgen’s US patent on Enbrel expired (US 5,447,851) Amgen bought two new “submarine patents” which had just surfaced, from Hoffman LaRoche (US 8,063,182 and US 8,163,522).
The patent office now has a post-grant review process which might be used to invalidate these two new Roche patents, thus freeing Sandoz (and several other companies) to bring out their biosimilar versions of the drug, (called etanercept).
But the filing fees would be large (about $50,000), and the legal fees about twice that. If anyone is interested in crowd funding the effort, let’s talk about it at the meetup in D.C. on March 18th.
The research, manufacture and distribution of drugs should not be left to the “free” market. It becomes pure, unadulterated extortion for obscene Pharma profits. And it looks like pure crony capitalism. Drugs should be government controlled, in cooperation with all countries. Pharmaceutical companies can be logically tasked with the manufacture of drugs, but nothing more; and certainly not with a profit incentive. Sickening.
This has been going on for decades [as the entire health care community is well aware]. The question that begs asking is not why this goes on [the desire to get something for nothing], but instead, how could the medical establishment allow this to happen?
The answers to this question should be as obvious as it is disconcerting.
There are two kinds of drug dealers: One type buys congresswhores and presidents to make their activities legal and monopolistic. The drugs they sell are designed to make you broke. Sometimes they have the side effect of curing health problems.
The other type sells drugs that are illegal. They buy congresswhores and presidents to keep; them illegal and keep profit margins high. These drugs are designed to make you happy. Sometimes they have the side effect of making you crazy.
Thanks to Yves for posting about this abuse of our system of social organization.
Why is health care about profit instead of trying to make others more healthful?…rhetorical question….its a mental health problem that the rich have….
Thank you for this very important post, Yves.
There is another wrinkle. Due to a combination of Big Pharma’s manipulation and distortion of world markets, the all-trumping profit-motive and a compliant FDA, almost all generic drugs (and the ingredients to make them) are now manufactured in India or China with virtually no regulatory oversight. Perhaps that is beginning to change:
Not just generic drugs. Many if not most “American” prescription drugs are manufactured by those same companies in India (and Israel). I’m told the product is shipped to the USA in 50 gallon drums and packaged here bearing the name of Lilly, Merck, or whatever monopoly patent holder has bought the right to extort the maximum price from sick people who are in no position to say no.
Hardly a different business model than that of the street corner dealer peddling grams of heroin.
This is a reply both to Carla and Crazy Horse. Carla says: “almost all generic drugs (and the ingredients to make them) are now manufactured in India or China with virtually no regulatory oversight”. This is simply not true! Manufacturing facilities in India and China also need to be FDA-approved if the drugs manufactured there have to be sold in the USA. At one point India had the second largest number of FDA-approved manufacturing facilities, second only to the USA. I do not know whether that is still true; but the number is still quite high.
The article cited by Carla specifically mentions Ranbaxy. Most Indians hold no brief for this company, which is known to be a bit dodgy. On the other hand, the so-caled whistle blower named Dinesh Thakur was paid FORTY EIGHT MILLION DOLLARS for whistle-blowing. That is serious money, and one has to wonder who paid him that kind of money. Of course this guy gave a great many self-serving interviews to the Indian media and also abroad, but it is difficult to believe that he was driven by pure altruism. Now the US FDA is using the Ranbaxy episode to tar all Indian companies with the same brush. Remember what I said above: India has an enormous number of US FDA-approved manufacturing facilities. This is clearly a case of trying to protect the profit margins of big US pharma companies.
Regarding Crazy Horse’s comment that drugs are shipped to the USA in 50-gallon drums, s/he is confusing two entirely different things. What are shipped in large drums are known as “bulk drugs,” or “active ingredients.” When you take a pill with 250 milli-grams of something, has it occurred to you that the pill weighs a lot more than 250 milli-grams? But those 250 milli-grams are the active ingredient. There are many companies in India that specialize in the manufacture of active ingredients and sell them to the US pharma companies. The active ingredient is then packaged into individual pills, a process known as formulation. BUT, and this is the point I want to make, a lot of the finished products, including formulation, are also manufactured in India, under licensed production. So a bottle of pills that is bought in the USA under the name of a US manufacturer could have been manufactured in India from beginning to end. Typically these drugs manufactured in India under licence are sold in the Indian market at 2% to 3% of the US retail price. So the companies can make a profit even at those levels. The rest is all gravy.
I’m speaking from limited knowledge, so I suspect your account is correct. The key point I was making is contained in your final two sentences. “American” prescription drugs are frequently manufactured in India, either partially or in finished form, and then sold in the USA at hundreds of times their cost of production.
@Lonely: Ranbaxy is the largest producer of pharmaceutical ingredients in India:
FDA inspection of Indian drug manufacturing facilities is now being increased, but has been woefully inadequate in the past:
There is plenty to worry about with imported drugs and drug ingredients:
If anybody should know that a huge overdose of any medicine can be toxic, big pharma ought to.
Now apply that idea to economic rent seeking. Just the right amount of it can keep your profits high. Too much of it has been known to lead to the guillotine. It looks like we are getting dangerously close to the ultimate outcome, but still they keep pushing on. There may no cure for this mental disease other than cutting its head off. If I come up with a novel way to do that, can I get a patent?
I remember first watching these issues when I was in Hartford, CT back in the late 90’s. I wish I could remember the particular details, such as the specific company, but I do remember that it was one of the big guns like Merck and they closed a large and brand new R&D Facility that cost them somewhere in the neighborhood of $20 Mil or more to build. The big issue with this particular facility (it was closed within a month after it came on line) was that it took longer than expected to build and all the equipment was determined to be obsolete.
It was a very pretty building… but that was about all it had to offer. It cost the CT taxpayers a small fortune. I can only imagine what the Fed Gov’t chipped in, not to mention the huge tax write-off.
For those who do not like profit in the drug industry, I will point out that if there were no or little profit, there would be very few new drugs. Profit makes it worthwhile to produce new drugs.
For those who do not like patent extensions for drugs reformulated to be taken at diff intervals, there is ussually a generic of the expired patent of the drug to be taken at the old interval. It is up to you to request a generic drug, otherwise the doctor will normally prescribe the more expensive brand name one.
I make my living from licensing patents of my inventions and it is a risky business. Most patents never produce ANY revenue. 5-10 years is certainly not enough time to recoup investment in a patent
I see you could not be bothered to read and respond to the post. You are seriously telling me the abuse of the patent system to extend patent life is necessary? Pray tell, why didn’t drug companies curl up their little toes and die before they discovered the many ways they’ve perfected of creating “new drug applications” that have NOTHING TO DO with R&D or creating new drugs? Contrary to your fact-free assertion, they did just fine with normal patent lives until they realized it was MORE profitable to milk existing patents than find new drugs.
Quick question, what is the fair price for a drug?
One way we normally determine that in economics is to say what is the cost of a substitute good. So let’s take Enbril (current cost in the US of about $20,000 a year), what are substitute goods?
Well the most direct such goods are:
We don’t have market costs yet on the last two (both were approved in late 2013), but as monoclonal antibodies, they look to be just as expensive as Enbril. Humira is maybe $1000 a year cheaper on average and Remicade maybe $1000 more expensive.
So drug companies are either illegally price fixing, or these high costs are around what is actually a fair price for the drug.
Well what about non-drug alternatives? Well that depends heavily on the disease. Some of them make Enbril look bizarrely cheap. Take Lupus, without TNF-antibodies you often end up having to undergo a lot of surgeries (splenectomies, kidney transplants, etc.) and you miss a lot more work (10 days a year is a pretty safe guess) – assuming you can work through the inflammation. You also get sicker and die younger.
I mean seriously, Enbril can only cost what it does if insurance companies are either forced to pay for it (because patients demand it) or because it is cheaper than other treatment options.
Pretty much every expensive drug on the market means we aren’t paying for something (like surgery) which is even more expensive … or that people can live lives that they otherwise couldn’t.
Now are there troubles with patent system? Sure. But obnoxious profits tend to draw competition, hence why I could list multiple recently approved competitors who will seek some of the cash from Enbril and bring down its price. Frankly, I wish drugs were even more obscenely profitable, then all this BS investment in real estate, credit default swaps, and the like could go somewhere to make a return that actually saves lives , because that is what happens when profits go down – money leaves the drug cycle and goes into the bubble de jure.
Wow, this is an astonishing comment. You must be in the employ of the medical industrial complex to write something this disingenuous.
I suggest you read up on monopoly and oligopoly pricing and try again. Patents create them, that’s the point. “Competition” would be a generic drug. So to prove your bizarre claim that there is actual competition, please tell me what % of the time, when a generic is introduced, that the price of the generic is not markedly lower than the price of the patented medication.
Anybody arguing that side as smoothly as Bob does is probably well paid to do so.
I’m only chiming in because my first job out of college, circa 1966, was with Riker Labs’ research department, so I can extend other commenters’ cynicism timeline of “many years” and “decades” to a half-century.
Even in the short time before I felt driven to start a different career, I was amply informed by everyone around me and by actual events that Riker (which styled itself an “ethical pharmaceuticals” house) didn’t take its own research program seriously. Instead, they said, Dart Industries bought companies that owned interesting product patents (and Riker has long since been swallowed similarly). The evidence was the back yard strewn with rusting equipment from those companies that never saw use again, and the assignment of a total loser as VP i/c research (as a way to tell him he would have been fired, but this crap assignment was a more gracious way to show him the door).
Our department, I was told by peers and by my own supervisor (a 20+ year veteran), existed solely to justify high drug prices.
The biological end of the hallway, where they supposedly tested the novel molecules we made, was not trusted by us chemists. My supervisor joked that we would occasionally recrystallize some aspirin or a known drug, give it a Riker number, and send it down the hall. Inevitable result: reported back as “no pharmacological interest” or “excessive liver toxicity” or whatever.
More than once, our senior chemist had to be driven home by friends when he would personally sample a (hopefully tranquilizing) compound that got rated as ‘no pharmacological interest’ (at least he must have trusted their ‘no excessive toxicity’ findings).
There are more anecdotes, but you get the idea. These scandals aren’t anything that would surprise Koholeth, and the way a crooked FDA serves as an accomplice to this day would also be a fertile field for an investigative reporter.
(For David and Bob)
Not to mention the huge taxpayer subsidies to develop any new ones in the first place. Check the links page for the article on the kid that couldn’t get a drug still in testing… one of the throwaway lines in the article was that the taxpayer shoveled in a $70 million dollar subsidy towards development (of this single drug).
David, I understand what you’re saying regarding the risks that you take, but I’d be willing to bet that the Feds haven’t subsidized 30% or more of your costs of the development that you did before creating a patent, successful or not.
The point you make, one that the general public can easily appreciate, is one that Big Pharma loves to repeat, similar to “Look, Squirrel!”. That way no one pays heed to their underlying business model.
And personally, as far as I’m concerned, the Doctors should be asking you, if appropriate, whether generics are acceptable before they write the prescription (my father, a physician, followed this particular practice and often told me about the various bribery techniques that Big Pharma salesmen used to get him to do otherwise).
The whole system is a mess. I had one friend that was a pharma salesman. He quit and told me the reason why was that he was sick of handing Dr.s rolex watches as gifts.
I was around 50 and came down with a case of roseacea, a miserable skin infection (usually one time, like measles or chicken pox) that’s common in very young children but rare for an adult. As a full-time student at the time I had no abundant amounts of cash and no insurance. The Dr. handed me a prescription for some crap that, when I got to the drugstore, I found had a $380.00 cost for 10 days worth and I had about $20.00 in my pocket.
I called the Dr.’s office the next morning (he also wore a rolex, by the way) and told him there was no way I could afford that stuff and did he have any samples he could give me instead. He said, “No, but don’t worry, any common anti-histamine does the same thing.”
R&D does cost a huge amount of money and somebody here gave the figure that govt pays for 30% of the R&D, that’s not much. Double blind tests cost money. Liability Insurance for a drug whose long term side effects are not known is exorbitant. Waiting years for FDA approval only to be turned down costs huge amounts. No pharm company wants to sell small amounts of a very expensive drug because the potential costs of litigation are more than they could make from it. They all want to sell huge amounts of a drug that a lot of people use and if their drug is not too expensive, it will get used most. When a drug is experimental and being custom made, of course it costs a huge amount, nobody does mass production before FDA approval so of course costs are high.
Here in the USA, we are subsidizing the costs of cheap drugs in the third world with our expensive drugs. R&D and getting FDA approval really is bizarro expensive.
“Here in the USA, we are subsidizing the costs of cheap drugs in the third world with our expensive drugs.” Yes, the old “benevolent masochist” justification for why we pay through the nose. But we are not on a sustainable path in America with our ever-escalating drug and treatment costs (i.e., $1000/pill for Hepatitis C drug Sovaldi that needs to be taken for 12 weeks at least, meaning an $84000 course of treatment not even counting the other components). Ask yourself what will happen when the cost of American healthcare grows so out of proportion to the rest of our economy that it either collapses outright or we simply cannot afford to use the new drugs from our own pharma industry at the astronomical prices they demand? It would be neither fair nor sane to run the system this way, especially since no one is forcing pharma to sell their products to any country. Considering that pharma spends more money on marketing than on R&D, that NIH funding is behind the vast majority of groundbreaking (risky) discoveries into druggable targets and mechanisms, and that pharma corporations are increasingly outsourcing R&D to foreign and contracting laboratories, we can conclude that R&D would hardly be ruined if drugs were priced fairly at home. We are not subsidizing the rest of the world- prices are high simply because our healthcare system essentially allows industry to name their price, rather than the other way around. Of course we’re going to get ripped off.
“Considering that pharma spends more money on marketing than on R&D, ”
That was another thing that hit me at Riker in the mid-60s. The company newsletter very often featured front-page pics of dozens of top salespeople being sent to Hawaii as performance rewards, but never a mention of the research team, much less any rewards.
Before accepting claims about the amount spent on research, get numbers and do comparisons, as some commenters have. Raw numbers and claims don’t tell the whole story. And don’t fail to read Ben Goldacre’s “Bad Pharma”, which rings very true to me after a career that kept on intersecting pharma’s orbit even when not directly employed there.
Ask yourself why aspirin got demonized for its minor faults as soon as patented NSAIDs were available, and look at the shelf space devoted to the high-priced well-advertised brand-name pills, compared with plain aspirin (and don’t believe that Reyes’ syndrome is the real reason). Ask why it is hard to find boric acid at the pharmacy anymore. Either boric acid or simple (for a gardener to buy) copper sulfate will cure toenail fungus easily with topical application of a water solution, cheaply and with near-zero risk, but your doctor was never taught that, and will (reluctantly) prescribe a big pharma internal medication that is known for its threat to your liver and its marginal effectiveness, and may just tell you to learn to live with the fungus as the lesser evil.
An honest FDA would be a help, but it was already too late for that back in the early 1970s when they fired the guy who reported on the inefficacy of the swine flu vaccine. He was told specifically that it was not his job to devise efficacy tests and apply them (despite his job title), but just to read the documentation supplied by the company and pass the vaccines or fail them on that basis. This ain’t tinfoil hat stuff – I read those facts to my classes straight from the pages of Science Magazine as the drama unfolded.
Big Pharma has lost all credibility with me, which is tragic because there is so much potential for good there, and their honest contributions to healthcare are so badly needed. Still, they now deserve zero benefit of any doubt, and need to dig themselves out of a deep moral hole.