A common criticism leveled at pharmaceutical companies is that they fleece consumers by marking up the price of their drugs far above what it costs to make them. Perhaps Pill X costs 25 cents to manufacture -- and the manufacturer wants $20.00 a dose. Sounds like highway robbery by Big Bad Pharma, huh?
The problem with this point of view is that it blithely ignores what it cost to get to Pill X.
The cost of manufacturing a drug that someone else has already discovered might, in fact, be 25 cents a pill. That's why generic manufacturers can sell their drugs so cheaply. Not so for the innovator, the manufacturer who seeks to create a therapy no one has ever used before. The cost of developing a drug, from the time the molecule is first discovered in a test tube to animal trials to clinical trials first in small and then in large numbers of people, has been estimated at $800 million. Eight hundred million dollars -- and that estimate is several years old! (That number would be much lower if not for excessive governmental regulation of the pharmaceutical industry, by the way.) The generic company doesn't have to pay this cost -- it only has to show the FDA that its product contains at least a certain percentage of the active ingredient originally developed by another company. But the innovator does.
If the innovating company bases prices only what it costs to manufacture its drugs, and not what it cost to develop them, it will quickly go bankrupt. If, as many industry critics would like, manufacturers were forced to price drugs according to the manufacturing costs alone, then existing therapies might be cheap for a while -- but there surely wouldn't be any new ones.
Remember, it's not just about the pill. It's about what it took to get to that pill.
Tuesday, April 22, 2008
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3 comments:
I agree with your point about R&D costs, and of course the same applies to items such as marketing, legal costs, and ongoing monitoring. However, I think the most important point here is that the company has the moral right to charge whatever it pleases. Many people intelligent enough to grasp that R&D is costly still bemoan that the drug companies dare to profit from their labor, rather than merely recoup their losses. That being said, there are ways that a free market might discourage very high prices for drugs. For one thing, even, say, a very good new medication for blood pressure would not be worth the price for most patients if it were 20 times more expensive than another option that was nearly as effective. (Of course, given the pricing schemes of most prescription drug plans these days, the listed "price" of the medication is rarely directly related to how much a consumer will actually pay the pharmacy for it.)
Oh, absolutely. That was just a quickie post with a practical defense of high drug prices, but the moral defense is that drugmakers are producers, not slaves, and should be treated as such.
I do think the price of medicines would fall drastically in a free market -- both because much of the cost of R&D comes from regulatory requirements that would be gone, and also because demand would not be artificially inflated, neither by government entitlements nor by privately insured patients who treat drugs as cheaper than they are because the co-pays make them look that way.
"The problem with this point of view is that it blithely ignores what it cost to get to Pill X."
It's not just the R&D (and confiscatory FDA) costs. It's also: (1) lost income due to a radically reduced "effective time" they have to sell the drug under their patent. They should have a full 20 years to make a profit, but due to various regulations, Pharma typically has only about 8 years to market and sell a drug.
(2) They have to raise the price of a drug for markets that do not have price caps (e.g., the U.S.) in order to recoup the loses from markets that do have price caps (e.g., Canada), and to recoup the anticipated loses from markets (e.g., in India and Italy) that violate a patent by manufacturing pirated drugs.
(3) They have to raise prices to recoup actual and anticipated loses from irrational insurance premiums and the sure-to-arise nonobjective lawsuits.
Javert
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