“Profits above morals and humanity”
from David Ruccio
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.
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—– look inside —– $5.94 / $20.00
—– look inside —– $4.90 / $8.00
—– look inside —– $15.99
—– look inside —– $5.99 / 12.99
—– look inside —– $5.93 / $12.99
—– look inside —– $4.97 / $9.90
—— Ugarteche, Puyana and Madi ——
Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
————— Michael Hudson ————–
Maria Alejandra Madi / Jack Reardon
————- Edward Fullbrook ————-
—————— Steve Keen —————–
————— Richard Smith —————
————– Gustavo Marques————
– Victor Beker and Beniamino Moro –
————– Lars Pålsson Syll ————-
—————– Stuart Birks —————-
Edward Fullbrook and Jamie Morgan
———— Armando Ochangco ———-
Shimshon Bichler / Jonathan Nitzan
————— Mauro Gallegati ————–
————— Herman Daly —————-
————— Asad Zaman —————
—————– C. T. Kurien —————
————— Robert Locke —————-
Real-World Economics Review Blog 
I am an academic research scientist working in the life sciences, fundamental cancer research in particular. As such, I am completely independent of any ties to the pharma industry, but at the same time, have some sense of the research landscape that they operate in.
This article is very interesting, and I am not opposed to the thrust of it, if the analysis is correct AND complete. Specifically, regarding completeness, the summary of the research paper described in the article suggests that median revenue from individual drugs brought to market far exceeds the costs of bringing an individual drug to market. I don’t doubt that this is true. But this does not necessarily imply price gouging. Here’s why.
It is a fact that the vast majority of therapies under development never reach the market, due to issues of saftey or insufficient efficacy, as determined in animal model trials, and then multiple rounds of human trials. These trials themselves follow typically one or two decades of basic research to identify disease processes that may be vulnerable to therapeutic targeting, and then development of therapies that specifically target these mechanisms. These decades of time often comprise hundreds or thousands of person years of research effort. It is important to note that the public fund much of the basic research costs through academic research, which pharmaceutical companies then leverage to launch therapy development efforts. These companies clearly benefit from this public investment, yet it is likely that this is necessary because only academic researchers have the flexibility to explore new possibilities and paradigms that might (but typically don’t immediately) eventually lead to new treatment options.
From the initiation of commercial drug development, the numbers that are typically discussed regarding the failure rate (putative therapies that do not come to market) is about 999 in 1000 (fail). This number may sound ludicrously high, but consider that many drugs are designed to improve on existing treatments, and therefore must demonstrate improved efficacy over what has come before, whilst maintaining near perfect safety.
Even if the failure rate were much lower than this anecdotal number, it is key to understand that the failure rate is very high, and that this appears inevitable. Therefore, fairly understanding the costs of successfully bringing one therapy to market must take into account the costs of all the (probably hundreds) of therapies whose development ultimately did not succeed. Unfortunately, given this equation, the costs of pharmaceuticals must reflect this entire development pipeline, if the pipeline is to remain sustainable, i.e. for a company to fund subsequent rounds of drug development (and failure), as well as taking profits.
This is all just to say, to fairly judge the pricing choices of pharmaceutical companies, it is important to take into account (and analyze) the complete development costs, which go far beyond the costs for each individual (successful) drug, since they must include the huge numbers of unsuccessful attempts.
In one final point; why might costs be increasing faster than general inflation costs in the rest of society. I can think of three reasons. First, standards of efficacy and safety have continually increased over recent decades, and this (reasonable) burden of evidence has flow on effects regarding costs. Second, the research tools used (such as experimentation hardware) have become dramatically more sophisticated and expensive, driving up costs. Third, and I would guess most significant, drug development to treat diseases is analogous to a process of exploration, where the natural tendency is to find the easy solutions first, i.e. diseases that have simple mechanisms, and can be treated with one drug. Once these ‘obvious’ solutions are discovered, only more and more challenging problems remain, demanding correspondingly complex solutions, with commensurately high costs. This is like comparing exploration on earth, where distances are fairly linear, and exploration in space, where once we reach the local planets, the distances to the next targets are no longer measurable in miles, but rather in light years. So past successes in drug development mean that only harder and harder problems remain, with complexity and difficulty seeming to present in a non-linear scale. This creates a cost dynamic which is decoupled from inflation, and is the real, fundamental challenge that must be addressed to maintain some forward momentum on the battle to continually improve the human condition.
The premise of your piece, if I understand you correctly, is that price gouging accusations are not fair without looking at the costs of drug development. But these numbers are available. Annual and quarterly reports based on generally accepting accounting principles are required by the SEC for publically traded firms, and the costs of research are capitalized into the cost of goods sold or into other line items. The results show that even including these costs, the profit margins for the pharmaceutical industry are extremely high. I defer to you in knowing the steps of drug development, but you do not work in the pricing department. One of my college jobs was to work in such a group for a large health care provider. In other parts of our group there was a “battle to continually improve the human condition,” as you say. However, I worked in the finance group and our battle was to get as much money out of the insurance companies and patients as we could.
My note is for Mr. Lock, not the original article.
Pharmaceutical companies want the world to believe theirs is the only viable model for drug development. It isn’t. On April 12, 1955, Edward R. Murrow asked Jonas Salk who owned the patent to the polio vaccine? “Well, the people, I would say,” Salk responded. “There is no patent. Could you patent the sun?” To this day the vaccine and its derivatives is not patented. No drug company owns it. The costs for its development were paid by charities (e.g., The March of Dimes) and government. Why was this model jettisoned for our present one? Greed! Just greed. And, very unequally shared greed. There is no evidence, none that the current model is superior in any way to the one to which Salk devoted his life. The source of much of our current societal malaise and conflicts is the substitution of a society, and in that way the substitution of an economy in which virtually everything is for sale and for profit. Profit is dangerous motivation. It tends to consume every other motive. Today it is consuming all of us. My vote is for a narrowly limited use of profit as a motive. And never should it be the primary motivation for anything related to human health, safety, or security. It’s okay to pursue profit in selling burgers or used cars. It’s not okay in anything vital for human life and safety. We learned this lesson at great cost in the 19th century, but it appears we’ve forgotten it. Time to learn it again.