Economy, Regs, & Taxes

The Wildly Outrageous Costs of Pharmaceuticals

Thank the FDA, ObamaCare and regulation in general for much of the problem.

James Shott · Sep. 13, 2016

Drug companies — “Big Pharma,” as they are derisively called by the Left — are big targets in America. Sometimes they deserve it. Consider Mylan’s recent EpiPen pricing issue, or the episode where Turing’s odious CEO Martin Shkreli raised the price of Daraprim by more than 55 times, from $13.50 per pill to $750, and offered little more than a smug reaction to criticism. There are bad guys in all areas of life, of course, and pharmaceutical companies are no exception. Perhaps these two examples are evidence of bad players at work. Both CEOs are major Democrat donors, after all.

But without getting into the minutiae of either of these situations — and certainly not defending either Mylan or Turing — here is some badly needed and eye-opening information about the business of producing pharmaceuticals.

Making drugs is a business, and like other manufacturers, drug producers find something people need or want and produce it. That’s called free-market capitalism. Life-saving drugs, or drugs that simply improve our health, are valuable and needed. Drug companies spend billions of dollars over many, many years to develop these useful, needed pharmaceutical products, improve them so that they will meet or surpass the Food & Drug Administration’s strict standards, and, once approved, then market them.

In June of this year, the American Action Forum released research addressing the process of producing new drugs. The process “is extraordinarily expensive and time consuming,” the article stated. “A Tufts University study found that the average cost to bring just one drug to the market is about $2.6 billion. It takes an average of 15 years from the time a drug developer first begins testing a new formula until the FDA approves it. Only 1 in 1,000 drug formulas will ever enter pre-clinical testing, and of those, roughly 8 percent will ultimately receive FDA approval.”

The FDA itself is one of the biggest reasons for that price tag. And the exorbitant barriers to new drug entry have been made astronomically worse by ObamaCare.

Let’s say PharmX creates 100,000 drug formulas, but only one in a thousand, or 100 of them, proceeds to pre-clinical testing and only eight will receive FDA approval. PharmX will have invested billions. The company has to sell enough of each of those eight drugs to pay for its development of all including the discarded formulas, and to have enough left over to finance new research and development, and some profit.

Like other inventors, drug companies patent their products, or receive an exclusivity period. A patent is issued for 20 years from the date of filing, and drug makers usually file early in the development stage to protect their ideas from other companies. If it takes an average of 15 years to get a drug through approval and to market, the pharmaceutical company has on average only five years to sell enough of the drug to recoup the $2.6 billion in development, approval and marketing costs. At the end of the patent period and/or the exclusivity period, another drug maker can produce a generic form of the drug, and sell it for a lot less.

Another aspect of this issue is when drugs made by U.S. companies cost more at home than they do in other countries, such as Canada. It doesn’t seem right that Canadians can buy American drugs cheaper than Americans can. But what is the drug company supposed to do when the Canadian government, or another government, wants to buy millions of dollars of its product at lower than market price when it is trying to recoup billions in costs? There are likely other drugs made by other companies that treat the same disease that these governments could buy instead, so should the drug company pass up that opportunity and leave the millions of dollars on the table, all while a competitor sells millions of dollars of its product to these countries at a below-market price?

Another obstacle to manufacturers’ ability to recoup the cost of bringing a new drug to market is that regulations imposed by other countries, perhaps to protect one of their own companies, makes the potential market for sales smaller.

And, despite the rigorous development and testing process required to gain the FDA’s approval that the drug is safe for public use, the required warnings about potential side effects and such that go on product sheets, and the fact that drugs are prescribed by patients’ doctors, drug manufacturers still get sued by patients. In short, these companies are squeezed at both ends.

Doing business in the U.S. is a real challenge, with often burdensome and unreasonable regulations and other hurdles that must be negotiated. That makes producing needed and wanted products and services difficult and expensive. It’s no wonder Big Pharma has major lobbying efforts aimed at creating more favorable conditions. But that’s called cronyism, not capitalism, and when you put Big Government and Big Business together like that, you have the reason for expensive medicine.

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