High Prescription Drug Prices pay for more than the High Cost of R & D

More often than not you hear Pharma defend high prescription drug prices as necessary to cover the high costs associated with pharmaceutical research and development.  Over the course of 7-10 years or longer they may spend $1.0 billion or more to get a product to market.  While the time and costs of drug development may be real, the rightfully skeptical healthcare market and patients have never really accepted this rationale for high prescription prices, often pointing to the more visible high cost of marketing and sales.  And now, this high cost of R & D rationale has become even less believable.

What makes this rationale even less believable today then ever before?  The fact that pharmaceutical companies can afford to spend tens of billions of dollars on mergers and acquisitions while dismantling the acquired companies, laying off thousands of employees (including research scientists), and at the same time, reducing the R & D investment the two merged companies might have otherwise spent.

The other area that challenges the credibility of the bogus high pricing rationale is the affordability pharmaceutical companies have to pay hundreds of millions of dollars or even billions of dollars in fines and settlements for alleged and sometimes proven wrongdoing.

Unfortunately, the billions of dollars spent on mega-mergers and litigation settlements don’t go towards producing any innovative new products.  Pfizer spent $68 billion (equal to the total annual amount of industry spending on R & D) to acquire Wyeth and Merck spent $41 billion to merge with Schering, not to mention the hundreds of millions spent by the two on restructuring, legal, and banking fees.  None of this money went to R & D.

Similarly, none of the $2.3 billion in fines and settlement Pfizer recently coughed up nor the hundreds of millions of dollars of settlement paid by other companies for their alleged indiscretions will go to R & D.   In fact, Pfizer’s $2.3 billion settlement represents more than 30% of their anticipated $6 billion spend on R& D this year.  The $2.3 billion alone would have put any other company in the top 20 of pharmaceutical companies in R & D spending.

So when Pharma says they need high prices to support R & D it is no surprise that the healthcare market and patients recoil with skepticism, frustration, and animosity.


2 thoughts on “High Prescription Drug Prices pay for more than the High Cost of R & D”

  1. Hi Mike – Nice post and I agree with much of what your saying but a few other things to keep in mind. First Pharma companies are producing high tech products in a very competative enviornment in which thier drug can become either, obsolete, subject to fierce market competition, and shorter periods of paten protection than in years past. In fact the price of branded prescription drugs have steadly increased since the early 80’s when government legislation (I believe the Waxman act, but I’m not sure) allowed for quicker pathways for generic drugs to market. Throw in the fact the FDA is more vigallent about putting boxed warnings and pulling drugs from the market years after launch but before paten experations, and companies are forced to have agressive pricing models that allow them to have lots of extra cash on hand to pay government fines andother sorts of litigation fees that are common in todays society. If you pulled the finical statements of a pharma compnay and the finacial statesments of a company like Apple you will see similar profit ratios and available cash ratios because of the high tech nature of their products and the somehwhat limited time frame in which their products are used. I’m not trying to defend every action of Pharma companies but when they are expected to have the same financial expectations of companies that sell ipods and other gagets they are going to use the same sort of priceing/marketing techniques that those companies use and to me thats the crux of the issue. Pharma/Device companies should not be held to the same expectaions as ordinary companies. Profit and Earnaings per share should not be the # 1 goal of these companies. I believe this along with the negative relationship between government and these companies has led to the current sitiuation with drug prices and until these two things change your just going to see more of it.

  2. Guy,
    Thank you. Your points are well taken. I believe there are two issues here. One is that the high cost of R & D can not and often does not necessarily justify the high prices, especially for products that offer little therapeutic value over less expensive alternatives. Second, there is nothing wrong with having a profitable (even very profitable) business or industry. I believe it is misleading and disingenuous however, to try an mitigate customer perceptions about your pricing by blaming the cost of R & D when you are spending hundreds of millions and billions of dollars on other expenses like mega-mergers and expenses related to fines and settlements for company indiscretions. mike@pharmareform.com

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