I’m at a meeting in D.C. about antibiotic resistance, so I’ve left the Blogerator 9000 to fire up this post from the archives about a drug company executive’s explanation of how drugs are priced. It’s remarkable–and frustrating–that nobody has picked up on the basic message: drug prices are consumer driven, not R&D expenditure driven.
This is a headline from the June 1st, 2005 edition of ScripNews (subscription only; so I’m a little behind in my reading-what scientist isn’t?). Here’s the punchline for lazy stupids that don’t like to read: the head of Pfizer has admitted that the cost of making a drug has nothing to do with how much drug companies charge for that drug.
Holy florfenicol sulfonamide, Batman! For years, defenders of Big Pharma (as well as Big Pharma itself) have claimed that they have to jack up drug prices to recoup research and development costs. But that ain’t so, says Pfizer CEO Dr. Hank McKinnell:
“It’s a fallacy to suggest that our industry, or any industry, prices a product to recapture the R&D budget spent in development,” he says. “Business doesn’t work like that.”
R&D is a sunk cost and can never be “recovered”, no matter what the industry decides with regard to the pricing of its products, he argues. Thus, a company sets its prices not on some historic cost (which is basically irrelevant), but on future possibilities and value to customers.
To drug companies, what Jonas Salk described as “patenting the sun“, is just a product:
In explaining his thesis, he compares the pricing of medicines to the pricing of a car or consumer product, where sustaining investors’ confidence in the risks and rewards of the industry is paramount. “A number of factors go into the mix,” he notes. “These include cost of business, competition, patent status, anticipated volume, and, most important, our estimation of the income generated by sales of the product. It is the anticipated income stream, rather than repayment of sunk costs, that is the primary determinant of price.”
The real problem, McKinnell argues, is that the business:
has not produced many important medicines in the past four or five years. “If the industry were innovating at the rate it was 25 years ago, I don’t think there would be as many complaints about costs.” Dr. McKinnell cites the example of Pfizer launching its impotence product, Viagra…, in 1996 at a cost of $8-9 per pill to patients without insurance. The product was so novel that price was not foremost in the picture, because “the only thing people saw was value.”
I realize we have a war going on, but this is pretty damn big. I haven’t heard this admission reported anywhere (outside of Scripnews). We’ve always been told that the U.S. consumer has to pay high prices for medicines because of high R&D costs. McKinnell puts the lie to that argument. For a lot of people, the price of drugs is a life or death matter. Doesn’t this statement qualify as important news? The mainstream media apparently doesn’t just suck at covering evolution…
I thought that the argument is not that, when you pay so much for drug X that you are specifically paying for the research of drug X, but rather that you are paying for drug research in general. Or maybe even more reasonable, that if the drug company didn’t foresee a high price of drug X in the future, it wouldn’t have invested any money to create it. I mean, they are getting their research money from somewhere . . . not that I want people to use their life savings to pay for their drugs, but it seems like that’s a big problem that is not just the drug companies’ fault.
It’s also helpful to read up on what Marcia Angell has said about this. She’s the former editor of NEJM and has written a great deal in essays and books on how drug R&D works.
Basically, even if prices were set to adjust R&D cost, that has little or nothing to do with the discovery of innovative drugs. Most innovative drugs are discovered by academia and small startups, and the overwhelming majority of R&D research from the drug companies is the pursuit of me-too or sibling drugs to attempt to take market share from competitors. Such drugs are low-hanging fruit, and represent a safer investment than the pursuit of truly innovative medications, which is better left to venture capital and government-sponsored research.
It looks to me, from the quotes, that what McKinnell is saying isn’t that R&D doesn’t figure into drug cost, but rather that it’s future R&D that drives it, not the R&D for the specific drug itself.
The comment “the cost of making a drug has nothing to do with how much drug companies charge for that drug” is completely spurious, since the cost of manufacturing is always an end price driver, whether past research is or not. And not all businesses necessarily seperate R&D from production costs.
I saw a report a few months back about a particular expensive drug. I forget the exact details but it was someting like this: The drug was marketed for disease A. It was found to also be effective for disease B, but only a fraction of the dose was needed. The drug company then started marketing the drug for disease B, with a smaller dose, but the cost for the smaller dose was significanly more than diluting the larger dose marketed for disease A. The main reason seemed to be because that’s what insurance companies would pay.
Here we go, details via google: