The R&D Explanation

The pharmaceutical industry offers several responses to the charges of excessively high prices. First, it notes that prescription drugs account for just 10 percent of the nation’s health care costs; by comparison, 32 percent of costs go to hospital care, according to a 2016 report from Medicare.

It also notes that an open market means that “patients in the U.S. can access the most innovative treatments far earlier than any other country,” says Robert Zirkelbach, executive vice president at the Pharmaceutical Research and Manufacturers of America (PhRMA), the industry trade group. For example, data from PhRMA show that patients in Europe wait an average of nearly two years longer to get access to cancer medicines than American patients.

But the industry’s primary defense of rising medicine prices are the high costs associated with drug development.

Drug companies spend over 10 years and up to $2.6 billion bringing a drug to market, according to a 2016 Journal of Health Economics article based on research by the Tufts Center for the Study of Drug Development (which gets a minority of its operating funds from the pharmaceutical industry). Of that amount, $1.4 billion is actual costs — items like salaries, labs, clinical-

trial expenses and manufacturing. The remaining $1.2 billion is “capital costs”: what the company sacrifices by investing time and money in an unproven drug. Some experts dispute these numbers, saying they overstate the true costs.

Even after accounting for their research investments, however, drug companies are among the most profitable public businesses in America. And an analysis from the research company Global Data revealed that 9 out of 10 big pharmaceutical companies spend more on marketing than on research. Most of them also have big budgets for lobbyists to ensure the laws continue to work in their favor. The Center for Responsive Politics puts the number of pharmaceutical industry lobbyists at 804 in 2016.

Further, some drug companies are moving away from doing all of their research in-house and instead are buying smaller companies with promising products. About 70 percent of industry sales come from drugs that originated in small companies, up from 30 percent in 1990, according to a Boston Consulting Group survey.

In addition, drug companies increasingly focus on products that can generate the highest profits. The majority of drugs approved by the FDA are now expensive specialty drugs. Many drug companies are also pursuing “orphan drugs” — medicines targeting diseases that afflict fewer than 200,000 people. These medications cost an average of $140,000 a year. The catch: Many orphan drugs eventually receive additional approvals as a treatment for other conditions, dramatically increasing the market for the drug.

The government supports orphan drug development with tax breaks and other incentives. In 2016, the pharmaceutical industry netted $1.76 billion in orphan drug tax credits.