New Study Shows That High R&D Costs Don’t Explain High Drug Prices

For years, defenders of pharma patents loved to claim that the reason that they needed patents and the reason they had to charge extortionate rates for drugs was because of the high cost of R&D for new drugs. The numbers keep going up. When I first started covering pharma patents, the number bandied about was $600 million per new drug. Then it jumped to $800 million. Then $1 billion. The latest I’ve heard them claiming is an average of $1.5 billion per new drug.

The number has always been bunk. Back in 2004 (at which time pharma companies were claiming $800 million per pill), Merrill Goozner wrote an excellent book, called “The $800 Million Pill” which completely rips this number to shreds, and shows how massively inflated it is. While the book is a bit out of date now, it’s still a really interesting read, and shows how almost every major new successful drug was mostly funded by the federal government (i.e., your tax dollars) with the pharma companies shouldering a tiny, tiny fraction of the purported costs. Similarly, the book “Against Intellectual Monopoly” showed that the costs claimed by pharma companies was greatly exaggerated, and often the vast majority of the money came from taxpayer funds, with only a tiny bit being taken on by private industry. In addition, much of the cost is from the clinical trials, and there’s an argument that that is also something that would benefit greatly from federal funding (there are plenty of stories of sketchy behavior by pharma firms when it comes to some clinical trials).

Anyway, given all that, there’s a new study out that highlights (in a different way) that the claims of high drug prices being due to high R&D costs is pure bullshit. The study did something I’m surprised no one has done before: compared drug prices with the price of R&D on those drugs. If the high cost of development was really what was driving the high drug prices, there should be some correlation there, right?

The researchers compared data on R&D costs with drug prices. They found no relationship between what pharmaceutical companies spend on R&D and what they charge for new medicines. The authors also assessed whether the therapeutic value of a product was associated with its price, but found no association there either.

“Our findings provide evidence that drug companies do not set prices based on how much they spent on R&D or how good a drug is. Instead, they charge what the market will bear,” said senior author Inmaculada Hernandez, PharmD, PhD, associate professor at Skaggs School of Pharmacy and Pharmaceutical Sciences.

Of course, that finding shouldn’t really be a surprise to anyone. Of course pharma companies are going to charge “what the market will bear.” But, therein lies the problem: we don’t have an actual market for most of these drugs. Patents create monopolies, meaning a total lack of competition, which allows pharma companies to set monopoly rents. Combine that with the US’s arcanely bizarre healthcare system, where patients have no idea how much drugs cost, and everything is opaque because insurance companies maybe pay some of it, and patients might get totally random bills at some later date, and its easy for “the market” to no longer function the way a market should function.

But, at the very least, don’t just accept the claim that drugs cost a lot because pharma has to spend a lot on R&D. All of the evidence suggests that’s ridiculous.