How Misleading Are the High Drug Prices?

“The $1000 Pill.”

“The Quest: $84,000 Miracle Cure Costs Less Than $150 to Make.”

“A Billion a Year for Costly Drug Treatment.”

These eye-catching headlines have been remaking their way in recent news, causing the same concerns that drug prices are too high and that pharmaceutical companies are making a large profit while those who cannot afford these costly treatments are out of luck. Large pharmaceutical companies typically report drug development costs anywhere between $1 - 4 billion. However, there are some who say that these numbers are misleading, and that pharmaceutical companies are inflating their costs in order to raise drug prices. So what is really going on? Are the high drug prices justified? And what do these drug development costs actually encompass?

First, let’s consider the term “drug prices.” What do people consider when thinking about the overall drug price? Drug prices need to account for the costs that the pharmaceutical company incurs when developing and manufacturing the drug, as well as making a profit for their stockholders and investors. While profit margins may seem excessively high, even a 0% profit margin would still result in seemingly exorbitantly high drug prices. This is because of the high cost of the actual drug development - not the simple manufacturing of the drug. Research and development costs include basic research, clinical trials, and multiple failures before resulting in the successful discovery and development of a drug.

R&D costs are notoriously high, especially with the high failure rates of many research endeavors. There are many articles, including some on this blog, that have discussed the inefficiency of the drug development pipeline, the failure of the clinical trials, and the challenges in basic scientific research. Pharmaceutical companies need to absorb the high R&D costs in their drug prices, and thus these expensive drug prices reflect the overall cost. However, there are articles that suggest that the high R&D costs are overinflated. In fact, these overinflated numbers may not take into account benefits such as tax breaks. There are also claims that pharmaceutical companies do not actually fund the majority of basic research, since 84% of basic research is funded by the government and private universities, and their high R&D costs should be lower, since they do not actually incur these costs.

So, there seems to be two differing opinions on the high drug prices. One is that they are too high and that pharmaceutical companies are making huge profits. The other is that these high drug prices are justified due to the high drug development costs. Some people suggest that in order to bring down these high drug prices, the R&D costs need to be de-linked from the pricing of a drug. Whether this R&D de-linking is funded separately by the government or private investors remains to be seen. Another major suggestion is the re-formatting of drug development R&D, and making it more efficient. Lowering the costs of each step through outsourcing is one way to lower the overall R&D costs, and perhaps lead to lower drug prices. Scientist strives to make the drug development process more efficient through outsourcing options, and perhaps this resource and other resources will lead to a drug development efficiency that can result in the lowering of the expensive drug prices.