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Will Lower Drug Prices Jeopardize Drug Research ?
February 6, 2004


Will Lower Drug Prices Jeopardize Drug Research?
Donald W. Light, University of Medicine & Dentistry of New Jersey
Joel Lexchin, School of Health Policy and Management, York University, Toronto, Ontario, Canada

This documented fact sheet provides evidence that all drug research by large firms, net of taxpayers’ subsidies, is
paid for out of domestic sales in each country, with profits to spare. Prices can be lower without jeopardizing basic
research for new drugs. More exposure to global price competition would encourage more innovative research and
less of the derivative me-too research that now dominates.

In the U.S., the FDA Commissioner, Mark McClellan, and the drug industry are responding to pressures for lower
costs by mounting a large campaign to pressure all other affluent countries to raise their prices to U.S. levels. They
claim that lower prices do not pay for drug research costs, but we provide evidence that this is untrue. Ultimately,
however, such nationalistic arguments are based on regarding basic research and new discoveries, which can
happen anywhere, and the cost of trials, which are carried out in the countries deemed most commercially
advantageous, as part of national companies and national accounts, when in fact they are part of a global
economy for pharmaceutical products.

FDA Myths
1. FDA Commissioner, Mark McClellan, holds that other affluent countries like Canada and the UK set their prices
for patented drugs so low that they do not pay for research and development (R&D) (McClellan 2003). We can find
no evidence to support that claim.

On the contrary, audited financial reports of major drug firms in the UK, show that all research costs are paid, with
substantial profits left over, based solely on domestic sales at British prices (Pharmaceutical Price Regulation
Scheme 2002). Likewise, 79 research drug companies in Canada submitted reports showing their R&D
expenditures have risen more than 50% since 1995, all paid for by domestic sales at Canadian prices (Patented
Medicine Prices Review Board 2002). Sales to the U.S. and elsewhere are in addition to the positive, domestic
balance sheets.

2. FDA Commissioner McClellan says that European or Canadian prices are “slowing the process of drug
development worldwide” (McClellan 2003). There is no known verifiable evidence to support this claim. In fact, drug
research has been increasing steadily in Europe as well as in the U.S., with some countries having a more rapid
increase than the U.S. (Patented Medicine Prices Review Board 2002).

3. FDA Commissioner McClellan says that “price controls discourage the R&D needed to develop new products”
(McClellan 2003). But there is no known verifiable evidence to support this claim.

R&D expenditures have been growing rapidly, though it is becoming more and more difficult to discover
breakthrough drugs on targets not already hit (Harris 2003). The truth kept from Americans is that first-line
treatment for 96% of all medical problems requires only 320 drugs (Laing et al. 2003). In wealthy countries, more
drugs might be appropriate to treat people who do not respond to first-line agents.

4. FDA Commissioner McClellan charges that efforts to negotiate lower prices for patented drugs by other
countries (and by major employers, unions and governors in the U.S.) are “no different than violating the patent
directly” to make cheap copies (McClellan 2003). This charge echoes the drug industry and implies that large
buyers seeking better value should be considered a criminal act.

5. FDA Commissioner McClellan paints a picture of other wealthy countries driving down their prices to marginal
costs, but the widening gap between prices for patented drugs in the U.S. and other countries is due to drug
companies raising U.S. prices, not other countries lowering theirs (Sager and Socolar 2003; Families USA 2003).

6. The “free-rider” problem that McClellan emphasizes can be solved by U.S. prices coming down to European
levels, where they will cover all R&D costs, plus profits that are higher than those in most industries.

7. Drug company profits, after all R&D costs, have long been more than double the profits of Fortune 500
corporations. In recent years they have jumped to triple and even quadruple the profits of other major companies
(National Institute for Health Care Management 2000). The global firms spend two and a half to three times more
for marketing and administration than for research (Families USA 2001).

8. Americans pay for more R&D than any other country because the United States accounts for more sales than
any other country. But while the U.S. accounts for 51% of world sales, it took 58% of global R&D expenditures
invested in the US to discover only 43% of the more important new drugs (NCEs) (European Federation of
Pharmaceutical Industries and Associations 2003). This means that other countries are helping to pay for the
large, inefficient U.S. R&D enterprise, the opposite of what the editors of Business Week claimed (Business Week
editors 2003). William Safire’s claim of a “foreign rip-off” as Americans pay for the world’s R&D is contradicted by
the facts above (Safire 2003).

Research is misdirected by the industry, against patients’ interests
9. Most drug innovation provides little or no therapeutic advantage over existing

Independent review panels plus a major industry review conclude that only 10 - 15 % of “new” drugs provide a
significant therapeutic breakthrough over existing drugs and involve a new chemical or molecule (Barral 1996;
Prescrire International 2003; National Institute for Health Care Management Research and Education Foundation
2002). Other industry-sponsored figures are much higher but not reliable.

10. The FDA approves drugs that are better than nothing (placebo) but does not test them against the best
existing drugs for the same problem. Most research is for “new” drugs to treat problems already treated by other
drugs.

11. About 18% of the drug industry’s research budget goes to basic research for breakthrough drugs. About 82%
goes to derivative innovations on existing drugs and to testing.

The long-standing survey of basic research by the National Science Foundation estimates that basic research has
increased to 18% of the total research and development (R&D) budget for the pharmaceutical industry. It used to
be less (National Science Foundation 2003). Industry-sponsored figures based on secret unverifiable data are
much higher but not reliable (DiMasi, Hansen, and Grabowski 2003). The 85-90% of “new” drugs that have little
therapeutic gain reflects equal protection from competition for much less investment and risk.

12. Congress has repeatedly extended patent protection for drugs beyond what other industries enjoy, despite
much higher profits year in and year out. Government protection from normal competition is now more than 50%
greater for the drug industry than a decade ago (National Institute for Health Care Management 2000). These
incentives reward research into derivative large markets, rather than to finding effective treatments for diseases
that have none.

13. These facts constitute the Blockbuster Syndrome: the lure of monopoly pricing and windfall profits for years
spurs the relentless pursuit for drugs that might sell more than $1 billion a year, regardless of therapeutic need or
benefit. Research projects for the disorders of affluent nations proliferate, as do clinical trials. Doctors are paid like
bounty hunters to recruit patients for thousands of dollars each. Most patients get the misimpression that the
experimental drug will be better than existing ones (Wolpe 2003). The corruption of professional judgment, ethics
and even medical science follow (Williams 2003; Wazana 2000; Barnett 2003; Lexchin, Bero, Djulbegovic et al.
2003; Bekelman, Mphil, and Gross 2003; Villanueva, Peiro, Librero et al. 2003; Fletcher 2003).

Drug research costs much less than claimed
14. Drug companies claim to spend 17% of domestic sales on R&D, but more objective data reports they spend
only 10% (National Science Foundation 2003). Thus, only 1.8% of sales goes to research for breakthrough new
drugs (18% x 10%) (Love 2003).

15. Taxpayers pay for most research costs, and many clinical trials as well.

In 2000, for example, industry spent 18% of its $13 billion for R&D on basic research, or $2.3 billion in gross costs
(National Science Foundation 2003). All of that money was subsidized by taxpayers through deductions and tax
credits. Taxpayers also paid for all $18 billion in NIH funds, as well as for R&D funds in the Department of Defense
and other public budgets. Most of that money went for basic research to discover breakthrough drugs, and public
money also supports more than 5000 clinical trials (Bassand, Martin, Ryden et al. 2002). Taxpayer contributions
are similar in more recent years, only larger.

16. The average amount of research funds the drug industry needs to recover appears to be much less than the
industry’s figure of $800 million per new drug approved (NDA).

The $800 million figure is based on the small unrepresentative subsample of all new drugs. It excludes the majority
of “new” drugs that are extensions or new administrations of existing drugs, as well as all drugs developed by NIH,
universities, foundations, foreign teams, or others that have been licensed in or bought. Variations on existing
drugs probably cost much less because so much of the work has already been done and trials are simpler.

About half of the $800 million figure consists of “opportunity costs”, the money that would have been made if the
R&D funds had been invested in equities, in effect a presumed profit built in and compounded every year and then
called a “cost.” Drug companies then expect to make a profit on this compounded profit, as well as on their actual
costs. Minus the built-in profits, R&D costs would average about $108 million 93% of the time and $400 million 7%
of the time.

The $800 million estimate also does not include taxpayers’ subsidies via deductions and credits and untaxed
profits (DiMasi, Hansen, and Grabowski 2003; DiMasi, Hansen, Grabowski et al. 1991). Net R&D costs are then still
lower.

Contrary to some press reports from the industry, screening for new compounds is becoming faster and more
efficient and the time from initial testing to approval has shortened substantially (Kaitin and Healy 2000). The large
size of trials seems more due to signing up specialists to lock in substantial market share. Advertising firms are now
running clinical trials (Bassand, Martin, Ryden et al. 2002; Peterson 2002; Moyers 2002).

17. Because clinical trials have become a high-profit sub-industry, trial “costs” appear to be much more than is
necessary.

An international team of experts estimates that clinical trials could be done for about $500 per patient rather than
$10,000 per patient, a 95% reduction (Bassand, Martin, Ryden et al. 2002). The most detailed empirical study of
trial costs also concludes that costs can be much less than reported (The Global Alliance for TB Drug
Development 2001).

U.S. drug prices very high

18. Americans seem unaware how much more they are paying for drugs than other countries, in the name of the
“free market” where prices are controlled by corporations. So-called “price controls” abroad are negotiated
wholesale prices. Corporate price controls in the U.S. are un-negotiated monopoly prices, which then large buyers
negotiate down.

According to a detailed analysis, American employers and health plans pay at wholesale 2.5-3.5 times the prices in
Australia and other countries with comparable prices for patented drugs (Productivity Commission of Australia
2001). There is no evidence that these prices do not cover research costs. U.S. generic prices shadow patent
drug prices and are also 2.5-3.5 times more.

19. High American prices are essentially monopoly rents charged to employers in every other industry. They shift
profits from other industries to the drug industry.

20. If American prices were cut in half, research budgets would not have to suffer unless executives decided to cut
them in favor of marketing, luxurious managerial allowances or high profits. They probably would not, because
R&D gets such favorable tax treatment compared to other expenses. Lower prices would save other Fortune 500
companies billions in drug benefit costs, and drug company profits could come into line with the profits of the
companies who pay for their drugs.

Realign incentives to reward true innovation
21. Current incentives strongly reward derivative innovation. We get what we reward.

22. Because the U.S. is by far the biggest spender, it has by far the most R&D and new drugs. Four other
industrialized countries, however, devote more of their GDP to R&D for new drugs than the U.S. (Patented
Medicine Prices Review Board 2002).

23. Officials of drug companies commonly claim that nearly all new drugs are discovered in the U.S. However, the
industry’s own studies (and others) show that over the past quarter century, the U.S. has accounted for less than
or about the same as its proportionate share of international new drugs, not more and certainly not nearly all
(Barral 1996; European Federation of Pharmaceutical Industries and Associations 2000). Until 2002, even the U.S.
pharmaceutical industry was investing an increasing percent of its R&D budget in highly productive research teams
abroad (Pharmaceutical Research and Manufacturers of America 2002).

24. Americans are getting less innovation and paying a lot more. Competing countries profit from these American
self-delusions by covering their R&D and keeping their own drug prices reasonable, while leaving drug companies
to make bonanza profits from the monopoly American market.

25. Price competition has been the greatest spur to innovation for over 200 years. Price protections reward
derivative and me-too innovation as well as excessive costs and a focus on blockbuster marketing. If we want lower
prices and more breakthrough innovations, we need to change the incentives to reward those goals (Baker and
Chatani 2002).

Authors’ Disclosure Statement
In 1996, JL received funding from Sandoz (now part of Novartis) for travel and accommodation to attend a meeting
in Basle, Switzerland with Sandoz executives to discuss marketing practices.

For more information about related topics visit the Physicians for a National Health Program site.
www.pnhp.org

 

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