How Pharmaceutical Companies Make Money
When you shell out $295,000 for a drug, you’re not paying for the chemical compounds in it, but the research, development and grueling approval process for the drug.
Estimates vary on how much each drug costs from inception to clinical trials to approval to selling, but the consensus is that it’s in the billions, which doesn’t account for drugs that never even make it to market. To recoup these costs, drug companies get a patent on the drug, giving them an (arguably deserved) monopoly. The profits on that high-priced drug in turn help fund development of future meds.
But, wait, there’s more …
The Pay-for-Patent Scheme
Eventually, the patent will expire, and a generic manufacturer or several can make and sell it for pennies on the dollar. To prolong its patent on a brand-name drug, a company will tweak the formula to “reset” the patent, so it can keep producing the drug exclusively for a few years longer. In theory, generic companies can challenge these tweaks in court, so they can start manufacturing the drug themselves, but it’s an expensive legal process.
To make it easier for everyone (except consumers), pharmaceutical companies pay generic makers to withhold cheaper versions from the market. For example, Bayer paid $400 million to generic drug makers to keep the generic version of the antibiotic drug Cipro off the market until 2003, when Bayer’s patent expired.
A 2011 Congressional Budget Office report estimated that a Senate bill to outlaw these payments (now stalled) would lower drug costs in the United States by $11 billion, as well as save the federal government $4.8 billion over 10 years, since it would be able to pay for generic versions for Medicare and Medicaid patients.
There is still hope: A court case challenging these types of payments is up before the Supreme Court on March 25th.
America, Land of the Expensive Scripts
In many countries, governments have instituted price controls to keep medicine more affordable for their citizens. But, in the U.S., drug companies are free to raise prices as they see fit.
Zola P. Horovitz, Ph.D, a pharmaceutical and biotechnology industry consultant, told the authors of the Freakonomics blog, “Most people do not realize that when a prescription is paid for in the U.S., the payer (the patient, his or her insurance company, or the government) is subsidizing the cost of that same prescription in most countries outside the U.S.”
She claims that companies–whether American or Norwegian or anywhere else–have to offload the full price almost exclusively onto Americans, while patients in other countries get a discount. In November, India moved to bring more “essential” drugs, like HIV medication, under price controls. And China clamped down on prices just last week.
So couldn’t the U.S. do the same? Not likely, since developing new drugs would no longer be profitable, and pharmaceutical research and development would drastically drop.