Drug Development, Pricing

Do big R&D budgets justify US premium drug prices? No way, analysts scoff

Do you want a new formula for calculating “excess” prices paid for branded drug prices? A group of healthcare researchers found a ripe prospect: Tackling the premium built into US drug costs.

Big Pharma R&D is a game of blockbusters. Finding one, getting one approved and then building the market is a multibillion-dollar quest. And there’s been considerable focus on the US premium, the extra that big biopharma collects in this country while selling the same drugs in tightly controlled single-payer markets in Europe for much, much less.

That US premium, the companies often insist, is essential to accommodate huge R&D budgets required to cover the billions in average costs for new drug development, what President Trump and others refer to as a huge subsidy that this country pays to help other countries who won’t share the load of innovation.

Writing in Health Affairs, though, a trio of investigators says the argument is bunk. They crunched the numbers on the list ex-US price against the average net in the US, using VA and Medicaid discounts to try and achieve a clearer picture of the bottom line for manufacturers. And they found that the US premium paid for the top 20 drugs on the market far exceeds the total amount the same 15 companies spent on their global R&D budgets.

That premium, they say, nets 15 companies $116 billion in extra annual revenue, compared to $76 billion in total research spending. And 3 companies earn more in premium pricing for one product than they spend on research each year: AbbVie — Humira, Biogen — Tecfidera; and Teva – Copaxone.


Nancy Yu, Zachary Helms and Peter Bach — financial analysts at the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center — write:

We found that the premiums pharmaceutical companies earn from charging substantially higher prices for their medications in the US compared to other Western countries generates substantially more than the companies spend globally on their research and development. This finding counters the claim that the higher prices paid by US patients and taxpayers are necessary to fund research and development. Rather, there are billions of dollars left over even after worldwide research budgets are covered.

If you take out the premium US payers cover for these drugs relative to R&D spending, you could save $40 billion off of the total $325 billion paid for drugs in 2015.

Don’t look for any rapid adoption in the US, though. These companies aren’t in the business of covering costs, and bleeding profits isn’t on the agenda in Washington DC. Trump’s focus, to the extent we understand it so far, is to make drug development simpler, with fewer regulatory requirements and thereby less expensive, offering a route to lower costs. This new piece underscores, though, that there is no direct relationship between research spending and blockbuster drug prices.

The story triggered an interesting round of comments on Twitter this morning.

“If the argument is disingenuous figleafing for monopoly pricing behavior, it has now also been falsified,” Bach responded to criticism of his piece.




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Research Scientist - Immunology
Recursion Pharmaceuticals Salt Lake City, UT
Director of Operations
Atlas Venture Cambridge, MA

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