There was a modest flurry in the news last week about a new study showing that the cost of developing a new drug is now $2.6 billion. The report, issued by Tufts University economist Joe DiMasi, is an update of his previous studies, the most recent of which found that in 2001 the cost of developing a drug was $802 million.
The $2.6 billion figure, which will undoubtedly be used to justify high drug prices, led many health care experts and advocates to raise questions about the study’s methodology. Part of the concern stems from the fact that the Tufts Center for the Study of Drug Development, which DiMasi directs, receives funding from the pharmaceutical industry. The study also relies on proprietary information that was provided by the industry.
In addition, the study itself is not yet publicly available; DiMasi released only a set of slides that summarized its main findings. It is also important to note that this $2.6 billion figure applies only to drugs that involve new chemical compounds and did not rely on any outside funding in the development process, such as research from the National Institutes of Health (NIH); that group of drugs accounts for fewer than one-sixth of the new drugs that are approved each year.
Whether or not the criticisms of the study are valid, $2.6 billion is not a number that should make the pharmaceutical industry proud. It implies that the cost of developing a new drug increased at annual rate of almost 8 percentage points above the overall inflation rate.
This rapid run-up in costs is exactly what economists would expect from an industry that is protected from competition by the government. Just as the old system of cost-plus contracts in the military sector led to outrageous charges for weapons purchased by the Defense Department, the system of government-granted patent monopolies gives companies little incentive to control costs and reduce waste. For this reason, it would not be surprising to find that major drug companies are seeing runaway cost increases.
Bloated development costs are perhaps the least of the problems stemming from the current system of drug research. Patent monopolies create absurd problems in paying for drugs that would be relatively cheap in a free market. For example, we are seeing state governments and insurers struggling with the $84,000 that Gilead Sciences is charging for Sovaldi, its new hepatitis C drug.
By comparison, generic producers in India can profitably sell the drug for $1,000 per treatment. We would not see news articles, hand-wringing columns and editorials about whether the government and insurers should be forced to pick up the tab if we were talking about $1,000 rather than $84,000. The patent-protected price of some other drugs is even more astronomical, with many new cancer drugs being sold for prices in the hundreds of thousands of dollars.
In addition to creating access problems, outrageous patent-protected prices give the drug companies an enormous incentive to misrepresent the safety and effectiveness of their drugs in order to maximize sales. And they act just as economic theory predicts. It’s rare for a month to pass without a new story about a company concealing or misrepresenting its research findings in order to increase sales.
The secrecy promoted by the patent system also slows down research. Drug companies only reveal the information necessary to gain a patent. They have no interest in sharing research findings that could be useful to competitors — a situation that contravenes the open environment in which science advances most quickly.
It would be possible to go on at some length documenting the inefficiency and corruption associated with patent-financed drug research, but the reality of American politics is that this doesn’t matter. The drug companies have enough money that, thanks to their lobbying and campaign donations, they will prevent any major changes to this system as long as they are making tens of billions of dollars a year.
This brings us to India. The one scenario that could lead to a change in this wasteful and corrupt system is if it becomes impossible to market drugs at grossly inflated prices. India’s dynamic generic industry holds out this possibility.
After all, if Indian generics are available at one percent of the price of drugs selling for tens or hundreds of thousands of dollars in the United States, it’s going to be difficult to keep the lower cost drugs away from people here. It would present the same problem as trying to keep cocaine or heroin out of the country. Either the cheap Indian drugs will come here or people will go there.
This is why it is very bad news for people in the United States, India and the rest of the world that India is now reviewing its patent policy at the insistence of Barack Obama’s administration. The White House wants India to adopt a much stronger patent regime that would limit the ability of its generic industry to provide low cost alternatives to expensive drugs in the United States. It has threatened sticks if India doesn’t go along, as well as some serious carrots in the form of improved trading relations if India adopts stronger patent protections.
If India adopts strong patent protections, it will likely doom the United States to maintaining a corrupt and wasteful patent system long into the future. Perhaps more importantly, it will limit the availability of affordable medicine to billions of low-income people in the developing world. But take heart: At least the drug companies will be able to recoup however many billions of dollars they say it costs them to develop a drug.