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“The reason why the medicine is expensive is because you bought the second medicine. The price of the first medicine is billions of dollars.” It is cheap to produce tablets and it is difficult to develop new drugs. This is every pharmaceutical circle. The basic logic that was instilled at the beginning. The pharmaceutical industry is a high-risk, high-threshold industry with extremely high R&D investment, extremely low success rate and strict supervision. The drug that will eventually be on the market stands at the tip of the pyramid. It must recover all the sunk costs and shoulder the source of funding for continued research and development. This makes all R&D companies confident in pricing.

However–

“The figure of $1 billion is one of the biggest myths of the pharmaceutical industry.” – Andrew Witt, CEO of GSK (2013)

First, drug research and development costs are not transparent. It is common to say that developing a new drug requires an average of $1 billion to $2 billion, two figures from DiMasi in 2003 and 2016. However, the method of calculating costs in the article has been widely questioned, and the cost calculated by different methods is one tenth of the original result. Statistics on drug development costs have been ambiguous and data sources are not completely reliable. The cost of drugs may vary considerably depending on the nature of the drug itself and its efficiency. For example, the cost of research and development of innovative drugs and drugs for expanding indications is definitely different. The cost of acquiring a molecule and the cost of research and development from scratch is different. It is difficult to calculate the cost of plant, office software and hardware upgrades, medical promotion seminars, patent litigation, etc. It is difficult to be comparable. Comparing 19 such studies found that the cost of developing a drug ranged from $30 million to $2.6 billion, a difference of up to 86 times. In the case of clinical trial unit cost, during the same period, the number given by the drug economist was $23,572, the BMS executive gave $10,000, and the NIH gave less than $5,000. R&D costs, each family has its own algorithm. However, is it not more efficient and cost-effective for research institutions to do research and development than pharmaceutical companies?

Second, the early R&D costs of public funding and the tax cuts have not paid off. Take “God Medicine” Gleevec (Imatinib) as an example. The calculation method of 50 billion US dollars in the 50-year research and development process has not been verified, but the public capital investment can be seen from its research and development history until the clinical phase II. Initially, Brian Druker of the Oregon Health and Science University and other scientists discovered imatinib and completed animal testing and some Phase I clinical trials. At the time, Druker spent 90% of his research funding on imatinib from his university, the National Cancer Institute (NIH), and the Leukemia and Lymphoma Society. Novartis’s contribution is only 10%. Since then, Druker has tried to persuade Novartis to continue Phase II clinical research. In 2001, a total of 1028 subjects were submitted to the FDA for the approval of three phase II clinical trials of chronic myelogenous leukemia, totaling $34 million to $80 million (according to risk costs and capital costs, NIH and pharmacoeconomics, respectively) The average subject cost of the home is calculated). However, in the three years before the IPO, Gleevec achieved sales of US$2 billion. Since then, the price has increased by an average of more than 5% per year. The average sales in 2009~2016 is stable at around US$4 billion. As of 2017, Gleevec’s global total sales are estimated to reach $40 billion. Then, are the public funds invested by the taxpayers in the early stage and the tax reductions of 50% of the clinical trial expenses of the rare disease indications received the return on the drug price? Gleevec, the US taxpayer who bears the highest price in the world, is indeed aggrieved at this point.

 

Third, most of the drug prices are returned to shareholders, and only a small part is really invested in research and development. According to the 2010 survey, global pharmaceutical companies’ R&D investment only accounts for 8% of their sales, marketing investment accounts for about 20%, and more than 50% of profits are distributed to shareholders as repurchases and dividends. Some studies have compared the R&D investment and marketing expenses of the top 10 multinational pharmaceutical companies. Obviously, compared with the “expensive” R&D, they have invested much more in market sales. So, is the profit brought by high drug prices in order to continue to research and develop innovation, or for the return of shareholders, the price of rising year by year, and higher sales?

Figure 2 Marketing expenses of 10 large multinational pharmaceutical companies vs. R&D expenses (US$1 billion)

Fourth, in a free market, prices are determined by demand, not cost. So far, the $40 billion in sales has already recovered several times the “cost”, while the annual Gleevec production cost, calculated at 50% profit margin, does not exceed $216. BMS’s Sprycel is Gleevec’s competing target, and was approved in 2006. In 2007, Novartis was awarded the second-generation product Tasigna. It stands to reason that Gleevec should have a large price cut. However, its price did not fall, which was attributed to the fact that two new drugs have set a higher price of 60,000 and 80,000 US dollars. Patients with chronic myelogenous leukemia who must take medication for life will still prefer Gleevec in order to find a “relatively cheap” price. Subsequently, its price is still rising year by year. Not only that, but the listing of generic drugs after the patent expires still does not immediately affect its price. In 2016, India’s generic drug company Sun Pharma’s first Gleevec generic drug was delayed for half a year from the original plan, and enjoyed a 180-day market exclusivity, during which the FDA promised not to approve other generic drugs. The cost of research and development of generic drugs is far less than the original drug, but its price is only 3,000 US dollars / year lower than Gleevec, rather than its pre-announced price reduction of 30%. There is no drug price control in the United States. In the case of competition by only a few pharmaceutical companies, a “joint monopoly” may be formed, and prices will not fall sharply. And as patients’ needs grow larger, future prices are not optimistic. Therefore, defending the cost of drug research and development as a high drug price is not the real logic of business people.

Figure 3 Trends in chronic myeloid leukemia in the United States

Finally, businessmen are not scientists. The early research and development of scientists is long and arduous, and most rely on public funds provided by the government. Once the potential drugs are transferred to commercial development, high drug prices are already doomed.

Drug price negotiations, tax exemptions and tax cuts are all short-term methods. To solve the problem of high drug prices and insufficient supply, it is ultimately necessary to rely on the benign competition of a large number of high-quality domestically produced drugs.

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