We all know that drug companies have no shame about their pricing and that it bears no reasonable relationship to the actual costs of creating and making their products. And the more emotion-laden the disease, apparently the less hesitation these companies feel about extracting even more profits, as new research reveals in the case of cancer medications. (JAMA Article) The researchers examined profitability of 99 cancer drugs. There is a wide range of estimates on the cost of drug development; these authors used one of $794 million on average, which I think is high since many cancer drugs both build on government subsidized research findings and get accelerated regulatory approval paths, which lowers costs. Sales data was compared to this average R & D cost to calculate some idea of return. Total sales for this set of cancer drugs just in 2017 was $107 billion, and this is worldwide, so keep in mind that the returns in the US are likely far higher than the global return, since prices are constrained outside the US. 49 of the cancer drugs had cumulative sales of over $5 billion each. Comparing sales to average R & D costs, the median return was $14.50 of sales for every $1 of R & D cost. Many drugs had ratios of 30 or higher. Even if you assumed the highest estimate of average R & D cost, the returns are absurd. Most of these drugs paid back their full R & D cost within a few years, some in as few as one or two years.
Let’s be clear, the drug companies are exploiting the emotional pain and fear of cancer patients to charge as much as they can, and then some, for drugs to treat the disease, counting on any attempt to reduce use or prices being met with outcry from patient advocates about restricting access to treatment. And while some of these drugs are beneficial, many have only modest effects on survival, much less curing disease. And many have very significant side effects. Congress, or CMS, should demand full actual cost data on research and development efforts by drug manufacturers and should have a reputable firm audit those. I suspect they would validate the lack of relationship between cost and prices. These high prices inflict pain on patients, directly by cost-sharing, and indirectly by causing substantial premium increases that affect all consumers with private insurance coverage. All this literally makes me want to puke, it is just repulsive. I don’t know how drug company board members or management can live with themselves.
This new research demonstrates how ludicrous that recent Deloitte report on drug company returns was. Drug companies are among the most profitable industries in the world. Let me be clear again about the source of my ire on this topic. I am a big free-market economics proponent; I think we would all be better off if we got rid of 90% of government regulation. Drug pricing, however, is not based on free-market principles. Drug pricing is based solely on a government-granted patent monopoly which destroys any pretense of a free market. You can see the effects of this by looking at what happens to prices when a patent expires, although in the case of many biologic cancer drugs there isn’t competition even after patent expiration so prices stay high. Since the pricing is based on a government distortion of un-regulated economics, the government should condition that grant on reasonable pricing behavior. In the last few months a few politicians have finally picked up on the logic of this approach. The prices of these cancer medications should be a third or less than what drug companies are charging for them and there should never be a price increase during the products’ life cycles. I really hope that 2019 is the year that we finally see a clampdown on this really deplorable behavior.