Why Drugs Cost So Much
Medical Editor: Jay Marks, M.D.
Anyone who has purchased prescription medications has probably wondered why they cost so much. The media has reported on the issue of drug costs a few times with the slant usually being that drug companies are greedy, selfish, and uncaring. Therefore, it is not surprising that the public also shares this view. In their defense, the drug companies usually point to the cost of research. The media then responds with figures showing that the companies spend more on marketing than they do on research. Is the issue really as simple as greed versus the cost of research? The answer is more complicated. To shed some light onto this issue, we need to examine the process of drug development and the economics of manufacturing and selling drugs.
The first step in the development of drugs is the discovery of a new compound (natural or synthetic) that affects a medical condition. The first phase of development involves research into the biological and chemical properties of this compound to determine its effects--how it is absorbed, distributed, and eliminated in the body--as well as its safety. These early studies occur in the laboratory using cells on plates (tissue cultures) and animals. If the new compound is safe and effective in animals, the next phase is testing in a small number of healthy human volunteers to confirm the information from the animal studies and to gain further information on the effects of the compound. Finally, the new compound is tested in humans who have the condition for which it will be used. Once the compound is proven to be safe and effective for the condition, the company applies to the Food and Drug Administration (FDA) for a license to manufacture and sell this drug. The FDA tightly regulates the testing of new compounds in humans and has strict criteria for the approval of drugs.
Drug companies are like other companies in that they manufacture products that must be sold for a profit in order for the company to survive and grow. They are different from some companies because the drug business is very risky. For instance, only one out of every ten thousand discovered compounds actually becomes an approved drug for sale. Much expense is incurred in the early phases of development of compounds that will not become approved drugs. In addition, it takes about 7 to 10 years and an average cost of 500 million dollars to develop each new drug. This money is spent before the FDA approves the drug, and if the drug is not approved, the company loses the money. These expenses must be covered by the revenue from compounds that successfully become approved drugs. Moreover, only 3 out of every 20 approved drugs bring in sufficient revenue to cover their developmental costs, and only 1 out of every 3 approved drugs generates enough money to cover the development costs of previous failures. This means that for a drug company to survive, it needs to discover a blockbuster (billion-dollar drug) every few years. After a drug is approved, millions of dollars are spent on marketing in educating healthcare providers and conducting post-marketing studies. Drug companies spend a lot of money on marketing because of the stiff competition they face from other drug companies for their drugs, and in order to develop each drug's highest revenue-generating potential. Given the poor odds of discovering another successful drug, it is more efficient to maximize the returns on a drug that is already on the market through advertising. In this sense, drug companies are no different than any other type of company. In addition to maximizing returns on their investment through advertising, drug companies also spend money to find new uses for drugs or better ways of using them. These efforts increase the use of the approved drugs and also benefit patients. Additionally, drug companies donate millions of dollars to charities and provide free drugs to individuals or countries that cannot afford medications.
In a nutshell, the price paid by a patient for a medication must cover the costs of developing new compounds that become approved drugs and compounds that fail to become drugs, as well as marketing, post-marketing studies, and a profit. The profit ensures that the company provides a return to investors. Profit is the incentive for the risk that the company takes. Without the promise of a reasonable profit, there is very little incentive for any company to develop new drugs. There is no denying that drugs are expensive. However, the price of drugs should be weighed against their benefits. Since many drugs reduce pain and suffering, prevent disease, or extend life, they should be seen as miracles. Viewed in this light, and compared to other items that cost as much or more but do not provide the same level of benefit, drug prices may not be so unreasonable.
Last Editorial Review: 2/9/2002