How to manage prescription drug costs

Lets agree on two things.

We don’t want to manage costs in a way that discourages the development of new drugs, including for those rare conditions.

Because of the critical nature of the product, its pricing cannot be left to the sole discretion of the manufacturer.

Now, what to do?

First some facts:

• From basic research to FDA approval and marketing can take up to fifteen years
• After years of research and testing the drug may not prove viable or may fail to obtain FDA approval
• Some drugs have the potential for wide use while others may help relatively few people world-wide because the condition is rare, but still carry the same developmental costs
• Most brand drugs have patent protection for twenty years before a generic version can be marketed .
• The average cost of developing a new drug among the top 20 global biopharmas is approximately $2.3 billion. That figure includes the average cost of developing a candidate from discovery through clinical trials to the market.
• Pharma companies spend over $8 billion advertising drugs annually.
• Pharma companies are profitable, above average – for pharmaceutical and other firms: gross profit margin approximately 77% and 37%, EBITDA margin: 29.4% vs 19%, net income margin: 13.8% vs 7.7%. However, Alphabet, Apple, and Microsoft have net profit margins of 22%, 20%, and 28%, respectively.
• The FDA approved 37 novel drugs in 2022, the fewest to pass regulatory scrutiny since 2016. Last year the FDA’s Center for Drug Evaluation and Research (CDER) approved 37 novel drugs. This is a drop from the highs of the past 5 years, and brings the rolling 5-year average down to 49 drugs per year.
• Only about 12 percent of drugs entering clinical trials are ultimately approved for introduction by the FDA. In recent studies, estimates of the average R&D cost per new drug range from less than $1 billion to more than $2 billion per drug.
• There is a big difference between the stated retail price of a drug and it’s actually price paid by insurers.
• About 13% of Americans have no insurance to cover prescription drugs.
• Americans subsidize the development of drugs that other countries can buy more cheaply for their citizens, since in almost all other countries, health care is national and is bought in volume by their governments.
• The United States and New Zealand are the only countries where drug makers are allowed to market prescription drugs directly to consumers.

As you can see from all the above, this is not a simple problem. Adding to the complexity is that most drug costs are not paid by patients, but by their employer or insurance.

The real problem is how to address the issue without a single national solution, because without that, costs merely shift from one group to another.

There is no way to create a fair pricing strategy that limits prices without offering a fair return to the manufacturer, an incentive to develop new drugs and the ability to profit from sales volume of life improving drugs. In other words some form of a public utility model.

We need a formula that considers all the above factors, especially with regard to research, development, extent of drug application and production costs.

Such calculation would set a maximum price per dose with an inflation factor. It would allow recouping costs within a reasonable period and ongoing profits based on total volume, with pre-determined unit price. Generic availability would occur only after profit targets were met.

In other words, caps on the cost of an individual drug, but no caps on the pharma companies total profit thus encouraging ongoing innovation and development.

Of course, I don’t have all the answers, but one thing for sure, we don’t have them now either.