How High Must Drug Prices Be to Support Research?

A health-research organization called ATI Advisory has released what I find to be a fascinating study about the research and development (R&D) spending on the list of 10 expensive drugs that Medicare selected for the price-negotiation process authorized by the Inflation Reduction Act (IRA). You can find details about that announcement in an earlier post.

The pharmaceutical industry marches in lockstep to the tune that it is, in effect, forced to charge high prices for its new drugs because they are so expensive to develop. The corollary to this is that being required to cut these prices under the IRA would reduce the incentive to searching for other new miracle drugs.

U.S. consumers shoulder nearly all of the global costs of finding new drugs, chiefly because foreign governments negotiate prices in their countries, but the U.S. government has little authority to do so here. I suspect that one of the reasons drug companies “cave” to foreign governments is that they know they can recoup their development costs in the U.S.

ATI sourced databases about clinical trials and other sources to determine the R&D costs for the 10 drugs targeted by Medicare. It used a broad definition of R&D that came up with larger totals that included, for example, the costs of post-launch trials of the new meds. Its numbers thus can’t be dismissed as narrowly defined cheap shots at the industry.

However, much post-launch spending is aimed at boosting a drug’s appeal and eventual market share. “R&D to bring a new drug to market is different from R&D to advance its position in that market,” its report said. “It’s generally less risky to spend money on expanding the market for an existing drug, particularly one that promises to be a blockbuster, than one that has yet to stand the test of FDA (U.S. Food and Drug Administration) review.”

Two of the drugs – Enbrel and Novolog – have been on the market for more than 20 years, well before development of the data sources that ATI relied upon. Why these drugs do not have meaningful competition after more than two decades on the market is a story for another day.

For the remaining eight drugs, here are ATI’s its estimates of cumulative R&D expenses and its projection of lifetime revenues.

DRUG                         R&D               LIFETIME

Eliquis                         $4.3 billion     $57.1 billion

Entresto                       $4.8                 $14.1

Farxiga                        $5.2                 $14.3

Imbruvica                    $1.4                 $36.8

Januvia                        $5.3                 $54.1

Jardiance                     $3.5                 $18.3

Stelara                         $2.1                 $53.6

Xarelto                        $7.8                 $54.3

The major limitation on this work is that it does not measure R&D spending on drugs that never made it to market or failed to become commercial successes. This is surely a big number and I’d love to see ATI or another unbiased researcher take a look.

Journalist Philip Moeller is the principal author of Simon & Schuster’s Get What’s Yours series of books about Social Security, Medicare, and health care. He is working on a new edition of his Medicare book.